PARKE BANCORP, INC. 10-Q

Item 1. Financial Statements Parke Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets (unaudited) (Dollars in thousands except per share data) June 30, 2024 December 31, 2023 Assets Cash and due from banks $ 6,840 $ 12,716 Interest bearing deposits with banks 160,838 167,660 Cash and cash equivalents 167,678 180,376 Investment securities available for sale, at fair value 6,258 7,095 Investment securities held to maturity, net of allowance for credit losses of $ 0 at June 30, 2024 and December 31, 2023 (fair value of $ 7,564 at June 30, 2024 and $ 7,892 at December 31, 2023) 9,251 9,292 Total investment securities 15,509 16,387 Loans, net of unearned income 1,805,141 1,787,340 Less: Allowance for credit losses ( 32,425 ) ( 32,131 ) Net loans 1,772,716 1,755,209 Accrued interest receivable 9,067 8,555 Premises and equipment, net 5,441 5,579 Restricted stock 9,982 7,636 Bank owned life insurance (BOLI) 28,738 28,415 Deferred tax asset 9,262 9,262 Other real estate owned (OREO) 1,558 1,550 Other 7,187 10,531 Total assets $ 2,027,138 $ 2,023,500 Liabilities and Shareholders' Equity Liabilities Deposits Noninterest-bearing deposits $ 198,761 $ 232,189 Interest-bearing deposits 1,297,680 1,320,638 Total deposits 1,496,441 1,552,827 FHLBNY borrowings 175,000 125,000 Subordinated debentures 43,206 43,111 Accrued interest payable 5,052 4,146 Other 14,639 14,099 Total liabilities 1,734,338 1,739,183 Shareholders' Equity Preferred stock, 1,000,000 shares authorized, $ 1,000 liquidation value Series B non-cumulative convertible; 325 shares and 375 shares outstanding at June 30, 2024 and December 31, 2023, respectively 325 375 Common stock, $ 0.10 par value; authorized 15,000,000 shares; Issued: 12,254,220 shares and 12,240,821 shares at June 30, 2024 and December 31, 2023, respectively 1,225 1,224 Additional paid-in capital 136,946 136,700 Retained earnings 157,725 149,437 Accumulated other comprehensive loss ( 406 ) ( 404 ) Treasury stock, 284,522 shares at June 30, 2024 and December 31, 2023, at cost ( 3,015 ) ( 3,015 ) Total shareholders’ equity 292,800 284,317 Total liabilities and shareholders' equity $ 2,027,138 $ 2,023,500 See accompanying notes to the unaudited consolidated financial statements 1 Parke Bancorp Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (unaudited) (Dollars in thousands except per share data) For the Three Months Ended June 30, For the Six Months Ended June 30, 2024 2023 2024 2023 Interest income: Interest and fees on loans $ 28,732 $ 25,763 $ 56,815 $ 50,307 Interest and dividends on investments 248 227 497 437 Interest on deposits with banks 1,209 1,277 2,354 2,547 Total interest income 30,189 27,267 59,666 53,291 Interest expense: Interest on deposits 13,684 9,079 27,141 16,661 Interest on borrowings 2,193 2,321 4,159 3,615 Total interest expense 15,877 11,400 31,300 20,276 Net interest income 14,312 15,867 28,366 33,015 Provision for (recovery of) credit losses 483 500 687 ( 1,900 ) Net interest income after provision for (recovery of) credit losses 13,829 15,367 27,679 34,915 Non-interest income Service fees on deposit accounts 359 931 738 2,146 Gain on sale of SBA loans 25 — 25 — Other loan fees 163 241 402 419 Bank owned life insurance income 162 147 322 290 Other 492 277 776 523 Total non-interest income 1,201 1,596 2,263 3,378 Non-interest expense Compensation and benefits 3,070 2,940 6,289 6,581 Professional services 551 494 996 1,087 Occupancy and equipment 672 645 1,313 1,290 Data processing 264 367 629 668 FDIC insurance and other assessments 322 347 653 573 OREO expense 236 198 589 370 Other operating expense 1,120 1,381 2,301 2,562 Total non-interest expense 6,235 6,372 12,770 13,131 Income before income tax expense 8,795 10,591 17,172 25,162 Income tax expense 2,340 2,461 4,566 5,902 Net income attributable to Company 6,455 8,130 12,606 19,260 Less: Preferred stock dividend ( 5 ) ( 7 ) ( 11 ) ( 14 ) Net income available to common shareholders $ 6,450 $ 8,123 $ 12,595 $ 19,246 Earnings per common share Basic $ 0.54 $ 0.68 $ 1.05 $ 1.61 Diluted $ 0.53 $ 0.67 $ 1.04 $ 1.59 Weighted average common shares outstanding Basic 11,962,197 11,945,424 11,960,487 11,944,794 Diluted 12,119,359 12,119,004 12,125,546 12,139,899 See accompanying notes to the unaudited consolidated financial statements 2 Parke Bancorp Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) (Dollars in thousands) For the Three Months Ended June 30, For the Six Months Ended June 30, 2024 2023 2024 2023 Net income attributable to the Company $ 6,455 $ 8,130 $ 12,606 $ 19,260 Unrealized gain (loss) on investment securities 32 ( 61 ) ( 3 ) 22 Tax impact on unrealized (gain) loss ( 8 ) 16 1 ( 6 ) Total unrealized gain (loss) on investment securities 24 ( 45 ) ( 2 ) 16 Comprehensive income attributable to the Company $ 6,479 $ 8,085 $ 12,604 $ 19,276 See accompanying notes to the unaudited consolidated financial statements 3 Parke Bancorp, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF EQUITY (unaudited) (Dollars in thousands except share data) Periods ended June 30, 2024 Shares of Preferred Stock Outstanding Preferred Stock Shares of Common Stock issued Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Shareholders' Equity Three Months Ended Balance, March 31, 2024 375 $ 375 12,247,343 $ 1,225 $ 136,801 $ 153,430 $ ( 430 ) $ ( 3,015 ) $ 288,386 Net income — — — — — 6,455 — — 6,455 Preferred stock shares conversion ( 50 ) ( 50 ) 6,877 — 49 — — — ( 1 ) Other comprehensive income — — — — — — 24 — 24 Stock compensation expense — — — — 96 — — — 96 Dividend on preferred stock ($ 15.00 per share) — — — — — ( 5 ) — — ( 5 ) Dividend on common stock ($ 0.18 per share) — — — — — ( 2,155 ) — — ( 2,155 ) Balance, June 30, 2024 325 $ 325 12,254,220 $ 1,225 $ 136,946 $ 157,725 $ ( 406 ) $ ( 3,015 ) $ 292,800 Six Months Ended Balance, December 31, 2023 375 $ 375 12,240,821 $ 1,224 $ 136,700 $ 149,437 $ ( 404 ) $ ( 3,015 ) $ 284,317 Net income — — — — — 12,606 — — 12,606 Common stock options exercised — — 6,522 1 55 — — — 56 Preferred stock shares conversion ( 50 ) ( 50 ) 6,877 — 49 — — — ( 1 ) Other comprehensive loss — — — — — — ( 2 ) — ( 2 ) Stock compensation expense — — — — 142 — — — 142 Dividend on preferred stock ($ 30.00 per share) — — — — — ( 11 ) — — ( 11 ) Dividend on common stock ($ 0.36 per share) — — — — — ( 4,307 ) — — ( 4,307 ) Balance, June 30, 2024 325 $ 325 12,254,220 $ 1,225 $ 136,946 $ 157,725 $ ( 406 ) $ ( 3,015 ) $ 292,800 See accompanying notes to the unaudited consolidated financial statements 4 Parke Bancorp, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF EQUITY (unaudited) (Dollars in thousands except share data) Periods ended June 30, 2023 Shares of Preferred Stock Outstanding Preferred Stock Shares of Common Stock issued Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Treasury Stock Total Shareholders' Equity Three Months Ended Balance, March 31, 2023 445 $ 445 12,231,193 $ 1,223 $ 136,341 $ 138,577 $ ( 465 ) $ ( 3,015 ) $ 273,106 Net income — — — — — 8,130 — — 8,130 Other comprehensive loss — — — — — — ( 45 ) — ( 45 ) Stock compensation expense — — — — 106 — — — 106 Dividend on preferred stock ($ 15.00 per share) — — — — — ( 7 ) — — ( 7 ) Dividend on common stock ($ 0.18 per share) — — — — — ( 2,150 ) — — ( 2,150 ) Balance, June 30, 2023 445 $ 445 12,231,193 $ 1,223 $ 136,447 $ 144,550 $ ( 510 ) $ ( 3,015 ) $ 279,140 Six Months Ended Balance, December 31, 2022 445 $ 445 12,225,097 $ 1,223 $ 136,201 $ 131,706 $ ( 526 ) $ ( 3,015 ) $ 266,034 Cumulative effect of adoption of ASU 2016-3 — — — — — ( 2,102 ) — — ( 2,102 ) Net income — — — — — 19,260 — — 19,260 Common stock options exercised — — 6,096 — 33 — — — 33 Other comprehensive income — — — — — — 16 — 16 Stock compensation expense — — — — 213 — — — 213 Dividend on preferred stock ($ 30.00 per share) — — — — — ( 14 ) — — ( 14 ) Dividend on common stock ($ 0.36 per share) — — — — — ( 4,300 ) — — ( 4,300 ) Balance, June 30, 2023 445 $ 445 12,231,193 $ 1,223 $ 136,447 $ 144,550 $ ( 510 ) $ ( 3,015 ) $ 279,140 See accompanying notes to the unaudited consolidated financial statements 5 Parke Bancorp Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Dollars in thousands) For the Six Months Ended June 30, 2024 2023 Cash Flows from Operating Activities: Net income $ 12,606 $ 19,260 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 286 175 Provision for (recovery of) credit losses 687 ( 1,900 ) Increase in value of bank owned life insurance ( 322 ) ( 290 ) Gain on sale of SBA loans ( 25 ) — SBA loans originated for sale ( 300 ) — Proceeds from sale of SBA loans originated for sale 325 — Net accretion of purchase premiums and discounts on securities ( 22 ) ( 17 ) Stock based compensation 142 213 Net changes in: Decrease (increase) in accrued interest receivable and other assets 2,824 ( 2,911 ) Increase in accrued interest payable and other accrued liabilities 1,048 186 Net cash provided by operating activities 17,249 14,716 Cash Flows from Investing Activities: Repayments and maturities of investment securities available for sale 824 953 Repayments and maturities of investment securities held to maturity 73 72 Net increase in loans ( 17,796 ) ( 34,698 ) (Purchases) sales of bank premises and equipment ( 53 ) 129 Redemptions of restricted stock 3,600 855 Purchases of restricted stock ( 5,946 ) ( 5,803 ) Net cash used in investing activities ( 19,298 ) ( 38,492 ) Cash Flows from Financing Activities: Cash dividends ( 4,318 ) ( 4,314 ) Proceeds from exercise of stock options 56 33 Conversion of Series B preferred stock ( 1 ) — Decrease in FHLBNY long-term borrowings ( 75,000 ) — Net increase in FHLBNY short-term borrowings 125,000 103,000 Increase in Federal Reserve short-term borrowings — 10,000 Net decrease in noninterest-bearing deposits ( 33,428 ) ( 81,554 ) Net decrease in interest-bearing deposits ( 22,958 ) ( 48,042 ) Net cash used in financing activities ( 10,649 ) ( 20,877 ) Net decrease in cash and cash equivalents ( 12,698 ) ( 44,653 ) Cash and Cash Equivalents, January 1, 180,376 182,150 Cash and Cash Equivalents, June 30, $ 167,678 $ 137,497 Supplemental Disclosure of Cash Flow Information: Interest paid $ 30,394 $ 19,210 Income taxes paid $ 1,702 $ 9,962 Non-cash Investing and Financing Items Loans transferred to OREO $ — $ 123 Accrued dividends payable $ 2,160 $ 2,157 See accompanying notes to the unaudited consolidated financial statements 6 Notes to Consolidated Financial Statements (Unaudited) NOTE 1. ORGANIZATION Parke Bancorp, Inc. (the “Company, we, us, our”) is a bank holding company headquartered in Sewell, New Jersey. Through subsidiaries, the Company provides individuals, corporations and other businesses and institutions with commercial and retail banking services, principally loans and deposits. The Company was incorporated in January 2005 under the laws of the State of New Jersey for the sole purpose of becoming the holding company of Parke Bank (the "Bank"). The Bank is a commercial bank, which was incorporated on August 25, 1998, and commenced operations on January 28, 1999 . The Bank is chartered by the New Jersey Department of Banking and Insurance and its deposits are insured by the Federal Deposit Insurance Corporation. The Bank maintains its principal office at 601 Delsea Drive, Sewell, New Jersey, and has six additional branch office locations; 501 Tilton Road, Northfield, New Jersey, 567 Egg Harbor Road, Washington Township, New Jersey, 67 East Jimmie Leeds Road, Galloway Township, New Jersey, 1150 Haddon Avenue, Collingswood, New Jersey, 1610 Spruce Street, Philadelphia, Pennsylvania, and 1032 Arch Street, Philadelphia, Pennsylvania. The Bank also has a loan office located at 1817 East Venango Street, Philadelphia, Pennsylvania. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Financial Statement Presentation: We prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Parke Bank (including certain partnership interests). Parke Capital Trust I, Parke Capital Trust II and Parke Capital Trust III are wholly-owned subsidiaries but are not consolidated as they do not meet the requirements for consolidation under applicable accounting guidance. We have eliminated inter-company balances and transactions. We have also reclassified certain prior year amounts to conform to the current year presentation, which did not have a material impact on our consolidated financial condition or results of operations. The accompanying interim financial statements should be read in conjunction with the annual financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. The accompanying interim financial statements for the three and six months ended June 30, 2024 and 2023 are unaudited. The balance sheet as of December 31, 2023, was derived from the audited financial statements. In the opinion of management, these financial statements include all normal and recurring adjustments necessary for a fair statement of the results for such interim periods. Results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of the results for the full year or any other period. Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the allowance for credit losses, the valuation of deferred income taxes, and the carrying value of other real estate owned ("OREO"). 7 NOTE 3. INVESTMENT SECURITIES The following is a summary of the Company's investments in available for sale and held to maturity securities as of June 30, 2024 and December 31, 2023: As of June 30, 2024 Amortized cost Gross unrealized gains Gross unrealized losses Fair value (Dollars in thousands) Available for sale: Residential mortgage-backed securities $ 6,804 $ 1 $ 547 $ 6,258 Total available for sale $ 6,804 $ 1 $ 547 $ 6,258 Held to maturity: Residential mortgage-backed securities $ 5,332 $ — $ 1,179 $ 4,153 States and political subdivisions 3,919 5 513 3,411 Total held to maturity $ 9,251 $ 5 $ 1,692 $ 7,564 As of December 31, 2023 Amortized cost Gross unrealized gains Gross unrealized losses Fair value (Dollars in thousands) Available for sale: Residential mortgage-backed securities $ 7,639 $ 3 $ 547 $ 7,095 Total available for sale $ 7,639 $ 3 $ 547 $ 7,095 Held to maturity: Residential mortgage-backed securities $ 5,406 $ — $ 1,054 $ 4,352 States and political subdivisions 3,886 38 384 3,540 Total held to maturity $ 9,292 $ 38 $ 1,438 $ 7,892 8 The amortized cost and fair value of debt securities classified as available for sale and held to maturity, by contractual maturity as of June 30, 2024 are as follows: Amortized Cost Fair Value (Dollars in thousands) Available for sale: Due within one year $ — $ — Due after one year through five years 2,576 2,406 Due after five years through ten years 850 788 Due after ten years 3,378 3,064 Total available for sale $ 6,804 $ 6,258 Held to maturity: Due within one year $ — $ — Due after one year through five years 1,446 1,451 Due after five years through ten years 1,507 1,205 Due after ten years 6,298 4,908 Total held to maturity $ 9,251 $ 7,564 Expected maturities may differ from contractual maturities because the issuers of certain debt securities do have the right to call or prepay their obligations without any penalty. The Company did not sell any securities during the three and six months ended June 30, 2024 or 2023. The following tables show the gross unrealized losses and fair value of the Company's available for sale investments for which an allowance for credit losses has not been recorded, which are aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2024 and December 31, 2023: As of June 30, 2024 Less Than 12 Months 12 Months or Greater Total Description of Securities Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (Dollars in thousand) Available for sale: Residential mortgage-backed securities $ 130 $ 1 $ 6,070 $ 546 $ 6,200 $ 547 Total available for sale $ 130 $ 1 $ 6,070 $ 546 $ 6,200 $ 547 As of December 31, 2023 Less Than 12 Months 12 Months or Greater Total Description of Securities Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (Dollars in thousands) Available for sale: Residential mortgage-backed securities $ 25 $ — $ 6,870 $ 547 $ 6,895 $ 547 Total available for sale $ 25 $ — $ 6,870 $ 547 $ 6,895 $ 547 On at least a quarterly basis, we review all debt securities that are in an unrealized loss position for a credit loss. An investment security is deemed impaired if the fair value of the investment is less than its amortized cost. Amortized cost includes adjustments (if any) made to the cost basis of an investment for accretion, amortization, and previous other-than-temporary impairments. For individual debt securities classified as available for sale, we determine whether a decline in fair value below the amortized cost has resulted from a credit loss or other factors. If the decline in fair value is due to credit, we will record the portion of the impairment loss relating to credit through an allowance for credit losses. Impairment that has not been recorded through an allowance for credit losses is recorded through other comprehensive income, net of applicable taxes. The Company’s unrealized loss for the debt securities classified as available for sale is comprised of 11 securities in the less than 12 months loss position and 16 securities in the 12 months or greater loss position at June 30, 2024. These securities are 9 mortgage-backed securities that had unrealized losses issued or guaranteed by the US government or US government sponsored entities. The unrealized losses associated with those mortgage-backed securities are generally driven by changes in interest rates and are not due to credit losses given the explicit or implicit guarantees provided by the U.S. government. Because the Company does not intend to sell the securities and it is not more likely than not that the Company will be required to sell these investments before recovery of their amortized cost basis, the Company does not consider the unrealized loss in these securities to be credit losses at June 30, 2024. The Company classifies the held-to-maturity debt securities into the following major security types: residential mortgage backed, and state and political subdivisions. These securities are highly rated with a history of no credit losses, and are assigned ratings based on the most recent data from ratings agencies depending on the availability of data for the security. Credit ratings of held-to-maturity debt securities, which are a significant input in calculating the expected credit loss, are reviewed on a quarterly basis. Based on the credit ratings of our held-to-maturity securities and our historical experience including no losses, we have determined that an allowance for credit loss on the held-to-maturity portfolio is not required. Because the Company does not intend to sell the securities and it is not more likely than not that the Company will be required to sell these investments before recovery of their amortized cost basis, the Company does not consider the unrealized loss in these securities to be credit losses at June 30, 2024. NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES ON LOANS At June 30, 2024 and December 31, 2023, the Company had $ 1.81 billion and $ 1.79 billion, respectively, in loans receivable outstanding. Outstanding balances include $ 2.1 million and $ 2.7 million at June 30, 2024 and December 31, 2023, respectively, for net deferred loan costs, and unamortized discounts. The portfolio segments of loans receivable at June 30, 2024 and December 31, 2023, consist of the following: June 30, 2024 December 31, 2023 (Dollars in thousands) Commercial and Industrial $ 35,954 $ 35,451 Construction 179,662 157,556 Real Estate Mortgage: Commercial – Owner Occupied 138,002 141,742 Commercial – Non-owner Occupied 351,325 369,909 Residential – 1 to 4 Family 443,968 449,682 Residential – 1 to 4 Family Investment 523,809 524,167 Residential – Multifamily 127,298 103,324 Consumer 5,123 5,509 Total Loan receivable 1,805,141 1,787,340 Allowance for credit losses on loans ( 32,425 ) ( 32,131 ) Total loan receivable, net of allowance for credit losses on loans $ 1,772,716 $ 1,755,209 10 An age analysis of past due loans by class at June 30, 2024 and December 31, 2023 is as follows: June 30, 2024 30-59 Days Past Due 60-89 Days Past Due Greater than 90 Days Total Past Due Current Total Loans (Dollars in Thousands) Commercial and Industrial $ — $ — $ 694 $ 694 $ 35,260 $ 35,954 Construction — — 1,091 1,091 178,571 179,662 Real Estate Mortgage: Commercial – Owner Occupied — — 1,117 1,117 136,885 138,002 Commercial – Non-owner Occupied — 3,806 2,106 5,912 345,413 351,325 Residential – 1 to 4 Family 14 67 1,955 2,036 441,932 443,968 Residential – 1 to 4 Family Investment — 1,256 — 1,256 522,553 523,809 Residential – Multifamily — — — — 127,298 127,298 Consumer — — — — 5,123 5,123 Total Loans $ 14 $ 5,129 $ 6,963 $ 12,106 $ 1,793,035 $ 1,805,141 December 31, 2023 30-59 Days Past Due 60-89 Days Past Due Greater than 90 Days Total Past Due Current Total Loans (Dollars in thousands) Commercial and Industrial $ — $ — $ 712 $ 712 $ 34,739 $ 35,451 Construction — — 1,091 1,091 156,465 157,556 Real Estate Mortgage: Commercial – Owner Occupied — — 1,117 1,117 140,625 141,742 Commercial – Non-owner Occupied — 1,549 3,107 4,656 365,253 369,909 Residential – 1 to 4 Family 58 1,793 1,211 3,062 446,620 449,682 Residential – 1 to 4 Family Investment — 440 — 440 523,727 524,167 Residential – Multifamily — — — — 103,324 103,324 Consumer 66 — — 66 5,443 5,509 Total Loans $ 124 $ 3,782 $ 7,238 $ 11,144 $ 1,776,196 $ 1,787,340 The following table provides the amortized cost of loans on nonaccrual status: 11 June 30, 2024 (amounts in thousands) Nonaccrual with no ACL Nonaccrual with ACL Total Nonaccrual Loans Past Due Over 90 Days Still Accruing Total Nonperforming Commercial and Industrial $ — $ 694 $ 694 $ — $ 694 Construction 1,091 — 1,091 — 1,091 Commercial - Owner Occupied 717 400 1,117 — 1,117 Commercial - Non-owner Occupied 2,106 — 2,106 — 2,106 Residential - 1 to 4 Family 1,209 746 1,955 — 1,955 Residential - 1 to 4 Family Investment — — — — — Residential - Multifamily — — — — — Consumer — — — — — Total $ 5,123 $ 1,840 $ 6,963 $ — $ 6,963 December 31, 2023 (amounts in thousands) Nonaccrual with no ACL Nonaccrual with ACL Total Nonaccrual Loans Past Due Over 90 Days Still Accruing Total Nonperforming Commercial and Industrial $ 277 $ 435 $ 712 $ — $ 712 Construction 1,091 — 1,091 — 1,091 Commercial - Owner Occupied 717 400 1,117 — 1,117 Commercial - Non-owner Occupied 3,107 — 3,107 — 3,107 Residential - 1 to 4 Family 1,211 — 1,211 — 1,211 Residential - 1 to 4 Family Investment — — — — — Residential - Multifamily — — — — — Consumer — — — — — Total $ 6,403 $ 835 $ 7,238 $ — $ 7,238 Allowance For Credit Losses (ACL) We maintain the ACL at a level that we believe to be appropriate to absorb estimated credit losses in the loan portfolios as of the balance sheet date. We established our allowance in accordance with guidance provided in Accounting Standard Codification ("ASC") - Financial Instruments - Credit Losses ("ASC 326"). The allowance for credit losses represents management’s estimate of expected losses inherent in the Company’s lending activities excluding loans accounted for under fair value. The allowance for credit losses is maintained through charges to the provision for credit losses in the Consolidated Statements of Income as expected losses are estimated. Loans or portions thereof that are determined to be uncollectible are charged against the allowance, and subsequent recoveries, if any, are credited to the allowance. The Company performs periodic reviews of its loan and lease portfolios to identify credit risks and to assess the overall collectability of those portfolios. The Company's allowance for credit losses includes a general component and an asset-specific component for collateral-dependent loans. To determine the asset-specific component of the allowance, the loans are evaluated individually based on the fair value of the underlying collateral. The Company generally measures the asset-specific allowance as the difference between the net realizable value of loan collateral and the recorded investment of a loan. 12 The general component of the allowance evaluates the impairments of pools of the loan portfolio collectively. It incorporates a historical valuation allowance and qualitative allowance. The historical valuation utilizes a vintage loss rate approach utilizing a third party software model. The vintage loss rate approach creates pools of loans based on the segments defined by management, and consists of commercial and industrial, construction, commercial - owner occupied, commercial - non-owner occupied, residential - 1 to 4 family, residential - 1 to 4 family investment, residential - multifamily, and consumer. The loan pools are aggregated by origination year. Charge-offs, net of recoveries, are allocated by the year of charge-off to each loan pool. An average life is prescribed to a pool of loans that were originated in a particular year. The actual charge-offs as a percent of total loans are calculated for each historical year, and projected for future years for each year within the average life time horizon. The sum of the actual charge-offs and projected charge-offs are divided by the average amortized origination amount for each respective year. Those charge-off percentages are added together to obtain an aggregated vintage loss percentage which is then multiplied by the outstanding loan balances to obtain a reserve requirement. The qualitative allowance component is based on general economic conditions and other qualitative risk factors both internal and external to the Company. It is generally determined by evaluating, among other things: (i) the experience, ability and effectiveness of the Bank's lending management and staff; (ii) the effectiveness of the Bank's lending policies, procedures and internal controls;(iii) volume and severity of loan credit quality; (iv) nature and volume of portfolio and term of loans (v) the composition and concentrations of credit; (vi) the effectiveness of the internal loan review system; and (vii) national and local economic trends and conditions, and industry conditions. Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Each component is determined to have either a high, high-moderate, moderate, low-moderate or low degree of risk. The results are then input into a "general allocation matrix" to determine an appropriate general valuation allowance. The Company has elected to exclude accrued interest receivable from the measurement of the ACL. When a loan is placed on non-accrual status, any outstanding accrued interest is generally reversed against interest income. The process of determining the level of the allowance for credit losses requires a high degree of estimate and judgment. It is reasonably possible that actual outcomes may differ from our estimates. Allowance for Credit Losses on Off-Balance Sheet Credit Exposures The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted through the provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. At June 30, 2024 and December 31, 2023, the allowance for credit losses on off-balance sheet credit exposures was $ 896.0 thousand and $ 499.0 thousand, respectively, on exposures totaling $ 177.7 million and $ 133.7 million, respectively. 13 The following tables present the information regarding the allowance for credit losses for the three and six months ended June 30, 2024 and 2023: Real Estate Mortgage Commercial and Industrial Construction Commercial Owner Occupied Commercial Non-owner Occupied Residential 1 to 4 Family Residential 1 to 4 Family Investment Residential Multifamily Consumer Total (Dollars in thousands) Three months ended June 30, 2024 March 31, 2024 $ 1,060 $ 3,033 $ 1,691 $ 5,386 $ 9,335 $ 9,596 $ 1,747 $ 70 $ 31,918 Charge-offs — — — — — — — ( 21 ) ( 21 ) Recoveries 2 — 1 — — — — — 3 Provisions (benefits) 6 959 ( 156 ) 28 ( 265 ) 87 ( 144 ) 10 525 Ending Balance at June 30, 2024 $ 1,068 $ 3,992 $ 1,536 $ 5,414 $ 9,070 $ 9,683 $ 1,603 $ 59 $ 32,425 Allowance for credit losses Six months ended June 30, 2024 December 31, 2023 $ 926 $ 3,347 $ 1,795 $ 7,108 $ 9,061 $ 8,783 $ 1,049 $ 62 $ 32,131 Charge-offs — — — — — — — ( 21 ) ( 21 ) Recoveries 24 — 1 — — — — — 25 Provisions (benefits) 118 645 ( 260 ) ( 1,694 ) 9 900 554 18 290 Ending Balance at June 30, 2024 $ 1,068 $ 3,992 $ 1,536 $ 5,414 $ 9,070 $ 9,683 $ 1,603 $ 59 $ 32,425 During the quarter, the increase to the Construction portfolio was due to an increase in the portfolio balance that increased the loan exposure and also caused changes to the qualitative factors related to concentration levels within the portfolio segments. The decrease to the Commercial Owner Occupied, Residential 1 to 4 Family, and the Residential Multifamily portfolios is driven by changes to the qualitative factors related to concentration levels within the portfolio segments. For the year to date, the increase in the Construction and Residential Multifamily portfolios was due to increases in the portfolio balances that increased the loan exposure and also caused changes to the qualitative factors related to concentration levels within the portfolio segments. The increase in the Residential 1 to 4 Family Investment portfolio was due to increase to the qualitative factors related to concentration and problem loan levels within the portfolio segments. The decrease to the Commercial Owner Occupied and Commercial Non-owner Occupied portfolios was due to decreases in the portfolio balances that decreased the loan exposure and also caused changes to the qualitative factors related to concentration levels within the portfolio segments. 14 Real Estate Mortgage Commercial and Industrial Construction Commercial Owner Occupied Commercial Non-owner Occupied Residential 1 to 4 Family Residential 1 to 4 Family Investment Residential Multifamily Consumer Total (Dollars in thousands) Three months ended June 30, 2023 March 31, 2023 $ 738 $ 3,599 $ 1,876 $ 8,076 $ 7,806 $ 8,070 $ 1,238 $ 104 $ 31,507 Charge-offs — — — — — — — — — Recoveries 8 — — — — — — — 8 Provisions (benefits) ( 156 ) 379 ( 7 ) 722 ( 96 ) ( 330 ) ( 6 ) ( 6 ) 500 Ending Balance at June 30, 2023 $ 590 $ 3,978 $ 1,869 $ 8,798 $ 7,710 $ 7,740 $ 1,232 $ 98 $ 32,015 Six months ended June 30, 2023 December 31, 2022 $ 390 $ 2,581 $ 2,298 $ 9,709 $ 6,076 $ 9,381 $ 1,347 $ 63 $ 31,845 Impact of adoption ASC 326 168 1,899 ( 171 ) ( 951 ) 1,782 ( 794 ) ( 128 ) 53 1,858 Charge-offs — — — — — — — — — Recoveries 10 — 2 — — — — — 12 Provisions (benefits) 22 ( 502 ) ( 260 ) 40 ( 148 ) ( 847 ) 13 ( 18 ) ( 1,700 ) Ending Balance at September 30, 2022 $ 590 $ 3,978 $ 1,869 $ 8,798 $ 7,710 $ 7,740 $ 1,232 $ 98 $ 32,015 During the quarter, the increase to provision for the Construction segment was due to an increase in the portfolio balance, while the increase in provision to the Commercial Non-owner Occupied segment was driven by an increase to the specific reserve. The credit provision during the quarter to the Commercial and Industrial and Residential 1-4 Family Investment segments were largely driven by declines or slowdowns to growth within the portfolio that lowered the loan exposure and also caused changes to the qualitative factors related to loan volume within the portfolio segments. For the six months ended June 30, 2023, the credit provision to the Construction, Commercial Owner Occupied, Residential 1 to 4 Family, and Residential 1 to 4 Family Investment segments was largely driven by declines or slowdowns to growth within the portfolio that lowered loan exposure and also caused changes to the qualitative factors related to loan volume within the portfolio segments, partially offset by increases in balances in the Construction and Residential 1 - 4 Family Investment segments. Collateral-Dependent Loans The following table presents the collateral-dependent loans by portfolio segment and collateral type at June 30, 2024: (amounts in thousands) Real Estate Business Assets Other Commercial and Industrial $ 694 $ — $ — Construction 1,091 — — Commercial - Owner Occupied 1,117 — — Commercial - Non-owner Occupied 2,106 — — Residential - 1 to 4 Family 1,955 — — Residential - 1 to 4 Family Investment — — — Residential - Multifamily — — — Consumer — — — Total $ 6,963 $ — $ — 15 The following table presents the collateral-dependent loans by portfolio segment and collateral type at December 31, 2023: (amounts in thousands) Real Estate Business Assets Other Commercial and Industrial $ 712 $ — $ — Construction 1,091 — — Commercial - Owner Occupied 1,117 — — Commercial - Non-owner Occupied 3,107 — — Residential - 1 to 4 Family 1,211 — — Residential - 1 to 4 Family Investment — — — Residential - Multifamily — — — Consumer — — — Total $ 7,238 $ — $ — Credit Quality Indicators : As part of the on-going monitoring of the credit quality of the Company's loan portfolio, management tracks certain credit quality indicators including trends related to the risk grades of loans, the level of classified loans, net charge-offs, nonperforming loans (see details above) and the general economic conditions in the region. The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 7. Grades 1 through 4 are considered “Pass”. A description of the general characteristics of the seven risk grades is as follows: 1. Good : Borrower exhibits the strongest overall financial condition and represents the most creditworthy profile. 2. Satisfactory (A) : Borrower reflects a well-balanced financial condition, demonstrates a high level of creditworthiness and typically will have a strong banking relationship with the Bank. 3. Satisfactory (B) : Borrower exhibits a balanced financial condition and does not expose the Bank to more than a normal or average overall amount of risk. Loans are considered fully collectable. 4. Watch List : Borrower reflects a fair financial condition, but there exists an overall greater than average risk. Risk is deemed acceptable by virtue of increased monitoring and control over borrowings. Probability of timely repayment is present. 5. Other Assets Especially Mentioned (OAEM) : Financial condition is such that assets in this category have a potential weakness or pose unwarranted financial risk to the Bank even though the asset value is not currently individually evaluated. The asset does not currently warrant adverse classification but if not corrected could weaken and could create future increased risk exposure. Includes loans that require an increased degree of monitoring or servicing as a result of internal or external changes. 6. Substandard : This classification represents more severe cases of #5 (OAEM) characteristics that require increased monitoring. Assets are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral. Asset has a well-defined weakness or weaknesses that impairs the ability to repay debt and jeopardizes the timely liquidation or realization of the collateral at the asset’s net book value. 7. Doubtful : Assets which have all the weaknesses inherent in those assets classified #6 (Substandard) but the risks are more severe relative to financial deterioration in capital and/or asset value; accounting/evaluation techniques may be questionable and the overall possibility for collection in full is highly improbable. Borrowers in this category require constant monitoring, are considered work-out loans and present the potential for future loss to the Bank. 16 The following tables provide an analysis of loans by portfolio segment based on the credit quality indicators used to determine the allowance for credit losses, as of June 30, 2024. (Dollars in thousands) Term Loans Amortized Cost Basis by Origination Year Revolving Loans at Amortized Cost Basis As of June 30, 2024 2024 2023 2022 2021 2020 Prior Total Commercial and Industrial Pass $ 1,053 $ 4,567 $ 1,378 $ 31 $ 709 $ 7,402 $ 20,120 $ 35,260 OAEM — — — — — — — — Substandard — — 417 — — — 277 694 Doubtful — — — — — — — — $ 1,053 $ 4,567 $ 1,795 $ 31 $ 709 $ 7,402 $ 20,397 $ 35,954 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Construction Pass $ — $ 319 $ 2,637 $ — $ 195 $ — $ 175,420 $ 178,571 OAEM — — — — — — — — Substandard — — — — — 1,091 — 1,091 Doubtful — — — — — — — — $ — $ 319 $ 2,637 $ — $ 195 $ 1,091 $ 175,420 $ 179,662 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Commercial – Owner Occupied Pass $ 863 $ 19,579 $ 35,294 $ 20,937 $ 6,873 $ 51,036 $ 2,303 $ 136,885 OAEM — — — — — — — — Substandard — — — — — 1,117 — 1,117 Doubtful — — — — — — — — $ 863 $ 19,579 $ 35,294 $ 20,937 $ 6,873 $ 52,153 $ 2,303 $ 138,002 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Commercial – Non-owner Occupied Pass $ 25,758 $ 15,818 $ 75,158 $ 32,396 $ 24,388 $ 158,602 $ 1,739 $ 333,859 OAEM — — — — — 15,360 — 15,360 Substandard — — — — 249 1,857 — 2,106 Doubtful — — — — — — — — $ 25,758 $ 15,818 $ 75,158 $ 32,396 $ 24,637 $ 175,819 $ 1,739 $ 351,325 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Residential – 1 to 4 Family Performing $ 20,992 $ 55,594 $ 113,448 $ 58,170 $ 31,790 $ 158,536 $ 3,483 $ 442,013 Nonperforming — — — — 758 1,197 — 1,955 $ 20,992 $ 55,594 $ 113,448 $ 58,170 $ 32,548 $ 159,733 $ 3,483 $ 443,968 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — 17 Residential – 1 to 4 Family Investment Performing $ 30,224 $ 83,329 $ 133,412 $ 110,577 $ 46,762 $ 119,505 $ — $ 523,809 Nonperforming — — — — — — — — $ 30,224 $ 83,329 $ 133,412 $ 110,577 $ 46,762 $ 119,505 $ — $ 523,809 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Residential – Multifamily Pass $ 997 $ 5,298 $ 45,801 $ 25,747 $ 12,020 $ 37,435 $ — $ 127,298 OAEM — — — — — — — $ — Substandard — — — — — — — $ — Doubtful — — — — — — — — $ 997 $ 5,298 $ 45,801 $ 25,747 $ 12,020 $ 37,435 $ — $ 127,298 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Consumer Performing $ — $ — $ — $ — $ — $ 5,123 $ — $ 5,123 Nonperforming — — — — — — — — $ — $ — $ — $ — $ — $ 5,123 $ — $ 5,123 Current period gross charge-offs $ — $ — $ — $ — $ — $ 21 $ — $ 21 As of June 30, 2024, the Company was in the process of foreclosing on $ 6.4 million in loans, consisting of 12 residential 1 to 4 family loans with a principal balance of $ 1.9 million, two commercial - owner occupied loans with a principal balance of $ 1.1 million, and eight commercial - non-owner occupied loans with a principal balance of $ 3.3 million. The following tables provide an analysis of loans by portfolio segment based on the credit quality indicators used to determine the allowance for credit losses, as of December 31, 2023. (Dollars in thousands) Term Loans Amortized Cost Basis by Origination Year Revolving Loans at Amortized Cost Basis As of December 31, 2023 2023 2022 2021 2020 2019 Prior Total Commercial and Industrial Pass $ 4,724 $ 1,269 $ 87 $ 759 $ 598 $ 7,154 $ 20,148 $ 34,739 OAEM — — — — — — — — Substandard — 435 — — — — 277 712 Doubtful — — — — — — — — $ 4,724 $ 1,704 $ 87 $ 759 $ 598 $ 7,154 $ 20,425 $ 35,451 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Construction Pass $ 323 $ 3,335 $ 4,499 $ 195 $ — $ — $ 148,113 $ 156,465 OAEM — — — — — — — — Substandard — — — — — 1,091 — 1,091 Doubtful — — — — — — — — $ 323 $ 3,335 $ 4,499 $ 195 $ — $ 1,091 $ 148,113 $ 157,556 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — 18 Commercial – Owner Occupied Pass $ 19,842 $ 36,030 $ 21,536 $ 7,104 $ 8,346 $ 45,249 $ 2,518 $ 140,625 OAEM — — — — — — — — Substandard — — — — — 1,117 — 1,117 Doubtful — — — — — — — — $ 19,842 $ 36,030 $ 21,536 $ 7,104 $ 8,346 $ 46,366 $ 2,518 $ 141,742 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Commercial – Non-owner Occupied Pass $ 19,123 $ 93,805 $ 37,002 $ 33,316 $ 54,484 $ 112,471 $ 1,180 $ 351,381 OAEM — — — — — 15,421 — 15,421 Substandard — — — 250 2,586 271 — 3,107 Doubtful — — — — — — — — $ 19,123 $ 93,805 $ 37,002 $ 33,566 $ 57,070 $ 128,163 $ 1,180 $ 369,909 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Residential – 1 to 4 Family Performing $ 58,358 $ 117,044 $ 61,580 $ 33,037 $ 25,623 $ 148,124 $ 4,705 $ 448,471 Nonperforming 155 — — 285 771 — — 1,211 $ 58,513 $ 117,044 $ 61,580 $ 33,322 $ 26,394 $ 148,124 $ 4,705 $ 449,682 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Residential – 1 to 4 Family Investment Performing $ 87,734 $ 138,884 $ 116,487 $ 50,119 $ 54,576 $ 76,367 $ — $ 524,167 Nonperforming — — — — — — — — $ 87,734 $ 138,884 $ 116,487 $ 50,119 $ 54,576 $ 76,367 $ — $ 524,167 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Residential – Multifamily Pass $ 2,292 $ 23,030 $ 27,006 $ 12,159 $ 9,989 $ 28,848 $ — $ 103,324 OAEM — — — — — — — $ — Substandard — — — — — — — $ — Doubtful — — — — — — — — $ 2,292 $ 23,030 $ 27,006 $ 12,159 $ 9,989 $ 28,848 $ — $ 103,324 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Consumer Performing $ — $ — $ — $ — $ — $ 5,493 $ 16 $ 5,509 Nonperforming — — — — — — — — $ — $ — $ — $ — $ — $ 5,493 $ 16 $ 5,509 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Modifications to Borrowers Experiencing Financial Difficulty At June 30, 2024, the Company did not make any modifications to borrowers experiencing financial difficulty. 19 NOTE 5. EARNINGS PER SHARE (“EPS”) The following tables set forth the calculation of basic and diluted EPS for the three and six-month periods ended June 30, 2024 and 2023. Three months ended June 30, Six months ended June 30, 2024 2023 2024 2023 (Dollars in thousands except share and per share data) Basic earnings per common share Net income available to the Company $ 6,455 $ 8,130 $ 12,606 $ 19,260 Less: Dividend on series B preferred stock ( 5 ) ( 7 ) ( 11 ) ( 14 ) Net income available to common shareholders 6,450 8,123 12,595 19,246 Basic weighted-average common shares outstanding 11,962,197 11,945,424 11,960,487 11,944,794 Basic earnings per common share $ 0.54 $ 0.68 $ 1.05 $ 1.61 Diluted earnings per common share Net income available to common shares $ 6,450 $ 8,123 $ 12,595 $ 19,246 Add: Dividend on series B preferred stock 5 7 11 14 Net income available to diluted common shares 6,455 8,130 12,606 19,260 Basic weighted-average common shares outstanding 11,962,197 11,945,424 11,960,487 11,944,794 Dilutive potential common shares 157,162 173,580 165,059 195,105 Diluted weighted-average common shares outstanding 12,119,359 12,119,004 12,125,546 12,139,899 Diluted earnings per common share $ 0.53 $ 0.67 $ 1.04 $ 1.59 As of June 30, 2024 and December 31, 2023, there were 312,630 and 330,536 weighted average option shares outstanding, respectively, that were not included in the computation of diluted EPS because these shares were anti-dilutive. NOTE 6. FAIR VALUE Fair Value Measurements The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions. In accordance with this guidance, the Company groups its assets and liabilities carried at fair value in three levels as follows: Level 1 Input: 1) Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2 Inputs: 1) Quoted prices for similar assets or liabilities in active markets. 2) Quoted prices for identical or similar assets or liabilities in markets that are not active. 3) Inputs other than quoted prices that are observable, either directly or indirectly, for the term of the asset or liability (e.g., interest rates, yield curves, credit risks, prepayment speeds or volatilities) or “market corroborated inputs.” 20 Level 3 Inputs: 1) Prices or valuation techniques that require inputs that are both unobservable (i.e. supported by little or no market activity) and that are significant to the fair value of the assets or liabilities. 2) These assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. Fair Value on a Recurring Basis: The following is a description of the Company’s valuation methodologies for assets carried at fair value on a recurring basis. These methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes that its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting measurement date. Investments in Available for Sale Securities: Where quoted prices are available in an active market, securities or other assets are classified in Level 1 of the valuation hierarchy. If quoted market prices are not available for the specific security or available for sale loans, then fair values are provided by independent third-party valuation services. These valuation services estimate fair values using pricing models and other accepted valuation methodologies, such as quotes for similar securities and observable yield curves and spreads. As part of the Company’s overall valuation process, management evaluates these third-party methodologies to ensure that they are representative of exit prices in the Company’s principal markets. Securities in Level 2 are mortgage-backed securities. The table below presents the balances of assets and liabilities measured at fair value on a recurring basis. Financial Assets Level 1 Level 2 Level 3 Total (Dollars in thousands) Available for Sale Securities As of June 30, 2024 Residential mortgage-backed securities $ — $ 6,258 $ — $ 6,258 Total $ — $ 6,258 $ — $ 6,258 As of December 31, 2023 Residential mortgage-backed securities — 7,095 — 7,095 Total $ — $ 7,095 $ — $ 7,095 For the six months ended June 30, 2024, there were no transfers between the levels within the fair value hierarchy. There were no level 3 assets or liabilities held during the three and six months ended June 30, 2024 and 2023. Fair Value on a Non-recurring Basis: Certain assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial Assets Level 1 Level 2 Level 3 Total (Dollars in thousands) As of June 30, 2024 Collateral-dependent loans $ — $ — $ 2,181 $ 2,181 OREO — — 1,558 1,558 As of December 31, 2023 Collateral-dependent loans $ — $ — $ 1,655 $ 1,655 OREO — — 1,550 1,550 21 Collateral-dependent loans are those loans that are accounted for under ASC 326, Financial Instruments - Credit Losses ("ASC 326"), in which the Bank has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties that collateralize the loans. These assets are generally classified as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. OREO consists of real estate properties that are recorded at fair value based upon current appraised value, or agreements of sale, less estimated disposition costs using level 3 inputs. Properties are reappraised annually. Fair Value of Financial Instruments The Company discloses estimated fair values for its significant financial instruments in accordance with FASB ASC (Topic 825), “ Disclosures about Fair Value of Financial Instruments ”. The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. For certain financial assets and liabilities, carrying value approximates fair value due to the nature of the financial instrument. These instruments include cash and cash equivalents, accrued interest receivable, bank owned life insurance, Federal Home Loan Bank of New York ("FHLBNY") restricted stock, demand and other non-maturity deposits and accrued interest payable, and they are considered to be level 1 measurements. The following table summarizes the carrying amounts and fair values for financial instruments that are not carried at fair value at June 30, 2024 and December 31, 2023: June 30, 2024 Carrying Amount Fair Value Total Level 1 Level 2 Level 3 (Dollars in thousands) Financial Assets: Investment securities HTM $ 9,251 $ 7,564 $ — $ 7,564 $ — Loans, net 1,772,716 1,757,297 — 1,747,119 10,178 Financial Liabilities: Time deposits $ 559,216 $ 557,738 $ — $ 557,738 $ — Borrowings 218,206 222,667 — 222,667 — December 31, 2023 Carrying Amount Fair Value Total Level 1 Level 2 Level 3 (Dollars in thousands) Financial Assets: Investment securities HTM $ 9,292 $ 7,892 $ — $ 7,892 $ — Loans, net 1,755,209 1,727,842 — 1,718,866 8,976 Financial Liabilities: Time deposits $ 607,070 $ 605,216 $ — $ 605,216 $ — Borrowings 168,111 172,985 — 172,985 — NOTE 7. COMMITMENTS AND CONTINGENCIES The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of these instruments reflect the extent of the Company’s involvement in these particular 22 classes of financial instruments. The Company’s exposure to the maximum possible credit risk in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. The Company evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable; inventory; property, plant and equipment and income-producing commercial properties. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments to fund fixed-rate loans were immaterial at June 30, 2024. Variable-rate commitments are generally issued for less than one year and carry market rates of interest. Such instruments are not likely to be affected by annual rate caps triggered by rising interest rates. As of June 30, 2024 and December 31, 2023, unused commitments to extend credit amounted to approximately $ 114.8 million and $ 93.8 million, respectively. At June 30, 2024 and December 31, 2023, the allowance for credit losses on off-balance sheet credit exposures was $ 896.0 thousand and $ 499 thousand, respectively. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. As of June 30, 2024 and December 31, 2023, standby letters of credit with customers were $ 0.6 million and $ 1.5 million, respectively. On June 26, 2024, the Bank entered into an agreement with the FHLBNY for a Municipal Letter of Credit ("MLOC") of $ 60.0 million. The MLOC is used to pledge against public deposits and the MLOC expires on September 25, 2024. There were no outstanding borrowings on the letters of credit as of June 30, 2024. The Company also has entered into an employment contract with the President of the Company, which provides for continued payment of certain employment salary and benefits prior to the expiration date of the agreement and in the event of a change in control, as defined. The Company has also entered in Change-in-Control Severance Agreements with certain officers which provide for the payment of severance in certain circumstances following a change in control. We provide banking services to customers that are licensed by various States to do business in the cannabis industry as growers, processors and dispensaries. Cannabis businesses are legal in these States, although they are not legal at the federal level. The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) published guidelines in 2014 for financial institutions servicing state legal cannabis businesses. A financial institution that provides services to cannabis-related businesses can comply with Bank Secrecy Act (“BSA”) disclosure standards by following the FinCEN guidelines. We maintain stringent written policies and procedures related to the acceptance of such businesses and to the monitoring and maintenance of such business accounts. We conduct a significant due diligence review of the cannabis business before the business is accepted, including confirmation that the business is properly licensed by the applicable state. Throughout the relationship, we continue monitoring the business, including site visits, to ensure that the business continues to meet our stringent requirements, including maintenance of required licenses and periodic financial reviews of the business. While we believe we are operating in compliance with the FinCEN guidelines, there can be no assurance that federal enforcement guidelines will not change. Federal prosecutors have significant discretion and there can be no assurance that the federal prosecutors will not choose to strictly enforce the federal laws governing cannabis. Any change in the Federal government’s enforcement position, could cause us to immediately cease providing banking services to the cannabis industry. At June 30, 2024 and December 31, 2023, deposit balances from cannabis customers were approximately $ 142.5 million and $ 96.7 million, or 9.5 % and 6.2 % of total deposits, respectively, with three customers accounting for 66.1 % and 60.6 % of the total at June 30, 2024 and December 31, 2023. At June 30, 2024 and December 31, 2023, there were cannabis-related loans in the amounts of $ 29.5 million and $ 27.1 million, respectively. 23