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, 2024 and December 31, 2023: (in thousands) Commercial Real Estate Acquisition and Development Commercial and Industrial Residential Mortgage Consumer Total June 30, 2024 Individually evaluated for impairment $ 599 $ — $ 6,175 $ 1,995 $ — $ 8,769 Collectively evaluated for impairment 500,417 88,214 259,496 509,114 56,965 1,414,206 Total loans $ 501,016 $ 88,214 $ 265,671 $ 511,109 $ 56,965 $ 1,422,975 December 31, 2023 Individually evaluated for impairment $ 826 $ — $ — $ 2,137 $ — $ 2,963 Collectively evaluated for impairment 492,877 77,060 274,604 497,734 61,429 1,403,704 Total loans $ 493,703 $ 77,060 $ 274,604 $ 499,871 $ 61,429 $ 1,406,667 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, 2024 and December 31, 2023: (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, 2024 Commercial real estate: Non-owner-occupied $ 295,647 $ — $ — $ — $ — $ — $ 295,647 All other CRE 204,520 165 85 — 250 599 205,369 Acquisition and development: 1-4 family residential construction 17,489 — — — — — 17,489 All other A&D 70,628 — — — — 97 70,725 Commercial and industrial 259,155 191 139 1 331 6,185 265,671 Residential mortgage: Residential mortgage - term 444,814 44 1,028 484 1,556 2,339 448,709 Residential mortgage - home equity 61,740 436 81 14 531 129 62,400 Consumer 55,890 581 378 27 986 89 56,965 Total $ 1,409,883 $ 1,417 $ 1,711 $ 526 $ 3,654 $ 9,438 $ 1,422,975 December 31, 2023 Commercial real estate: Non-owner-occupied $ 296,343 $ — $ — $ — $ — $ 227 $ 296,570 All other CRE 196,123 411 — — 411 599 197,133 Acquisition and development: 1-4 family residential construction 18,224 — — — — — 18,224 All other A&D 58,723 — — — — 113 58,836 Commercial and industrial 274,465 120 19 — 139 — 274,604 Residential mortgage: Residential mortgage - term 433,878 130 717 384 1,231 2,720 437,829 Residential mortgage - home equity 61,021 520 158 75 753 268 62,042 Consumer 60,576 463 277 84 824 29 61,429 Total $ 1,399,353 $ 1,644 $ 1,171 $ 543 $ 3,358 $ 3,956 $ 1,406,667 Non-accrual loans that have been subject to partial charge-offs totaled $1.1 million at June 30, 2024 and $0.1 million at December 31, 2023. Loans secured by 1-4 family residential real estate properties in the process of foreclosure totaled $1.5 million at June 30, 2024 and $1.8 million at December 31, 2023 . The Corporation maintains an ACL at a level that management believes will 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 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 properties obtained for investment 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 junior 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, 2024 and December 31, 2023, 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 Total June 30, 2024 Individually evaluated $ — $ — $ — $ — $ — $ — Collectively evaluated 4,852 992 3,964 7,162 953 17,923 Total ACL $ 4,852 $ 992 $ 3,964 $ 7,162 $ 953 $ 17,923 December 31, 2023 Individually evaluated $ — $ — $ — $ — $ — $ — Collectively evaluated 5,120 940 3,717 6,774 929 17,480 Total ACL $ 5,120 $ 940 $ 3,717 $ 6,774 $ 929 $ 17,480 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 tables present the amortized cost basis of collateral-dependent individually evaluated loans as of June 30, 2024 and December 31, 2023. June 30, 2024 (in thousands) Real Estate Other Collateral Non-Accrual Loans with No Allowance Commercial real estate $ 599 $ — $ 599 Commercial and industrial — 6,175 6,175 Residential mortgage 1,995 — 1,995 Total Loans $ 2,594 $ 6,175 $ 8,769 December 31, 2023 (in thousands) Real Estate Other Collateral Non-Accrual Loans with No Allowance Commercial real estate $ 826 $ — $ 826 Residential mortgage 2,137 — 2,137 Total Loans $ 2,963 $ — $ 2,963 The following tables present the activity in the ACL for the six- and three-month periods ended June 30, 2024 and 2023: Six months ended (in thousands) Commercial Real Estate Acquisition and Development Commercial and Industrial Residential Mortgage Consumer Unallocated Total Beginning balance at January 1, 2024 $ 5,120 $ 940 $ 3,717 $ 6,774 $ 929 $ — $ 17,480 Loan charge-offs — — (1,230) (45) (824) — (2,099) Recoveries collected 37 6 34 26 227 — 330 Credit loss (credit)/expense (305) 46 1,443 407 621 — 2,212 ACL balance at June 30, 2024 $ 4,852 $ 992 $ 3,964 $ 7,162 $ 953 $ — $ 17,923 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 (credit)/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 Three months ended (in thousands) Commercial Real Estate Acquisition and Development Commercial and Industrial Residential Mortgage Consumer Unallocated Total ACL balance at April 1, 2024 $ 4,962 $ 1,014 $ 4,002 $ 7,017 $ 987 $ — $ 17,982 Loan charge-offs — — (1,118) (45) (318) — (1,481) Recoveries collected — 3 3 9 157 — 172 Credit loss (credit)/expense (110) (25) 1,078 181 127 — 1,251 ACL balance at June 30, 2024 $ 4,852 $ 992 $ 3,964 $ 7,162 $ 953 $ — $ 17,923 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/(credit) 171 29 (45) 93 186 — 434 ACL balance at June 30, 2023 $ 4,946 $ 1,134 $ 3,549 $ 6,417 $ 859 $ — $ 16,905 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 tabls present loan balances by year of origination and internally assigned risk rating for our portfolio segments as of dates presented: (in thousands) 2024 2023 2022 2021 2020 2019 and Prior Revolving Total Portfolio Loans June 30, 2024 Commercial real estate: Non-owner-occupied Pass $ 5,866 $ 23,850 $ 66,716 $ 29,620 $ 52,809 $ 111,451 $ 1,874 $ 292,186 Special Mention — — — — 732 — — 732 Substandard — — — — — 2,729 — 2,729 Total non-owner occupied 5,866 23,850 66,716 29,620 53,541 114,180 1,874 295,647 Current period gross charge-offs — — — — — — — — All other CRE Pass 10,726 31,357 30,646 24,536 20,152 77,244 5,297 199,958 Special Mention — — — 1,434 204 — — 1,638 Substandard — — — — — 3,491 282 3,773 Total all other CRE 10,726 31,357 30,646 25,970 20,356 80,735 5,579 205,369 Current period gross charge-offs — — — — — — — — Acquisition and development: 1-4 family residential construction Pass 1,325 13,866 — — — — 2,298 17,489 Special Mention — — — — — — — — Substandard — — — — — — — — Total acquisition and development 1,325 13,866 — — — — 2,298 17,489 Current period gross charge-offs — — — — — — — — All other A&D Pass 7,622 24,112 19,888 1,917 2,281 10,557 4,251 70,628 Special Mention — — — — — — — — Substandard — — — — — 97 — 97 Total all other A&D 7,622 24,112 19,888 1,917 2,281 10,654 4,251 70,725 Current period gross charge-offs — — — — — — — — Commercial and industrial: Pass 16,310 40,278 59,753 20,774 8,092 16,183 82,938 244,328 Special Mention — — — — 1,979 — 3,847 5,826 Substandard — — 4,079 1,142 6,584 765 2,947 15,517 Total commercial and industrial 16,310 40,278 63,832 21,916 16,655 16,948 89,732 265,671 Current period gross charge-offs 465 — 57 651 41 16 — 1,230 Residential mortgage: Residential mortgage - term Pass 16,831 57,219 97,006 84,619 37,150 146,885 2,186 441,896 Special Mention — — — 40 — — — 40 Substandard — — — 1,067 15 5,636 55 6,773 Total residential mortgage - term 16,831 57,219 97,006 85,726 37,165 152,521 2,241 448,709 Current period gross charge-offs — — — — — 30 — 30 Residential mortgage - home equity Pass 30 940 4,243 818 444 669 54,643 61,787 Special Mention — — — — — — — — Substandard — — — — 36 14 563 613 Total residential mortgage - home equity 30 940 4,243 818 480 683 55,206 62,400 Current period gross charge-offs — — 15 — — — — 15 Consumer: Pass 5,990 14,615 8,324 4,804 1,592 18,632 2,791 56,748 Special Mention — — — — — — — — Substandard — 72 17 103 20 5 — 217 Total consumer 5,990 14,687 8,341 4,907 1,612 18,637 2,791 56,965 Current period gross charge-offs 96 174 60 15 11 468 — 824 Total Portfolio Loans Pass 64,700 206,237 286,576 167,088 122,520 381,621 156,278 1,385,020 Special Mention — — — 1,474 2,915 — 3,847 8,236 Substandard — 72 4,096 2,312 6,655 12,737 3,847 29,719 Total Portfolio Loans $ 64,700 $ 206,309 $ 290,672 $ 170,874 $ 132,090 $ 394,358 $ 163,972 $ 1,422,975 Current YTD Period: Current period gross charge-offs $ 561 $ 174 $ 132 $ 666 $ 52 $ 514 $ — $ 2,099 (in thousands) 2023 2022 2021 2020 2019 2018 and Prior Revolving Total Portfolio Loans December 31, 2023 Commercial real estate: Non-owner-occupied Pass $ 23,511 $ 65,878 $ 30,332 $ 54,270 $ 40,575 $ 65,134 $ 1,138 $ 280,838 Special Mention — — — — — 4,331 — 4,331 Substandard — — — — — 11,401 — 11,401 Total non-owner occupied 23,511 65,878 30,332 54,270 40,575 80,866 1,138 296,570 Current period gross charge-offs — — — — — 87 — 87 All other CRE Pass 30,130 27,379 27,042 20,691 22,879 60,054 4,495 192,670 Special Mention — — — 644 — — — 644 Substandard — — — — 1,847 1,372 600 3,819 Total all other CRE 30,130 27,379 27,042 21,335 24,726 61,426 5,095 197,133 Current period gross charge-offs — — — — — — — — Acquisition and development: 1-4 family residential construction Pass 13,745 3,446 — — — — 1,033 18,224 Special Mention — — — — — — — — Substandard — — — — — — — — Total acquisition and development 13,745 3,446 — — — — 1,033 18,224 Current period gross charge-offs — — — — — — — — All other A&D Pass 12,184 25,099 2,966 3,046 1,301 9,946 4,181 58,723 Special Mention — — — — — — — — Substandard — — — — — 113 — 113 Total all other A&D 12,184 25,099 2,966 3,046 1,301 10,059 4,181 58,836 Current period gross charge-offs — — — — — — — — Commercial and industrial: Pass 52,004 66,559 24,387 11,753 8,872 10,052 78,992 252,619 Special Mention 558 — — — — — — 558 Substandard — 9,352 1,854 6,806 98 837 2,480 21,427 Total commercial and industrial 52,562 75,911 26,241 18,559 8,970 10,889 81,472 274,604 Current period gross charge-offs 100 103 35 166 — 19 — 423 Residential mortgage: Residential mortgage - term Pass 51,625 94,723 88,835 38,228 25,375 130,402 1,577 430,765 Special Mention — — — — — — — — Substandard — 138 929 17 98 5,825 57 7,064 Total residential mortgage - term 51,625 94,861 89,764 38,245 25,473 136,227 1,634 437,829 Current period gross charge-offs — — — — — 13 — 13 Residential mortgage - home equity Pass 1,127 4,657 864 475 286 489 53,467 61,365 Special Mention — — — — — — — — Substandard — — — 38 — 16 623 677 Total residential mortgage - home equity 1,127 4,657 864 513 286 505 54,090 62,042 Current period gross charge-offs — — — — — 42 — 42 Consumer: Pass 18,299 10,616 6,361 2,206 510 20,365 2,873 61,230 Special Mention — — — — — — — — Substandard 14 35 113 23 6 2 6 199 Total consumer 18,313 10,651 6,474 2,229 516 20,367 2,879 61,429 Current period gross charge-offs 236 223 74 8 4 329 — 874 Total Portfolio Loans Pass 202,625 298,357 180,787 130,669 99,798 296,442 147,756 1,356,434 Special Mention 558 — — 644 — 4,331 — 5,533 Substandard 14 9,525 2,896 6,884 2,049 19,566 3,766 44,700 Total Portfolio Loans $ 203,197 $ 307,882 $ 183,683 $ 138,197 $ 101,847 $ 320,339 $ 151,522 $ 1,406,667 Current YTD Period: Current period gross charge-offs $ 336 $ 326 $ 109 $ 174 $ 4 $ 490 $ — $ 1,439 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) 2024 2023 2022 2021 2020 2019 and Prior Revolving Total Portfolio Loans June 30, 2024 Commercial real estate: Non-owner-occupied Performing $ 5,866 $ 23,850 $ 66,716 $ 29,620 $ 53,541 $ 114,180 $ 1,874 $ 295,647 Nonperforming — — — — — — — — Total non-owner occupied 5,866 23,850 66,716 29,620 53,541 114,180 1,874 295,647 All other CRE Performing 10,726 31,357 30,646 25,970 20,356 80,136 5,579 204,770 Nonperforming — — — — — 599 — 599 Total all other CRE 10,726 31,357 30,646 25,970 20,356 80,735 5,579 205,369 Acquisition and development: 1-4 family residential construction Performing 1,325 13,866 — — — — 2,298 17,489 Nonperforming — — — — — — — — Total acquisition and development 1,325 13,866 — — — — 2,298 17,489 All other A&D Performing 7,622 24,112 19,888 1,917 2,281 10,557 4,251 70,628 Nonperforming — — — — — 97 — 97 Total all other A&D 7,622 24,112 19,888 1,917 2,281 10,654 4,251 70,725 Commercial and industrial: Performing 16,310 40,278 59,753 20,819 16,655 16,947 88,723 259,485 Nonperforming — — 4,079 1,097 — 1 1,009 6,186 Total commercial and industrial 16,310 40,278 63,832 21,916 16,655 16,948 89,732 265,671 Residential mortgage: Residential mortgage - term Performing 16,831 57,219 97,006 85,596 37,012 150,011 2,211 445,886 Nonperforming — — — 130 153 2,510 30 2,823 Total residential mortgage - term 16,831 57,219 97,006 85,726 37,165 152,521 2,241 448,709 Residential mortgage - home equity Performing 30 940 4,243 818 444 669 55,113 62,257 Nonperforming — — — — 36 14 93 143 Total residential mortgage - home equity 30 940 4,243 818 480 683 55,206 62,400 Consumer: Performing 5,990 14,669 8,324 4,846 1,612 18,617 2,791 56,849 Nonperforming — 18 17 61 — 20 — 116 Total consumer 5,990 14,687 8,341 4,907 1,612 18,637 2,791 56,965 Total Portfolio Loans Performing 64,700 206,291 286,576 169,586 131,901 391,117 162,840 1,413,011 Nonperforming — 18 4,096 1,288 189 3,241 1,132 9,964 Total Portfolio Loans $ 64,700 $ 206,309 $ 290,672 $ 170,874 $ 132,090 $ 394,358 $ 163,972 $ 1,422,975 (in thousands) 2023 2022 2021 2020 2019 2018 and Prior Revolving Total Portfolio Loans December 31, 2023 Commercial real estate: Non-owner-occupied Performing $ 23,511 $ 65,878 $ 30,332 $ 54,270 $ 40,575 $ 80,639 $ 1,138 $ 296,343 Nonperforming — — — — — 227 — 227 Total non-owner occupied 23,511 65,878 30,332 54,270 40,575 80,866 1,138 296,570 All other CRE Performing 30,130 27,379 27,042 21,335 24,726 60,827 5,095 196,534 Nonperforming — — — — — 599 — 599 Total all other CRE 30,130 27,379 27,042 21,335 24,726 61,426 5,095 197,133 Acquisition and development: 1-4 family residential construction Performing 13,745 3,446 — — — — 1,033 18,224 Nonperforming — — — — — — — — Total acquisition and development 13,745 3,446 — — — — 1,033 18,224 All other A&D Performing 12,184 25,099 2,966 3,046 1,301 9,946 4,181 58,723 Nonperforming — — — — — 113 — 113 Total all other A&D 12,184 25,099 2,966 3,046 1,301 10,059 4,181 58,836 Commercial and industrial: Performing 52,562 75,911 26,241 18,559 8,970 10,889 81,472 274,604 Nonperforming — — — — — — — — Total commercial and industrial 52,562 75,911 26,241 18,559 8,970 10,889 81,472 274,604 Residential mortgage: Residential mortgage - term Performing 51,625 94,722 89,629 38,245 25,375 133,526 1,603 434,725 Nonperforming — 139 135 — 98 2,701 31 3,104 Total residential mortgage - term 51,625 94,861 89,764 38,245 25,473 136,227 1,634 437,829 Residential mortgage - home equity Performing 1,127 4,657 864 475 286 488 53,802 61,699 Nonperforming — — — 38 — 17 288 343 Total residential mortgage - home equity 1,127 4,657 864 513 286 505 54,090 62,042 Consumer: Performing 18,304 10,616 6,405 2,229 516 20,367 2,879 61,316 Nonperforming 9 35 69 — — — — 113 Total consumer 18,313 10,651 6,474 2,229 516 20,367 2,879 61,429 Total Portfolio Loans Performing 203,188 307,708 183,479 138,159 101,749 316,682 151,203 1,402,168 Nonperforming 9 174 204 38 98 3,657 319 4,499 Total Portfolio Loans $ 203,197 $ 307,882 $ 183,683 $ 138,197 $ 101,847 $ 320,339 $ 151,522 $ 1,406,667 Loan Modfications for Borrowers Experiencing Financial Difficulty modifications. Therefore, the disclosures related to loan restructurings are for modifications which have a direct impact on cash flows. The following tables present the amortized cost basis as of June 30, 2024 and the financial effect of loans modified to borrowers experiencing financial difficulty during the six- and three-months ended June 30, 2024: (in thousands) Term Extension Percentage of Total Loan Type Weighted Average Term and Principal Payment Extension Six months ended June 30, 2024 Owner-occupied commercial real estate $ 893 0.4% 12 months Total $ 893 (in thousands) Term Extension Percentage of Total Loan Type Weighted Average Term and Principal Payment Extension Three months ended June 30, 2024 Owner-occupied commercial real estate $ 893 0.4% 12 months Total $ 893 |