6. Allowance for Credit Losses

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Available for Sale Securities and Held to Maturity Securities

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The Company has evaluated available for sale debt securities that are in an unrealized loss position and has determined that any decline in value is unrelated to credit loss and related to changes in market interest rates since purchase. None of the available for sale debt securities held were past due at June 30, 2026. In addition, as of June 30, 2026, the Company had not made a decision to sell any of its debt securities held, nor did the Company consider it more likely than not that it would be required to sell such securities before recovery of their amortized cost basis. The Company does not expect to have credit losses associated with the debt securities, and no allowance was recognized on the debt securities portfolio.

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Loans Held for Investment

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The allowance for credit losses for loans held for investment represents management’s best estimate of all expected credit losses over the expected contractual life of the Company’s existing portfolio. Management’s methodology for determining the allowance for credit losses uses the current expected credit losses (“CECL”) standard. Management considers the level of allowance for credit losses to be a reasonable and supportable estimate of expected credit losses inherent within the loans held for investment portfolio as of June 30, 2026. While the Company believes it has an appropriate allowance for the existing loan portfolio at June 30, 2026, additional provision for losses on existing loans may be necessary in the future. Future changes in the allowance for credit losses are expected to be volatile given dependence upon, among other things, the portfolio composition and quality, as well as changes in macroeconomic forecasts and loan cash flow assumptions. In addition to the allowance for credit losses, the Company maintains a separate allowance for credit losses related to off-balance sheet credit exposures, including unfunded loan commitments, and this amount is included in other liabilities within the consolidated balance sheets. For further information on the policies that govern the estimation of the allowance for credit losses, see Note 1 to the consolidated financial statements in the Company’s 2025 Form 10-K.

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One of the most significant judgments involved in estimating the Company’s allowance for credit losses relates to the macroeconomic forecasts used to estimate credit losses over the reasonable and supportable forecast period. To determine the Company’s best estimate of expected credit losses as of June 30, 2026, the Company utilized a single macroeconomic scenario, the baseline forecast, published by Moody’s Analytics in June 2026 that was updated to reflect the U.S. economic outlook. During our previous macroeconomic assessment as of March 31, 2026, the Company utilized the same single macroeconomic scenario, the baseline forecast, published by Moody’s Analytics in March 2026. The baseline economic scenario expects economic growth to moderate in the near term, as energy prices remain elevated and the effects from the conflict in the Middle East and tariffs weigh on the economy. In this scenario, the unemployment rate is expected to gradually increase, peaking at 4.6% in the first half of 2027. Significant variables that impact the modeled losses across the Company’s loan portfolios are the U.S. Real Gross Domestic Product, or GDP, growth rates and unemployment rate assumptions. Changes in these assumptions and forecasts of economic conditions could significantly affect the estimate of expected credit losses at the balance sheet date or between reporting periods.

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During the three months ended June 30, 2026, the reversal of credit losses was primarily driven by changes in the U.S. economic outlook associated with collectively evaluated loans and loan portfolio changes, including changes in loan mix and risk rating grade migration, partially offset by a build in the allowance related to specific reserves, within the banking segment, since the prior quarter. The provision for credit losses during the six months ended June 30, 2026 was primarily driven by a build in the allowance related to specific reserves and net charge-offs, partially offset by changes in the U.S. economic outlook associated with collectively evaluated loans, including changes in loan mix and risk rating grade migration. Specific to the Bank, the net impact to the allowance of changes associated with individually evaluated loans during the three and six months ended June 30, 2026 included a provision for credit losses of $1.9 million and $5.9 million, respectively, while collectively evaluated loans during the three and six months ended June 30, 2026 included a reversal of credit losses of $2.9 million and $5.2 million, respectively. The change in the allowance for credit losses during the noted period was primarily attributable to the Bank and also reflected other factors including, but not limited to, loan mix, and changes in loan balances and qualitative factors from the prior quarter. The changes in the allowance during the three and six months ended June 30, 2026 were also impacted by net charge-offs of $3.2 million and $7.5 million, respectively.

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During the three months ended June 30, 2025, the reversal of credit losses was primarily driven by changes in the U.S. economic outlook associated with collectively evaluated loans, loan portfolio changes and net charge-offs, partially offset by a build in the allowance related to specific reserves, including changes in loan mix and risk rating grade migration, within the banking segment, since the prior quarter. The provision for credit losses during the six months ended June 30, 2025 was primarily driven by a build in the allowance related to loan portfolio changes and specific reserves, including changes in loan mix and risk rating grade migration, partially offset by net charge-offs and changes in the U.S. economic outlook associated with collectively evaluated loans. Specific to the Bank, the net impact to the allowance of changes associated with individually evaluated loans during the three and six months ended June 30, 2025 included a provision for credit losses of $1.8 million and $3.4 million, respectively, while collectively evaluated loans during the three and six months ended June 30, 2025 included a reversal of credit losses of $9.1 million and $1.4 million, respectively. The changes in the allowance for credit losses during the noted periods were primarily attributable to the Bank and also reflected other factors including, but not limited to, the change in economic scenario, loan mix, and changes in loan balances and qualitative factors from the prior quarter. The changes in the allowance during the three and six months ended June 30, 2025 were also impacted by net charge-offs of $0.9 million and $5.2 million, respectively.

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Changes in the allowance for credit losses for loans held for investment, distributed by portfolio segment, are shown below (in thousands).

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Unfunded Loan Commitments

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The Bank uses a process similar to that used in estimating the allowance for credit losses on the funded portion to estimate the allowance for credit loss on unfunded loan commitments. The allowance is based on the estimated exposure at default, multiplied by the lifetime Probability of Default grade and Loss Given Default grade for that particular loan segment. The Bank estimates expected losses by calculating a commitment usage factor based on industry usage factors. The commitment usage factor is applied over the relevant contractual period. Loss factors from the underlying loans to which commitments are related are applied to the results of the usage calculation to estimate any liability for credit losses related for each loan type. The expected losses on unfunded commitments align with statistically calculated parameters used to calculate the allowance for credit losses on the funded portion. There is no reserve calculated for letters of credit as they are issued primarily as credit enhancements and the likelihood of funding is low.

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Changes in the allowance for credit losses for loans with off-balance sheet credit exposures are shown below (in thousands).

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During the three months ended June 30, 2026, the decrease in the reserve for unfunded commitments was primarily due to decreases in expected loss rates, while during the six months ended June 30, 2026 the decrease in the reserve for unfunded commitment was primarily due to decreases in commitment balances and expected loss rates. During the three and six months ended June 30, 2025, the increases in the reserve for unfunded commitments were primarily due to increases in commitment balances.