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Loans

9 Months Ended

Sep. 30, 2023

Loan balances as of September 30, 2023 and December 31, 2022 are summarized in the table below. Categories of loans include:


(in thousands)	September 30, 2023		December 31, 2022
Commercial loans
Commercial and industrial	$	114,265	$	126,108
Owner-occupied commercial real estate	58,486		61,836
Investor commercial real estate	129,831		93,121
Construction	252,105		181,966
Single tenant lease financing	933,873		939,240
Public finance	535,960		621,032
Healthcare finance	235,622		272,461
Small business lending	192,996		123,750
Franchise finance	455,094		299,835

Total commercial loans	2,908,232		2,719,349
Consumer loans
Residential mortgage	393,501		383,948
Home equity	23,544		24,712
Other consumer loans	369,451		324,598

Total consumer loans	786,496		733,258
Total commercial and consumer loans	3,694,728		3,452,607
Net deferred loan origination fees/costs and premiums/discounts on purchased loans and other1	40,340		46,794
Total loans	3,735,068		3,499,401
Allowance for credit losses	(36,452)		(31,737)
Net loans	$	3,698,616	$	3,467,664

1 Includes carrying value adjustments of $29.0 million and $32.5 million related to terminated interest rate swaps associated with public finance loans as of September 30, 2023 and December 31, 2022, respectively.

Risk characteristics of each loan portfolio segment are as follows:

Commercial and Industrial: Commercial and industrial loans’ sources of repayment are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Loans are made for working capital, equipment purchases, or other purposes. Most commercial and industrial loans are secured by the assets being financed and may incorporate a personal guarantee. This portfolio segment is generally concentrated in the Midwest and Southwest regions of the United States.

Owner-Occupied Commercial Real Estate: The primary source of repayment is the cash flow from the ongoing operations and activities conducted by the borrower, or an affiliate of the borrower, who owns the property. This portfolio segment is generally concentrated in the Midwest and Southwest regions of the United States and its loans are often secured by manufacturing and service facilities, as well as office buildings.

Investor Commercial Real Estate: These loans are underwritten primarily based on the cash flow expected to be generated from the property and are secondarily supported by the value of the real estate. These loans typically incorporate a personal guarantee from the primary sponsor or sponsors. This portfolio segment generally involves larger loan amounts with repayment primarily dependent on the successful leasing and operation of the property securing the loan or the business conducted on the property securing the loan. Investor commercial real estate loans may be more adversely affected by changing economic conditions in the real estate markets, industry dynamics or the overall health of the local economy where the property is located. The properties securing the Company’s investor commercial real estate portfolio tend to be diverse in terms of property type and are generally located in the Midwest and Southwest regions of the United States. Management monitors and evaluates commercial real estate loans based on property financial performance, collateral value, guarantor strength, economic and industry conditions together with other risk grade criteria. As a general rule, the Company avoids financing special use projects unless other underwriting factors are present to mitigate these additional risks.

Construction: Construction loans are secured by land and related improvements and are made to assist in the construction of new structures, which may include commercial (retail, industrial, office, and multi-family) properties, land development for residential properties or single family residential properties offered for sale by the builder. These loans generally finance a variety of project costs, including land, site preparation, architectural services, construction, closing and soft costs and interim financing needs. The cash flows of builders, while initially predictable, may fluctuate with market conditions, and the value of the collateral securing these loans may be subject to fluctuations based on general economic changes. This portfolio segment is generally concentrated in the Midwest and Southwest regions of the United States.

Single Tenant Lease Financing: These loans are made on a nationwide basis to property owners of real estate subject to long-term lease arrangements with single tenant operators. The real estate is typically operated by regionally, nationally or globally branded businesses. The loans are underwritten based on the financial strength of the borrower, characteristics of the real estate, cash flows generated from the lease arrangements and the financial strength of the tenant. Similar to the other loan portfolio segments, management monitors and evaluates these loans based on borrower and tenant financial performance, collateral value, industry trends and other risk grade criteria.

Public Finance: These loans are made on a nationwide basis to governmental and not-for-profit entities to provide both tax-exempt and taxable loans for a variety of purposes including: short-term cash-flow needs; debt refinancing; economic development; quality of life projects; infrastructure improvements; renewable energy projects; and equipment financing. The primary sources of repayment for public finance loans include pledged revenue sources including but not limited to: general obligations; property taxes; income taxes; tax increment revenue; utility revenue; gaming revenues; sales tax; and pledged general revenue. Certain loans may also include an additional collateral pledge of mortgaged property or a security interest in financed equipment.

Healthcare Finance: These loans are made on a nationwide basis to healthcare providers, primarily dentists, for practice acquisition financing or refinancing that occasionally includes owner-occupied commercial real estate and equipment purchases. The sources of repayment are primarily based on the identified cash flows from operations of the borrower and related entities and secondarily on the underlying collateral provided by the borrower.

Small Business Lending: These loans are made on a nationwide basis to small businesses and generally carry a partial guaranty from the U.S. Small Business Administration (“SBA”) under its 7(a) loan program. We generally sell the government guaranteed portion of SBA loans into the secondary market while retaining the non-guaranteed portion of the loan and the servicing rights. Loans in the small business lending portfolio have sources of repayment that are primarily based on the identified cash flows of the borrower and secondarily on any underlying collateral provided by the borrower. Loans may, but do not always, have a collateral shortfall. For SBA loans where the guaranteed portion is retained, the SBA guaranty provides a tertiary source of repayment to the Bank in event of borrower default. Cash flows of borrowers, however, may not be as expected and collateral securing these loans may fluctuate in value. Loans are made for a broad array of purposes including, but not limited to, providing operating cash flow, funding ownership changes, and facilitating equipment purchases.

Franchise Finance: These loans are made on a nationwide basis through our partnership with ApplePie Capital, which through their deep relationships with franchise brands provides franchisees with financing options for new franchise units, recapitalization, expansion, equipment and working capital. The sources of repayment are either based on identified cash flows from existing operations of the borrower or pro forma cash flow for new franchise locations.

Residential Mortgage: With respect to residential loans that are secured by 1-to-4 family residences and are generally owner occupied, the Bank typically establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the financial circumstances of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in residential property values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country.

Home Equity: Home equity loans and lines of credit are typically secured by a subordinate interest in 1-to-4 family residences. The properties securing the home equity portfolio segment are generally geographically diverse as the Bank offered these products on a nationwide basis. Repayment of these loans and lines of credit is primarily dependent on the financial circumstances of the borrowers and may be impacted by changes in unemployment levels and property values on residential properties, among other economic conditions in the market.

Other Consumer: These loans primarily consist of consumer loans and credit cards. Consumer loans may be secured by consumer assets such as horse trailers or recreational vehicles. Some consumer loans are unsecured, such as small installment loans, home improvement loans and certain lines of credit. Repayment of consumer loans is primarily dependent upon the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country.

Allowance for Credit Losses (“ACL”) Methodology

The ACL for loans represents management's estimate of all expected credit losses over the expected life of the Company’s existing loan portfolio. Management estimates the ACL balance using relevant available information about the collectability of cash flows, from internal and external sources, including historical information relating to past events, current conditions, and reasonable and supportable forecasts of future economic conditions. When the Company is unable to forecast future economic events, management may revert to historical information.

The Company's methodologies incorporate a one-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average.

The ACL methodology may also consider other adjustments to address changes in conditions, trends, and circumstances such as local industry changes that could have a significant impact on the risk profile of the loan portfolio and provide for adjustments that may not be reflected and/or captured in the historical loss data. These factors include: lending policies, imprecision in forecasting future economic conditions, loan profile, lending staff, problem loan trends, loan review, collateral, credit concentration, or other internal and external factors.

The Company also includes qualitative adjustments to the allowance based on factors and considerations that have not otherwise been fully accounted for. Qualitative adjustments include, but are not limited to:

•Changes in lending policies and procedures, including changes in underwriting standards and collections, charge-offs and recovery practices

•Changes in international, national, regional and local conditions

•Changes in the nature and volume of the portfolio and terms of loans

•Changes in the experience, depth and ability of lending management

•Changes in the volume and severity of past due loans and other similar conditions

•Changes in the quality of the organization’s loan review system

•Changes in the value of underlying collateral for collateral dependent loans

•The existence and effect of any concentrations of credit and changes in the levels of such concentrations

•The effect of other external factors (i.e. competition, legal and regulatory requirements) on the level of estimated credit losses

The ACL is measured on a collective or pool basis when similar risk characteristics exist. The Company segments its portfolio generally by Federal Financial Institutions Examination Council ("FFIEC") Call Report codes that align with its lines of business. Additional sub-segmentation may be utilized to identify groups of loans with unique risk characteristics relative to the rest of the portfolio.

Loans that do not share similar risk characteristics are evaluated on an individual basis. These evaluations are typically performed on loans with a deteriorated internal risk rating. The allowance for credit loss is determined based on several methods, including estimating the fair value of the underlying collateral or the present value of expected cash flows.

The Company relies on a third-party platform that offers multiple methodologies to measure historical life-of-loan losses.

Modified Loans to Borrowers Experiencing Financial Difficulty

The Company may make modifications to certain loans in order to alleviate temporary difficulties in the borrower’s financial condition and/or constraints on the borrower’s ability to repay the loan, and to minimize potential losses to the Company. Modifications may include changes in the amortization terms of the loan, reductions in interest rates, acceptance of interest only payments, and/or reductions to the outstanding loan balance. Such loans are typically placed on nonaccrual status when there is doubt concerning the full repayment of principal and interest or the loan has been delinquent for a period of 90 days or more. These loans may be returned to accrual status when all contractual amounts past due have been brought current, and the borrower’s performance under the modified terms of the loan agreement and the ultimate collectability of all contractual amounts due under the modified terms is no longer in doubt. The Company typically measures the ACL on modified loans to borrowers experiencing financial difficulty on an individual basis when the loans are deemed to no longer share risk characteristics that are similar with other loans in the portfolio. The determination of the ACL for these loans is based on a discounted cash flow approach for both those measured collectively and individually, unless the loan is deemed collateral dependent, which requires measurement of the ACL based on the estimated expected fair value of the underlying collateral, less costs to sell. GAAP requires the Company to make certain disclosures related to these loans, including certain types of modifications, as well as how such loans have performed since their modifications.

Provision for Credit Losses

A provision for estimated losses on loans is charged to income based upon management’s evaluation of the potential losses. Such an evaluation, which includes a review of all loans for which full repayment may not be reasonably assured, considers, among other matters, the estimated net realizable value of the underlying collateral, as applicable, economic conditions, loan loss experience, and other factors that are particularly susceptible to changes that could result in a material adjustment in the near term. While management attempts to use the best information available in making its evaluations, future allowance adjustments may be necessary if economic conditions change substantially from the assumptions used in making the evaluations.

Policy for Charging Off Loans

The Company’s policy is to charge off a loan at any point in time when it no longer can be considered a bankable asset, meaning collectible within the parameters of policy. A secured loan is generally charged down to the estimated fair value of the collateral, less costs to sell, no later than when it is 120 days past due as to principal or interest. An unsecured loan generally is charged off no later than when it is 180 days past due as to principal or interest. A home improvement loan generally is charged off no later than when it is 90 days past due as to principal or interest.

The following tables present changes in the balance of the ACL during the three and nine months ended September 30, 2023.


(in thousands)	Three Months Ended September 30, 2023
Allowance for credit losses:	Balance, Beginning of Period		(Credit) Provision Charged to Expense		Losses Charged Off		Recoveries		Balance, End of Period
Commercial and industrial	$	1,849	$	260	$	—	$	1	$	2,110
Owner-occupied commercial real estate	789		69		—		—		858
Investor commercial real estate	1,416		488		(591)		—		1,313
Construction	1,940		163		—		—		2,103
Single tenant lease financing	9,970		(1,605)		—		—		8,365
Public finance	1,509		(98)		—		—		1,411
Healthcare finance	2,421		(194)		—		—		2,227
Small business lending	2,618		2,341		(751)		13		4,221
Franchise finance	4,484		763		—		—		5,247

Residential mortgage	2,550		(215)		(56)		1		2,280
Home equity	224		(34)		—		2		192
Other consumer loans	6,288		(88)		(119)		44		6,125

Total	$	36,058	$	1,850	$	(1,517)	$	61	$	36,452


(in thousands)	Nine Months Ended September 30, 2023
Allowance for credit losses:	Balance, Beginning of Period		Adoption of CECL		(Credit) Provision Charged to Expense		Losses Charged Off		Recoveries		Balance, End of Period
Commercial and industrial	$	1,711	$	(120)	$	7,265	$	(6,965)	$	219	$	2,110
Owner-occupied commercial real estate	651		62		145		—		—		858
Investor commercial real estate	1,099		(191)		996		(591)		—		1,313
Construction	2,074		(435)		464		—		—		2,103
Single tenant lease financing	10,519		(346)		(1,808)		—		—		8,365
Public finance	1,753		(135)		(207)		—		—		1,411
Healthcare finance	2,997		1,034		(1,779)		(25)		—		2,227
Small business lending	2,168		334		3,834		(2,169)		54		4,221
Franchise finance	3,988		(313)		1,903		(331)		—		5,247

Residential mortgage	1,559		406		367		(56)		4		2,280
Home equity	69		133		(15)		—		5		192
Other consumer loans	3,149		2,533		811		(502)		134		6,125

Total	$	31,737	$	2,962	$	11,976	$	(10,639)	$	416	$	36,452

Prior to the adoption of ASU 2016-13 on January 1, 2023, the Company calculated the allowance for loan losses using the incurred loss methodology. The following table presents the activity in the allowance for loan losses by segment for the three and nine months ended September 30, 2022.


(in thousands)	Three Months Ended September 30, 2022
Allowance for loan losses:	Balance, Beginning of Period		(Credit) Provision Charged to Expense		Losses Charged Off		Recoveries		Balance, End of Period
Commercial and industrial	$	2,026	$	(301)	$	—	$	2	$	1,727
Owner-occupied commercial real estate	703		(87)		—		—		616
Investor commercial real estate	621		453		—		—		1,074
Construction	1,707		(117)		—		—		1,590
Single tenant lease financing	9,712		315		—		—		10,027
Public finance	1,850		(61)		—		—		1,789
Healthcare finance	4,762		(1,150)		—		—		3,612
Small business lending	1,956		217		(130)		3		2,046
Franchise finance	2,281		734		—		—		3,015

Residential mortgage	1,138		231		—		1		1,370
Home equity	54		7		—		1		62
Other consumer loans	2,343		651		(106)		50		2,938

Total	$	29,153	$	892	$	(236)	$	57	$	29,866


(in thousands)	Nine Months Ended September 30, 2022
Allowance for loan losses:	Balance, Beginning of Period		(Credit) Provision Charged to Expense		Losses Charged Off		Recoveries		Balance, End of Period
Commercial and industrial	$	1,891	$	(166)	$	—	$	2	$	1,727
Owner-occupied commercial real estate	742		(126)		—		—		616
Investor commercial real estate	328		746		—		—		1,074
Construction	1,612		(22)		—		—		1,590
Single tenant lease financing	10,385		(1,589)		—		1,231		10,027
Public finance	1,776		13		—		—		1,789
Healthcare finance	5,940		(2,328)		—		—		3,612
Small business lending	1,387		847		(210)		22		2,046
Franchise finance	1,083		1,932		—		—		3,015

Residential mortgage	643		724		—		3		1,370
Home equity	64		(139)		—		137		62
Other consumer loans	1,990		1,116		(397)		229		2,938
Tax refund advance loans	—		1,860		(1,860)		—		—
Total	$	27,841	$	2,868	$	(2,467)	$	1,624	$	29,866

In addition to the ACL, the Company established a reserve for off-balance sheet commitments, classified in other liabilities, as required by the adoption of the CECL methodology for measuring credit losses. This reserve is maintained at a level management believes to be sufficient to absorb losses arising from unfunded loan commitments. The day one entry for off-balance sheet commitments resulted in a reserve of $2.5 million. 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 details activity in the provision for credit losses on off-balance sheet commitments for the three months ended September 30, 2023.



(dollars in thousands)	Balance June 30, 2023		Provision for credit losses		Balance September 30, 2023
Off-balance sheet commitments
Commercial loans
Commercial and industrial	$	188	$	18	$	206
Owner-occupied commercial real estate	8		1		9
Investor commercial real estate	20		(3)		17
Construction	2,897		(8)		2,889


Healthcare finance	—		—		—
Small business lending	242		148		390


Total commercial loans	3,355		156		3,511
Consumer loans
Residential mortgage	59		(34)		25
Home equity	63		(9)		54
Other consumer	14		(2)		12
Total consumer loans	136		(45)		91
Total allowance for off-balance sheet commitments	$	3,491	$	111	$	3,602

The following table details activity in the provision for credit losses on off-balance sheet commitments for the nine months ended September 30, 2023.



(dollars in thousands)	Pre-ASC 326 Adoption		Impact of ASC 326 Adoption		Provision for credit losses		Balance September 30, 2023
Off-balance sheet commitments
Commercial loans
Commercial and industrial	$	—	$	110	$	96	$	206
Owner-occupied commercial real estate	—		—		9		9
Investor commercial real estate	—		9		8		17
Construction	—		2,193		696		2,889


Healthcare finance	—		2		(2)		—
Small business lending	—		—		390		390


Total commercial loans	—		2,314		1,197		3,511
Consumer loans
Residential mortgage	—		127		(102)		25
Home equity	—		52		2		54
Other consumer	—		11		1		12
Total consumer loans	—		190		(99)		91
Total allowance for off-balance sheet commitments	$	—	$	2,504	$	1,098	$	3,602

The following table presents the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2022.


(in thousands)	Loans						Allowance for Loan Losses
December 31, 2022	Ending Balance: Collectively Evaluated for Impairment		Ending Balance: Individually Evaluated for Impairment		Ending Balance		Ending Balance: Collectively Evaluated for Impairment		Ending Balance: Individually Evaluated for Impairment		Ending Balance
Commercial and industrial	$	116,307	$	9,801	$	126,108	$	1,660	$	51	$	1,711
Owner-occupied commercial real estate	60,266		1,570		61,836		651		—		651
Investor commercial real estate	93,121		—		93,121		1,099		—		1,099
Construction	181,966		—		181,966		2,074		—		2,074
Single tenant lease financing	939,240		—		939,240		10,519		—		10,519
Public finance	621,032		—		621,032		1,753		—		1,753
Healthcare finance	272,461		—		272,461		2,997		—		2,997
Small business lending1	113,699		10,051		123,750		1,465		703		2,168
Franchise finance	299,835		—		299,835		3,988		—		3,988

Residential mortgage	380,272		3,676		383,948		1,559		—		1,559
Home equity	24,683		29		24,712		69		—		69
Other consumer	324,581		17		324,598		3,149		—		3,149

Total	$	3,427,463	$	25,144	$	3,452,607	$	30,983	$	754	$	31,737

1 Balance is partially guaranteed by the U.S. government.

The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. A description of the general characteristics of the risk grades is as follows:

•“Pass” - Higher quality loans that do not fit any of the other categories described below.

•“Special Mention” - Loans that possess some credit deficiency or potential weakness, which deserve close attention.

•“Substandard” - Loans that possess a defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.

•“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 that 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.

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

The Company does not risk grade its consumer loans. It classifies them as either performing or nonperforming. Below is a description of those classifications:

•“Performing” - Loans that are accruing and full collection of principal and interest is expected.

•“Nonperforming” - Loans that are 90 days delinquent or for which the full collection of principal and interest may be in doubt.

The following tables present the credit risk profile of the Company’s commercial and consumer loan portfolios by loan class and by year of origination for the years indicated based on rating category and payment activity as of September 30, 2023.


	September 30, 2023
	Term Loans (amortized cost basis by origination year)												Revolving loans amortized cost basis		Revolving loans converted to term
(in thousands)	2023		2022		2021		2020		2019		Prior						Total
Commercial and industrial
Pass	$	22,954	$	22,268	$	15,535	$	2,543	$	12,543	$	9,065	$	28,909	$	—	$	113,817
Special Mention	—		32		—		—		—		—		416		—		448
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
Total Commercial and industrial	22,954		22,300		15,535		2,543		12,543		9,065		29,325		—		114,265
Gross charge-offs	—		—		6,914		—		51		—		—		—		6,965

Owner-occupied commercial real estate
Pass	678		11,360		9,027		6,645		5,607		12,982		—		—		46,299
Special Mention	823		—		—		8,453		—		1,541		—		—		10,817
Substandard	—		—		—		—		—		1,370		—		—		1,370
Doubtful	—		—		—		—		—		—		—		—		—
Total owner-occupied commercial real estate	1,501		11,360		9,027		15,098		5,607		15,893		—		—		58,486
Investor commercial real estate
Pass	5,033		36,150		24,800		9,927		48,070		5,851		—		—		129,831
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
Total investor commercial real estate	5,033		36,150		24,800		9,927		48,070		5,851		—		—		129,831
Gross charge-offs	591		—		—		—		—		—		—		—		591
Construction
Pass	9,816		140,221		58,773		37,982		—		—		4,667		—		251,459
Special Mention	—		—		646		—		—		—		—		—		646
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
Total construction	9,816		140,221		59,419		37,982		—		—		4,667		—		252,105
Single tenant lease financing
Pass	36,431		223,113		90,103		67,327		144,143		354,024		—		—		915,141
Special Mention	—		4,374		6,748		3,053		—		4,557		—		—		18,732
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
Total single tenant lease financing	36,431		227,487		96,851		70,380		144,143		358,581		—		—		933,873
Public finance
Pass	2,017		35,716		29,750		3,590		46,076		416,531		—		—		533,680
Special Mention	—		—		—		—		—		2,280		—		—		2,280
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
Total public finance	2,017		35,716		29,750		3,590		46,076		418,811		—		—		535,960


	September 30, 2023
	Term Loans (amortized cost basis by origination year)												Revolving loans amortized cost basis		Revolving loans converted to term
(in thousands)	2023		2022		2021		2020		2019		Prior						Total
Healthcare finance
Pass	—		—		10,191		132,692		66,555		24,929		—		—		234,367
Special Mention	—		—		—		—		1,255		—		—		—		1,255
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
Total healthcare finance	—		—		10,191		132,692		67,810		24,929		—		—		235,622
Gross charge-offs	—		—		—		—		25		—		—		—		25
Small business lending 1
Pass	86,442		45,532		15,566		14,850		3,582		12,837		4,300		—		183,109
Special Mention	1,095		1,493		98		566		707		1,028		47		—		5,034
Substandard	—		1,169		55		1,510		1,161		520		438		—		4,853
Doubtful	—		—		—		—		—		—		—		—		—
Total small business lending	87,537		48,194		15,719		16,926		5,450		14,385		4,785		—		192,996
Gross charge-offs	67		464		281		1,357		—		—		—		—		2,169
Franchise finance
Pass	177,616		217,700		59,476		—		—		—		—		—		454,792
Special Mention	—		—		302		—		—		—		—		—		302
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
Total franchise finance	177,616		217,700		59,778		—		—		—		—		—		455,094
Gross charge-offs	—		331		—		—		—		—		—		—		331
Consumer loans
Residential mortgage
Payment performance
Performing	10,013		195,002		92,181		30,876		13,176		50,899		—		—		392,147
Nonperforming	—		494		116		74		—		670		—		—		1,354
Total residential mortgage	10,013		195,496		92,297		30,950		13,176		51,569		—		—		393,501
Gross charge-offs	—		53		3		—		—		—		—		—		56
Home equity
Payment performance
Performing	1,391		2,085		443		477		153		608		16,855		1,532		23,544
Nonperforming	—		—		—		—		—		—		—		—		—
Total home equity	1,391		2,085		443		477		153		608		16,855		1,532		23,544
Other consumer
Payment performance
Performing	94,161		111,134		43,766		27,814		28,411		63,276		801		—		369,363
Nonperforming	—		53		—		6		16		13		—		—		88
Total other consumer	94,161		111,187		43,766		27,820		28,427		63,289		801		—		369,451
Gross charge-offs	86		60		19		42		107		188		—		—		502
Total Loans	$	448,470	$	1,047,896	$	457,576	$	348,385	$	371,455	$	962,981	$	56,433	$	1,532	$	3,694,728
Total gross charge-offs	$	744	$	908	$	7,217	$	1,399	$	183	$	188	$	—	$	—	$	10,639

1 Balance in “Substandard” is partially guaranteed by the U.S. government.

The following tables present the credit risk profile of the Company’s commercial and consumer loan portfolios based on rating category and payment activity as of December 31, 2022.


	December 31, 2022
(in thousands)	Pass		Special Mention		Substandard		Total
Commercial and industrial	$	114,934	1,373		$	9,801	$	126,108
Owner-occupied commercial real estate	50,721		9,546		1,569		61,836
Investor commercial real estate	93,121		—		—		93,121
Construction	180,768		1,198		—		181,966
Single tenant lease financing	936,207		3,033		—		939,240
Public finance	618,752		2,280		—		621,032
Healthcare finance	271,085		1,376		—		272,461
Small business lending 1	107,885		5,814		10,051		123,750
Franchise finance	299,241		594		—		299,835

Total loans	$	2,672,714	$	25,214	$	21,421	$	2,719,349

1 Balance in “Substandard” is partially guaranteed by the U.S. government.


	December 31, 2022
(in thousands)	Performing		Nonaccrual		Total
Residential mortgage	$	382,900	$	1,048	$	383,948
Home equity	24,712		—		24,712
Other consumer	324,581		17		324,598

Total consumer loans	$	732,193	$	1,065	$	733,258

The following tables present the Company’s loan portfolio delinquency analysis as of September 30, 2023 and December 31, 2022.


	September 30, 2023
(in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans
Commercial and industrial	$	30	$	40	$	—	$	70	$	114,195	$	114,265
Owner-occupied commercial real estate	—		—		—		—		58,486		58,486
Investor commercial real estate	—		—		—		—		129,831		129,831
Construction	—		—		—		—		252,105		252,105
Single tenant lease financing	—		—		—		—		933,873		933,873
Public finance	—		—		—		—		535,960		535,960
Healthcare finance	—		—		—		—		235,622		235,622
Small business lending1	1,329		239		1,753		3,321		189,675		192,996
Franchise finance	1,927		302		—		2,229		452,865		455,094

Residential mortgage	1,381		485		494		2,360		391,141		393,501
Home equity	—		—		—		—		23,544		23,544
Other consumer	224		35		11		270		369,181		369,451

Total	$	4,891	$	1,101	$	2,258	$	8,250	$	3,686,478	$	3,694,728

1 Balance is partially guaranteed by the U.S. government.


	December 31, 2022
(in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans
Commercial and industrial	$	81	$	—	$	51	$	132	$	125,976	$	126,108
Owner-occupied commercial real estate	—		—		—		—		61,836		61,836
Investor commercial real estate	—		—		—		—		93,121		93,121
Construction	—		1,198		—		1,198		180,768		181,966
Single tenant lease financing	—		—		—		—		939,240		939,240
Public finance	—		—		—		—		621,032		621,032
Healthcare finance	—		—		—		—		272,461		272,461
Small business lending1	57		—		3,485		3,542		120,208		123,750
Franchise Finance	313		—		—		313		299,522		299,835

Residential mortgage	—		283		185		468		383,480		383,948
Home equity	—		—		—		—		24,712		24,712
Other consumer	91		10		—		101		324,497		324,598
Total	$	542	$	1,491	$	3,721	$	5,754	$	3,446,853	$	3,452,607

1 Balance is partially guaranteed by the U.S. government.

Loans are reclassified to a non-accruing status when, in management’s judgment, the collateral value and financial condition of the borrower do not justify accruing interest. At the time the accrual is discontinued, all unpaid accrued interest is reversed against earnings. Interest income accrued in prior years, if any, is charged to the allowance for credit losses. Payments subsequently received on nonaccrual loans are applied to principal. A loan is returned to accrual status when principal and interest are no longer past due and collectability is probable, typically after a minimum of nine consecutive months of performance.

The following table summarizes the Company’s nonaccrual loans and loans past due 90 days or more and still accruing by loan class for the periods indicated:


	September 30, 2023						December 31, 2022
(in thousands)	Nonaccrual Loans		Nonaccrual Loans with no Allowance for Credit Losses		Total Loans 90 Days or More Past Due and Accruing		Nonaccrual Loans		Nonaccrual Loans with no Allowance for Loan Losses		Total Loans 90 Days or More Past Due and Accruing
Commercial and industrial	$	—	$	—	$	—	$	51	$	—	$	—
Owner-occupied commercial real estate	—		—		—		1,570		1,570		—





Small business lending1	4,442		1,721		—		4,764		2,766		—


Residential mortgage	1,354		1,354		—		1,048		1,048		79

Other consumer	89		89		—		17		17		—
Total loans	$	5,885	$	3,164	$	—	$	7,450	$	5,401	$	79

1 Balance is partially guaranteed by the U.S. government.

There was $0.1 million and $0.2 million in interest income recognized on nonaccrual loans for the nine months ended September 30, 2023 and September 30, 2022, respectively.

Determining fair value for collateral dependent loans requires obtaining a current independent appraisal of the collateral and applying a discount factor, which includes selling costs if applicable, to the value. The fair value of real estate is generally based on appraisals by qualified licensed appraisers. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a cash flow analysis. Fair value on other collateral such as business assets is typically ascertained by assessing, either singularly or some combination of, asset appraisals, accounts receivable aging reports, inventory listings and/or customer financial statements. Both appraised values and values based on borrower’s financial information are discounted as considered appropriate based on age and quality of the information and current market conditions.

The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses as of September 30, 2023.


	September 30, 2023
(in thousands)	Commercial Real Estate		Residential Real Estate		Other		Total		Allowance on Collateral Dependent Loans
Commercial and industrial	$	—	$	—	$	1,370	$	1,370	$	—
Owner-occupied commercial real estate	—		—		—		—		—





Small business lending1	1,578		1,219		1,328		4,125		1,521


Residential mortgage	—		1,354		—		1,354		—

Other consumer loans	—		—		89		89		—
Total loans	$	1,578	$	2,573	$	2,787	$	6,938	$	1,521

1 Balance is partially guaranteed by the U.S. government.

The following table presents the Company’s impaired loans as of December 31, 2022.


	December 31, 2022
(in thousands)	Recorded Balance		Unpaid Principal Balance		Specific Allowance
Loans without a specific valuation allowance
Commercial and industrial	$	9,750	$	9,750	$	—
Owner-occupied commercial real estate	1,570		1,779		—





Small business lending	8,184		8,705		—


Residential mortgage	3,676		3,835		—
Home equity	29		29		—
Other consumer loans	17		36		—

Total	23,226		24,134		—
Loans with a specific valuation allowance
Commercial and industrial	51		51		51






Small business lending 1	1,867		1,867		703



Total	1,918		1,918		754
Total impaired loans	$	25,144	$	26,052	$	754

1 Balance is partially guaranteed by the U.S. government.

The table below presents average balances and interest income recognized for impaired loans during the three and nine months ended September 30, 2022.


	Three Months Ended				Nine Months Ended
	September 30, 2022				September 30, 2022
(in thousands)	Average Balance		Interest Income		Average Balance		Interest Income
Loans without a specific valuation allowance
Commercial and industrial	$	4,906	$	—	$	1,636	$	—
Owner-occupied commercial real estate	1,645		—		2,471		—





Small business lending	2,167		—		1,288		—


Residential mortgage	3,711		9		3,550		26
Home equity	15		—		14		—
Other consumer loans	8		—		9		—
Total	12,452		9		8,968		26
Loans with a specific valuation allowance
Commercial and industrial	$	350	$	—	456		—



Single tenant lease financing	—		—		547		—

Healthcare finance	660		—		826		45
Small business lending	1,827		—		1,611		—




Other consumer loans	199		—		66		—
Total	3,036		—		3,506		45
Total impaired loans	$	15,488	$	9	$	12,474	$	71

1 Balance is partially guaranteed by the U.S. government.

Loan Modifications to Borrowers Experiencing Financial Difficulty

In January 2023, the Company adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt restructurings and Vintage Disclosures” (“ASU 2022-02”), which eliminated the accounting guidance for troubled debt restructurings (“TDRs”) while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. This guidance was applied on a prospective basis. Upon adoption of this guidance, the Company no longer establishes a specific reserve for modifications to borrowers experiencing financial difficulty. Instead, these modifications are included in their respective loan pool and a historical loss rate is applied to the current loan balance to arrive at the quantitative baseline portion of the ACL.

Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, forbearances, term extensions and other actions intended to minimize loss and to avoid foreclosure or repossession of collateral. The Company did not have any loan modifications made to borrowers experiencing financial difficulty during the three and nine months ended September 30, 2023.

There were no loans classified as new TDRs during the three months ended September 30, 2022. There was one portfolio residential mortgage loan classified as a new TDR during the nine months ended September 30, 2022 with a pre-modification and post-modification outstanding recorded investment of $0.7 million. The Company did not allocate a specific allowance for that loan as of September 30, 2022. The modifications consisted of interest-only payments for a period of time. There were no performing TDRs that had payment defaults within the twelve months following modification during the three and nine months ended September 30, 2022, respectively.

Other Real Estate Owned

The Company had $0.1 million in other real estate owned (“OREO”) as of September 30, 2023, which consisted of one residential mortgage property. The Company did not have any OREO as of December 31, 2022. There were two loans, one totaling $0.5 million and one loan totaling $0.1 million, in the process of foreclosure at September 30, 2023 and December 31, 2022, respectively.