| LOANS AND ALLOWANCE FOR CREDIT LOSSES | LOANS AND ALLOWANCE FOR CREDIT LOSSES The Company’s loan portfolio is grouped into segments, which are further broken down into classes to allow management to monitor the performance by the borrower and to monitor the yield on the portfolio. The risks associated with lending activities differ among the various loan classes and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans, and general economic conditions. All of these factors may adversely impact both the borrower’s ability to repay its loans and the value of its associated collateral. The Company has various types of commercial real estate loans, which have differing levels of credit risk. Owner-occupied commercial real estate loans are generally dependent upon the successful operation of the borrower’s business, with the cash flows generated from the business being the primary source of repayment of the loan. If the business suffers a downturn in sales or profitability, the borrower’s ability to repay the loan could be in jeopardy. Non-owner occupied and multi-family commercial real estate loans and non-owner occupied residential loans present a different credit risk to the Company than owner-occupied commercial real estate loans, as the repayment of the loan is dependent upon the borrower’s ability to generate a sufficient level of occupancy to produce rental income that exceeds debt service requirements and operating expenses. Lower occupancy or lease rates may result in a reduction in cash flows, which hinders the ability of the borrower to meet debt service requirements and may result in lower collateral values. The Company generally recognizes that greater risk is inherent in these credit relationships compared to owner-occupied loans mentioned above. Acquisition and development loans consist of 1-4 family residential construction and commercial and land development loans. The risk of loss on these loans is largely dependent on the Company’s ability to assess the property’s value at the completion of the project, which should exceed the property’s construction costs. During the construction phase, a number of factors could potentially negatively impact the collateral value, including cost overruns, delays in completing the project, competition, and real estate market conditions, which may change based on the supply of similar properties in the area. In the event the collateral value at the completion of the project is not sufficient to cover the outstanding loan balance, the Company must rely upon other repayment sources, if any, including the guarantors of the project or other collateral securing the loan. Commercial and industrial loans include advances to businesses for general commercial purposes and include permanent and short-term working capital, machinery and equipment financing, and may be either in the form of lines of credit or term loans. Although commercial and industrial loans may be unsecured to our highest-rated borrowers, the majority of these loans are secured by the borrower’s accounts receivable, inventory and machinery and equipment. In a significant number of these loans, the collateral also includes the business real estate or the business owner’s personal real estate or assets. Commercial and industrial loans present credit exposure to the Company, as they are more susceptible to risk of loss during a downturn in the economy as borrowers may have greater difficulty in meeting their debt service requirements and the value of the collateral may decline. The Company attempts to mitigate this risk through its underwriting standards, including evaluating the creditworthiness of the borrower and, to the extent available, credit ratings on the business. Additionally, monitoring of the loans through annual renewals and meetings with the borrowers is typical. However, these procedures cannot eliminate the risk of loss associated with commercial and industrial lending. Municipal loans consist of extensions of credit to municipalities and school districts within the Company’s market area. These loans generally present a lower risk than commercial and industrial loans, as they are generally secured by the municipality’s full taxing authority, by revenue obligations, or by its ability to raise assessments on its clients for a specific utility. The Company originates loans to its retail clients, including fixed-rate and adjustable first lien mortgage loans, with the underlying 1-4 family owner occupied residential property securing the loan. The Company’s risk exposure is minimized in these types of loans through the evaluation of the creditworthiness of the borrower, including credit scores and debt-to-income ratios, and underwriting standards, which limit the loan-to-value ratio to generally no more than 80% upon loan origination, unless the borrower obtains private mortgage insurance. Home equity loans, including term loans and lines of credit, present a slightly higher risk to the Company than 1-4 family first liens, as these loans can be first or second liens on 1-4 family owner occupied residential property, but can have loan-to-value ratios of no greater than 85% of the value of the real estate taken as collateral. The creditworthiness of the borrower is also considered, including credit scores and debt-to-income ratios. Installment and other loans’ credit risk is mitigated through prudent underwriting standards, including evaluation of the creditworthiness of the borrower through credit scores and debt-to-income ratios and, if secured, the collateral value of the assets. These loans can be unsecured or secured by assets the value of which may depreciate quickly or may fluctuate and may present a greater risk to the Company than 1-4 family residential loans. The following table presents the loan portfolio by segment and class, excluding residential LHFS, at September 30, 2024 and December 31, 2023: September 30, 2024 December 31, 2023 Commercial real estate: Owner occupied $ 622,726 $ 373,757 Non-owner occupied 1,164,501 694,638 Multi-family 276,296 150,675 Non-owner occupied residential 190,786 95,040 Acquisition and development: 1-4 family residential construction 56,383 24,516 Commercial and land development 262,317 115,249 Commercial and industrial 601,469 367,085 Municipal 27,960 9,812 Residential mortgage: First lien 451,195 266,239 Home equity - term 6,508 5,078 Home equity - lines of credit 303,165 186,450 Installment and other loans 18,131 9,774 Total loans $ 3,981,437 $ 2,298,313 In order to monitor ongoing risk associated with its loan portfolio and specific loans within the segments, management uses an internal grading system. The first several rating categories, representing the lowest risk to the Bank, are combined and given a “Pass” rating. Management generally follows regulatory definitions in assigning criticized ratings to loans, including "Special Mention," "Substandard," "Doubtful" or "Loss." The Special Mention category includes loans that have potential weaknesses that may, if not monitored or corrected, weaken the asset or inadequately protect the Bank's position at some future date. These assets pose elevated risk, but their weakness does not yet justify a more severe, or classified rating. Substandard loans are classified as they have a well-defined weakness, or weaknesses that jeopardize liquidation of the debt. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Substandard loans include loans that management may determine to be either individually evaluated, referred to as "Substandard - Individually Evaluated Loan," or collectively evaluated, referred to as "Substandard Non-Individually Evaluated Loan." A Doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as Loss is deferred. Loss loans are considered uncollectible, as the borrowers are often in bankruptcy, have suspended debt repayments, or have ceased business operations. Once a loan is classified as Loss, there is little prospect of collecting the loan’s principal or interest and it is charged off. The Company has a loan review policy and program, which is designed to identify and monitor risk in the lending function. The Management ERM Committee, comprised of executive officers, senior officers and loan department personnel, is charged with the oversight of overall credit quality and risk exposure of the Company's loan portfolio. This includes the monitoring of the lending activities of all Company personnel with respect to underwriting and processing new loans and the timely follow-up and corrective action for loans showing signs of deterioration in quality. A loan review program provides the Company with an independent review of the commercial loan portfolio on an ongoing basis. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as extended delinquencies, bankruptcy, repossession or death of the borrower occurs, which heightens awareness as to a possible credit event. Internal loan reviews are completed annually on all commercial relationships with a committed loan balance in excess of $1.0 million, which includes confirmation of risk rating by an independent credit officer. In addition, all commercial relationships greater than $500 thousand rated Substandard, Doubtful or Loss are reviewed quarterly and corresponding risk ratings are reaffirmed by the Company's Problem Loan Committee, with subsequent reporting to the Management ERM Committee and the Board of Directors. The following table presents the amortized cost basis of the loan portfolio, by year of origination, loan class, and credit quality, as of September 30, 2024 and December 31, 2023. For residential and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan and payment activity, which residential mortgage and installment and other consumer loans are presented below based on payment performance: performing or nonperforming. Term Loans Amortized Cost Basis by Origination Year As of September 30, 2024 2024 2023 2022 2021 2020 Prior Revolving Loans Amortized Basis Revolving Loans Converted to Term Total Commercial Real Estate: Owner-occupied: Risk rating Pass $ 30,447 $ 85,352 $ 129,668 $ 114,761 $ 32,532 $ 160,478 $ 6,446 $ 283 $ 559,967 Special mention — 2,688 313 1,348 1,831 6,670 165 — 13,015 Substandard - Non-IEL 110 2,077 17,653 7,597 8,435 8,641 94 — 44,607 Substandard - IEL — 192 — 896 932 3,117 — — 5,137 Total owner-occupied loans $ 30,557 $ 90,309 $ 147,634 $ 124,602 $ 43,730 $ 178,906 $ 6,705 $ 283 $ 622,726 Current period gross charge offs - owner-occupied $ — $ — $ 13 $ 313 $ — $ 12 $ — $ — $ 338 Non-owner occupied: Risk rating Pass $ 76,044 $ 137,520 $ 194,349 $ 328,128 $ 130,201 $ 262,980 $ 778 $ 398 $ 1,130,398 Special mention — 10,108 2,981 337 8,858 3,790 — — 26,074 Substandard - Non-IEL — — 1,156 — — 4,594 — 859 6,609 Substandard - IEL — — — — — 1,420 — — 1,420 Total non-owner occupied loans $ 76,044 $ 147,628 $ 198,486 $ 328,465 $ 139,059 $ 272,784 $ 778 $ 1,257 $ 1,164,501 Current period gross charge offs - non-owner occupied $ — $ — $ — $ — $ — $ — $ — $ — $ — Multi-family: Risk rating Pass $ 6,916 $ 8,438 $ 106,885 $ 59,107 $ 31,234 $ 61,297 $ 75 $ — $ 273,952 Special mention — — 1,107 — — — — — 1,107 Substandard - Non-IEL — — — — — 237 — — 237 Substandard - IEL — — — — — 1,000 — — 1,000 Total multi-family loans $ 6,916 $ 8,438 $ 107,992 $ 59,107 $ 31,234 $ 62,534 $ 75 $ — $ 276,296 Current period gross charge offs - multi-family $ — $ — $ — $ — $ — $ 7 $ — $ — $ 7 Non-owner occupied residential: Risk rating Pass $ 8,894 $ 23,655 $ 31,532 $ 30,155 $ 19,933 $ 73,281 $ 439 $ — $ 187,889 Special mention — — — 147 43 526 — — 716 Substandard - Non-IEL — — 52 134 — 1,431 — — 1,617 Substandard - IEL — — 391 33 — 140 — — 564 Total non-owner occupied residential loans $ 8,894 $ 23,655 $ 31,975 $ 30,469 $ 19,976 $ 75,378 $ 439 $ — $ 190,786 Current period gross charge offs - non-owner occupied residential $ — $ — $ — $ — $ — $ — $ — $ — $ — continued Term Loans Amortized Cost Basis by Origination Year As of September 30, 2024 2024 2023 2022 2021 2020 Prior Revolving Loans Amortized Basis Revolving Loans Converted to Term Total Acquisition and development: 1-4 family residential construction: Risk rating Pass $ 32,828 $ 14,652 $ 5,175 $ 1,152 $ 940 $ 946 $ — $ 242 $ 55,935 Special mention 74 222 — — — — — — 296 Substandard - Non-IEL — — — — — — — — — Substandard - IEL — — — 152 — — — — 152 Total 1-4 family residential construction loans $ 32,902 $ 14,874 $ 5,175 $ 1,304 $ 940 $ 946 $ — $ 242 $ 56,383 Current period gross charge offs - 1-4 family residential construction $ — $ — $ — $ — $ — $ — $ — $ — $ — Commercial and land development: Risk rating Pass $ 44,312 $ 71,243 $ 70,096 $ 16,594 $ 19,648 $ 7,079 $ 4,964 $ 8,837 $ 242,773 Special mention 2,306 2,382 4,372 994 2,123 3,437 — — 15,614 Substandard - Non-IEL — 275 — — — — — — 275 Substandard - IEL — — 3,285 370 — — — — 3,655 Total commercial and land development loans $ 46,618 $ 73,900 $ 77,753 $ 17,958 $ 21,771 $ 10,516 $ 4,964 $ 8,837 $ 262,317 Current period gross charge offs - commercial and land development $ — $ 23 $ — $ — $ — $ — $ — $ — $ 23 Commercial and Industrial: Risk rating Pass $ 71,366 $ 93,138 $ 87,249 $ 80,565 $ 28,924 $ 85,851 $ 105,250 $ 4,138 $ 556,481 Special mention 446 2,153 2,640 245 1,379 1,358 3,041 — 11,262 Substandard - Non-IEL — 1,382 2,868 7,656 — 3,212 9,548 — 24,666 Substandard - IEL 419 3,486 190 622 2,965 1,364 14 — 9,060 Total commercial and industrial loans $ 72,231 $ 100,159 $ 92,947 $ 89,088 $ 33,268 $ 91,785 $ 117,853 $ 4,138 $ 601,469 Current period gross charge offs - commercial and industrial $ — $ — $ 202 $ 11 $ — $ 6 $ — $ — $ 219 Municipal: Risk rating Pass $ 227 $ 10,388 $ 3,124 $ 293 $ 13,928 $ — $ — $ 27,960 Total municipal loans $ 227 $ — $ 10,388 $ 3,124 $ 293 $ 13,928 $ — $ — $ 27,960 Current period gross charge offs - municipal $ — $ — $ — $ — $ — $ — $ — $ — $ — Residential mortgage: First lien: Payment performance Performing $ 50,716 $ 98,953 $ 105,266 $ 53,549 $ 25,783 $ 111,910 $ — $ 626 $ 446,803 Nonperforming — 312 244 487 116 3,233 — — 4,392 Total first lien loans $ 50,716 $ 99,265 $ 105,510 $ 54,036 $ 25,899 $ 115,143 $ — $ 626 $ 451,195 Current period gross charge offs - first lien $ — $ — $ — $ — $ — $ — $ — $ — $ — continued Term Loans Amortized Cost Basis by Origination Year As of September 30, 2024 2024 2023 2022 2021 2020 Prior Revolving Loans Amortized Basis Revolving Loans Converted to Term Total Home equity - term: Payment performance Performing $ 621 $ 867 $ 1,075 $ 209 $ 478 $ 3,221 $ — $ — $ 6,471 Nonperforming — — 36 — — 1 — — 37 Total home equity - term loans $ 621 $ 867 $ 1,111 $ 209 $ 478 $ 3,222 $ — $ — $ 6,508 Current period gross charge offs - home equity - term $ — $ — $ — $ — $ — $ — $ — $ — $ — Home equity - lines of credit: Payment performance Performing $ — $ — $ — $ — $ — $ — $ 225,526 $ 75,987 $ 301,513 Nonperforming — — — — — — 1,024 628 1,652 Total residential real estate - home equity - lines of credit loans $ — $ — $ — $ — $ — $ — $ 226,550 $ 76,615 $ 303,165 Current period gross charge offs - home equity - lines of credit $ — $ — $ — $ — $ — $ — $ 50 $ — $ 50 Installment and other loans: Payment performance Performing $ 2,080 $ 3,595 $ 2,816 $ 2,042 $ 455 $ 664 $ 6,436 $ 17 $ 18,105 Nonperforming 9 3 — — — 14 — — 26 Total Installment and other loans $ 2,089 $ 3,598 $ 2,816 $ 2,042 $ 455 $ 678 $ 6,436 $ 17 $ 18,131 Current period gross charge offs - installment and other $ 115 $ 12 $ — $ 32 $ — $ 33 $ 14 $ — $ 206 Term Loans Amortized Cost Basis by Origination Year As of December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Basis Revolving Loans Converted to Term Total Commercial Real Estate: Owner-occupied: Risk rating Pass $ 50,829 $ 103,192 $ 69,888 $ 21,232 $ 21,251 $ 62,634 $ 4,941 $ — $ 333,967 Special mention — — 2,517 1,176 — 1,314 — — 5,007 Substandard - Non-IEL — 9,923 — 6,075 — 2,687 312 — 18,997 Substandard - IEL — — — 13,366 — 2,420 — — 15,786 Total owner-occupied loans $ 50,829 $ 113,115 $ 72,405 $ 41,849 $ 21,251 $ 69,055 $ 5,253 $ — $ 373,757 Current period gross charge offs - owner-occupied $ — $ — $ — $ — $ — $ — $ — $ — $ — Non-owner occupied: Risk rating Pass $ 82,879 $ 102,212 $ 235,031 $ 83,652 $ 63,176 $ 120,696 $ 509 $ — $ 688,155 Special mention — — — 524 — 2,112 — — 2,636 Substandard - Non-IEL — — — — — 2,739 — 868 3,607 Substandard - IEL — — — — — 240 — — 240 Total non-owner occupied loans $ 82,879 $ 102,212 $ 235,031 $ 84,176 $ 63,176 $ 125,787 $ 509 $ 868 $ 694,638 Current period gross charge offs - non-owner occupied $ — $ — $ — $ — $ — $ — $ — $ — $ — continued Term Loans Amortized Cost Basis by Origination Year As of December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Basis Revolving Loans Converted to Term Total Multi-family: Risk rating Pass $ 2,701 $ 61,805 $ 28,541 $ 12,694 $ 7,437 $ 33,895 $ 117 $ — $ 147,190 Special mention — — — — 244 2,008 — — 2,252 Substandard - Non-IEL — — — — — — — — — Substandard - IEL — — — — — 1,233 — — 1,233 Total multi-family loans $ 2,701 $ 61,805 $ 28,541 $ 12,694 $ 7,681 $ 37,136 $ 117 $ — $ 150,675 Current period gross charge offs - multi-family $ — $ — $ — $ — $ — $ — $ — $ — $ — Non-owner occupied residential: Risk rating Pass $ 10,075 $ 20,473 $ 16,947 $ 7,974 $ 6,444 $ 28,319 $ 1,130 $ — $ 91,362 Special mention — — — — — 731 — — 731 Substandard - Non-IEL — — — — — 375 — — 375 Substandard - IEL 2 — 192 1,461 — 917 — — 2,572 Total non-owner occupied residential loans $ 10,077 $ 20,473 $ 17,139 $ 9,435 $ 6,444 $ 30,342 $ 1,130 $ — $ 95,040 Current period gross charge offs - non-owner occupied residential $ — $ — $ — $ — $ — $ 12 $ — $ — $ 12 Acquisition and development: 1-4 family residential construction: Risk rating Pass $ 18,820 $ 5,400 $ — $ — $ — $ — $ — $ — $ 24,220 Special mention 222 — 74 — — — — — 296 Substandard - Non-IEL — — — — — — — — — Substandard - IEL — — — — — — — — — Total 1-4 family residential construction loans $ 19,042 $ 5,400 $ 74 $ — $ — $ — $ — $ — $ 24,516 Current period gross charge offs - 1-4 family residential construction $ — $ — $ — $ — $ — $ — $ — $ — $ — Commercial and land development: Risk rating Pass $ 28,829 $ 48,453 $ 9,847 $ 9,927 $ 110 $ 1,774 $ 6,574 $ 6,936 $ 112,450 Special mention — — — 1,001 — 437 — — 1,438 Substandard - Non-IEL — — — — — — — — — Substandard - IEL — — — — — 1,361 — — 1,361 Total commercial and land development loans $ 28,829 $ 48,453 $ 9,847 $ 10,928 $ 110 $ 3,572 $ 6,574 $ 6,936 $ 115,249 Current period gross charge offs - commercial and land development $ — $ — $ — $ — $ — $ — $ — $ — $ — continued Term Loans Amortized Cost Basis by Origination Year As of December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Basis Revolving Loans Converted to Term Total Commercial and Industrial: Risk rating Pass $ 67,735 $ 69,670 $ 67,117 $ 24,580 $ 10,753 $ 20,775 $ 86,475 $ 1,522 $ 348,627 Special mention — 4,251 4,364 11 552 356 2,258 — 11,792 Substandard - Non-IEL — — 4,682 — 5 225 1,082 — 5,994 Substandard - IEL — 69 — 7 — 455 141 — 672 Total commercial and industrial loans $ 67,735 $ 73,990 $ 76,163 $ 24,598 $ 11,310 $ 21,811 $ 89,956 $ 1,522 $ 367,085 Current period gross charge offs - commercial and industrial $ — $ 161 $ 106 $ — $ — $ 8 $ 473 $ — $ 748 Municipal: Risk rating Pass $ — $ — $ 3,403 $ — $ — $ 6,409 $ — $ — $ 9,812 Total municipal loans $ — $ — $ 3,403 $ — $ — $ 6,409 $ — $ — $ 9,812 Current period gross charge offs - municipal $ — $ — $ — $ — $ — $ — $ — $ — $ — Residential mortgage: First lien: Payment performance Performing $ 43,641 $ 71,311 $ 34,704 $ 8,056 $ 7,465 $ 97,943 $ — $ 638 $ 263,758 Nonperforming — — — — 120 2,361 — — 2,481 Total first lien loans $ 43,641 $ 71,311 $ 34,704 $ 8,056 $ 7,585 $ 100,304 $ — $ 638 $ 266,239 Current period gross charge offs - first lien $ — $ — $ — $ — $ — $ 58 $ — $ — $ 58 Home equity - term: Payment performance Performing $ 607 $ 732 $ 90 $ 426 $ 115 $ 3,105 $ — $ — $ 5,075 Nonperforming — — — — — 3 — — 3 Total home equity - term loans $ 607 $ 732 $ 90 $ 426 $ 115 $ 3,108 $ — $ — $ 5,078 Current period gross charge offs - home equity - term $ — $ — $ — $ — $ — $ — $ — $ — $ — Home equity - lines of credit: Payment performance Performing $ — $ — $ — $ — $ — $ — $ 107,967 $ 77,171 $ 185,138 Nonperforming — — — — — — 1,296 16 1,312 Total residential real estate - home equity - lines of credit loans $ — $ — $ — $ — $ — $ — $ 109,263 $ 77,187 $ 186,450 Current period gross charge offs - home equity - lines of credit $ — $ — $ — $ — $ — $ — $ 40 $ — $ 40 Installment and other loans: Payment performance Performing $ 758 $ 413 $ 332 $ 106 $ 670 $ 947 $ 6,500 $ — $ 9,726 Nonperforming 3 — — — 33 12 — — 48 Total Installment and other loans $ 761 $ 413 $ 332 $ 106 $ 703 $ 959 $ 6,500 $ — $ 9,774 Current period gross charge offs - installment and other $ 181 $ 24 $ — $ — $ 4 $ 10 $ 28 $ — $ 247 For commercial real estate, acquisition and development, commercial and industrial and municipal segments, a loan is evaluated individually when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining expected credit losses, and whether the loan will be individually evaluated, include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not individually evaluated. Generally, loans that are more than 90 days past due will be individually evaluated for a specific reserve. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed to determine if the loan should be placed on nonaccrual status. Nonaccrual loans are, by definition, deemed to be individually evaluated under CECL. A specific reserve allocation for individually evaluated loans is measured on a loan-by-loan basis for commercial and construction loans by either the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. For loans that are experiencing financial difficulty for extended periods of time, periodic updates on fair values are obtained, which may include updated appraisals. Updated fair values are incorporated into the analysis in the next reporting period. Loan charge-offs, which may include partial charge-offs, are taken on an individually evaluated loan that is collateral dependent if the carrying balance of the loan exceeds the appraised value of the collateral, the loan has been placed on nonaccrual status or identified as uncollectible, and it is deemed to be a confirmed loss. Typically, loans with a charge-off or partial charge-off will continue to be individually evaluated. Generally, an individually evaluated loan with a partial charge-off may continue to have a specific reserve on it after the partial charge-off, if factors warrant. At September 30, 2024 and December 31, 2023, the Company’s individually evaluated loans were measured based on the estimated fair value of the collateral securing the loan, except for purchased auto loans on nonaccrual status and accruing loans accounted for as TDRs prior to the adoption of ASU 2022-02. For real estate loans, collateral generally consists of commercial or residential real estate, but in the case of commercial and industrial loans, it could also consist of accounts receivable, inventory, equipment or other business assets. Commercial and industrial loans may also have real estate collateral. Updated appraisals are generally required every 18 months for classified commercial loans, secured by commercial real estate, in excess of $250 thousand. The “as is" value provided in the appraisal is often used as the fair value of the collateral in determining impairment, unless circumstances, such as subsequent improvements, approvals, or other circumstances, dictate that another value than that provided by the appraiser is more appropriate. Generally, commercial loans secured by real estate that are evaluated individually are measured at fair value using certified real estate appraisals that had been completed within the last 18 months. Appraised values are discounted for estimated costs to sell the property and other selling considerations to arrive at the property’s fair value. In those situations in which it is determined an updated appraisal is not required for loans individually evaluated for credit expected losses, fair values are based on either an existing appraisal or a DCF analysis as determined by management. The approaches are discussed below: • Existing appraisal – if the existing appraisal provides a strong loan-to-value ratio (generally 70% or lower) and, after consideration of market conditions and knowledge of the property and area, it is determined by the Credit Administration staff that there has not been a significant deterioration in the collateral value, the existing certified appraised value may be used. Discounts to the appraised value, as deemed appropriate for selling costs, are factored into the fair value. • Discounted cash flows – in limited cases, DCF may be used on projects in which the collateral is liquidated to reduce the borrowings outstanding and is used to validate collateral values derived from other approaches. Collateral on loans evaluated individually is not limited to real estate, and may consist of accounts receivable, inventory, equipment or other business assets. Estimated fair values are determined based on borrowers’ financial statements, inventory ledgers, accounts receivable aging or appraisals from individuals with knowledge in the business. Stated balances are generally discounted for the age of the financial information or the quality of the assets. In determining fair value, liquidation discounts are applied to this collateral based on existing loan evaluation policies. The Company distinguishes substandard loans for both loans individually and collectively evaluated, as it places less emphasis on a loan’s classification, and increased reliance on whether the loan was performing in accordance with the contractual terms. A substandard classification does not automatically meet the definition of an individually evaluated loan. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual extensions of credit classified as substandard. As a result, the Company’s methodology includes an evaluation of certain accruing commercial real estate, acquisition and development, commercial and industrial and municipal loans rated substandard to be collectively evaluated for credit expected losses. Although the Company believes these loans meet the definition of substandard, they are generally performing and management has concluded that it is likely the Company will be able to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. The following table presents the amortized cost basis of nonaccrual loans, according to loan class, with and without reserves on individually evaluated loans as of September 30, 2024 and December 31, 2023. The Company did not recognize interest income on nonaccrual loans during the three and nine months ended September 30, 2024 and 2023. During the nine months ended September 30, 2024, the Company recorded interest income previously applied to principal of $1.6 million from the payoff of a commercial real estate loan, which totaled $13.4 million at December 31, 2023. September 30, 2024 December 31, 2023 Nonaccrual loans with a related ACL Nonaccrual loans with no related ACL Total nonaccrual loans Loans Past Due 90+ Accruing Nonaccrual loans with a related ACL Nonaccrual loans with no related ACL Total nonaccrual loans Loans Past Due 90+ Accruing Commercial real estate: Owner-occupied $ 232 $ 4,905 $ 5,137 $ 252 $ — $ 15,786 $ 15,786 $ — Non-owner occupied — 1,420 1,420 — — 240 240 — Multi-family 1,000 — 1,000 — — 1,233 1,233 — Non-owner occupied residential — 564 564 — — 2,572 2,572 — Acquisition and development: 1-4 family residential construction — 152 152 — — — — — Commercial and land development 3,655 — 3,655 — — 1,361 1,361 — Commercial and industrial 2,455 6,605 9,060 — 68 604 672 — Residential mortgage: First lien 312 3,912 4,224 63 — 2,309 2,309 66 Home equity – term 37 — 37 22 — 3 3 — Home equity – lines of credit — 1,652 1,652 — — 1,312 1,312 — Installment and other loans 15 11 26 — 3 36 39 — Total $ 7,706 $ 19,221 $ 26,927 $ 337 $ 71 $ 25,456 $ 25,527 $ 66 A loan is considered to be collateral-dependent when the borrower is experiencing financial difficulty and the repayment is expected to be provided substantially through the operation or sale of collateral. At September 30, 2024 and December 31, 2023, substantially all individually evaluated loans were collateral-dependent and consisted primarily of commercial real estate, acquisition and development and residential mortgage loans, which were primarily secured by commercial or residential real estate. The following table presents the amortized cost basis of collateral-dependent loans by class as of September 30, 2024 and December 31, 2023: Type of Collateral September 30, 2024 Business Assets Commercial Real Estate Equipment Land Residential Real Estate Other Total Commercial real estate: Owner occupied $ — $ 5,137 $ — $ — $ — $ — $ 5,137 Non-owner occupied — 1,420 — — — — 1,420 Multi-family — 1,000 — — — — 1,000 Non-owner occupied residential — 564 — — — — 564 Acquisition and development: 1-4 family residential construction — — — — 152 — 152 Commercial and land development — 3,655 — — — — 3,655 Commercial and industrial 4,270 — 4,114 679 — — 9,063 Residential mortgage: First lien — — — — 4,152 — 4,152 Home equity - term — — — — 37 — 37 Home equity - lines of credit — — — — 1,652 — 1,652 Installment and other loans — — 3 — — 9 12 Total $ 4,270 $ 11,776 $ 4,117 $ 679 $ 5,993 $ 9 $ 26,844 December 31, 2023 Commercial real estate: Owner occupied $ — $ 15,786 $ — $ — $ — $ — $ 15,786 Non-owner occupied — 240 — — — — 240 Multi-family — 1,233 — — — — 1,233 Non-owner occupied residential — 2,572 — — — — 2,572 Acquisition and development: Commercial and land development — — — 1,361 — — 1,361 Commercial and industrial 2 76 594 — — — 672 Residential mortgage: First lien — — — — 2,231 — 2,231 Home equity - term — — — — 3 — 3 Home equity - lines of credit — — — — 1,312 — 1,312 Installment and other loans — — 18 — — — 18 Total $ 2 $ 19,907 $ 612 $ 1,361 $ 3,546 $ — $ 25,428 ASU 2022-02 requires that the Company evaluate, based on the accounting for loan modifications, whether the borrower is experiencing financial difficulty and the modification results in a more-than-insignificant direct change in the contractual cash flows and represents a new loan or a continuation of an existing loan. This standard requires all loan modifications to be accounted for under the general loan modification guidance in ASC 310-20, Receivables – Nonrefundable Fees and Other Costs. The Company may modify loans to borrowers experiencing financial difficulty by providing principal forgiveness, term extension, interest rate reduction or an other-than-insignificant payment delay. When principal forgiveness is provided, the amount of forgiveness is charged off against the ACL. The Company may also provide multiple types of modifications on an individual loan. During the nine months ended September 30, 2024, the Company extended modifications to three borrowers experiencing financial difficulty that had a more-than-insignificant direct change in the contractual cash flows of the loan. In addition, the Company acquired three F |
