
	September 30,		December 31,
	2023		2022
($ in thousands)
SBA(1)	$	219,305	$	145,172
Commercial, non-real estate	34,044		11,484
Residential real estate	34,891		37,815
Strategic Program loans	20,040		24,259
Commercial real estate	21,680		12,063
Consumer	7,675		5,808
Total loans held for investment	$	337,635	$	236,601
Deferred loan fees, net	(452)		(399)
Allowance for credit losses(2)	(12,986)		(11,985)
Net loans	$	324,197	$	224,217

(1) Included in the SBA loans held for investment above are $112.5 million and $49.5 million of loans guaranteed by the SBA as of September 30, 2023 and December 31, 2022, respectively.
(2) The Company adopted ASU 2016-13 as of January 1, 2023. The 2022 amounts presented are calculated under the prior accounting standard.

Strategic Program Loans – In 2016, the Company began originating loans with various third-party loan origination platforms that use technology and other innovative systems to streamline the origination of unsecured consumer and secured or unsecured business loans to a wide array of borrowers within certain approved credit profiles. Loans issued by the Company through these programs generally follow and are limited to specific predetermined underwriting criteria. The Company earns monthly minimum program fees from these third parties. Based on the volume of loans originated by the Company related to each Strategic Program, an additional fee equal to a percentage of the loans generated under the Strategic Program may be collected. The program fee is included within non-interest income on the Consolidated Statements of Income.

The Company generally retains the loans and/or receivables for a number of business days after origination before selling the loans and/or receivables to the Strategic Program platform or another investor. Interest income is recognized by the Company while holding the loans. These loans are classified as held-for-sale on the balance sheet.

The Company may also hold a portion of the loans or receivable and sell the remainder directly to the Strategic Programs or other investors. The Company generally services the loans originated through the Strategic Programs in consideration of servicing fees equal to a percentage of the loans generated under the Strategic Programs. In turn, the Strategic Program service providers, subject to the Company’s approval and oversight, serve as sub-servicer and perform typical primary servicing duties including loan collections, modifications, charging-off, reporting and monitoring.

Each Strategic Program establishes a “reserve” deposit account with the Company. The agreements generally require that the reserve account deposit balance does not fall below an agreed upon dollar or percentage threshold related to the total loans currently outstanding as held for sale by the Company for the specific Strategic Program. If necessary, the Company has the right to withdraw amounts from the reserve account to fulfill loan purchaser obligations created under the program agreements. Total cash held in reserve by Strategic Programs at the Company at September 30, 2023 and December 31, 2022, was $29.1 million and $16.6 million, respectively.


	September 30,		December 31,
	2023		2022
($ in thousands)
Retained Strategic Program loans	$	20,040	$	24,259
Strategic Program loans held-for-sale	45,710		23,589
Total Strategic Program loans	$	65,750	$	47,848

In determining an appropriate amount for the allowance, the Bank segmented and aggregated the loan portfolio based on the Federal Deposit Insurance Corporation ("FDIC") Consolidated Reports of Condition and Income ("Call Report") codes. The following pool segments identified as of September 30, 2023 are based on the CECL methodology:


($ in thousands)
Construction and land development	$	26,668
Residential real estate	49,046
Residential real estate multifamily	602
Commercial real estate	183,579
Commercial and industrial	19,364
Consumer	6,870
Lease financing receivables	31,466
Retained Strategic Program loans	20,040
Total loans	$	337,635

The portfolio classes identified as of December 31, 2022 are based on the incurred loss methodology and are segmented by general ledger classification as detailed below.


($ in thousands)
SBA	$	145,172
Commercial, non-real estate	11,484
Residential real estate	37,815
Retained Strategic Program loans	24,259
Commercial real estate	12,063
Consumer	5,808
Total loans	$	236,601


	Three Months Ended September 30, 2023
($ in thousands)	Beginning Balance		Provision for Credit Losses		Charge-Offs		Recoveries		Ending Balance
Construction and land development	$	279	$	14	$	—	$	—	$	293
Residential real estate	708		223		—		3		934
Residential real estate multifamily	6		—		—		—		6
Commercial real estate	3,167		46		(31)		389		3,571
Commercial and industrial	287		151		(107)		18		349
Consumer	90		39		(28)		2		103
Lease financing receivables	528		6		—		—		534
Retained Strategic Program loans	7,256		2,431		(2,748)		257		7,196
Total allowance for loan losses	$	12,321	$	2,910	$	(2,914)	$	669	$	12,986

Unfunded lending commitments	42		160		—		—		202
Total allowance for credit losses	$	12,363	$	3,070	$	(2,914)	$	669	$	13,188


	Nine Months Ended September 30, 2023
($ in thousands)	Beginning Balance		Impact of ASU 2016-13 adoption		Provision (Reversal) of Credit Losses		Charge-Offs		Recoveries		Ending Balance
Construction and land development	$	424	$	(67)	$	(64)	$	—	$	—	$	293
Residential real estate	876		(58)		150		(121)		87		934
Residential real estate multifamily	3		1		2		—		—		6
Commercial real estate	3,238		(574)		671		(153)		389		3,571
Commercial and industrial	339		(85)		265		(191)		21		349
Consumer	65		14		69		(47)		2		103
Lease financing receivables	339		(105)		300		—		—		534
Retained Strategic Program loans	6,701		1,131		6,860		(8,289)		793		7,196
Total allowance for loan losses	$	11,985	$	257	$	8,253	$	(8,801)	$	1,292	$	12,986

Unfunded lending commitments	—		26		176		—		—		202
Total allowance for credit losses	$	11,985	$	283	$	8,429	$	(8,801)	$	1,292	$	13,188


	Three Months Ended September 30, 2022
($ in thousands)	Beginning Balance		Provision (Reversal) of Loan Losses		Charge-Offs		Recoveries		Ending Balance
SBA	$	3,384	$	675	$	(259)	$	9	$	3,809
Commercial, non-real estate	274		190		—		—		464
Residential real estate	415		38		—		—		453
Retained Strategic Program loans	6,442		3,542		(3,070)		233		7,147
Commercial real estate	22		7		—		—		29
Consumer	65		5		(4)		—		66
Total allowance for loan losses	$	10,602	$	4,457	$	(3,333)	$	242	$	11,968


	Nine Months Ended September 30, 2022
($ in thousands)	Beginning Balance		Provision (Reversal) of Loan Losses		Charge-Offs		Recoveries		Ending Balance
SBA	$	2,739	$	1,405	$	(392)	$	57	$	3,809
Commercial, non-real estate	132		330		—		2		464
Residential real estate	352		101		—		—		453
Retained Strategic Program loans	6,549		8,465		(8,508)		641		7,147
Commercial real estate	21		8		—		—		29
Consumer	62		8		(4)		—		66
Total allowance for loan losses	$	9,855	$	10,317	$	(8,904)	$	700	$	11,968

The following table presents the loan balances by portfolio class, based on impairment method, and the corresponding balances in the allowance as of December 31, 2022. For the year ended December 31, 2022, the allowance was calculated based on the incurred loss methodology.


	Allowance for Loan Losses						Portfolio Loan Balances
($ in thousands)	Individually		Collectively		Total		Individually		Collectively		Total
SBA	$	—	$	4,294	$	4,294	$	450	$	144,722	$	145,172
Commercial, non-real estate	—		401		401		—		11,484		11,484
Residential real estate	—		497		497		—		37,815		37,815
Retained Strategic Program loans	—		6,701		6,701		—		24,259		24,259
Commercial real estate	—		27		27		—		12,063		12,063
Consumer	—		65		65		—		5,808		5,808
Total loans	$	—	$	11,985	$	11,985	$	450	$	236,151	$	236,601


	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
($ in thousands)
With no related allowance recorded
SBA	$	450	$	450	$	—	$	711	$	36
Commercial, non-real estate	—		—		—		—		—
Residential real estate	—		—		—		—		—
Retained Strategic Program loans	—		—		—		—		—
Commercial real estate	—		—		—		—		—
Consumer	—		—		—		—		—
Total	$	450	$	450	$	—	$	711	$	36


September 30, 2023
($ in thousands)	Current		30-59 Days Due Due		60-89 Days Due Due		90+ Days Past Due & Still Accruing		Total Past Due		Non- Accrual(1)		Total

Construction and land development	$	26,371	$	—	$	—	$	297	$	297	$	—	$	26,668
Residential real estate	48,928		—		—		—		—		118		49,046
Residential real estate multifamily	602		—		—		—		—		—		602
Commercial real estate	169,497		3,815		—		—		3,815		10,267		183,579
Commercial and industrial	19,323		20		—		—		20		21		19,364
Consumer	6,806		44		7		13		64		—		6,870
Lease financing receivables	31,466		—		—		—		—		—		31,466
Retained Strategic Program loans	18,262		950		770		58		1,778		—		20,040
Total	$	321,255	$	4,829	$	777	$	368	$	5,974	$	10,406	$	337,635

(1) Included in the nonaccrual loan balances are $4.7 million of SBA 7(a) loan balances guaranteed by the SBA.


December 31, 2022
($ in thousands)	Current		30-59 Days Due Due		60-89 Days Due Due		90+ Days Past Due & Still Accruing		Total Past Due		Non- Accrual		Total
SBA	$	143,733	$	1,439	$	—	$	—	$	1,439	$	—	$	145,172
Commercial, non-real estate	11,484		—		—		—		—		—		11,484
Residential real estate	37,387		428		—		—		428		—		37,815
Retained Strategic Program loans	22,080		1,184		802		193		2,179		—		24,259
Commercial real estate	12,063		—		—		—		—		—		12,063
Consumer	5,776		32		—		—		32		—		5,808
Total	$	232,523	$	3,083	$	802	$	193	$	4,078	$	—	$	236,601

The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Bank measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. Generally, collectively assessed loans are grouped by Call Report code and then risk grade grouping.

In addition to past due and nonaccrual status criteria, the Company also evaluates loans using a loan grading system. Internal loan grades are based on current financial information, historical payment experience, and credit documentation, among other factors. Performance-based grades are summarized below:

Watch – A Watch asset may be a larger loan or one that places a heavier reliance on collateral due to the relative financial strength of the borrower. The assets may be maintenance intensive requiring closer monitoring. The obligor is believed to have an adequate primary source of repayment.

Special Mention – A Special Mention asset has potential weaknesses that may be temporary or, if left uncorrected, may result in a loss. While concerns exist, the Company believes that it is currently protected against a default and loss is considered unlikely and not imminent.

Substandard – A Substandard asset is believed to be inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have identified weaknesses and are characterized by the possibility that the Company may sustain some loss if deficiencies are not corrected.

Not Rated – For certain Strategic Program and consumer loans, the Company does not evaluate and risk rate the loans in the same manner as other loans in the Company’s portfolio. The Not Rated loans are typically homogenous, smaller dollar balances approved using abridged underwriting methods that allow the Company to streamline the loan approval process and increase efficiency. Credit quality for Strategic Program loans is highly correlated with delinquency levels.

The following table presents the ending balances of the Company's loan and lease portfolio including non-performing loans by class of receivable and originating year and considering certain credit quality indicators as of the date indicated along with gross chargeoffs for the nine months ended September 30, 2023:


September 30, 2023	2023		2022		2021		Prior		Revolving Loans		Total
($ in thousands)

Construction and land development
Pass	$	9,595	$	12,400	$	4,276	$	100	$	—	$	26,371
Watch	—		—		—		—		—		—
Special Mention	—		—		—		—		—		—
Substandard	—		297		—		—		—		297
Total	9,595		12,697		4,276		100		—		26,668
Current period gross writeoff	—		—		—		—		—		—

Residential real estate
Pass	17,117		9,363		1,497		3,072		2,134		33,183
Watch	4,378		6,718		1,740		2,254		—		15,090
Special Mention	—		367		173		115		—		655
Substandard	—		118		—		—		—		118
Total	21,495		16,566		3,410		5,441		2,134		49,046
Current period gross writeoff	—		(121)		—		—		—		(121)

Residential real estate multifamily
Pass	231		265		80		—		—		576
Watch	—		—		—		26		—		26
Special Mention	—		—		—		—		—		—
Substandard	—		—		—		—		—		—

The following table presents the ending balances of the Company's loan and lease portfolio including non-performing loans by class of receivable and considering certain credit quality indicators as of the date indicated:


December 31, 2022
($ in thousands)	Pass Grade 1-4		Special Mention Grade 5		Classified/ Doubtful/Loss Grade 6-8		Total
SBA	$	144,149	$	573	$	450	$	145,172
Commercial, non-real estate	11,484		—		—		11,484
Residential real estate	37,815		—		—		37,815
Commercial real estate	12,063		—		—		12,063
Consumer	5,808		—		—		5,808
Not Risk Graded
Retained Strategic Program loans							24,259
Total	$	211,319	$	573	$	450	$	236,601

Effective January 1, 2023 loan modifications to borrowers experiencing financial difficulty are required to be disclosed by type of modification and by type of loan. Prior accounting guidance classified loans which were modified as troubled debt restructurings ("TDRs") only if the modification reflected a concession from the lender in the form of a below market interest rate or other concession in addition to borrower financial difficulty. Under the new guidance (ASU 2022-02), loans with modifications made after January 1, 2023, will be reported under the new loan modification guidance whether a concession is made or not. As of January 1, 2023, the Company has ceased to recognize or measure new TDRs but those existing at December 31, 2022 will remain until settled.


($ in thousands)	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
December 31, 2022
SBA	1	$	377	$	377
Total at December 31, 2022	1	$	377	$	377

At December 31, 2022, there were no commitments to lend additional funds to debtors whose loan terms have been modified in a TDR. There was one principal charge-off recorded related to TDRs during the nine months ended September 30, 2022 for $0.01 million. There was no principal charge-off recorded related to TDRs during the three months ended September 30, 2022.

During the three and nine months ended September 30, 2022, there were no loan modifications to TDRs. Separately, one restructured loan incurred a default within 12 months of the restructure date during the nine months ended September 30, 2022. This same loan was paid in full with interest on June 2, 2022.

A collateral-dependent financial loan relies substantially on the operation or sale of the collateral for repayment. In evaluating the overall risk associated with a loan, the Company considers (1) character, overall financial condition and resources, and payment record of the borrower; (2) the prospects for support from any financially responsible guarantors; and (3) the nature and degree of protection provided by the cash flow and value of any underlying collateral. The loan may become collateral-dependent when foreclosure is probable or the borrower is experiencing financial difficulty and its sources of repayment become inadequate over time. At such time, the Company develops an expectation that repayment will be provided substantially through the operation or sale of the collateral.


($ in thousands)	Collateral Type
As of September 30, 2023	Real Estate		Personal Property		Total
Residential real estate	$	118	$	—	$	118
Commercial real estate	10,267		—		10,267
Commercial and industrial	—		21		21
Total	$	10,385	$	21	$	10,406