Note 4 – Loans Receivable, Allowance for Credit Losses and Credit Quality

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Loans Held for Sale

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Loans held for sale to the secondary market are carried at the lower of cost or estimated market value on an individual loan basis. Gains on sales of loans are recognized in the consolidated statements of income at the time of sale. Losses on sales of loans are recognized in the consolidated statements of income when incurred. Interest income is recognized on loans held for sale between the time the loan is funded and the loan is sold. Direct loan origination costs and fees are deferred upon origination and are recognized in the consolidated statements of income on the date of sale. As of March 31, 2026 and December 31, 2025, the Company had $64.0 million and $66.4 million of consumer loans held for sale, respectively.

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Loans Receivable

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Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported as held for investment at their outstanding principal balance adjusted for any charge-offs and net of any deferred fees (including purchase accounting adjustments) and origination costs (collectively referred to as “amortized cost”). Loan origination fees and certain direct origination costs are deferred and amortized as an adjustment of yield using the payment terms required by the loan contract. When loans are sold or repaid, any unamortized fees and costs are recorded to interest income on loans. Interest income on loans is accrued based upon the daily principal amount outstanding except for loans on non-accrual status. For acquired loans with no signs of credit deterioration at acquisition, interest income is also accrued based upon the daily principal amount outstanding, adjusted further by the accretion of any discount or amortization of any premium associated with the loan.

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Loans are generally placed into nonaccrual status when they are past due 90 days or more as to either principal or interest or when, in the opinion of management, the collection of principal and/or interest is in doubt. A loan remains in nonaccrual status until the loan is current as to payment of both principal and interest or past due less than 90 days and the borrower demonstrates the ability to pay and remain current. When cash payments are received, they are applied to principal first, then to accrued interest. It is the Company’s policy not to record interest income on nonaccrual loans until principal has become current. In certain instances, accruing loans that are past due 90 days or more as to principal or interest may not go on nonaccrual status if the Company determines that the loans are well-secured and are in the process of collection.

Allowance for Credit Losses

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The ACL represents management’s best estimate of credit losses over the remaining life of the loan portfolio. Loans are charged-off against the ACL when management believes the loan balance is no longer collectible. Subsequent recoveries of previously charged-off amounts are recorded as increases to the ACL. The provision for credit losses is an amount sufficient to bring the ACL to an estimated balance that management considers adequate to absorb lifetime expected losses in the Company’s held-for-investment loan portfolio. The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.

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Management’s determination of the adequacy of the ACL under FASB ASC 326 is based on an evaluation of the composition of the loan portfolio, current economic conditions, historical loan loss experience, reasonable and supportable forecasts, and other risk factors. The Company uses a third-party CECL model as part of its estimation of the ACL on a quarterly basis. Loans with similar risk characteristics are collectively assessed within pools (or segments). Loss estimates within the collectively assessed population are based on a combination of pooled assumptions and loan-level characteristics. The Company has determined that using federal call codes is an appropriate loan segmentation methodology, as it is generally based on risk characteristics of a loan’s underlying collateral.

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Using federal call codes also allows the Company to utilize and assess publicly available external information when developing its estimate of the ACL. The weighted average remaining maturity (“WARM”) method is the primary credit loss estimation methodology used by the Company and involves estimating future cash flows and expected credit losses for pools of loans using their expected remaining WARM.

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In applying future economic forecasts, the Company utilizes a forecast period of up to two years. The Company considers economic forecasts of inflation, national gross domestic product, and unemployment rates sourced from the Federal Open Market Committee’s “Summary of Economic Projections” to inform the model for future loss estimation.

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Additionally, interest rate forecasts sourced from CME Group’s “FedWatch”, Wells Fargo’s “U.S. Economic Outlook,” and FHN Financial’s “Economic Forecast” publications are used for consideration of rate sensitivity in the model’s loan prepayment speed estimation. Historical loss rates used in the quantitative model are primarily derived using both the Bank’s data and peer bank data obtained from publicly available sources (i.e., federal call reports). The Bank’s peer group is comprised of financial institutions of relatively similar size and in similar markets (i.e., $10 billion or less of total assets and headquartered in New England). The peer group used for certain loan segments is a national peer group of financial institutions of relatively similar size, where appropriate. The changes did not have a material impact on the ACL during the year ended December 31, 2025.

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Management also considers qualitative adjustments when estimating credit losses to take into account the model’s quantitative limitations.

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Management continually assesses the peer group and related data used to inform the ACL calculation.

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Qualitative adjustments to quantitative loss factors, either negative or positive, may include considerations of economic conditions including economic forecasts as detailed above, volume and severity of past due loans, value of underlying collateral, experience, depth, and ability of management, and concentrations of credit.

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The Company made no significant changes to loss factors, assumptions nor qualitative factors within the CECL model during the three months ended March 31, 2026 and 2025.

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For those loans that do not share similar risk characteristics, the Company evaluates the ACL needs on an individual (or loan by loan) basis. This population of individually evaluated loans (or loan relationships with the same primary source of repayment) is determined on a quarterly basis and consists of: loans with a risk rating of substandard or worse or loan terms differing significantly from other pooled loans. In accordance with the Company’s policy, non-accrual residential real estate loans that are below $500,000 and well secured (loan-to-value <60%) are excluded from being individually evaluated.

Measurement of credit loss is based on the expected future cash flows of an individually evaluated loan, discounted at the loan’s effective interest rate, or measured on an observable market value, if one exists, or the estimated market value of the collateral underlying the loan, discounted to consider estimated costs to sell the collateral for collateral-dependent loans. If the net value is less than the loan’s amortized cost, a specific reserve in the ACL is recorded, which is charged-off in the period when management believes the loan balance is no longer collectible.

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The Company’s Troubled Asset Resolution Committee approves the key methodologies and assumptions, as well as the ACL on at least a quarterly basis. While management uses available information at the time of estimation to determine expected credit losses on loans, future changes in the ACL may be necessary based on changes in portfolio composition, portfolio credit quality, and/or economic conditions. In addition, bank regulatory agencies periodically review the Bank’s ACL and may require an increase in the provision for credit losses or the recognition of further loan charge-offs, based on judgments different than those of management.

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Collateral-dependent Loans – The Company has certain loans for which repayment is dependent upon the operation or sale of collateral, as the borrower is experiencing financial difficulty. The underlying collateral can vary based upon the type of loan. The following provides more detail about the types of collateral that secure collateral-dependent loans:

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Non-owner-occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate.

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Purchased Credit-Deteriorated (“PCD”) Loans - PCD loans are acquired individual loans (or acquired groups of loans with similar risk characteristics) that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality, as determined by the Company’s analyses. A PCD loan is recorded at its purchase price plus the ACL expected at the time of acquisition, or “gross up” of the amortized cost basis, if any. Changes in the current estimate of the ACL subsequent to acquisition from the estimated allowance previously recorded are recognized in the income statement as provision for credit losses or recoveries of credit losses in subsequent periods as they arise.

Evidence that purchased loans, measured at amortized cost, have more-than-insignificant deterioration in credit quality and, therefore meet the PCD definition, may include past-due status, non-accrual status, risk rating and other standard indicators (i.e., modification due to financial difficulty, charge-offs, bankruptcy).

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In the ordinary course of business, the Company enters into commitments to extend credit. Such financial instruments are recorded in the consolidated financial statements when they are funded. The credit risk associated with these commitments is evaluated in a manner similar to the ACL on loans. The reserve for unfunded commitments is included in other liabilities on the consolidated balance sheets.

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Loans consist of the following as of the dates stated:

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Included in the above are approximately $466.8 million and $404.8 million in loans to borrowers in the cannabis industry at March 31, 2026 and December 31, 2025, respectively. Of that total, $321.0 million and $228.8 million were direct loans to cannabis companies and were collateralized by real estate at March 31, 2026 and December 31, 2025, respectively.

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During the three months ended March 31, 2026 and 2025, the Company purchased approximately $14.7 million and $14.4 million of consumer loan pools, respectively. The loans purchased during the three months ended March 31, 2026 and 2025 included loan pools collateralized by automobiles.

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The outstanding balances of consumer purchased loans, shown net of premium (discount) are as follows as of the dates stated:

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The carrying value of loans pledged to secure advances from the FHLB were $1.25 billion and $1.56 billion as of March 31, 2026 and December 31, 2025, respectively.

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The following table presents the aging of the amortized cost of loans receivable by loan category as of the date stated:

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As of March 31, 2026, the Company had one commercial and industrial loan with an outstanding balance of $12.7 million that was ninety days past due and still accruing. The loan is well secured and in the process of collection, as the borrower has brought the loan current. The Company had no loans ninety days past due and still accruing as of March 31, 2025.

The following table presents the amortized cost of nonaccrual loans receivable by loan category as of the dates stated:

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During the three months ended March 31, 2026 and 2025, the Company reversed $483,000 and $378,000 of interest income for loans that were placed on non-accrual respectively.

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Credit Quality Information

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The Company utilizes a nine-grade internal rating system for all loans, except consumer loans, which are not risk rated, as follows:

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Loans rated 1-5: Loans in these categories are considered “pass” rated loans with low to average risk.

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Loans rated 6: Loans in this category are considered “special mention”. These loans are starting to show signs of potential weakness and are being closely monitored by management.

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Loans rated 7: Loans in this category are considered “substandard”. Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected. Non-accrual residential real estate and commercial loans are downgraded to a substandard risk rating.

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Loans rated 8: Loans in this category are considered “doubtful”. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

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Loans rated 9: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.

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On an annual basis, or more often if needed, the Company reviews the accuracy of risk ratings for all commercial real estate, construction and land development loans, and commercial and industrial loans based on various ongoing performance characteristics and supporting information that is provided from time to time by commercial borrowers. Annually, the Company engages an independent third-party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process.

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The following table presents the amortized cost of loans receivable by internal risk grade by year of origination as of March 31, 2026. Also presented are current period gross charge-offs by loan type and vintage year for the three months ended March 31, 2026: