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Note 5 - Loans Receivable

6 Months Ended

Jun. 30, 2024

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 5 - Loans Receivable

The Bancorp’s current lending programs are described below:

Residential Real Estate. The primary lending activity of the Bancorp has been the granting of conventional mortgage loans to enable borrowers to purchase existing homes, refinance existing homes, or construct new homes. Conventional loans are made up to a maximum of 97% of the purchase price or appraised value, whichever is less. For loans made in excess of 80% of value, private mortgage insurance is generally required in an amount sufficient to reduce the Bancorp’s exposure to 80% or less of the appraised value of the property. Loans insured by private mortgage insurance companies can be made for up to 97% of value. Loans closed with over 20% of equity do not require private mortgage insurance because of the borrower’s level of equity investment.

Fixed rate loans that originated generally conform to Freddie Mac guidelines for loans purchased under the 1-4 family program. Loan interest rates are determined based on secondary market yield requirements and local market conditions. Fixed rate mortgage loans may be sold and/or classified as held for sale to control exposure to interest rate risk.

The Bancorp’s Adjustable-Rate Mortgage Loans (“ARMs”) include offerings that have a three, five, seven or ten year fixed period. The ability of the Bancorp to successfully market ARM’s depends upon loan demand, prevailing interest rates, volatility of interest rates, and terms offered by competitors.

Home Equity Line of Credit. The Bancorp offers a fixed and variable rate revolving line of credit secured by the equity in the borrower’s home. Both products offer an interest only option where the borrower pays interest only on the outstanding balance each month. Equity lines will typically require a second mortgage appraisal and a second mortgage lender’s title insurance policy. Loans are generally made up to a maximum of 89% of the appraised value of the property less any outstanding liens.

Fixed-term home improvement and equity loans are made up to a maximum of 85% of the appraised value of the improved property, less any outstanding liens. These loans are offered on both a fixed and variable rate basis with a maximum term of 240 months. All home equity loans are made on a direct basis to borrowers.

Commercial Real Estate and Multifamily Loans. Commercial real estate loans are typically made to a maximum of 80% of the appraised value. Such loans are generally made on an adjustable-rate basis. These loans are typically made for terms of 15 to 25 years. Loans with an amortizing term exceeding 15 years normally have a balloon feature calling for a full repayment within seven to ten years from the date of the loan. The balloon feature affords the Bancorp the opportunity to restructure the loan if economic conditions warrant. Commercial real estate loans include loans secured by commercial rental units, apartments, condominium developments, small shopping centers, owner occupied commercial/industrial properties, hospitality units and other retail and commercial developments.

While commercial real estate lending is generally considered to involve a higher degree of risk than single family residential lending due to the concentration of principal in a limited number of loans and the effects of general economic conditions on real estate developers and managers, the Bancorp has endeavored to reduce this risk in several ways. In originating commercial real estate loans, the Bancorp considers the feasibility of the project, the financial strength of the borrowers and lessees, the managerial ability of the borrowers, the location of the project and the economic environment. Management evaluates the debt coverage ratio and analyzes the reliability of cash flows, as well as the quality of earnings. All such loans are made in accordance with well-defined underwriting standards and are generally supported by personal guarantees, which represent a secondary source of repayment.

Loans for the construction of commercial properties are generally located within an area permitting physical inspection and regular review of business records. Projects financed outside of the Bancorp’s primary lending area generally involve borrowers and guarantors who are or were previous customers of the Bancorp or projects that are underwritten according to the Bank’s underwriting standards.

Construction and Land Development. Construction loans on residential properties are made primarily to individuals who are under contract with a general contractor. The maximum loan-to-value ratio is 89% of either the current appraised value or the cost of construction, whichever is less. Residential construction loans are typically made for a period of one year.

Loans are also made for the construction of commercial properties. All such loans are made in accordance with well-defined underwriting standards. Generally if the loans are not owner occupied, these types of loans require proof of intent to lease and a confirmed end-loan takeout. In general, loans made do not exceed 80% of the appraised value of the property. Commercial construction loans are typically made for periods not to exceed two years or date of occupancy, whichever is less.

Commercial Business and Farmland Loans. Although the Bancorp’s priority in extending various types of commercial business loans changes from time to time, the basic considerations in determining the makeup of the commercial business loan portfolio are economic factors, regulatory requirements and money market conditions. The Bancorp seeks commercial loan relationships from the local business community and from its present customers. Prudent lending policies based upon sound credit analysis governs the extension of commercial credit. The following loans, although not inclusive, are considered preferable for the Bancorp’s commercial loan portfolio: loans collateralized by liquid assets; loans secured by general use machinery and equipment; secured short-term working capital loans to established businesses secured by business assets; short-term loans with established sources of repayment and secured by sufficient equity and real estate; and unsecured loans to customers whose character and capacity to repay are firmly established.

Consumer Loans. The Bancorp offers consumer loans to individuals for personal, household or family purposes. Consumer loans are either secured by adequate collateral, or unsecured. Unsecured loans are based on the strength of the applicant’s financial condition. All borrowers must meet current underwriting standards. The consumer loan program includes both fixed and variable rate products.

Manufactured Homes. The Bancorp purchases fixed rate closed loans from a third-party that are subject to Bancorp’s underwriting requirements and secured by manufactured homes. The maturity date on these loans can range up to 25 years. In addition, these loans are partially secured by a reserve account held at the Bancorp.

Government Loans. The Bancorp is permitted to purchase non-rated municipal securities, tax anticipation notes and warrants within the local market area.

Loans consist of the following as of June 30, 2024, and December 31, 2023:

(Dollars in thousands)
	June 30, 2024			December 31, 2023
Loans secured by real estate:
Residential real estate	$	475,371		$	484,948
Home equity		48,435			46,599
Commercial real estate		529,421			503,202
Construction and land development		88,699			115,227
Multifamily		219,841			219,917
Total loans secured by real estate		1,361,767			1,369,893
Commercial business		98,402			97,386
Consumer		611			610
Manufactured homes		28,721			30,845
Government		14,014			10,021
Loans receivable		1,503,515			1,508,755
Add (less):
Net deferred loan origination costs		3,053			3,705
Loan clearing/(unapplied) funds		(171	)		135
Loans receivable, net of deferred fees and costs..	$	1,506,398		$	1,512,595

The Bancorp's age analysis of past due loans is summarized below:

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due and Accruing		Total Past Due and Accruing		Current		Accruing Loans		Non-accrual Loans		Total Loans Receivable
June 30, 2024
Residential real estate	$	5,796	$	1,004	$	93	$	6,893	$	465,983	$	472,877	$	2,494	$	475,371
Home equity		80		4		-		84		47,901		47,984		451		48,435
Commercial real estate		4,006		189		201		4,396		522,514		526,910		2,511		529,421
Construction and land development		1,038		-		-		1,038		87,661		88,699		-		88,699
Multifamily		4,033		915		-		4,948		211,815		216,763		3,078		219,841
Commercial business		150		116		-		265		95,592		95,857		2,545		98,402
Consumer		-		-		-		-		611		611		-		611
Manufactured homes		247		215		-		462		28,259		28,721		-		28,721
Government		-		-		-		-		14,014		14,014		-		14,014
Total	$	15,349	$	2,443	$	294	$	18,086	$	1,474,350	$	1,492,436	$	11,079	$	1,503,515

December 31, 2023
Residential real estate	$	5,857	$	4,362	$	1,131	$	11,350	$	471,905	$	483,255	$	1,693	$	484,948
Home equity		226		18		-		244		45,887		46,131		468		46,599
Commercial real estate		3,168		262		712		4,142		498,227		502,369		833		503,202
Construction and land development		2,523		-		-		2,523		112,704		115,227		-		115,227
Multifamily		5,333		-		-		5,333		210,869		216,202		3,715		219,917
Commercial business		105		29		-		134		94,355		94,489		2,897		97,386
Consumer		12		-		-		12		596		608		2		610
Manufactured homes		634		379		-		1,013		29,832		30,845		-		30,845
Government		-		-		-		-		10,021		10,021		-		10,021
Total	$	17,858	$	5,050	$	1,843	$	24,751	$	1,474,396	$	1,499,147	$	9,608	$	1,508,755

The following table shows the amortized cost of loans, segregated by portfolio segment, credit quality rating and year of origination as of June 30, 2024, and December 31, 2023, and gross charge-offs for the six months ended June 30, 2024, and for the year ended December 31, 2023.

June 30, 2024	2024			2023		2022		2021		2020		Prior			Revolving		Revolving Converted to Term		Total
Total Loans Receivable	$	59,052		$	148,865	$	312,351	$	320,044	$	222,859	$	348,625		$	89,980	$	1,741	$	1,503,515
Total current period gross charge-off	$	(44	)	$	-	$	-	$	-	$	-	$	(65	)	$	-	$	-	$	(109	)

Residential real estate
Pass (1-6)	$	6,131		$	26,332	$	94,478	$	103,636	$	108,437	$	127,982		$	2,003	$	-	$	469,000
Special Mention (7)		-			195		368		660		408		1,757			-		-		3,387
Substandard (8)		-			205		891		149		576		1,163			-		-		2,984
Total	$	6,131		$	26,732	$	95,737	$	104,445	$	109,421	$	130,903		$	2,003	$	-	$	475,371
Current period gross charge-off		-			-		-		-		-		-			-		-		-

Home equity
Pass (1-6)	$	161		$	74	$	108	$	116	$	6	$	2,824		$	43,839	$	287	$	47,417
Special Mention (7)		-			10		-		-		4		15			530		-		559
Substandard (8)		-			-		148		-		-		67			89		156		460
Total	$	161		$	84	$	257	$	116	$	10	$	2,906		$	44,458	$	443	$	48,435
Current period gross charge-off		-			-		-		-		-		-			-		-		-

Commercial real estate
Pass (1-6)	$	17,181		$	63,455	$	126,214	$	97,321	$	55,651	$	158,310		$	2,765	$	-	$	520,896
Special Mention (7)		493			-		-		2,406		422		2,492			201		-		6,014
Substandard (8)		-			-		909		-		220		1,256			126		-		2,511
Total	$	17,675		$	63,455	$	127,123	$	99,726	$	56,293	$	162,057		$	3,092	$	-	$	529,421
Current period gross charge-off		-			-		-		-		-		-			-		-		-

*Construction and land development*
Pass (1-6)	$	20,911		$	37,868	$	9,609	$	9,098	$	403	$	8		$	3,115	$	1,298	$	82,309
Special Mention (7)		-			-		-		1,725		2,497		-			-		-		4,222
Substandard (8)		-			365		-		1,803		-		-			-		-		2,168
Total	$	20,911		$	38,232	$	9,609	$	12,626	$	2,900	$	8		$	3,115	$	1,298	$	88,699
Current period gross charge-off		-			-		-		-		-		-			-		-		-

Multifamily
Pass (1-6)	$	-		$	9,710	$	61,191	$	76,783	$	39,251	$	24,351		$	565	$	-	$	211,852
Special Mention (7)		-			-		794		3,012		465		121			-		-		4,392
Substandard (8)		-			-		-		1,358		1,536		703			-		-		3,597
Total	$	-		$	9,710	$	61,985	$	81,153	$	41,252	$	25,175		$	565	$	-	$	219,841
Current period gross charge-off		-			-		-		-		-		(65	)		-		-		(65	)

Commercial business
Pass (1-6)	$	7,050		$	10,366	$	11,920	$	8,154	$	4,529	$	15,111		$	36,318	$	-	$	93,449
Special Mention (7)		-			43		1,038		49		-		850			429		-		2,408
Substandard (8)		-			37		1,080		223		191		1,014			-		-		2,545
Total	$	7,050		$	10,446	$	14,038	$	8,425	$	4,720	$	16,976		$	36,747	$	-	$	98,402
Current period gross charge-off		-			-		-		-		-		-			-		-		-

Consumer
Pass (1-6)	$	238		$	206	$	58	$	71	$	2	$	36		$	-	$	-	$	611
Substandard (8)		-			-		-		-		-		-			-		-		-
Total	$	238		$	206	$	58	$	71	$	2	$	36		$	-	$	-	$	611
Current period gross charge-off		(44	)		-		-		-		-		-			-		-		(44	)

Manufactured homes
Pass (1-6)	$	-		$	-	$	1,909	$	12,137	$	8,261	$	6,414		$	-	$	-	$	28,721
Substandard (8)		-			-		-		-		-		-			-		-		-
Total	$	-		$	-	$	1,909	$	12,137	$	8,261	$	6,414		$	-	$	-	$	28,721
Current period gross charge-off		-			-		-		-		-		-			-		-		-

Government
Pass (1-6)	$	6,885		$	-	$	1,635	$	1,344	$	-	$	4,150		$	-	$	-	$	14,014
Total	$	6,885		$	-	$	1,635	$	1,344	$	-	$	4,150		$	-	$	-	$	14,014
Current period gross charge-off		-			-		-		-		-		-			-		-		-

December 31, 2023	2023		2022			2021		2020			2019			Prior			Revolving			Revolving Converted to Term		Total
Total Loans Receivable	$	148,105	$	323,820		$	321,183	$	234,861		$	108,683		$	274,027		$	94,893		$	3,183	$	1,508,755
Total current period gross charge-off	$	-	$	(40	)	$	-	$	(25	)	$	(41	)	$	(909	)	$	(27	)	$	-		(1,042	)

Residential real estate
Pass (1-6)	$	20,740	$	97,671		$	106,778	$	115,001		$	23,873		$	113,987		$	1,716		$	-	$	479,766
Special Mention (7)		405		-			473		173			431			1,602			-			-		3,084
Substandard (8)		-		786			152		471			217			472			-			-		2,098
Total	$	21,145	$	98,457		$	107,403	$	115,645		$	24,521		$	116,061		$	1,716		$	-	$	484,948
Current period gross charge-off		-		(40	)		-		(25	)		(39	)		(893	)		-			-		(997	)

Home equity
Pass (1-6)	$	110	$	114		$	101	$	14		$	61		$	2,051		$	42,801		$	700	$	45,952
Special Mention (7)		-		-			-		-			4			31			70			63		168
Substandard (8)		-		161			-		-			-			67			251			-		479
Total	$	110	$	275		$	101	$	14		$	65		$	2,149		$	43,122		$	763	$	46,599
Current period gross charge-off		-		-			-		-			-			(16	)		(27	)		-		(43	)

Commercial real estate
Pass (1-6)	$	52,880	$	127,607		$	90,108	$	55,236		$	56,255		$	108,489		$	2,649		$	-	$	493,224
Special Mention (7)		-		69			2,429		1,274			1,123			2,397			142			-		7,434
Substandard (8)		-		-			-		230			-			2,314			-			-		2,544
Total	$	52,880	$	127,676		$	92,537	$	56,740		$	57,378		$	113,200		$	2,791		$	-	$	503,202
Current period gross charge-off		-		-			-		-			-			-			-			-		-

Construction and land development
Pass (1-6)	$	48,518	$	24,948		$	13,411	$	1,732		$	4,284		$	473		$	12,539		$	2,420	$	108,325
Special Mention (7)		365		76			4,205		2,256			-			-			-			-		6,902
Substandard (8)		-		-			-		-			-			-			-			-		-
Total	$	48,883	$	25,024		$	17,616	$	3,988		$	4,284		$	473		$	12,539		$	2,420	$	115,227
Current period gross charge-off		-		-			-		-			-			-			-			-		-

Multifamily
Pass (1-6)	$	9,333	$	53,493		$	78,122	$	41,773		$	13,156		$	19,609		$	186		$	-	$	215,672
Substandard (8)		-		-			1,666		1,562			-			1,017			-			-		4,245
Total	$	9,333	$	53,493		$	79,788	$	43,335		$	13,156		$	20,626		$	186		$	-	$	219,917
Current period gross charge-off		-		-			-		-			-			-			-			-		-

Commercial business
Pass (1-6)	$	13,110	$	13,774		$	9,327	$	5,705		$	4,105		$	12,905		$	33,954		$	-	$	92,880
Special Mention (7)		373		197			58		-			129			436			417			-		1,610
Substandard (8)		43		1,094			256		214			-			1,121			168			-		2,896
Total	$	13,526	$	15,065		$	9,641	$	5,919		$	4,234		$	14,462		$	34,539		$	-	$	97,386
Current period gross charge-off		-		-			-		-			-			-			-			-		-

Consumer
Pass (1-6)	$	338	$	73		$	108	$	4		$	14		$	71		$	-		$	-	$	608
Substandard (8)		-		-			-		2			-			-			-			-		2
Total	$	338	$	73		$	108	$	6		$	14		$	71		$	-		$	-	$	610
Current period gross charge-off		-		-			-		-			(2	)		-			-			-		(2	)

Manufactured homes
Pass (1-6)	$	-	$	1,942		$	12,556	$	9,214		$	5,031		$	2,102		$	-		$	-	$	30,845
Total	$	-	$	1,942		$	12,556	$	9,214		$	5,031		$	2,102		$	-		$	-	$	30,845
Current period gross charge-off		-		-			-		-			-			-			-			-		-

Government
Pass (1-6)	$	1,890	$	1,815		$	1,433	$	-		$	-		$	4,883		$	-		$	-	$	10,021
Total	$	1,890	$	1,815		$	1,433	$	-		$	-		$	4,883		$	-		$	-	$	10,021
Current period gross charge-off		-		-			-		-			-			-			-			-		-

The Bancorp has established a standard loan grading system to assist management, lenders and review personnel in their analysis and supervision of the loan portfolio. The use and application of these grades by the Bancorp is uniform and conforms to regulatory definitions. The loan grading system is as follows:

1 – Superior Quality

Loans in this category are substantially risk free. Loans fully collateralized by a Bank certificate of deposit or Bank deposits with a hold are substantially risk free.

2 – Excellent Quality

The borrower generates excellent and consistent cash flow for debt coverage, excellent average credit scores, excellent liquidity and net worth and are reputable operators with over 15 years' experience. Current and debt to tangible net worth ratios are excellent. Loan to value is substantially below policy and collateral condition is excellent.

3 – Great Quality

The borrower generates more than sufficient cash flow to fund debt service and cash flow is improving. Average credit scores are very strong. Operators are reputable with significant years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are very strong. Loan to value is significantly below policy and collateral condition is significantly above average.

4 – Above Average Quality

The borrower generates more than sufficient cash flow to fund debt service, but cash flow trends may be stable or slightly declining. Average credit scores are strong. The borrower is a reputable operator with many years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are strong. Loan to value is below policy and collateral condition is above average.

5 – Average Quality

Borrowers are considered creditworthy and can repay the debt in the normal course of business, however, cash flow trends may be inconsistent or fluctuating. Average credit scores are satisfactory, and years of experience is acceptable. Liquidity and net worth are satisfactory. Current and debt to tangible net worth ratios are average. Loan to value is slightly below policy and the collateral condition is slightly above average.

6 – Pass

Borrowers are considered creditworthy, but financial condition may show signs of weakness due to internal or external factors. Cash flow trends may be declining annually. Average credit scores may be low but remain acceptable. The borrower has limited years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are below average. Loan to value is nearing policy limits and collateral condition is average.

7 – Special Mention

A special mention asset has identified weaknesses that deserve Management’s close attention. If left uncorrected, these weaknesses may result in deterioration of the repayment prospects for the asset or in the Bancorp’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Bancorp to sufficient risk to warrant adverse classification. There is still adequate protection by the current sound worth and paying capacity of the obligor or of the collateral pledged. The Special Mention rating is viewed as transitional and will be monitored closely.

Loans in this category may exhibit some of the following risk factors. Cash flow trends may be consistently declining or may be questionable. Debt coverage ratios may be at or near 1:1. Average credit scores may be very weak, or the borrower may have minimal years of experience. Liquidity, net worth, current and debt to tangible net worth ratios may be very weak. Loan to value may be at policy limits or may exceed policy limits. Collateral condition may be below average.

8 – Substandard

This classification consists of loans which are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Financial statements normally reveal some or all of the following: poor trends, lack of earnings and cash flow, excessive debt, lack of liquidity, and the absence of creditor protection. Loans are still considered collectible, but due to increased risks and defined weaknesses of the credit, some loss could be incurred in collection if the deficiencies are not corrected.

9 – Doubtful

Such loans have been placed on nonaccrual status and may be heavily dependent upon collateral possessing a value that is difficult to determine or based upon some near-term event which lacks clear certainty. These loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of the principal balance highly improbable.

10 – Loss

Loans that are considered uncollectible and of such little value that continuing to carry them as assets is not warranted.

Performing loans are loans that are paying as agreed and are approximately less than ninety days past due on payments of interest and principal.

Non-performing loans include those loans that are 90 days or more past due and those loans that have been placed on non-accrual status.

Loan Modification Disclosures Pursuant to ASU 2022-02

The following table shows the amortized cost of loans that were both experiencing financial difficulty and modified during the three months and six months ended June 30, 2024, and year ended December 31, 2023, segregated by portfolio segment and type of modification. The percentage of the amortized cost of loans that were modified to borrowers in financial distress as compared to the amortized cost of each segment of financial receivable is also presented below.

	For the three months ended June 30, 2024
(Dollars in thousands)	Payment Delay		Term Extension		Interest Rate Reduction		Combination Term Extension and Interest Rate Reduction		% of Total Segment Financing Receivables
Residential Real Estate	$	132	$	241	$	-	$	-		0.08	%
Total	$	132	$	241	$	-	$	-		0.02	%

(Dollars in thousands)

Current

30-59 Days

Past Due

60-89

Days Past

Due

Greater Than 90

Days Past Due

Residential Real Estate

241

132

Total

241

132

	For the six months ended June 30, 2024
(Dollars in thousands)	Payment Delay		Term Extension		Interest Rate Reduction		Combination Term Extension and Interest Rate Reduction		% of Total Segment Financing Receivables
Residential Real Estate	$	132	$	1,491	$	-	$	-		0.34	%
Total	$	132	$	1,491	$	-	$	-		0.11	%

(Dollars in thousands)

Current

30-59 Days

Past Due

60-89

Days Past

Due

Greater Than 90

Days Past Due

Residential Real Estate

1,296

195

132

Total

1,296

195

132

	For the year ended December 31, 2023
(Dollars in thousands)	Payment Delay		Term Extension		Interest Rate Reduction		Combination Term Extension and Interest Rate Reduction		% of Total Segment Financing Receivables
Residential Real Estate	$	-	$	868	$	-	$	-		0.18	%
Total	$	-	$	868	$	-	$	-		0.06	%

(Dollars in thousands)

Current

30-59 Days

Past Due

60-89

Days Past

Due

Greater Than 90

Days Past Due

Residential Real Estate

868

Total

868

There were no commitments to lend additional amounts to the borrowers included in the previous tables.

The Bancorp closely monitors the performance of loans that have been modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The borrowers with term extension have had their maturity dates extended and as a result their monthly payments were reduced.

Upon the Bancorp’s determination that a modified loan has subsequently been deemed uncollectible, the loan is written off. Therefore, the amortized cost of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

Acquired Loan Purchase Discounts

As part of the fair value of loans receivable, there was a net fair value discount for loans acquired of $4.8 million at June 30, 2024, compared to $5.2 million at December 31, 2023.

Accretable yield, or income recorded for the six months ended June 30, is as follows:

(dollars in thousands)	Total
2023	$	245
2024		431

Accretable yield, or income expected to be recorded in the future is as follows:

(dollars in thousands)	Total
Remainder of 2024	$	337
2025		652
2026		482
2027		311
2028		295
2029 and thereafter		2,696
Total	$	4,773

AllowanceforCreditLosses

The allowance for credit losses is established for current expected credit losses on the Bancorp’s loan portfolio utilizing guidance in Accounting Standards Codification (ASC) Topic 326. The Bancorp adopted ASU 2016-13 on January 1, 2023.

The determination of the allowance requires significant judgment to estimate credit losses measured on a collective pool basis when similar risk characteristics exist, and for loans evaluated individually. In determining the allowance, the Bancorp estimates expected future losses for the loan’s entire contractual term adjusted for expected payments when appropriate. The allowance estimate considers relevant available information, from internal and external sources relating to the historical loss experience, current conditions, and reasonable and supportable forecasts for the Bancorp’s outstanding loan balances. The allowance is an estimation that reflects management’s evaluation of expected losses related to the Bancorp’s financial assets measured at amortized cost. To ensure that the allowance is maintained at an adequate level, a detailed analysis is performed on a quarterly basis and an appropriate provision is made to adjust the allowance.

The Bancorp categorizes the loan portfolio into nine segments based on similar risk characteristics. Loans within each segment are collectively evaluated using the probability of default (“PD”)/loss given default (“LGD”) methodology (PD/LGD). In creating the “current expected credit loss (CECL)” model as required under ASC 326, the Bancorp has established a two-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average. Due to its minimal loss history, the Bancorp elected to use peer data for a more reasonable calculation. The following table shows the changes in the allowance for credit losses, segregated by portfolio segment, for the three and six months ended June 30, 2024, and 2023.

The Bancorp's activity in the allowance for credit losses, by loan segment, is summarized below for the three months ended June 30, 2024:

(Dollars in thousands)	Beginning Balance		Charge-offs			Recoveries		Provisions			Ending Balance

Allowance for credit losses:
Residential real estate	$	4,017	$	-		$	10	$	270		$	4,297
Home equity		737		-			-		(10	)		727
Commercial real estate		7,256		-			2		(355	)		6,903
Construction and land development		3,456		-			-		(389	)		3,067
Multifamily		957		(65	)		31		(44	)		879
Commercial business		2,135		-			7		63			2,205
Consumer		6		(26	)		5		20			5
Manufactured homes		173		-			-		(16	)		157
Government		68		-			-		22			90
Total	$	18,805	$	(91	)	$	55	$	(439	)	$	18,330

The Bancorp's activity in the allowance for credit losses, by loan segment, is summarized below for the three months ended June 30, 2023:

(Dollars in thousands)	Beginning Balance		Charge-offs			Recoveries		Provisions			Ending Balance

Allowance for credit losses:
Residential real estate	$	5,068	$	-		$	11	$	(225	)	$	4,854
Home equity		643		-			-		37			680
Commercial real estate		7,119		(360	)		1		271			7,031
Construction and land development		3,229		-			-		370			3,599
Multifamily		1,059		-			86		(125	)		1,020
Commercial business		2,095		(368	)		101		222			2,050
Consumer		64		(21	)		3		11			57
Manufactured homes		216		-			-		(50	)		166
Government		75		-			-		(25	)		50
Total	$	19,568	$	(749	)	$	202	$	486		$	19,507

The Bancorp's activity in the allowance for credit losses, by loan segment, is summarized below for the six months ended June 30, 2024:

(Dollars in thousands)	Beginning Balance		Charge-offs			Recoveries		Provisions			Ending Balance

Allowance for credit losses:
Residential real estate	$	3,984	$	-		$	20	$	293		$	4,297
Home equity		698		-			-		29			727
Commercial real estate		7,045		-			2		(144	)		6,903
Construction and land development		4,206		-			-		(1,139	)		3,067
Multifamily		933		(65	)		31		(20	)		879
Commercial business		1,649		-			9		548			2,205
Consumer		7		(44	)		6		36			5
Manufactured homes		181		-			-		(24	)		157
Government		65		-			-		25			90
Total	$	18,768	$	(109	)	$	68	$	(397	)	$	18,330

The Bancorp's activity in the allowance for credit losses, by loan segment, is summarized below for the six months ended June 30, 2023:

(Dollars in thousands)	Beginning Balance		Adoption of ASC 326		PCD Gross-up		Charge-offs			Recoveries		Provisions			Ending Balance

Allowance for credit losses:
Residential real estate	$	3,021	$	1,688	$	535	$	-		$	63	$	(453	)	$	4,854
Home equity		410		99		29		-			-		142			680
Commercial real estate		5,784		1,003		443		(372	)		1		172			7,031
Construction and land development		1,253		1,735		-		-			-		611			3,599
Multifamily		1,007		141		-		-			86		(214	)		1,020
Commercial business		1,365		320		5		(443	)		148		655			2,050
Consumer		57		5		17		(40	)		6		12			57
Manufactured homes		-		112		-		-			-		54			166
Government		-		55		-		-			-		(5	)		50
Total	$	12,897	$	5,158	$	1,029	$	(855	)	$	304	$	974		$	19,507

A collateral dependent financial loan relies solely on the operation or sale of the collateral for repayment. In evaluating the overall risk associated with the loan, the Bancorp considers character, overall financial condition and resources, and payment record of the borrower; the prospects for support from any financially responsible guarantors; and the nature and degree of protection provided by the cash flow and value of any underlying collateral. However, as other sources of repayment become inadequate over time, the significance of the collateral's value increases and the loan may become collateral dependent.

The table below presents the amortized cost basis and allowance for credit losses (“ACL”) allocated for collateral dependent loans in accordance with ASC 326, which are individually evaluated to determine expected credit losses.

(Dollars in thousands)	June 30, 2024

	Real Estate		Equipment/Inventory		Accounts Receivable		Other		Total		ACL Allocation
Commercial Business		-		1,375		1,428		159		2,961		1,218
Commercial Real Estate		2,511		-		-		-		2,511		79
Construction Land Development		2,168		-		-		-		2,168		-
Multifamily		3,597		-		-		-		3,597		-
	$	8,276	$	1,375	$	1,428	$	159	$	11,237	$	1,297

(Dollars in thousands)	December 31, 2023

	Real Estate		Equipment/Inventory		Accounts Receivable		Other		Total		ACL Allocation
Residential Real Estate	$	30	$	-	$	-	$	-	$	-	$	30
Commercial Business		-		1,583		1,557		192		3,332		738
Commercial Real Estate		2,541		-		-		-		2,541		53
Multifamily		4,244		-		-		-		4,244		85
	$	6,815	$	1,583	$	1,557	$	192	$	10,117	$	906

A deferred cost reserve is maintained for the portfolio of manufactured home loans that have been purchased. This reserve is available for use for manufactured home loan nonperformance and costs associated with nonperformance. If the segment performs in line with expectations, the deferred cost reserve is paid as a premium to the third-party originator of the loan. The unamortized balance of the deferred cost reserve totaled $3.2 million and $3.5 million as of June 30, 2024, and December 31, 2023, respectively, and is included in net deferred loan origination cost.

The following table presents non–accrual loans and loans past due over 90 days still on accrual by class of loans:

As of June 30, 2024	Nonaccrual with No Allowance for Credit Loss		Nonaccrual with Allowance for Credit Loss		Nonaccrual Loans in Total		Loans Past Due over 90 Days Still Accruing
Residential real estate	$	770	$	1,724		2,494	$	93
Home equity		148		303		451		-
Commercial real estate		1,906		605		2,511		201
Construction and land development		-		-		-		-
Multifamily		3,078		-		3,078		-
Commercial business		1,397		1,148		2,545		-
Consumer		-		-		-		-
Manufactured homes		-		-		-		-
Government		-		-		-		-
Total	$	7,298	$	3,781	$	11,079	$	294

As of December 31, 2023	Nonaccrual with No Allowance for Credit Loss		Nonaccrual with Allowance for Credit Loss		Nonaccrual Loans in Total		Loans Past Due over 90 Days Still Accruing
Residential real estate	$	442	$	1,251	$	1,693	$	1,131
Home equity		161		307		468		-
Commercial real estate		603		230		833		712
Construction and land development		-		-		-		-
Multifamily		2,357		1,358		3,715		-
Commercial business		1,724		1,173		2,897		-
Consumer		-		2		-		-
Manufactured homes		-		-		-		-
Government		-		-		-		-
Total	$	5,287	$	4,321	$	9,608	$	1,843

Accrued interest receivable on loans totaled $5.4 million on June 30, 2024, and $5.7 million on December 31, 2023, and is excluded from the estimate of credit losses. The Bancorp made the accounting policy election to not measure an ACL for accrued interest receivable. Accrued interest deemed uncollectible will be written off through interest income.

Liability for Credit Losses on Unfunded Loan Commitments

The liability for credit losses inherent in unfunded loan commitments is included in accrued expenses and other liabilities on the Consolidated Balance Sheet. The adequacy of the reserve for unfunded commitments is determined quarterly based on methodology similar to the methodology for determining the ACL. The following table shows the changes in the liability for credit losses on unfunded loan commitments.

	Three months ended,		Three months ended,
(Dollars in thousands)	June 30, 2024		June 30, 2023
Balance, beginning of period	$	3,399	$	3,108
Adoption of ASC 326		-		-
Provision		515		28
Balance, end of period	$	3,914	$	3,136

	Six months ended,		Six months ended,
(Dollars in thousands)	June 30, 2024		June 30, 2023
Balance, beginning of period	$	3,441	$	3,108
Adoption of ASC 326		-		-
Provision		473		28
Balance, end of period	$	3,914	$	3,136