INBK 10-Q Quarterly Report Sept. 30, 2023

FIRST INTERNET BANCORP

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inbk-20230930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended September 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From ________ to ________.

Commission File Number 001-35750


First Internet Bancorp
(Exact Name of Registrant as Specified in Its Charter)


Indiana						20-3489991
(State or Other Jurisdiction of Incorporation or Organization)						(I.R.S. Employer Identification No.)

8701 East 116th Street Fishers , IN						46038
(Address of Principal Executive Offices)						(Zip Code)


			( 317 ) 532-7900
			(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbols

Name of each exchange on which registered

Common Stock, without par value

INBK

The Nasdaq Stock Market LLC

6.0% Fixed to Floating Subordinated Notes due 2029

INBKZ

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer ¨			Accelerated Filer þ
Non-accelerated Filer ¨			Smaller Reporting Company ☐
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ

As of November 3, 2023, the registrant had 8,643,673 shares of common stock issued and outstanding.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts, but rather statements based on the current expectations of First Internet Bancorp and its consolidated subsidiaries (the “Company,” “we,” “our,” or “us”) regarding our business strategies, intended results and future performance, including without limitation statements concerning the financial condition, results of operations, trends in lending policies and loan programs, plans and prospective business partnerships, objectives, future performance and business of the Company. Forward-looking statements are generally preceded by terms such as “acquire”, “anticipate,” “attempt,” “believe,” “can,” “change,” “continue,” “could,” “decline,” “decrease,” “differentiate,” “diversify,” “driving,” “effort,” “emerging,” “estimate,” “expect,” “grow,” “increase,” “intend,” “likely,” “may,” “objective,” “plan,” “position,” “potential,” “preliminary,” “pursue,” “remain,” “retain,” “should,” “slowest,” “succeed,” “will,” “win,” “would” or other similar expressions. Such statements are subject to certain risks and uncertainties, including without limitation: changes in market rates and prices that may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our balance sheet ; changing bank regulatory conditions, policies or programs, whether arising as a result of new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally or First Internet Bank (the “Bank”) in particular; more restrictive regulatory capital requirements; increased costs, including deposit insurance premiums; other general economic conditions, whether national or regional, and conditions in the lending markets in which we participate that may have an adverse effect on the demand for our loans and other products; our credit quality and related levels of nonperforming assets and credit losses, and the value and salability of the real estate that is the collateral for our loans; failures or breaches of or interruptions in the communication and information systems on which we rely to conduct our business that could reduce our revenues, increase our costs or lead to disruptions in our business; our dependence on capital distributions from the Bank; results of examinations of us by our regulators, including the possibility that our regulators may, among other things, require us to increase our allowance for credit losses or to write-down assets; regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products; our liquidity requirements being adversely affected by changes in our assets and liabilities; the effect of legislative or regulatory developments, including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry; competitive factors among financial services organizations, including product and pricing pressures and our ability to attract, develop and retain qualified banking professionals; the growth and profitability of noninterest or fee income being less than expected; the loss of any key members of senior management; the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board, the Securities and Exchange Commission (the “SEC”), the Public Company Accounting Oversight Board and other regulatory agencies; and the effect of fiscal and governmental policies of the United States federal government. Additional factors that may affect our results include those discussed in this Quarterly Report on Form 10-Q and our most recent Annual Report on Form 10-K under the heading “Risk Factors” and in other reports filed with the SEC . We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The factors listed above could affect our financial performance and could cause our actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

Except as required by law, we do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

PART I

ITEM 1. FINANCIAL STATEMENTS

First Internet Bancorp

Condensed Consolidated Balance Sheets

(Amounts in thousands except share data)


	September 30, 2023		December 31, 2022
	(Unaudited)
Assets
Cash and due from banks	$	3,595	$	17,426
Interest-bearing deposits	517,610		239,126
Total cash and cash equivalents	521,205		256,552

Securities available-for-sale, at fair value (amortized cost of $507,632 and $436,183 in 2023 and 2022, respectively)	450,827		390,384
Securities held-to-maturity, at amortized cost, net of allowance for credit losses (fair value of $201,650 and $168,483 in 2023 and 2022, respectively)	231,928		189,168
Loans held-for-sale (includes $9,110 at fair value in 2022)	31,669		21,511
Loans	3,735,068		3,499,401
Allowance for credit losses - loans	( 36,452 )		( 31,737 )
Net loans	3,698,616		3,467,664
Accrued interest receivable	23,761		21,069
Federal Home Loan Bank of Indianapolis stock	28,350		28,350
Cash surrender value of bank-owned life insurance	40,619		39,859
Premises and equipment, net	74,197		72,711
Goodwill	4,687		4,687
Servicing asset, at fair value	9,579		6,255
Other real estate owned	106		—
Accrued income and other assets	53,479		44,894
Total assets	$	5,169,023	$	4,543,104
Liabilities and Shareholders’ Equity
Liabilities
Noninterest-bearing deposits	$	125,265	$	175,315
Interest-bearing deposits	3,958,280		3,265,930
Total deposits	4,083,545		3,441,245
Advances from Federal Home Loan Bank	614,933		614,928
Subordinated debt, net of unamortized debt issuance costs of $2,239 and $2,468 in 2023 and 2022, respectively	104,761		104,532
Accrued interest payable	2,968		2,913
Accrued expenses and other liabilities	15,072		14,512
Total liabilities	4,821,279		4,178,130
Commitments and Contingencies
Shareholders’ Equity
Preferred stock, no par value; 4,913,779 shares authorized; issued and outstanding - none	—		—
Voting common stock, no par value; 45,000,000 shares authorized; 8,669,673 and 9,065,883 shares issued and outstanding in 2023 and 2022, respectively	185,085		192,935
Nonvoting common stock, no par value; 86,221 shares authorized; issued and outstanding - none	—		—
Retained earnings	203,856		205,675
Accumulated other comprehensive loss	( 41,197 )		( 33,636 )
Total shareholders’ equity	347,744		364,974
Total liabilities and shareholders’ equity	$	5,169,023	$	4,543,104

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Condensed Consolidated Statements of Income – Unaudited

(Amounts in thousands except share and per share data)


	Three Months Ended				Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Interest Income
Loans	$	48,898	$	34,643	$	139,647	$	100,246
Securities – taxable	4,301		2,701		11,742		7,489
Securities – non-taxable	912		491		2,570		1,068
Other earning assets	8,904		1,264		19,211		2,436
Total interest income	63,015		39,099		173,170		111,239
Interest Expense
Deposits	40,339		10,520		102,285		23,025
Other borrowed funds	5,298		4,585		15,788		12,790
Total interest expense	45,637		15,105		118,073		35,815
Net Interest Income	17,378		23,994		55,097		75,424
Provision for credit losses - loans	1,850		892		11,976		2,868
Benefit for credit losses - debt securities held to maturity	( 15 )		—		( 15 )		—
Provision for credit losses - off-balance sheet commitments	111		—		1,098		—
Net Interest Income After Provision for Credit Losses	15,432		23,102		42,038		72,556
Noninterest Income
Service charges and fees	208		248		635		845
Loan servicing revenue	1,064		653		2,699		1,858
Loan servicing asset revaluation	( 257 )		( 333 )		( 670 )		( 1,100 )
Mortgage banking activities	—		871		76		4,454



Gain on sale of loans	5,569		2,713		14,498		8,510


Other	823		164		1,486		883
Total noninterest income	7,407		4,316		18,724		15,450
Noninterest Expense
Salaries and employee benefits	11,767		10,439		34,267		31,149
Marketing, advertising and promotion	500		1,041		2,049		2,717
Consulting and professional services	552		790		2,189		3,912
Data processing	701		483		1,880		1,422
Loan expenses	1,336		1,142		4,385		3,417
Premises and equipment	2,315		2,808		7,753		7,767
Deposit insurance premium	1,067		229		2,546		797

Other	1,518		1,063		4,311		3,579
Total noninterest expense	19,756		17,995		59,380		54,760
Income Before Income Taxes	3,083		9,423		1,382		33,246
Income Tax (Benefit) Provision	( 326 )		987		( 2,892 )		4,056
Net Income	$	3,409	$	8,436	$	4,274	$	29,190
Income Per Share of Common Stock
Basic	$	0.39	$	0.89	$	0.48	$	3.04
Diluted	$	0.39	$	0.89	$	0.48	$	3.01
Weighted-Average Number of Common Shares Outstanding
Basic	8,744,385		9,458,259		8,889,532		9,615,039
Diluted	8,767,217		9,525,855		8,907,748		9,681,742
Dividends Declared Per Share	$	0.06	$	0.06	$	0.18	$	0.18

1 Beginning January 1, 2023, the allowance calculation is based on the CECL methodology. Prior to January 1, 2023, the allowance calculation was based on the incurred loss methodology.

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Condensed Consolidated Statements of Comprehensive (Loss) Income – Unaudited

(Amounts in thousands except per share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net income	$	3,409	$	8,436	$	4,274	$	29,190
Other comprehensive loss
Securities available-for-sale
Net unrealized holding losses recorded within other comprehensive loss before income tax	( 11,308 )		( 18,406 )		( 11,006 )		( 51,682 )

Income tax benefit	( 2,600 )		( 5,121 )		( 2,537 )		( 13,384 )
Net effect on other comprehensive loss	( 8,708 )		( 13,285 )		( 8,469 )		( 38,298 )

Securities held-to-maturity
Reclassification of securities from available-for-sale to held-to-maturity	—		—		—		( 5,402 )
Amortization of net unrealized holding losses on securities transferred from available-for-sale to held-to-maturity	173		296		537		608
Income tax provision (benefit)	45		69		140		( 1,203 )
Net effect on other comprehensive loss	128		227		397		( 3,591 )

Cash flow hedges
Net unrealized holding gains on cash flow hedging derivatives recorded within other comprehensive income (loss) before income tax	740		6,058		664		19,424
Income tax provision	171		1,393		153		5,639
Net effect on other comprehensive loss	569		4,665		511		13,785

Total other comprehensive loss	( 8,011 )		( 8,393 )		( 7,561 )		( 28,104 )
Comprehensive (loss) income	$	( 4,602 )	$	43	$	( 3,287 )	$	1,086

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited

Nine Months Ended September 30, 2023 and 2022

(Amounts in thousands except per share data)


	Voting and Nonvoting Common Stock		Retained Earnings		Accumulated Other Comprehensive Loss		Total Shareholders’ Equity
Balance, January 1, 2023	$	192,935	$	205,675	$	( 33,636 )	$	364,974
Impact of adoption of new accounting standards 1	—		( 4,491 )		—		( 4,491 )
Net income	—		4,274		—		4,274

Other comprehensive loss	—		—		( 7,561 )		( 7,561 )
Dividends declared ($ 0.18 per share)	—		( 1,602 )		—		( 1,602 )

Recognition of the fair value of share-based compensation	873		—		—		873
Repurchased shares of common stock ( 462,525 )	( 8,535 )		—		—		( 8,535 )
Excise tax on repurchase of common stock	( 85 )		—		—		( 85 )
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units	3		—		—		3
Common stock redeemed for the net settlement of share-based awards	( 106 )		—		—		( 106 )

Balance, September 30, 2023	$	185,085	$	203,856	$	( 41,197 )	$	347,744

Balance, January 1, 2022	$	218,946	$	172,431	$	( 11,039 )	$	380,338
Net income	—		29,190		—		29,190

Other comprehensive loss	—		—		( 28,104 )		( 28,104 )
Dividends declared ($ 0.18 per share)	—		( 1,744 )		—		( 1,744 )

Recognition of the fair value of share-based compensation	1,967		—		—		1,967
Repurchased shares of common stock ( 518,167 )	( 20,626 )		—		—		( 20,626 )
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units	15		—		—		15
Common stock redeemed for the net settlement of share-based awards	( 179 )		—		—		( 179 )

Balance, September 30, 2022	$	200,123	$	199,877	$	( 39,143 )	$	360,857

1 Reflects the impact of adopting Accounting Standards Update (“ASU”) 2016-13.

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited

Three Months Ended September 30, 2023 and 2022

(Amounts in thousands except per share data)


	Voting and Nonvoting Common Stock		Retained Earnings		Accumulated Other Comprehensive Loss		Total Shareholders’ Equity
Balance July 1, 2023	$	186,545	$	200,973	$	( 33,186 )	$	354,332

Net income	—		3,409		—		3,409

Other comprehensive loss	—		—		( 8,011 )		( 8,011 )
Dividends declared ($ 0.06 per share)	—		( 526 )		—		( 526 )

Recognition of the fair value of share-based compensation	386		—		—		386
Repurchased shares of common stock ( 97,834 )	( 1,828 )		—		—		( 1,828 )
Excise tax on repurchase of common stock	( 18 )		—		—		( 18 )



Balance, September 30, 2023	$	185,085	$	203,856	$	( 41,197 )	$	347,744

Balance July 1, 2022	$	204,071	$	192,011	$	( 30,750 )	$	365,332

Net income	—		8,436		—		8,436

Other comprehensive loss	—		—		( 8,393 )		( 8,393 )
Dividends declared ($ 0.06 per share)	—		( 570 )		—		( 570 )

Recognition of the fair value of share-based compensation	434		—		—		434
Repurchased shares of common stock ( 120,000 )	( 4,387 )		—		—		( 4,387 )
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units	5		—		—		5


Balance, September 30, 2022	$	200,123	$	199,877	$	( 39,143 )	$	360,857

First Internet Bancorp

Condensed Consolidated Statements of Cash Flows – Unaudited

(Amounts in thousands except per share data)


	Nine Months Ended September 30,
	2023		2022
Operating Activities
Net income	$	4,274	$	29,190
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	3,019		6,745
Increase in cash surrender value of bank-owned life insurance	( 760 )		( 712 )
Provision for credit losses 1	13,059		2,868
Share-based compensation expense	873		1,967


Loans originated for sale	( 248,622 )		( 431,053 )
Proceeds from sale of loans	249,296		466,148
Gain on loans sold	( 14,969 )		( 13,629 )

Decrease in fair value of loans held-for-sale	143		599
Gain (loss) on derivatives	362		( 3,625 )

Loan servicing asset revaluation	670		1,100

Net change in accrued income and other assets	( 4,385 )		19,262
Net change in accrued expenses and other liabilities	( 3,584 )		( 5,084 )
Net cash provided by operating activities	( 624 )		73,776
Investing Activities
Net loan activity, excluding purchases	( 51,677 )		( 87,883 )
Proceeds from sale of other real estate owned	—		1,188

Maturities and calls of securities available-for-sale	39,749		69,798

Purchase of securities available-for-sale	( 110,749 )		( 12,133 )
Maturities and calls of securities held-to-maturity	14,236		5,927
Purchase of securities held-to-maturity	( 53,573 )		( 41,246 )
Redemption of Federal Home Loan Bank of Indianapolis stock	—		431
Purchase of Federal Home Loan Bank of Indianapolis stock	—		( 3,131 )

Purchase of premises and equipment	( 4,970 )		( 14,368 )

Loans purchased	( 194,318 )		( 295,254 )
Net proceeds from sale of portfolio loans	—		14,466
Other investing activities	( 3,442 )		374
Net cash used in investing activities	( 364,744 )		( 361,831 )
Financing Activities
Net increase in deposits	640,370		13,685

Cash dividends paid	( 1,623 )		( 1,733 )


Repurchase of common stock	( 8,620 )		( 20,626 )
Proceeds from advances from Federal Home Loan Bank	415,000		455,000
Repayment of advances from Federal Home Loan Bank	( 415,000 )		( 380,000 )

Other, net	( 106 )		( 179 )
Net cash provided by financing activities	630,021		66,147
Net Increase (Decrease) in Cash and Cash Equivalents	264,653		( 221,908 )
Cash and Cash Equivalents, Beginning of Period	256,552		442,960
Cash and Cash Equivalents, End of Period	$	521,205	$	221,052
Supplemental Disclosures


Cash paid during the period for interest	118,019		35,946
Cash paid during the period for taxes	864		1,893
Loans transferred to other real estate owned	106		—
Loans transferred to held-for-sale from portfolio	—		14,049
Cash dividends declared, paid in subsequent period	520		557
Securities purchased during the period, settled in subsequent period	2,632		2,997
Transfer of available-for-sale mortgage-backed securities to held-to-maturity mortgage-backed securities at fair value	—		96,220

1 Beginning January 1, 2023, the allowance calculation is based on the CECL methodology. Prior to January 1, 2023, the allowance calculation was based on the incurred loss methodology.

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Notes to Condensed Consolidated Financial Statements – Unaudited

(Table amounts in thousands except share and per share data)

Note 1: Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information or footnotes necessary for a complete presentation of financial condition, results of operations, changes in shareholders’ equity, or cash flows in accordance with GAAP. In our opinion, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation have been included. The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results expected for the year ending December 31, 2023 or any other period. The September 30, 2023 condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the First Internet Bancorp Annual Report on Form 10-K for the year ended December 31, 2022.

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments, or assumptions that could have a material effect on the carrying value of certain assets and liabilities. These estimates, judgments, and assumptions affect the amounts reported in the condensed consolidated financial statements and the disclosures provided. The determination of the allowance for credit losses, income taxes, valuations and impairments of investment securities and goodwill, as well as fair value measurements of derivatives and loans held-for-sale are highly dependent upon management’s estimates, judgments, and assumptions, and changes in any of these could have a significant impact on the condensed consolidated financial statements.

The condensed consolidated financial statements include the accounts of First Internet Bancorp (the “Company”), its wholly owned subsidiary, First Internet Bank of Indiana (the “Bank”), and the Bank’s three wholly owned subsidiaries, First Internet Public Finance Corp., JKH Realty Services, LLC and SPF15, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.

The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations, and cash flows of the Company.

Other than the adoption of new accounting standards, the Company has not changed its significant accounting and reporting policies from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Adoption of new accounting standards

ASU 2016 - 13

On January 1, 2023, the Company adopted ASU 2016-03 Financial Instruments - Credit losses (“ASC 326”): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected credit loss (“CECL”) methodology. The CECL estimate is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures, including loan commitments, standby letters of credit, financial guarantees and other similar instruments. Additionally, ASC 326 resulted in changes to the accounting for available-for-sale debt securities.

The Company adopted ASC 326 for all financial assets measured at amortized cost, available for sale securities and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. The Company recorded a net decrease to retained earnings of $ 4.5 million as of January 1, 2023 for the cumulative effect of adopting ASC 326. The net adjustment to allowance for credit losses (“ACL”) includes $ 2.3 million related to loans, $ 1.9 million related to off-balance sheet credit exposures and $ 0.3 million related to held-to-maturity debt securities.

ACL - Available-For-Sale (“AFS”) Debt Securities

For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors, such as interest rates or market conditions. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded. Changes in the ACL are recorded as a provision for, or recovery of, credit loss expense. Losses are charged against the allowance when management believes that uncollectibility of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable on AFS debt securities totaled $ 2.3 million at September 30, 2023 and is excluded from the estimate of credit losses. The Company made the policy election to exclude accrued interest from the amortized cost basis of AFS debt securities and report accrued interest separately on the condensed consolidated balance sheet.

ACL - Held-To-Maturity (“HTM”) Debt Securities

Management measures expected credit losses on HTM debt securities on a collective basis by major security type. Accrued interest receivable on HTM debt securities totaled $ 1.1 million at September 30, 2023 and is excluded from the estimate of credit losses. The Company made the accounting policy election to not measure an ACL for accrued interest. Accrued interest deemed uncollectible will be written off through interest income. The HTM securities portfolio includes municipal securities, residential mortgage-backed-securities, commercial mortgage-backed securities and corporate securities. All residential and commercial mortgage-backed securities are U.S. government issued or sponsored and substantially all municipal and corporate securities are rated investment grade or above.

The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. At the time of adoption, the estimated reserve was $ 0.3 million.

ACL - Loans

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.

Accrued interest receivable on loans totaled $ 17.9 million and is excluded from the estimate of credit losses. The Company 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.

ACL - Loans - Collectively Evaluated

The ACL is measured on a collective pool basis when similar risk characteristics exist. The Company has identified the following portfolio segments in the table below.

The Company utilized a discounted cash flow (“DCF”) method to estimate the quantitative portion of the allowance for credit losses for loans evaluated on a collective pooled basis. For each segment, a loss driver analysis was performed in order to identify loss drivers and create a regression model for use in forecasting cash flows.

In creating the DCF model, the Company has established a one-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 Company elected to use peer data for a more conservative calculation.

Key inputs into the DCF model include loan-level detail, including the amortized cost basis of individual loans, payment structure, loss history, and forecasted loss drivers. The Company utilizes a third party to provide economic forecasts

under various scenarios, which are assessed quarterly considering the scenarios in the context of the current economic environment and loss risk.

Expected credit losses are estimated over the contractual term of the loans and adjusted for prepayments when appropriate. The contractual term excludes extensions, renewals, and modifications unless the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

Additional key assumptions in the DCF model include the probability of default (“PD”), loss given default (“LGD”), and prepayment/curtailment rates. The Company utilizes the model-driven PD and a LGD derived from a method referred to as Frye Jacobs. The Frye Jacobs method is a mathematical formula that traces the relationship between LGD and PD over time and projects the LGD based on the level of PD forecasted. In all cases, the Frye Jacobs method is utilized to calculate LGDs during the forecast period, reversion period and long-term historical average. Prepayment and curtailment rates were calculated through third party analysis of the Company’s own data.

Qualitative factors for the DCF and weighted-average remaining maturity methodologies include the following:

• 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

ACL - Loans - Individually Evaluated

Loans that do not share risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation. The Company has determined that any loans which have been placed on nonaccrual status will be individually evaluated. Individual analysis will establish a specific reserve for loans, if necessary. Specific reserves on nonaccrual loans are typically based on management’s best estimate of the fair value of collateral securing these loans, adjusted for selling costs as necessary.

ACL - Off-Balance Sheet Credit Exposures

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACL for off-balance sheet credit exposure is recorded as a liability and adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Funding rates are based on a historical analysis of the Company’s portfolio, while estimates of credit losses are determined using the same loss rates as funded loans.

Regulatory Capital

As permitted by the federal banking regulatory agencies, the Company has elected the option to delay the impact of the day one adoption of ASC 326. Refer to “Item 2. Regulatory Capital Requirements” for details of the phase-in transition adjustments.

Modified Loans to Borrowers Experiencing Financial Difficulty

Concurrent with the adoption of ASU 2016-03, the Company adopted ASU 2022-02 “Financial Instruments-Credit Losses (ASC 326): Troubled Debt Restructurings and Vintage Disclosures,” as amended. The update eliminated the accounting guidance for troubled debt restructurings (“TDRs”) by creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty.

Note 2: Earnings Per Share

Earnings per share of common stock are based on the weighted-average number of basic shares and dilutive shares outstanding during the period.

The following is a reconciliation of the weighted-average common shares for the basic and diluted earnings per share computations for the three and nine months ended September 30, 2023 and 2022.


(dollars in thousands, except per share data)	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Basic earnings per share
Net income	$	3,409	$	8,436	$	4,274	$	29,190
Weighted-average common shares	8,744,385		9,458,259		8,889,532		9,615,039
Basic earnings per common share	$	0.39	$	0.89	$	0.48	$	3.04
Diluted earnings per share
Net income	$	3,409	$	8,436	$	4,274	$	29,190
Weighted-average common shares	8,744,385		9,458,259		8,889,532		9,615,039

Dilutive effect of equity compensation	22,832		67,596		18,216		66,703
Weighted-average common and incremental shares	8,767,217		9,525,855		8,907,748		9,681,742
Diluted earnings per common share 1	$	0.39	$	0.89	$	0.48	$	3.01

1 Potential dilutive common shares are excluded from the computation of diluted EPS in the periods where the effect would be antidilutive. Excluded from the computation of diluted EPS were weighted-average antidilutive shares totaling 12,713 and 28,363 for the three and nine months ended September 30, 2023, respectively. Excluded from the computation of diluted EPS were weighted-average antidilutive shares totaling 426 and 1,616 for the three and nine months ended September 30, 2022, respectively.

Note 3: Securities

The following tables summarize securities AFS and securities HTM as of September 30, 2023 and December 31, 2022.


	September 30, 2023
	Amortized		Gross Unrealized				Fair
(in thousands)	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Government-sponsored agencies	$	98,594	$	550	$	( 1,966 )	$	97,178
Municipal securities	69,031		64		( 6,323 )		62,772
Agency mortgage-backed securities - residential 1	235,468		—		( 42,372 )		193,096
Agency mortgage-backed securities - commercial	37,931		—		( 1,768 )		36,163
Private label mortgage-backed securities - residential	20,292		—		( 1,716 )		18,576
Asset-backed securities	6,713		2		( 12 )		6,703
Corporate securities	39,603		113		( 3,377 )		36,339

Total available-for-sale	$	507,632	$	729	$	( 57,534 )	$	450,827


	September 30, 2023
	Amortized Cost		Gross Unrealized				Fair Value		Allowance for Credit Losses		Net Carrying Value
(in thousands)			Gains		Losses
Securities held-to-maturity
Municipal securities	$	13,903	$	—	$	( 1,454 )	$	12,449	$	( 3 )	$	13,900
Mortgage-backed securities - residential	170,524		—		( 23,112 )		147,412		—		170,524
Mortgage-backed securities - commercial	5,782		—		( 1,592 )		4,190		—		5,782
Corporate securities	42,040		—		( 4,441 )		37,599		( 318 )		41,722
Total held-to-maturity	$	232,249	$	—	$	( 30,599 )	$	201,650	$	( 321 )	$	231,928

1 Includes $ 0.4 million of additional premium related to terminated interest rate swaps associated with agency mortgage-backed securities - residential as of September 30, 2023.

Accrued interest receivable on AFS and HTM securities at September 30, 2023 was $ 2.3 million and $ 1.1 million, respectively, and is included in accrued interest receivable on the condensed consolidated balance sheet. The Company elected to exclude all accrued interest receivable from securities when estimating credit losses.

Over 96% of mortgage-backed securities (including both AFS and HTM) held by the Company are issued by U.S. government-sponsored entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government and have a long history of no credit losses; therefore, the Company did not record an ACL on these securities.

Additionally, the Company evaluated credit impairment for individual AFS securities that are in an unrealized loss position and determined that the unrealized losses are unrelated to credit quality and are primarily attributable to changes in interest rates and volatility in the financial markets. As the Company does not intend to sell the AFS securities that are in an unrealized loss position, and it is unlikely that it will be required to sell these securities before recovery of their amortized cost basis, the Company did not record an ACL on these securities.

In accordance with the adoption of ASC 326, the Company also evaluated its HTM securities that are in an unrealized loss position and considered issuer bond ratings, historical loss rates for bond ratings and economic forecasts. As a result, the Company recorded in an initial ACL in retained earnings of $ 0.3 million on January 1, 2023. The Company reevaluated these securities at September 30, 2023 and determined no additional ACL was necessary.


	December 31, 2022
	Amortized		Gross Unrealized				Fair
(in thousands)	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Government-sponsored agencies	$	35,606	$	—	$	( 1,797 )	$	33,809
Municipal securities	68,958		458		( 2,140 )		67,276
Agency mortgage-backed securities - residential 1	252,066		—		( 36,974 )		215,092
Agency mortgage-backed securities - commercial	17,142		—		( 1,302 )		15,840
Private label mortgage-backed securities - residential	11,777		—		( 1,322 )		10,455
Asset-backed securities	5,000		—		( 40 )		4,960
Corporate securities	45,634		35		( 2,717 )		42,952

Total available-for-sale	$	436,183	$	493	$	( 46,292 )	$	390,384


	December 31, 2022
	Amortized		Gross Unrealized				Fair
(in thousands)	Cost		Gains		Losses		Value
Securities held-to-maturity
Municipal securities	$	13,946	$	—	$	( 1,114 )	$	12,832
Agency mortgage-backed securities - residential	121,853		—		( 15,112 )		106,741
Agency mortgage-backed securities - commercial	5,818		—		( 1,266 )		4,552
Corporate securities	47,551		—		( 3,193 )		44,358
Total held-to-maturity	$	189,168	$	—	$	( 20,685 )	$	168,483

1 Includes $0.5 million of additional premium related to terminated interest rate swaps associated with agency mortgage-backed securities - residential as of December 31, 2022.

The carrying value of securities at September 30, 2023 is shown below by their contractual maturity date. Actual maturities will differ because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Available-for-Sale
(in thousands)	Amortized Cost		Fair Value
Within one year	$	550	$	545
One to five years	29,373		30,293
Five to ten years	60,746		57,066
After ten years	116,559		108,385
	207,228		196,289
Agency mortgage-backed securities - residential	235,468		193,096
Agency mortgage-backed securities - commercial	37,931		36,163
Private label mortgage-backed securities - residential	20,292		18,576
Asset-backed securities	6,713		6,703

Total	$	507,632	$	450,827


	Held-to-Maturity
(in thousands)	Amortized Cost		Fair Value
Within one year	$	995	$	977
One to five years	7,135		6,817
Five to ten years	43,859		38,974
After ten years	3,954		3,280
	55,943		50,048
Agency mortgage-backed securities - residential	170,524		147,412
Agency mortgage-backed securities - commercial	5,782		4,190
Total	$	232,249	$	201,650

There were no gross gains or losses resulting from the sale of available-for-sale securities during the three and nine months ended September 30, 2023 and September 30, 2022, respectively.

Certain investments in debt securities are reported in the condensed consolidated financial statements at an amount less than their historical cost. The total fair value of these investments at September 30, 2023 and December 31, 2022 was $ 605.9 million and $ 527.4 million, which was approximately 93 % and 94 %, respectively, of the Company’s AFS and HTM securities portfolios. As of September 30, 2023, the Company’s security portfolio consisted of 504 securities, of which 488 were in an unrealized loss position. As of December 31, 2022, the Company’s security portfolio consisted of 445 securities, of which 434 were in an unrealized loss position. The unrealized losses are related to the categories noted below.

U. S. Government-Sponsored Agencies, Municipal Securities and Corporate Securities

The unrealized losses on the Company’s investments in securities issued by U.S. Government-sponsored agencies, municipal organizations and corporate entities were caused primarily by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be upon maturity.

Agency Mortgage-Backed and Private Label Mortgage-Backed Securities

The unrealized losses on the Company’s investments in agency mortgage-backed and private label mortgage-backed securities were caused primarily by interest rate changes. The Company expects to recover the amortized cost basis over the terms of the securities. The Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be upon maturity.

The following tables show the securities portfolio’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2023 and December 31, 2022.


	September 30, 2023
	Less Than 12 Months				12 Months or Longer				Total
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Securities available-for-sale
U.S. Government-sponsored agencies	$	42,445	$	( 184 )	$	26,328	$	( 1,782 )	$	68,773	$	( 1,966 )
Municipal securities	9,729		( 815 )		46,445		( 5,508 )		56,174		( 6,323 )
Agency mortgage-backed securities- residential	4,292		( 67 )		188,803		( 42,305 )		193,095		( 42,372 )
Agency mortgage-backed securities- commercial	21,856		( 95 )		14,307		( 1,673 )		36,163		( 1,768 )
Private label mortgage-backed securities - residential	9,431		( 251 )		9,145		( 1,465 )		18,576		( 1,716 )
Asset-backed securities	5,803		( 12 )		—		—		5,803		( 12 )
Corporate securities	1,720		( 330 )		23,953		( 3,047 )		25,673		( 3,377 )

Total	$	95,276	$	( 1,754 )	$	308,981	$	( 55,780 )	$	404,257	$	( 57,534 )


	December 31, 2022
	Less Than 12 Months				12 Months or Longer				Total
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Securities available-for-sale
U.S. Government-sponsored agencies	$	29,668	$	( 1,008 )	$	4,141	$	( 789 )	$	33,809	$	( 1,797 )
Municipal securities	39,557		( 1,766 )		4,778		( 374 )		44,335		( 2,140 )
Agency mortgage-backed securities - residential	170,026		( 29,690 )		45,066		( 7,284 )		215,092		( 36,974 )
Agency mortgage-backed securities - commercial	10,560		( 926 )		5,280		( 376 )		15,840		( 1,302 )
Private label mortgage-backed securities	2,445		( 330 )		8,010		( 992 )		10,455		( 1,322 )
Asset-backed securities	4,960		( 40 )		—		—		4,960		( 40 )
Corporate securities	21,568		( 1,452 )		13,239		( 1,265 )		34,807		( 2,717 )

Total	$	278,784	$	( 35,212 )	$	80,514	$	( 11,080 )	$	359,298	$	( 46,292 )


	December 31, 2022
	Less Than 12 Months				12 Months or Longer				Total
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Securities held-to-maturity
Municipal securities	$	8,160	$	( 661 )	$	4,258	$	( 453 )	$	12,418	$	( 1,114 )
Agency mortgage-backed securities - residential	68,408		( 8,848 )		38,332		( 6,264 )		106,740		( 15,112 )
Agency mortgage-backed securities - commercial	4,552		( 1,266 )		—		—		4,552		( 1,266 )
Corporate securities	36,866		( 2,685 )		7,492		( 508 )		44,358		( 3,193 )

Total	$	117,986	$	( 13,460 )	$	50,082	$	( 7,225 )	$	168,068	$	( 20,685 )

The following table summarizes ratings for the Company’s HTM portfolio issued by state and political subdivisions and other securities as of September 30, 2023.


	Held-to-Maturity
(in thousands)	State and Municipal		Other		Total
Aaa/AAA	$	95	$	—	$	95
Aa1/AA+	9,831		—		9,831
Aa2/AA	1,539		—		1,539
A1/A+	1,794		—		1,794
A2/A	644		5,000		5,644
A3/A-	—		4,512		4,512
Baa1/BBB+	—		9,500		9,500
Baa2/BBB	—		8,500		8,500
Baa3/BBB-	—		12,528		12,528
Ba1/BB+	—		2,000		2,000
Not Rated 1	—		176,306		176,306
Total	$	13,903	$	218,346	$	232,249

1 HTM agency mortgage-backed securities - commercial and residential are listed under Other securities as not rated.

There were no amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statements of income during the three and nine months ended September 30, 2023.

Note 4: Loans

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 other 1	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 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: