Loans and Related Allowance for Credit Losses | Note 5 – Loans and Related Allowance for Credit Losses The following table summarizes the primary segments of the loan portfolio at June 30, 2023 and December 31, 2022: (in thousands) Commercial Real Estate Acquisition and Development Commercial and Industrial Residential Mortgage Consumer Total June 30, 2023 Individually evaluated for impairment $ — $ — $ — $ 2,151 $ — $ 2,151 Collectively evaluated for impairment 483,485 79,003 249,683 473,389 62,327 1,347,887 Total loans $ 483,485 $ 79,003 $ 249,683 $ 475,540 $ 62,327 $ 1,350,038 December 31, 2022 Individually evaluated for impairment $ 2,262 $ 356 $ — $ 3,880 $ — $ 6,498 Collectively evaluated for impairment 456,569 70,240 245,396 440,531 60,260 1,272,996 Total loans $ 458,831 $ 70,596 $ 245,396 $ 444,411 $ 60,260 $ 1,279,494 The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans at June 30, 2023 and December 31, 2022: (in thousands) Current 30-59 Days Past Due 60-89 Days Past Due 90 Days+ Past Due Total Past Due and Accruing Non- Accrual Total Loans June 30, 2023 Commercial real estate: Non owner-occupied $ 284,580 $ — $ — $ — $ — $ — $ 284,580 All other CRE 198,905 — — — — — 198,905 Acquisition and development: 1-4 family residential construction 20,228 — — — — — 20,228 All other A&D 58,647 — — — — 128 58,775 Commercial and industrial 249,425 177 81 — 258 — 249,683 Residential mortgage: Residential mortgage - term 411,033 428 704 45 1,177 2,518 414,728 Residential mortgage - home equity 60,227 241 — 18 259 326 60,812 Consumer 61,591 498 141 97 736 — 62,327 Total $ 1,344,636 $ 1,344 $ 926 $ 160 $ 2,430 $ 2,972 $ 1,350,038 December 31, 2022 Commercial real estate: Non owner-occupied $ 269,971 $ — $ — $ — $ — $ 87 $ 270,058 All other CRE 188,715 — — — — 58 188,773 Acquisition and development: 1-4 family residential construction 19,637 — — — — — 19,637 All other A&D 50,813 — — — — 146 50,959 Commercial and industrial 245,342 54 — — 54 — 245,396 Residential mortgage: Residential mortgage - term 380,502 31 722 239 992 2,893 384,387 Residential mortgage - home equity 59,223 399 48 43 490 311 60,024 Consumer 59,789 363 83 25 471 — 60,260 Total $ 1,273,992 $ 847 $ 853 $ 307 $ 2,007 $ 3,495 $ 1,279,494 Non-accrual loans that have been subject to partial charge-offs totaled $0.1 million at June 30, 2023 and $0.1 million at December 31, 2022. Loans secured by 1-4 family residential real estate properties in the process of foreclosure totaled $1.8 million at June 30, 2023. There were no loans subject to foreclosure at December 31, 2022. As a percentage of the loan portfolio, accruing loans past due 30 days or more was 0.18% at June 30, 2023 compared to 0.17% at March 31, 2023 and 0.16% at December 31, 2022. Effective January 1, 2023, the Corporation adopted the accounting guidance in ASU No. 2022-02, which eliminated the recognition and measurement of TDRs. Due to the removal of the TDR designation, the Corporation evaluates all loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the above. Therefore, the disclosures related to loan restructurings are only for modifications that directly affect cash flows. A loan that is considered a non-accrual or restructured loan may be subject to the individually evaluated loan analysis if the commitment is $0.1 million or greater; otherwise, the restructured loan remains in the appropriate segment in the ACL model and associated reserves are adjusted based on changes in the discounted cash flows resulting from the modification of the restructured loan. For a discussion with respect to reserve calculations regarding individually evaluated loans, refer to the “Nonrecurring Loans” section in Note 6, Fair Value Measurements. There were no loan modifications made to borrowers facing financial difficulties in the three- or six-month period ending June 30, 2023. The Corporation maintains an ACL at a level determined to be adequate to absorb expected credit losses associated with the Corporation’s financial instruments over the life of those instruments as of the balance sheet date. The Corporation develops and documents a systematic ACL methodology based on the following portfolio segments: (i) commercial real estate, (ii) acquisition and development, (iii) commercial and industrial, (iv) residential mortgage, and (v) consumer. The Corporation’s loan portfolio is segmented by homogeneous loan types that behave similarly to economic cycles. The segmentation in the CECL model is different from the segmentation in the Incurred Loss model. The following is a discussion of the key risks by portfolio segment that management assesses in preparing the ACL. Commercial Real Estate- loans are secured by commercial purpose real estate, including both owner occupied properties and investment properties, for various purposes such as hotels, strip malls and apartments. Operations of the individual projects as well as global cash flows of the debtors are the primary source of repayment of these loans. The condition of the local economy is an important indicator of risk, but there are more specific risks depending on the collateral type as well as the business. Acquisition and Development- loans include both commercial and consumer. Commercial loans are made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer. Consumer loans are made for the construction of residential homes for which a binding sales contract exists and generally are for a period of time sufficient to complete construction. Residential construction loans to individuals generally provide for the payment of interest only during the construction phase. Credit risk for residential real estate construction loans can arise from construction delays, cost overruns, failure of the contractor to complete the project to specifications and economic conditions that could impact demand for supply of the property being constructed. Commercial and Industrial- loans are made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the operations of the borrower is the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the borrower. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt. These loans are also made to local municipalities for various purposes including refinancing existing obligations, infrastructure up-fit and expansion, or to purchase new equipment. The primary repayment source for local municipalities include the tax base of the municipality, specific revenue streams related to the infrastructure financed, and other business operations of the municipal authority. The health and stability of state and local economies directly impacts each municipality’s tax basis and are important indicators of risk for this segment. The ability of each municipality to increase taxes and fees to offset service requirements give this type of loan a very low risk profile in the continuum of the Corporation’s loan portfolio. Residential mortgage- loans are secured by first and second liens such as home equity lines of credit and 1-4 family residential mortgages. The primary source of repayment for these loans is the income of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The state of the local housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy debt. Consumer- loans are made to individuals and may be either secured by assets other than 1-4 family residences or unsecured. This segment includes automobile loans and unsecured loans and lines of credit. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values. The following table summarizes the primary segments of the ACL at June 30, 2023 and allowance for loan loss (“ALL”) at December 31, 2022, segregated by the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment: (in thousands) Commercial Real Estate Acquisition and Development Commercial and Industrial Residential Mortgage Consumer Unallocated Total June 30, 2023 Individually evaluated $ — $ — $ — $ — $ — $ — $ — Collectively evaluated 4,946 1,134 3,549 6,417 859 — 16,905 Total ACL $ 4,946 $ 1,134 $ 3,549 $ 6,417 $ 859 $ — $ 16,905 December 31, 2022 Individually evaluated $ — $ — $ — $ 26 $ — $ — $ 26 Collectively evaluated 6,345 979 2,845 3,134 877 430 14,610 Total ALL $ 6,345 $ 979 $ 2,845 $ 3,160 $ 877 $ 430 $ 14,636 Changes in the fair value of the types of collateral for individually evaluated loans are reported as provision for credit loss in the period of change. The evaluation of the need and amount of a specific allocation of the ACL and whether a loan can be removed from impairment status is made on a quarterly basis. The following table presents the amortized cost basis of collateral-dependent individually evaluated loans as of June 30, 2023. June 30, 2023 (dollars in thousands) Real Estate Non-Accrual Loans with No Allowance Residential mortgage $ 2,151 $ 2,151 Total Loans $ 2,151 $ 2,151 The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not required at December 31, 2022: Impaired Loans with Specific Allowance Impaired Loans with No Specific Allowance Total Impaired Loans (in thousands) Recorded Investment Related Allowances Recorded Investment Recorded Investment (1) Unpaid Principal Balance December 31, 2022 Commercial real estate Non owner-occupied $ — $ — $ 187 $ 187 $ — All other CRE — — 2,075 2,075 — Acquisition and development 1-4 family residential construction — — 210 210 — All other A&D — — 146 146 109 Commercial and industrial — — — — — Residential mortgage Residential mortgage – term 345 26 3,225 3,570 41 Residential mortgage – home equity — — 310 310 — Consumer — — — — — Total impaired loans $ 345 $ 26 $ 6,153 $ 6,498 $ 150 (1) Recorded investment consists of unpaid principal balance, net of charge-offs, interest payments received applied to principal and unamortized deferred loan origination fees and cost. The following tables present the activity in the ACL and ALL for the six- and three- month periods ended June 30, 2023 and 2022: Three months ended (in thousands) Commercial Real Estate Acquisition and Development Commercial and Industrial Residential Mortgage Consumer Unallocated Total Beginning balance at January 1, 2023 prior to adoption of ASC 326 $ 6,345 $ 979 $ 2,845 $ 3,160 $ 877 $ 430 $ 14,636 Impact of adopting ASC 326 (1,143) (15) 1,334 2,112 208 (430) 2,066 Loan Charge-offs (87) — (166) (24) (518) — (795) Recoveries collected 5 7 9 36 93 — 150 Credit Loss Expense (174) 163 (473) 1,133 199 — 848 ACL balance at June 30, 2023 $ 4,946 $ 1,134 $ 3,549 $ 6,417 $ 859 $ — $ 16,905 ALL balance at January 1, 2022 $ 6,032 $ 2,615 $ 2,460 $ 3,484 $ 934 $ 430 $ 15,955 Loan Charge-offs — — (52) (33) (545) — (630) Recoveries collected 1 20 9 101 76 — 207 Credit Loss Expense 187 (463) 413 (440) 508 — 205 ALL balance at June 30, 2022 $ 6,220 $ 2,172 $ 2,830 $ 3,112 $ 973 $ 430 $ 15,737 Three months ended (in thousands) Commercial Real Estate Acquisition and Development Commercial and Industrial Residential Mortgage Consumer Unallocated Total ACL balance at April 1, 2023 $ 4,862 $ 1,103 $ 3,755 $ 6,324 $ 827 $ — $ 16,871 Loan Charge-offs (87) — (166) (18) (185) — (456) Recoveries collected — 2 5 18 31 — 56 Credit Loss Expense 171 29 (45) 93 186 — 434 ACL balance at June 30, 2023 $ 4,946 $ 1,134 $ 3,549 $ 6,417 $ 859 $ — $ 16,905 ALL balance at April 1, 2022 $ 5,922 $ 2,542 $ 2,513 $ 2,945 $ 940 $ 430 $ 15,292 Charge-offs — — (4) (24) (299) — (327) Recoveries — 2 6 86 54 — 148 Credit Loss Expense 298 (372) 315 105 278 — 624 ALL balance at June 30, 2022 $ 6,220 $ 2,172 $ 2,830 $ 3,112 $ 973 $ 430 $ 15,737 The Corporation’s methodology for estimating the ACL includes: Segmentation. Specific Analysis. Quantitative Analysis. Qualitative Analysis. The ACL is based on estimates, and actual losses may vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios 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. Credit Quality Indicators: The Corporation’s internally assigned grades are as follows: Pass Special Mention Substandard the debt. Such assets are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful Loss The following table presents loan balances by year of origination and internally assigned risk rating for our portfolio segments as of dates presented: (in thousands) 2023 2022 2021 2020 2019 2018 and Prior Revolving Total Portfolio Loans June 30, 2023 Commercial real estate: Non owner-occupied Pass $ 19,702 $ 66,666 $ 31,131 $ 47,947 $ 40,130 $ 60,486 $ 807 $ 266,869 Special Mention — — — — — 6,167 — 6,167 Substandard — — — — — 11,544 — 11,544 Total non-owner occupied 19,702 66,666 31,131 47,947 40,130 78,197 807 284,580 Current period gross charge-offs — — — — — 87 — 87 All other CRE Pass 16,648 28,223 25,694 21,675 25,017 70,917 4,490 192,664 Special Mention — — — — — — 1,203 1,203 Substandard — — 1,080 — 1,888 1,471 599 5,038 Total all other CRE 16,648 28,223 26,774 21,675 26,905 72,388 6,292 198,905 Current period gross charge-offs — — — — — — — — Acquisition and development: 1-4 family residential construction Pass 3,905 12,561 1,198 — — 195 2,369 20,228 Special Mention — — — — — — — — Substandard — — — — — — — — Total acquisition and development 3,905 12,561 1,198 — — 195 2,369 20,228 Current period gross charge-offs — — — — — — — — All other A&D Pass 6,966 20,364 5,072 9,427 1,328 11,501 3,989 58,647 Special Mention — — — — — — — — Substandard — — — — — 128 — 128 Total all other A&D 6,966 20,364 5,072 9,427 1,328 11,629 3,989 58,775 Current period gross charge-offs — — — — — — — — Commercial and industrial: Pass 20,732 73,589 26,631 13,851 10,735 12,981 69,070 227,589 Special Mention — — — — — 334 844 1,178 Substandard — 8,923 2,140 6,896 135 876 1,946 20,916 Total commercial and industrial 20,732 82,512 28,771 20,747 10,870 14,191 71,860 249,683 Current period gross charge-offs — — — 166 — — — 166 Residential mortgage: Residential mortgage - term Pass 29,970 80,804 90,055 40,502 26,163 138,450 2,004 407,948 Special Mention — — — — — — — — Substandard — — 926 156 101 5,557 40 6,780 Total residential mortgage - term 29,970 80,804 90,981 40,658 26,264 144,007 2,044 414,728 Current period gross charge-offs — — — — — 13 — 13 Residential mortgage - home equity Pass 1,060 5,301 909 505 307 571 51,535 60,188 Special Mention — — — — — — — — Substandard — — — 41 — 19 564 624 Total residential mortgage - home equity 1,060 5,301 909 546 307 590 52,099 60,812 Current period gross charge-offs — — — — — 11 — 11 Consumer: Pass 12,170 13,199 8,094 2,895 930 22,045 2,733 62,066 Special Mention — — — — — — — — Substandard — 56 163 24 7 5 6 261 Total consumer 12,170 13,255 8,257 2,919 937 22,050 2,739 62,327 Current period gross charge-offs 86 141 272 2 — 17 — 518 Total Portfolio Loans Pass 111,153 300,707 188,784 136,802 104,610 317,146 136,997 1,296,199 Special Mention — — — — — 6,501 2,047 8,548 Substandard — 8,979 4,309 7,117 2,131 19,600 3,155 45,291 Total Portfolio Loans $ 111,153 $ 309,686 $ 193,093 $ 143,919 $ 106,741 $ 343,247 $ 142,199 $ 1,350,038 Current YTD Period: Current period gross charge-offs $ 86 $ 141 $ 272 $ 168 $ — $ 128 $ — $ 795 (in thousands) 2022 2021 2020 2019 2018 2017 and Prior Revolving Total Portfolio Loans December 31, 2022 Commercial real estate: Non owner-occupied Pass $ 67,429 $ 31,710 $ 48,421 $ 41,221 $ 19,414 $ 42,069 $ 1,570 $ 251,834 Special Mention — — — — — 6,289 — 6,289 Substandard — — — — — 11,935 — 11,935 Total non-owner occupied 67,429 31,710 48,421 41,221 19,414 60,293 1,570 270,058 Current period gross charge-offs — — — — — — — — All other CRE Pass 24,655 26,947 22,906 27,213 8,873 67,691 4,790 183,075 Special Mention — 1,111 — — — — — 1,111 Substandard — — — 3,006 — 357 1,224 4,587 Total all other CRE 24,655 28,058 22,906 30,219 8,873 68,048 6,014 188,773 Current period gross charge-offs — — — — — — — — Acquisition and development: 1-4 family residential construction Pass 15,629 1,453 151 — — 210 2,194 19,637 Special Mention — — — — — — — — Substandard — — — — — — — — Total acquisition and development 15,629 1,453 151 — — 210 2,194 19,637 Current period gross charge-offs — — — — — 20 — 20 All other A&D Pass 18,733 4,979 9,755 1,408 558 12,961 2,419 50,813 Special Mention — — — — — — — — Substandard — — — — — 146 — 146 Total all other A&D 18,733 4,979 9,755 1,408 558 13,107 2,419 50,959 Current period gross charge-offs — — — — — — — — Commercial and industrial: Pass 83,608 30,451 15,982 12,707 5,013 9,528 63,668 220,957 Special Mention — 2,555 — — — 338 2,134 5,027 Substandard 8,923 — 7,167 173 634 311 2,204 19,412 Total commercial and industrial 92,531 33,006 23,149 12,880 5,647 10,177 68,006 245,396 Current period gross charge-offs — 97 34 3 — — — 134 Residential mortgage: Residential mortgage - term Pass 64,930 93,665 42,784 27,120 14,132 133,397 2,306 378,334 Special Mention — — — — — — — — Substandard — — 16 237 143 5,634 23 6,053 Total residential mortgage - term 64,930 93,665 42,800 27,357 14,275 139,031 2,329 384,387 Current period gross charge-offs — — — — — 28 — 28 Residential mortgage - home equity Pass 5,739 957 538 328 97 478 51,232 59,369 Special Mention — — — — — — — — Substandard — — 44 — 21 40 550 655 Total residential mortgage - home equity 5,739 957 582 328 118 518 51,782 60,024 Current period gross charge-offs — — — — 12 6 — 18 Consumer: Pass 16,748 10,495 3,845 1,596 687 24,096 2,654 60,121 Special Mention — — — — — — — — Substandard — 92 27 9 7 — 4 139 Total consumer 16,748 10,587 3,872 1,605 694 24,096 2,658 60,260 Current period gross charge-offs 36 494 18 37 11 40 — 636 Total Portfolio Loans Pass 297,471 200,657 144,382 111,593 48,774 290,430 130,833 1,224,140 Special Mention — 3,666 — — — 6,627 2,134 12,427 Substandard 8,923 92 7,254 3,425 805 18,423 4,005 42,927 Total Portfolio Loans $ 306,394 $ 204,415 $ 151,636 $ 115,018 $ 49,579 $ 315,480 $ 136,972 $ 1,279,494 Current YTD Period: Current period gross charge-offs $ 36 $ 591 $ 52 $ 40 $ 23 $ 94 $ — $ 836 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. The following tables present loan balances by year of origination segregated by performing and non-performing loans for the periods presented: (in thousands) 2023 2022 2021 2020 2019 2018 and Prior Revolving Total Portfolio Loans June 30, 2023 Commercial real estate: Non owner-occupied Performing $ 19,702 $ 66,666 $ 31,131 $ 47,947 $ 40,130 $ 78,197 $ 807 $ 284,580 Nonperforming — — — — — — — — Total non-owner occupied 19,702 66,666 31,131 47,947 40,130 78,197 807 284,580 All other CRE Performing 16,648 28,223 26,774 21,675 26,905 72,388 6,292 198,905 Nonperforming — — — — — — — — Total all other CRE 16,648 28,223 26,774 21,675 26,905 72,388 6,292 198,905 Acquisition and development: 1-4 family residential construction Performing 3,905 12,561 1,198 — — 195 2,369 20,228 Nonperforming — — — — — — — — Total acquisition and development 3,905 12,561 1,198 — — 195 2,369 20,228 All other A&D Performing 6,966 20,364 5,072 9,427 1,328 11,501 3,989 58,647 Nonperforming — — — — — 128 — 128 Total all other A&D 6,966 20,364 5,072 9,427 1,328 11,629 3,989 58,775 Commercial and industrial: Performing 20,732 82,512 28,771 20,747 10,870 14,191 71,860 249,683 Nonperforming — — — — — — — — Total commercial and industrial 20,732 82,512 28,771 20,747 10,870 14,191 71,860 249,683 Residential mortgage: Residential mortgage - term Performing 29,970 80,804 90,981 40,658 26,163 141,559 2,030 412,165 Nonperforming — — — — 101 2,448 14 2,563 Total residential mortgage - term 29,970 80,804 90,981 40,658 26,264 144,007 2,044 414,728 Residential mortgage - home equity Performing 1,060 5,301 909 505 307 571 51,814 60,467 Nonperforming — — — 41 — 19 285 345 Total residential mortgage - home equity 1,060 5,301 909 546 307 590 52,099 60,812 Consumer: Performing 12,170 13,255 8,234 2,919 937 21,981 2,735 62,231 Nonperforming — — 23 — — 69 4 96 Total consumer 12,170 13,255 8,257 2,919 937 22,050 2,739 62,327 Total Portfolio Loans Performing 111,153 309,686 193,070 143,878 106,640 340,583 141,896 1,346,906 Nonperforming — — 23 41 101 2,664 303 3,132 Total Portfolio Loans $ 111,153 $ 309,686 $ 193,093 $ 143,919 $ 106,741 $ 343,247 $ 142,199 $ 1,350,038 (in thousands) 2022 2021 2020 2019 2018 2017 and Prior Revolving Total Portfolio Loans December 31, 2022 Commercial real estate: Non owner-occupied Performing $ 67,429 $ 31,710 $ 48,421 $ 41,221 $ 19,414 $ 60,206 $ 1,570 $ 269,971 Nonperforming — — — — — 87 — 87 Total non-owner occupied 67,429 31,710 48,421 41,221 19,414 60,293 1,570 270,058 All other CRE Performing 24,655 28,058 22,906 30,219 8,873 67,990 6,014 188,715 Nonperforming — — — — — 58 — 58 Total all other CRE 24,655 28,058 22,906 30,219 8,873 68,048 6,014 188,773 Acquisition and development: 1-4 family residential construction Performing 15,629 1,453 151 — — 210 2,194 19,637 Nonperforming — — — — — — — — Total acquisition and development 15,629 1,453 151 — — 210 2,194 19,637 All other A&D Performing 18,733 4,979 9,755 1,408 558 12,962 2,419 50,814 Nonperforming — — — — — 145 — 145 Total all other A&D 18,733 4,979 9,755 1,408 558 13,107 2,419 50,959 Commercial and industrial: Performing 92,531 33,006 23,149 12,880 5,647 10,177 68,006 245,396 Nonperforming — — — — — — |