Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Unless otherwise indicated or unless the context requires otherwise, all references in this Report to the “Corporation,” “we,” “us,” “our,” or similar references mean First Business Financial Services, Inc. together with our subsidiary. “FBB” or the “Bank” refers to our subsidiary, First Business Bank.
Forward-Looking Statements
This report may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which reflect our current views with respect to future events and financial performance. Forward-looking statements are not based on historical information, but rather are related to future operations, strategies, financial results, or other developments. Forward-looking statements are based on management’s expectations as well as certain assumptions and estimates made by, and information available to, management at the time the statements are made. Such statements are subject to risks and uncertainties, including among other things:
• Adverse changes in the economy or business conditions, either nationally or in our markets including, without limitation, inflation, economic downturn, labor shortages, wage pressures, the adverse effects of public health events on the global, national, and local economy, and geopolitical instability and international conflicts that may affect energy prices or otherwise result in market volatility.
• Uncertainty created by potential federal government actions relating to the authority of regulatory agencies (including bank regulators), international trade policy, prolonged shutdown of the federal government, and other significant policy matters.
• Competitive pressures among depository and other financial institutions nationally and in our markets.
• Increases in defaults by borrowers and other delinquencies.
• Management's ability to manage growth effectively, including the successful expansion of our client support, administrative infrastructure, and internal management systems.
• Fluctuations in interest rates and market prices.
• Changes in legislative or regulatory requirements applicable to us and our subsidiaries.
• Changes in tax requirements, including tax rate changes, new tax laws, and revised tax law interpretations.
• Fraud, including client and system failure or breaches of our network security, including our internet banking activities.
• Failure to comply with the applicable SBA regulations in order to maintain the eligibility of the guaranteed portions of SBA loans.
• Ongoing volatility in the banking sector may result in new legislation, regulations or policy changes that could subject the Corporation and the Bank to increased government regulation and supervision.
• The proportion of the Corporation’s deposit account balances that exceed FDIC insurance limits may expose the Bank to enhanced liquidity risk.
• The Corporation may be subject to increases in FDIC insurance assessments.
These risks could cause actual results to differ materially from what we have anticipated or projected. These risk factors and uncertainties should be carefully considered by our shareholders and potential investors. See Part I, Item 1A — Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2025, and in this report, below, for discussion relating to risk factors impacting us. Investors should not place undue reliance on any such forward-looking statements, which speak only as of the date made. These factors could affect our financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods.
Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, we caution that, while our management believes such assumptions or bases are reasonable and are made in good
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faith, assumed facts or bases can vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. Where, in any forward-looking statement, an expectation or belief is expressed as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be achieved or accomplished.
We do not intend to, and specifically disclaim any obligation to, update any forward-looking statements.
The following discussion and analysis is intended as a review of significant events and factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with the unaudited Consolidated Financial Statements and the Notes thereto presented in this Form 10-Q.
Overview
We are a registered bank holding company incorporated under the laws of the State of Wisconsin and are engaged in the commercial banking business through our wholly-owned banking subsidiary, FBB. All of our operations are conducted through FBB and First Business Specialty Finance, LLC, a wholly-owned subsidiary of FBB. We operate as a business bank focusing on delivering a full line of commercial banking products and services tailored to meet the specific needs of small and medium-sized businesses, business owners, executives, professionals, and high net worth individuals. Our products and services include those for business banking, private wealth management services, and bank consulting. Within business banking, we offer commercial lending, asset-based lending, accounts receivable financing, equipment financing, floorplan financing, vendor financing, SBA lending and servicing, treasury management services, and company retirement plans. Our private wealth management services include trust and estate administration, financial planning, investment management, and private banking for executives and owners of our business banking clients and others. Our bank consulting experts provide investment portfolio administrative services and asset liability management services. We are not a retail bank and do not rely on a traditional branch network to gather deposits or attract clients. Instead, our operating model is built on deep client relationships, specialized financial expertise, and an efficient, centralized administrative structure designed to deliver best-in-class client satisfaction. This focused approach enables our experienced professionals to provide the level of insight and service required to develop and sustain long-term client relationships. We conduct our commercial banking operations through one operating segment.
Financial Performance Summary
Results as of and for the three months ended March 31, 2026 include:
• Net income available to common shareholders totaled $12.0 million, or diluted earnings per share of $1.44, for the three months ended March 31, 2026, compared to $11.0 million, or diluted earnings per share of $1.32, for the same period in 2025.
• Annualized return on average assets (“ROAA”) for the three months ended March 31, 2026 measured 1.13% compared to 1.14% for the same period in 2025.
• Return on average tangible common equity (“ROATCE”) is defined as net income available to common shareholders divided by average equity less average intangible assets and average preferred stock. ROATCE was 13.55% for the three months ended March 31, 2026, compared to 14.12% for the same period in 2025.
• Efficiency ratio measured 61.14% for the three months ended March 31, 2026, compared to 60.28% for the same period in 2025.
• Pre-tax, pre-provision (“PTPP”) adjusted earnings, which excludes certain one-time and discrete items, for the three months ended March 31, 2026 was $17.2 million, compared to $16.2 million in the same period in 2025.
• Net interest margin was 3.56% for the three months ended March 31, 2026 compared to 3.69% for the same period in 2025.
• Top line revenue, defined as net interest income plus non-interest income, totaled $44.3 million for the three months ended March 31, 2026, compared to $40.8 million in the same period in 2025.
• Effective tax rate, including the benefit from Low-Income Housing Tax Credits, was 15.16% for the three months ended March 31, 2026 compared to 17.00% for the same period in 2025.
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• Provision for credit losses was $3.0 million for the three months ended March 31, 2026 compared to $2.7 million for the same period in 2025.
• Total assets at March 31, 2026 increased $239.0 million, or 5.9%, to $4.321 billion from $4.082 billion at December 31, 2025.
• Period-end gross loans and leases receivable increased $125.9 million, or 14.9% annualized, to $3.501 billion as of March 31, 2026 compared to $3.375 billion as of December 31, 2025. Average gross loans and leases of $3.426 billion increased $240.0 million, or 7.5%, for the three months ended March 31, 2026, compared to $3.186 billion for the same period in 2025.
• Non-performing assets were $40.5 million and 0.94% of total assets as of March 31, 2026, compared to $43.9 million and 1.07% of total assets as of December 31, 2025.
• The allowance for credit losses, including reserve for unfunded credit commitments, increased $797,000 compared to December 31, 2025. The allowance for credit losses, including reserve for unfunded credit commitments, was 1.10% of total loans, compared to 1.12% at December 31, 2025.
• Period-end core deposits at March 31, 2026 increased $123.1 million, or 18.4% annualized, to $2.796 billion from $2.673 billion as of December 31, 2025. Average core deposits of $2.849 billion increased $485.7 million or 20.6%, for the three months ended March 31, 2026, compared to $2.363 billion for the same period in 2025.
• Private wealth and trust assets under management and administration increased by $66.1 million, or 6.9% annualized, to $3.881 billion at March 31, 2026, compared to $3.815 billion at December 31, 2025. Private wealth trust assets under management and administration increased $456.2 million, or 13.3%, compared to March 31, 2025.
Results of Operations
Top Line Revenue
Top line revenue, comprised of net interest income and non-interest income, increased $3.5 million, or 8.5%, for the three months ended March 31, 2026, compared to the same period in 2025, due to a 6.8% increase in net interest income and a 15.8% increase in non-interest income. The increase in net interest income was primarily driven by increases in average loans and leases outstanding, partially offset by a decrease in net interest margin. The increase in non-interest income was due primarily to increases in commercial loan swap income, private wealth income, bank-owned life insurance income, and service charges on deposits, partially offset by decreases in gains on sale of SBA loans.
The components of top line revenue were as follows:
For the Three Months Ended March 31,
2026
2025
$ Change
% Change
(Dollars in Thousands)
Net interest income
$35,518
$33,258
$2,260
6.8%
Non-interest income
8,775
7,579
1,196
15.8
Top line revenue
$44,293
$40,837
$3,456
8.5
Annualized Return on Average Assets (“ROAA”) and Annualized Return on Average Tangible Common Equity (“ROATCE”)
ROAA for the three months ended March 31, 2026 was 1.13%, compared to 1.14% for the three months ended March 31, 2025. The decrease in ROAA was due to a decrease in net interest margin and an increase in operating expense, partially offset by an improved fee income ratio as non-interest income grew at a faster rate than net interest income. We consider ROAA a critical metric to measure the profitability of our organization and how efficiently our assets are deployed. ROAA also allows us to better benchmark our profitability to our peers without the need to consider different degrees of leverage which can ultimately influence return on equity measures.
ROATCE for the three months ended March 31, 2026 was 13.6%, compared to 14.1% for the three months ended March 31, 2025. The explanation of the decrease in ROATCE is consistent with the ROAA discussion above. We view ROATCE as an important measurement for monitoring profitability and continue to focus on improving our return to our shareholders by enhancing the overall profitability of our client relationships, controlling our expenses, and minimizing our costs of credit.
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Efficiency Ratio and Pre-Tax, Pre-Provision Adjusted Earnings
Efficiency ratio measured 61.1% for the three months ended March 31, 2026, compared to 60.3% for the three months ended March 31, 2025. The increase in efficiency ratio was primarily due to a decrease in net interest margin and an increase in compensation expense, partially offset by a volume-driven increase in net interest income and an increase in non-interest income. Efficiency ratio is a non-GAAP measure representing operating expense, which is non-interest expense excluding the effects of the SBA recourse benefit or provision, net gains or losses on repossessed assets, amortization of other intangible assets, and other discrete items, if any, divided by operating revenue, which is equal to net interest income plus non-interest income less realized net gains or losses on securities, if any.
PTPP adjusted earnings for three months ended March 31, 2026 were $17.2 million, up 6.1%, compared to $16.2 million for the three months ended March 31, 2025. The increase in PTPP is primarily due to an increase in net interest income and non-interest income. This increase in total revenue was partially offset by an increase in non-interest expense primarily due to an increase in compensation expense. In the judgment of the Corporation’s management, the adjustments made to non-interest expense and non-interest income allow investors and analysts to better assess the Corporation’s operating expenses in relation to its core operating revenue by removing the volatility associated with certain one-time items and other discrete items. PTPP adjusted earnings is a non-GAAP measure that allows management to benchmark performance of our model to our peers without the influence of the provision for credit losses and tax considerations, which will ultimately influence other traditional financial measures, including ROAA and ROATCE. The information provided below reconciles the efficiency ratio to its most comparable GAAP measure.
Please refer to the Non-Interest Income and Non-Interest Expense sections below for discussion on additional drivers of the year-over-year change in the efficiency ratio and PTPP adjusted earnings.
For the Three Months Ended March 31,
2026
2025
$ Change
% Change
(Dollars in Thousands)
Total non-interest expense
$26,953
$24,719
$2,234
9.0%
Less:
Net gain on repossessed assets
—
(8)
8
NM
(Recovery) impairment of tax credit investments
(7)
110
(117)
NM
SBA recourse benefit
(121)
—
(121)
NM
Total operating expense (a)
$27,081
$24,617
$2,464
10.0
Net interest income
$35,518
$33,258
$2,260
6.8
Total non-interest income
8,775
7,579
1,196
15.8
Operating revenue (b)
$44,293
$40,837
$3,456
8.5
Efficiency ratio
61.14%
60.28%
Pre-tax, pre-provision adjusted earnings (b-a)
$17,212
$16,220
$992
6.1
Average total assets
$4,248,641
$3,842,368
$406,273
10.6
Net Interest Income
Net interest income levels depend on the amount of and yield on interest-earning assets as compared to the amount of and rate paid on interest-bearing liabilities. Net interest income is sensitive to changes in market rates of interest and the asset/liability management processes to prepare for and respond to such changes.
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The following table provides information with respect to (1) the change in net interest income attributable to changes in rate (changes in rate multiplied by prior volume) and (2) the change in net interest income attributable to changes in volume (changes in volume multiplied by prior rate) for the three months ended March 31, 2026 compared to the same period in 2025. The change in net interest income attributable to changes in rate and volume (changes in rate multiplied by changes in volume) has been allocated to the rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.
Increase (Decrease) for the Three Months
Ended March 31,
2026 Compared to 2025
Rate
Volume
Net
(In Thousands)
Interest-earning assets
Commercial real estate and other mortgage loans (1)
$
(1,853
)
$
2,183
$
330
Commercial and industrial loans (1)
(1,185
)
1,867
682
Consumer and other loans (1)
21
1
22
Total loans and leases receivable
(3,017
)
4,051
1,034
Mortgage-related securities
61
709
770
Other investment securities
34
37
71
FHLB and FRB Stock
133
(216
)
(83
)
Short-term investments
(128
)
702
574
Total net change in income on interest-earning assets
(2,917
)
5,283
2,366
Interest-bearing liabilities
Transaction accounts
(1,174
)
2,116
942
Money market accounts
(1,108
)
711
(397
)
Certificates of deposit
(178
)
764
586
Wholesale deposits
(96
)
(123
)
(219
)
Total deposits
(2,556
)
3,468
912
FHLB advances
127
(934
)
(807
)
Other borrowings
(1
)
2
1
Total net change in expense on interest-bearing liabilities
(2,430
)
2,536
106
Net change in net interest income
$
(487
)
$
2,747
$
2,260
(1) The average balances of loans and leases include non-accrual loans and leases and loans held for sale.
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The table below shows our average balances, interest, average yields/rates, net interest margin, and the spread between the combined average yields earned on interest-earning assets and average rates on interest-bearing liabilities for the three months ended March 31, 2026 and 2025. The average balances are derived from average daily balances.
For the Three Months Ended March 31,
2026
2025
Average
Balance
Interest
Average
Yield/Rate (4)
Average
Balance
Interest
Average
Yield/Rate (4)
(Dollars in Thousands)
Interest-earning assets
Commercial real estate and other
mortgage loans (1)
$
2,071,202
$
30,216
5.84
%
$
1,925,661
$
29,886
6.21
%
Commercial and industrial loans (1)
1,306,970
25,409
7.78
1,212,656
24,727
8.16
Consumer and other loans (1)
47,579
683
5.74
47,479
661
5.57
Total loans and leases receivable (1)
3,425,751
56,308
6.57
3,185,796
55,274
6.94
Mortgage-related securities (2)
375,989
3,965
4.22
308,656
3,195
4.14
Other investment securities (3)
50,146
280
2.23
43,145
209
1.94
FHLB and FRB stock
9,067
211
9.31
13,623
294
8.63
Short-term investments
128,649
1,132
3.52
51,072
558
4.37
Total interest-earning assets
3,989,602
61,896
6.21
3,602,292
59,530
6.61
Non-interest-earning assets
259,039
240,076
Total assets
$
4,248,641
$
3,842,368
Interest-bearing liabilities
Transaction accounts
$
1,220,945
$
8,354
2.74
%
$
927,250
$
7,412
3.20
%
Money market accounts
925,282
6,354
2.75
831,598
6,751
3.25
Certificates of deposit
273,635
2,447
3.58
189,547
1,861
3.93
Wholesale deposits
682,138
6,773
3.97
694,431
6,992
4.03
Total interest-bearing deposits
3,102,000
23,928
3.09
2,642,826
23,016
3.48
FHLB advances
200,132
1,567
3.13
305,549
2,374
3.11
Other borrowings
54,815
883
6.44
54,708
882
6.45
Total interest-bearing liabilities
3,356,947
26,378
3.14
3,003,083
26,272
3.50
Non-interest-bearing demand
deposit accounts
428,739
414,499
Other non-interest-bearing liabilities
85,304
90,683
Total liabilities
3,870,990
3,508,265
Stockholders’ equity
377,651
334,103
Total liabilities and stockholders’
equity
$
4,248,641
$
3,842,368
Net interest income
$
35,518
$
33,258
Interest rate spread
3.06
%
3.11
%
Net interest-earning assets
$
632,655
$
599,209
Net interest margin
3.56
%
3.69
%
Average interest-earning assets to
average interest-bearing liabilities
118.85
%
119.95
%
Return on average assets (4)
1.13
%
1.14
%
Return on average tangible common equity (4)
13.55
%
14.12
%
Average equity to average assets
8.89
%
8.70
%
Non-interest expense to average
assets (4)
2.54
%
2.57
%
(1) The average balances of loans and leases include non-accrual loans and leases and loans held for sale. Interest income related to non-accrual loans and leases is recognized when collected. Interest income includes net loan fees in lieu of interest.
(2) Includes amortized cost basis of assets available-for-sale and held-to-maturity.
(3) Yields on tax-exempt municipal securities are not presented on a tax-equivalent basis in this table.
(4) Represents annualized yields/rates.
The change in yield of the respective interest-earning assets or the rate paid on interest-bearing liability compared to the change in short-term market rates is commonly referred to as a beta. The table below displays the beta calculations for loans and leases, total interest earning assets, core deposits, interest-bearing deposits and total interest-bearing liabilities for the three months
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ended March 31, 2026 and 2025. Additionally, adjusted total loans and leases receivable and adjusted total interest-earning assets exclude the volatile impact of fees in lieu of interest ("FILOI").
For the Three Months Ended March 31,
2026
2025
Increase
Asset and Liability Beta Analysis
Average Yield/Rate (4)
(Decrease)
Total loans and leases receivable (a)
6.57%
6.94%
(0.37)%
Total interest-earning assets (b)
6.21%
6.61%
(0.40)%
Total core deposits (e)
2.41%
2.71%
(0.30)%
Total bank funding (f)
2.73%
3.02%
(0.29)%
Net interest margin (g)
3.56%
3.69%
(0.13)%
Effective fed funds rate (3)(i)
3.64%
4.33%
(0.69)%
Beta Calculations:
Total loans and leases receivable (a)/(i)
53.6%
Total interest-earning assets (b)/(i)
58.0%
Total core deposits (e)/(i)
43.5%
Total bank funding (2)(f)/(i)
42.0%
(1) Excluding fees in lieu of interest.
(2) Total bank funding represents total deposits plus FHLB advances.
(3) Board of Governors of the Federal Reserve System (US), Effective Federal Funds Rates (DFF) from FRED, Federal Reserve Bank of St. Louis.
(4) Represents annualized yields/rates.
Comparison of Net Interest Income for the Three Months Ended March 31, 2026 and 2025
Net interest income increased $2.3 million, or 6.8%, during the three months ended March 31, 2026, compared to the three months ended March 31, 2025. The increase in net interest income primarily reflected increases in average gross loans and leases, partially offset by lower net interest margin. Average gross loans and leases for the three months ended March 31, 2026 increased $240.0 million, or 7.5%, compared to the three months ended March 31, 2025.
The yield on average interest-earning assets for the three months ended March 31, 2026, was 6.21%, compared to 6.61% for the three months ended March 31, 2025. The decrease in yield was primarily due to the decrease in short-term market rates.
The average rate paid on total interest-bearing liabilities was 3.14% for the period ended March 31, 2026, a decrease from 3.50% for the period ended March 31, 2025. Total interest-bearing liabilities includes interest-bearing deposits, FHLB advances, subordinated and junior subordinated notes and debentures payable, federal funds purchased, and other borrowings. The average rates paid decreased due to lower short-term interest rates and the replacement of maturing wholesale funds which were at higher fixed rates.
Net interest margin decreased to 3.56% for the three months ended March 31, 2026, compared to 3.69% for the three months ended March 31, 2025. The decrease in net interest margin was primarily due to the decline in short-term earning asset yields outpacing the decline in total bank funding costs. Additionally, the year-over-year increase in non-performing assets contributed to three basis points of decline in net interest margin.
Management believes its success in growing core deposits, disciplined loan pricing, and increased production in existing higher-yielding commercial lending products will allow the Corporation to achieve a net interest margin that supports its long-term profitability goals. The collection of fees in lieu of interest (e.g. prepayment fees and asset-based loan fees) is an expected source of volatility to quarterly net interest income and net interest margin. In addition, net interest margin may also experience volatility due to events such as the collection of interest on loans previously in non-accrual status or the accumulation of significant short-term deposit inflows.
The Corporation maintains a target for net interest margin in the range of 3.60% - 3.65%. Performance in future periods will vary due to factors such as the level of fees in lieu of interest and the timing, pace, and scale of future interest rate changes.
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Provision for Credit Losses
We determine our provision for credit losses pursuant to our allowance for credit loss methodology. It is based on a reasonable and supportable forecast as well as considerations for composition, risk, and performance indicators in our credit portfolio. Refer to Allowance for Credit Losses , below, for further information regarding our allowance for credit loss methodology.
The following table shows the components of the provision for credit losses for the three months ended March 31, 2026 compared to the same period in 2025.
For the Three Months Ended March 31,
2026
2025
(In Thousands)
Change in qualitative factors
$
(706
)
$
(355
)
Change in quantitative factors
10
1,560
Charge-offs
2,331
3,810
Recoveries
(168
)
(398
)
Change in reserves on individually evaluated loans, net
382
(2,495
)
Change due to loan growth, net
1,068
741
Change in unfunded credit commitment reserves
43
(204
)
Total provision for credit losses
$
2,960
$
2,659
Qualitative factor changes reflect management’s evaluation of the level of risk within the portfolio based upon several factors for each portfolio segment. Quantitative factor changes reflect the change in the reasonable and supportable forecast as well as other model assumptions. Charge-offs in excess of previously established specific reserves require an additional provision for credit losses to maintain the allowance for credit losses at a level deemed appropriate by management. This amount is net of the release of any specific reserve that may have already been provided. The addition of specific reserves on individually evaluated loans represents new specific reserves established when collateral shortfalls or government guaranty deficiencies are present, while the release of specific reserves represents the reduction of previously established reserves that are no longer required. Refer to Asset Quality , below, for further information regarding the overall credit quality of our loan and lease portfolio.
Comparison of Non-Interest Income for the Three Months Ended March 31, 2026 and 2025
Non-Interest Income
Non-interest income for the three months ended March 31, 2026 increased $1.2 million, or 15.8%, to $8.8 million compared to $7.6 million for the same period in 2025. The increase in total non-interest income was primarily driven by increases in commercial loan swap fees, private wealth fee income, bank-owned life insurance income, and service charges on deposits, offset by a decrease in gains on sale of SBA loans.
Management continues to focus on revenue growth from multiple non-interest income sources to maintain a diversified revenue stream. Contribution from fee-based revenue sources can be variable and driven by changes in the interest rate environment, client activity, and the value of underlying investments. Total non-interest income accounted for 19.8% of total revenues for the three months ended March 31, 2026, compared to 18.6% for the three months ended March 31, 2025.
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The components of non-interest income were as follows:
For the Three Months Ended March 31,
2026
2025
$ Change
% Change
(Dollars in Thousands)
Private wealth management services fee income
$3,877
$3,492
$385
11.0%
Gain on sale of SBA loans
592
963
(371)
(38.5)
Service charges on deposits
1,318
1,048
270
25.8
Loan fees
436
388
48
12.4
Bank-owned life insurance policy income
757
437
320
73.2
Swap fees
628
113
515
455.8
Other non-interest income
1,167
1,138
29
2.5
Total non-interest income
$8,775
$7,579
$1,196
15.8
Fee income ratio (1)
19.8%
18.6%
(1) Fee income ratio is fee income, per the above table, divided by top line revenue (defined as net interest income plus non-interest income).
Commercial loan swap fee income increased $515,000 for the three months ended March 31, 2026, compared to the same period in 2025. Swap fee income varies period to period based on loan activity and the interest rate environment.
Private wealth fee income increased $385,000, or 11.0% for the three months ended March 31, 2026, compared to the same period in 2025. Private wealth fee income was up compared to the prior year primarily due to an increase in assets under management and administration. Private wealth fee income can vary due to the mix of business at different fee structures and can be positively or negatively influenced by the timing and magnitude of volatility in the capital markets. As of March 31, 2026, private wealth and trust assets under management and administration increased $456.2 million, or 13.3%, totaling $3.881 billion compared to $3.425 billion as of March 31, 2025, due to an increase in market values, new clients, and new money from existing clients.
Bank-owned life insurance policy income increased $320,000, or 73.2%, for the three months ended March 31, 2026, compared to the same period in 2025. This increase was primarily due to the purchase of new policies in the second quarter of 2025, with an aggregate cash surrender value of $24.5 million.
Service charges on deposits increased $270,000, or 25.8% for the three months ended March 31, 2026, compared to the same period in 2025. The increase was primarily driven by new and expanded core deposit relationships and a reduction in earnings credit rates. Treasury management business development efforts remain robust as gross treasury management service charges increased $148,000, or 9.1%, for the three months ended March 31, 2026, compared to the same period in 2025. Management believes growth in gross analyzed service charges is a strong indicator of success for the Corporation given the direct correlation to adding and expanding core business relationships.
Gain on sale of SBA loans decreased $371,000, or 38.5%, for the three months ended March 31, 2026, compared to the same period in 2025. Gain on sale of SBA loans varies period to period based on the amount of closed and fully funded loans.
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Comparison of Non-Interest Expense for the Three Months Ended March 31, 2026 and 2025
Non-Interest Expense
Non-interest expense for the three months ended March 31, 2026 increased $2.2 million, or 9.0%, compared to the same periods in 2025. Operating expense, which excludes certain one-time and discrete items as defined in the Efficiency Ratio and Pre-Tax, Pre-Provision Adjusted Earnings section above, increased $2.5 million, or 10.0%, for the three months ended March 31, 2026, compared to the same periods in 2025. The increase in operating expense was primarily due to an increase in compensation expense.
The components of non-interest expense were as follows :
For the Three Months Ended March 31,
2026
2025
$ Change
% Change
(Dollars in Thousands)
Compensation
$18,541
$16,747
$1,794
10.7%
Occupancy
588
590
(2)
(0.3)
Professional fees
1,446
1,459
(13)
(0.9)
Data processing
1,270
1,082
188
17.4
Marketing
711
968
(257)
(26.5)
Equipment
407
376
31
8.2
Computer software
1,921
1,603
318
19.8
FDIC insurance
909
780
129
16.5
Other non-interest expense
1,160
1,114
46
4.1
Total non-interest expense
$26,953
$24,719
$2,234
9.0
Total operating expense (1)
$27,081
$24,617
$2,464
10.0
Actual full-time equivalent employees
378
354
(1) Total operating expense represents total non-interest expense, adjusted to exclude the impact of discrete items as previously defined in the non-GAAP efficiency ratio calculation, above.
Compensation expense for the three months ended March 31, 2026 increased $1.8 million, or 10.7%, compared to the same period in 2025. Growth reflects increases in average FTEs, salaries, individual incentive compensation, and the acceleration of deferred compensation related to the CEO retirement. Successful hiring efforts to secure talent resulted in average full-time equivalent employees for the three months ended March 31, 2026 increasing to 373, up 5.7%, compared to 353 for the three months ended March 31, 2025.
Computer software expense increased $318,000, or 19.8%, for the three months ended March 31, 2026, compared to the same period in 2025. The increase was primarily due to our commitment to innovative technology to support growth initiatives, enhance productivity, and improve the client experience.
Data processing expense increased $188,000, or 17.4%, for the three months ended March 31, 2026, compared to the same period in 2025. The increase was primarily due to a change in credit card vendor and core provider costs commensurate with an increase in transactions, accounts, and clients.
FDIC insurance expense increased $129,000, or 16.5%, for the three months ended March 31, 2026, compared to the same period in 2025. The increase was primarily due to an increase in assessment rate related to an increase in non-performing assets and wholesale deposits.
Marketing expense decreased $257,000, or 26.5%, for the three months ended March 31, 2026, compared to the same period in 2025. The decrease was primarily due to timing of projects. Management expects marketing spend for full year 2026 to be in line with prior year spend.
Income Taxes
Income tax expense totaled $2.2 million for the three months ended March 31, 2026 compared to $2.3 million for the same period in 2025. Income tax expense included a $578,000 net benefit from tax credit investments compared to $459,000 for the same
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period in 2025. The effective tax rate for the three months ended March 31, 2026 was 15.2%, compared to 17.0% for the same period in 2025. The change in tax expense reflects updated tax credit partnership estimates and timing of stock compensation vesting activity. The Corporation expects to report an effective tax rate between 16% and 18% for 2026.
The provision for income taxes is determined by applying an estimated annual effective income tax rate to income before taxes and adjusting for discrete items. The rate is based on the most recent annualized forecast of pre-tax income, book versus tax differences, and tax credits, if any. If we conclude that a reliable estimated annual effective tax rate cannot be determined, the actual effective tax rate for the year-to-date period may be used. We re-evaluate the income tax rates each quarter and the current projected effective tax rate for the entire year may change.
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Financial Condition
General
Total assets increased by $239.0 million, or 5.9%, to $4.321 billion as of March 31, 2026 compared to $4.082 billion at December 31, 2025. The increase in total assets was primarily driven by increases in loans and leases receivable and short-term investments. Total liabilities increased by $230.5 million, or 6.2%, to $3.941 billion at March 31, 2026 compared to $3.710 billion at December 31, 2025. The increase in total liabilities was primarily due to an increase in core deposits. Total stockholders’ equity increased by $8.5 million, or 2.3%, to $380.1 million at March 31, 2026 compared to $371.6 million at December 31, 2025. The increase in total stockholders’ equity was primarily due to the retention of earnings partially offset by dividends paid to common and preferred stockholders.
Cash and Cash Equivalents
Cash and cash equivalents include short-term investments and cash and due from banks. Cash and due from banks increased $1.8 million to $32.6 million at March 31, 2026 from $30.8 million at December 31, 2025. Short-term investments increased by $95.9 million to $104.6 million at March 31, 2026 from $8.7 million at December 31, 2025. Our short-term investments primarily consist of interest-bearing deposits held at the FRB. We value the safety and soundness provided by the FRB, and therefore, we incorporate short-term investments in our readily accessible liquidity program. The increase compared to prior year-end is primarily due to cash management activity, including loan funding and deposit activity. As of March 31, 2026 and December 31, 2025, interest-bearing deposits held at the FRB were $103.6 million and $7.7 million, respectively. In general, the level of our cash and short-term investments will be influenced by the timing of deposit gathering, scheduled maturities of wholesale deposits, funding of loan and lease growth when opportunities are presented, and the level of our securities portfolio. Please refer to the section entitled Liquidity and Capital Resources for further discussion.
Securities
Total securities, including available-for-sale and held-to-maturity, decreased by $2.2 million, or 0.5%, to $425.1 million, or 9.8% of total assets at March 31, 2026 compared to $427.3 million or 10.5% of total assets at December 31, 2025. During the three months ended March 31, 2026, the Corporation recognized unrealized losses of $3.2 million before income taxes through other comprehensive income, compared to unrealized gains of $4.7 million for the same period in 2025. The unrealized losses in the current period were driven by changes in market interest rates. As of March 31, 2026 and December 31, 2025, our overall securities portfolio, including available-for-sale securities and held-to-maturity securities, had an estimated weighted-average expected maturity of 4.6 and 4.7 years, respectively. Our investment philosophy remains as stated in our most recent Annual Report on Form 10-K.
We use a third-party pricing service as our primary source of market prices for our securities portfolio. On a quarterly basis, we validate the reasonableness of prices received from this source through independent verification, data integrity validation primarily through comparison of current price to an expectation-based analysis of movement in prices based upon the changes in the related yield curves, and other market factors. We did not recognize any credit losses in the securities portfolio as of March 31, 2026.
Loans and Leases Receivable
Period-end loans and leases receivable, net of allowance for credit losses, increased by $124.9 million, or 15.0% annualized, to $3.462 billion at March 31, 2026 from $3.337 billion at December 31, 2025 primarily driven by commercial and industrial loan growth. Management expects to continue to manage loan growth towards our long term target of 10%.
Commercial and Industrial ("C&I") loans increased $84.4 million, or 26.5% annualized, to $1.358 billion compared to December 31, 2025. The increase was due to growth across our bank markets and in asset based lending.
Total commercial real estate (“CRE”) loans increased $35.2 million to $2.095 billion. The increase was primarily due to growth across our bank markets.
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CRE loans represented 59.9% and 61.0% of our total loans as of March 31, 2026 and December 31, 2025, respectively. As of March 31, 2026, 14.6% of the CRE loans were owner-occupied CRE, compared to 14.3% as of December 31, 2025. We consider the owner-occupied CRE more characteristic of the Corporation’s C&I portfolio as, in general, the client’s primary source of repayment is the cash flow from the operating entity occupying the commercial real estate property.
We continue to actively pursue C&I loans across the Corporation as this segment of our loan and lease portfolio provides an attractive yield commensurate with an appropriate level of credit risk and creates more opportunities for core deposit, treasury management, and private wealth management relationships which generate additional fee revenue.
Underwriting of new credit is primarily through approval from a serial sign-off or committee process and is a key component of our operating philosophy. Business development officers have no individual lending authority. To monitor the ongoing credit quality of our loans and leases, each credit is evaluated for proper risk rating using a nine grade risk rating system at the time of origination, subsequent renewal, evaluation of updated financial information from our borrowers, or as other circumstances dictate.
While we continue to experience competition from banks and non-banks operating in our primary geographic areas, we remain committed to our underwriting standards and will not deviate from those standards for the sole purpose of growing our loan and lease portfolio. We continue to expect our new loan and lease activity to be adequate to replace normal amortization, allowing us to continue growing in future years. The types of loans and leases we originate and the various risks associated with these originations remain consistent with information previously outlined in our most recent Annual Report on Form 10-K.
The following table presents information concerning the composition of the Bank’s consolidated loans and leases receivable.
As of March 31,
As of December 31,
2026
2025
Amount
Outstanding
% of Total
Loans and
Leases
Amount
Outstanding
% of Total
Loans and
Leases
(Dollars in Thousands)
Commercial real estate:
Commercial real estate — owner occupied
$
306,593
8.8
%
$
293,706
8.7
%
Commercial real estate — non-owner occupied
925,425
26.4
885,870
26.2
Construction and land development
224,866
6.4
248,560
7.4
Multi-family
577,271
16.5
571,468
16.9
1-4 family
61,332
1.8
60,661
1.8
Total commercial real estate
2,095,487
59.9
2,060,265
61.0
Commercial and industrial
1,358,413
38.8
1,273,997
37.8
Consumer and other
47,223
1.3
40,965
1.2
Total gross loans and leases receivable
3,501,123
100.0
%
3,375,227
100.0
%
Less:
Allowance for credit losses
36,631
35,877
Deferred loan fees and costs, net
2,220
1,986
Loans and leases receivable, net
$
3,462,272
$
3,337,364
Below is a view of selected loan portfolios disaggregated by North American Industry Classification (“NAICs”) code as of March 31, 2026:
Real Estate
Wholesale
and
Manufacturing
Retail and
Hospitality
Transportation
and
Warehousing
Other
Total
Commercial real estate — owner
occupied
5%
30%
21%
11%
33%
100%
Commercial real estate — non-
owner occupied
78% (1)
—%
9%
2%
11%
100%
Commercial and industrial
5%
28%
18%
6%
43%
100%
(1) Includes approximately $302.6 million of office real estate, or 8.6% of gross loans.
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See Asset Quality for further discussion of industry-specific risks.
Deposits
Deposit composition
As of March 31,
As of December 31,
2026
2025
Amount Outstanding
% of Total Deposits
Amount Outstanding
% of Total Deposits
(Dollars in Thousands)
Non-interest-bearing transaction accounts
$405,281
11.4%
$378,770
11.2%
Interest-bearing transaction accounts
1,170,271
32.8
1,103,696
32.7
Money market accounts
960,052
26.9
905,773
26.8
Certificates of deposit
260,455
7.3
284,764
8.4
Wholesale deposits
769,943
21.6
707,412
20.9
Total deposits
$3,566,002
100.0%
$3,380,415
100.0%
Uninsured deposits
$1,237,344
$1,220,177
Less: uninsured deposits collateralized by
pledged assets or letters of credit
59,613
68,656
Total uninsured, net of collateralized deposits
$1,177,731
33.0%
$1,151,521
34.1%
As of March 31, 2026, total period-end deposits increased by $185.6 million, or 22.0% annualized, to $3.566 billion from $3.380 billion at December 31, 2025. As of March 31, 2026, total period-end core deposits increased $123.1 million, or 18.4% annualized, to $2.796 billion, compared to $2.673 billion at December 31, 2025. Core deposits are considered all deposits that are not wholesale deposits. Management believes the Bank’s deposit-centric sales strategy, led by treasury management sales, will continue to contribute to a net increase in core deposits; however, period-end deposit balances associated with core relationships will fluctuate based upon maturity of time deposits, client demands for the use of their cash, and our ability to maintain existing and acquire new client relationships. Therefore, we believe average balances are a better indicator of our deposit growth.
Our strategic efforts remain focused on adding core deposit relationships. We measure the success of core deposit gathering efforts based on the number and average balances of our deposit accounts as compared to ending balances due to the variability of some of our larger relationships. The Bank’s average core deposits increased $485.7 million, or 20.6%, to $2.849 billion for the three months ended March 31, 2026 compared to $2.363 billion for the three months ended March 31, 2025.
FHLB Advances and Other Borrowings
As of March 31, 2026, FHLB advances and other borrowings increased by $51.4 million, or 20.4%, to $303.5 million from $252.1 million at December 31, 2025. The increase was primarily driven by liquidity management considerations. The increase also supported interest rate risk management through match-funding of fixed-rate assets to enhance funding flexibility and help stabilize net interest margin. Average FHLB advances and other borrowings decreased by $105.3 million, or 29.2%, to $254.9 million from $360.2 million at March 31, 2025. The decrease is primarily due to funding needs being met by growth in deposits.
We may utilize FHLB advances to the extent we maintain an adequate level of excess borrowing capacity for liquidity and contingency funding purposes and pricing remains favorable in comparison to the wholesale deposit alternative. We will use FHLB advances and/or brokered certificates of deposit in specific maturity periods needed, typically three to five years, to match-fund fixed rate loans and effectively mitigate the interest rate risk measured through our asset/liability management process and to support asset growth initiatives while taking into consideration our operating goals and desired level of usage of wholesale funds. Please refer to the section entitled Liquidity and Capital Resources , below, for further information regarding our use and monitoring of wholesale funds.
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Preferred Stock
The Corporation has 12,500 shares, or $12.5 million in aggregate liquidation preference, of 7.0% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, with a liquidation preference of $1,000 per share (the “Series A Preferred Stock”) outstanding as of March 31, 2026 and December 31, 2025.
The Corporation expects to pay dividends on the Series A Preferred Stock when and if declared by its Board, at a fixed rate of 7.0% per annum, payable quarterly, in arrears, on March 15, June 15, September 15 and December 15 of each year up to, but excluding, March 15, 2027. For each dividend period from and including March 15, 2027, dividends will be paid at a floating rate of Three-Month Term SOFR plus a spread of 539 basis points per annum. During the three months ended March 31, 2026, the Corporation paid $219,000 in cash dividends with respect to the Series A Preferred Stock. The Series A Preferred Stock is perpetual and has no stated maturity. The Corporation may redeem the Series A Preferred Stock at its option at a redemption price equal to $1,000 per share, plus any declared and unpaid dividends (without regard to any undeclared dividends), subject to regulatory approval, on or after March 15, 2027 or within 90 days following a regulatory capital treatment event, in accordance with the terms of the Series A Preferred Stock.
Derivatives
The Board approved Bank policies allow the Bank to participate in hedging strategies or to use financial futures, options, forward commitments, or interest rate swaps. The Bank utilizes, from time to time, derivative instruments in the course of its asset/liability management. The Bank’s derivative financial instruments, under which the Bank is required to either receive cash from or pay cash to counterparties depending on changes in interest rates applied to notional amounts, are carried at fair value on the consolidated balance sheets.
As of March 31, 2026, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was approximately $1.207 billion, compared to $1.167 billion as of December 31, 2025. We receive fixed rates and pay floating rates based upon designated benchmark interest rates on the swaps with commercial borrowers. These swaps mature between June 2026 and July 2041. Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements. As of March 31, 2026, the commercial borrower swaps were reported on the Unaudited Consolidated Balance Sheets as a derivative asset of $6.2 million and liability of $35.5 million compared to a derivative asset of $9.7 million and liability of $34.6 million as of December 31, 2025. On the offsetting swap contracts with dealer counterparties, we pay fixed rates and receive floating rates based upon designated benchmark interest rates. These interest rate swaps also have maturity dates between June 2026 and July 2041. Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and were reported on the Unaudited Consolidated Balance Sheets as a net derivative asset of $29.3 million as of March 31, 2026, compared to a net derivative asset of $24.9 million as of December 31, 2025. The gross amounts of the fair value of the dealer counterparty swaps as of March 31, 2026, without regard to the enforceable master netting agreement, was a gross derivative liability of $6.2 million and gross derivative asset of $35.5 million, compared to a gross derivative liability of $9.7 million and gross derivative asset of $34.6 million as of December 31, 2025.
The Bank also enters into interest rate swaps to manage interest rate risk and reduce the cost of match-funding certain long-term fixed rate loans. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Bank making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. The instruments are designated as cash flow hedges as the receipt of floating rate interest from the counterparty is used to manage interest rate risk associated with forecasted interest payments on short-term FHLB advances or wholesale deposits. The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affect earnings. As of March 31, 2026, the aggregate notional value of interest rate swaps designated as cash flow hedges was $492.5 million. These interest rate swaps mature between April 2026 and February 2041. A pre-tax unrealized gain of $2.7 million was recognized in other comprehensive income for the three months ended March 31, 2026, and there was no ineffective portion of these hedges.
The Bank also enters into interest rate swaps to mitigate market value volatility on certain long-term fixed securities. The objective of the hedge is to protect the Corporation against changes in fair value due to changes in benchmark interest rates. The instruments are designated as fair value hedges as the changes in the fair value of the interest rate swap are expected to offset changes in the fair value of the hedged item attributable to changes in the SOFR swap rate, the designated benchmark interest rate. These
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derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Bank making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affect earnings. As of March 31, 2026, the aggregate notional value of interest rate swaps designated as fair value hedges was $12.5 million. These interest rate swaps mature between February 2031 and October 2034. A pre-tax unrealized gain of $39,000 was recognized in other comprehensive income for the three months ended March 31, 2026, and there was no ineffective portion of these hedges.
For further information and discussion of our derivatives, see Note 13 — Derivative Financial Instruments of the Consolidated Financial Statements.
Asset Quality
Non-performing Assets
Total non-performing assets consisted of the following at March 31, 2026 and December 31, 2025, respectively:
March 31,
2026
December 31,
2025
(Dollars in Thousands)
Non-accrual loans and leases
Commercial real estate:
Commercial real estate - owner occupied
$
—
$
—
Commercial real estate - non-owner occupied
—
—
Construction and land development
11,424
14,581
Multi-family
4,204
4,292
1-4 family
—
—
Total non-accrual commercial real estate
15,628
18,873
Commercial and industrial
24,875
24,982
Consumer and other
—
—
Total non-accrual loans and leases
40,503
43,855
Repossessed assets, net
—
—
Total non-performing assets
$
40,503
$
43,855
Total non-accrual loans and leases to gross loans and leases
1.16
%
1.30
%
Total non-accrual loans to gross loans and leases plus repossessed assets, net
1.16
1.30
Total non-performing assets to total assets
0.94
1.07
Allowance for credit losses to gross loans and leases
1.10
1.12
Allowance for credit losses to non-accrual loans and leases
95.03
85.95
Non-performing assets decreased $3.4 million, to $40.5 million at March 31, 2026, compared to $43.9 million at December 31, 2025. The Corporation’s non-accrual loans as a percentage of total gross loans and leases measured 1.16% and 1.30% at March 31, 2026 and December 31, 2025, respectively. The decline was primarily due to the sale at par of a land development CRE non-accrual loan within a previously identified southeast Wisconsin-based client relationship.
We use a wide variety of available metrics to assess the overall asset quality of the portfolio and no one metric is used independently to make a final conclusion as to the asset quality of the portfolio. Non-performing assets as a percentage of total assets were 0.94% and 1.07% at March 31, 2026 and December 31, 2025, respectively. As of March 31, 2026 and December 31, 2025, the payment performance of our loans and leases did not indicate any new areas of concern, as 98.8% and 98.7%, respectively, of the total portfolio at the end of each period was in current payment status.
We reviewed loans and leases with exposure to certain industries as of March 31, 2026:
• Transportation, Equipment Finance: $18.1 million, or 0.5%, of total loans - Management considered the following: $1.5 million, or 8.5%, of Equipment Finance Transportation loans are rated Category IV. Due to our experience and forecast of continued sector stress, we are not currently originating new loans to this borrower profile in this lending niche. Based on our reserve methodology for individually and collectively evaluated loans, we believe our reserves related to this industry to be
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appropriate.
• Transportation, excluding Equipment Finance: $44.1 million or 1.3% of total loans - Management considered the following: One borrower with a balance of $5.7 million, or 13.0%, of the loan balance in this category is rated Category IV. Collateral on these loans includes commercial real estate, business assets, and equipment. Based on our reserve methodology for individually and collectively evaluated loans, we believe our reserves related to this industry to be appropriate.
• Office, Commercial Real Estate: $302.6 million, or 8.6%, of total loans - Management considered the following: office exposure is concentrated in the Wisconsin markets where local market vacancy rates are below national rates and none of the loans in this category are rated Category IV. Based on our reserve methodology for individually and collectively evaluated loans, we believe our reserves related to this loan category to be appropriate.
• Multifamily, Commercial Real Estate: $568.9 million, or 16.2%, of total loans - Management considered the following: multifamily exposure is concentrated in the Wisconsin markets where local market vacancy rates are below national rates and none of the loans in this category are rated Category IV. Based on our reserve methodology for individually and collectively evaluated loans, we believe our reserves related to this loan category to be appropriate.
We also monitor asset quality through our established categories as defined in Note 5 – Loans, Lease Receivables, and Allowance for Credit Losses of the Consolidated Financial Statements. As we continue to actively monitor the credit quality of our loan and lease portfolios, we may identify additional loans and leases for which the borrowers or lessees are having difficulties making the required principal and interest payments based upon factors including, but not limited to, the inability to sell the underlying collateral, inadequate cash flow from the operations of the underlying businesses, liquidation events, or bankruptcy filings. We proactively work with our loan borrowers experiencing financial difficulty to find meaningful solutions to difficult situations that are in the best interests of the Bank.
As of March 31, 2026, as well as in all previous reporting periods, there were no loans over 90 days past due and still accruing interest. Loans and leases greater than 90 days past due are placed on non-accrual status and individually evaluated for reserve requirement. Cash received while a loan or a lease is on non-accrual status is generally applied solely against the outstanding principal. If collectability of the contractual principal and interest is not in doubt, payments received may be applied to both interest and principal.
The following represents additional information regarding our non-accrual loans and leases:
As of and for the Three Months
Ended March 31,
As of and
for the
Year Ended
December 31,
2026
2025
2025
(In Thousands)
Individually evaluated loans and leases with no specific reserves required
$
25,416
$
10,570
$
29,525
Individually evaluated loans and leases with specific reserves required
15,087
13,486
14,330
Total individually evaluated loans and leases
40,503
24,056
43,855
Less: Specific reserves (included in allowance for credit losses)
5,931
6,423
5,550
Net carrying value of non-accrual loans and leases
$
34,572
$
17,633
$
38,305
Average non-accrual loans and leases
$
45,198
$
27,228
$
26,567
Allowance for Credit Losses
The allowance for credit losses, including unfunded commitment reserves, increased $797,000, or 2.1%, to $38.5 million as of March 31, 2026 from $37.7 million as of December 31, 2025. The allowance for credit losses as a percentage of gross loans and leases was 1.10% as of March 31, 2026 compared to 1.12% as of December 31, 2025.
During the three months ended March 31, 2026, we recorded net charge-offs of $2.2 million, comprised of $2.3 million of charge-offs and $168,000 of recoveries, compared to net charge-offs of $3.4 million, comprised of $3.8 million of charge-offs and $398,000 of recoveries during the three months ended March 31, 2025. Charge-offs on Equipment Finance loans were higher in the
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three months ended March 31, 2025 due to a change in policy which accelerated charge-offs by approximately one quarter. Management believes this change better reflects the impact of an accelerated collection and liquidation process. We will continue to experience some level of periodic charge-offs in the future as exit strategies are considered and executed. Loans and leases with previously established specific reserves may ultimately result in a charge-off under a variety of scenarios.
As of March 31, 2026 and December 31, 2025, our ratio of allowance for credit losses to total non-accrual loans and leases was 95.0% and 86.0%, respectively. This ratio increased primarily due to a decrease in non-accrual loans primarily driven by the sale of a non-accrual loan and increase in ACL reserves primarily driven by an increase in general reserves due to loan growth. Non-accrual loans and leases exhibit weaknesses that inhibit repayment in compliance with the original terms of the note or lease; however, the evaluation of non-accrual loans and leases may not always result in a specific reserve included in the allowance for credit losses.
When it is determined that we will not receive our entire contractual principal or the loss is confirmed, we record a charge against the allowance for credit loss reserve to bring the loan or lease to its net realizable value. It is typically part of our process to obtain appraisals on individually evaluated loans and leases that are primarily secured by real estate. As we complete new appraisals and/or market evaluations, in specific situations current fair values collateralizing certain collateral-dependent loans are inadequate to support the entire amount of the outstanding debt.
As a result of our review process, we have concluded an appropriate allowance for credit losses for the funded and unfunded loan and lease portfolio was $38.5 million, or 1.10% of gross loans and leases, at March 31, 2026 compared to $37.7 million, or 1.12% of gross loans and leases, at December 31, 2025. The decrease in this ratio is due to lower general reserves as a percentage of total loans primarily due to lower qualitative factors. Given the ongoing complexities with current workout situations and the uncertainty surrounding future economic conditions, further charge-offs, and increased provisions for credit losses may be recorded if additional facts and circumstances lead us to a different conclusion. Various federal and state regulatory agencies review the allowance for credit losses. These agencies could require certain loan and lease balances to be classified differently or charged off when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination.
The following represents additional information regarding our allowance for credit losses:
As of
March 31,
2026
December 31,
2025
September 30,
2025
June 30,
2025
(In Thousands)
% of Total
Loans and
Leases
(In Thousands)
% of Total
Loans and
Leases
(In Thousands)
% of Total
Loans and
Leases
(In Thousands)
% of Total
Loans and
Leases
Allowance for credit losses:
Loans collectively evaluated
$30,700
0.88%
$30,327
0.90%
$31,065
0.93%
$30,685
0.94%
Loans individually evaluated
5,931
0.17%
5,550
0.16%
5,625
0.17%
6,176
0.19%
Unfunded commitments reserve
1,858
1,815
1,692
1,349
Total
38,489
1.10%
37,692
1.12%
38,382
1.15%
38,210
1.18%
Loans and lease receivables:
$3,498,903
$3,373,241
$3,334,956
$3,250,925
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The following is a summary of the activity in the allowance for credit losses:
As of and for the Three
Months Ended March 31,
2026
2025
(Dollars in Thousands)
Allowance at beginning of period
$
37,692
$
37,268
Charge-offs:
Commercial real estate:
Commercial real estate — owner occupied
—
—
Commercial real estate — non-owner occupied
—
—
Construction and land development
—
—
Multi-family
—
—
1-4 family
—
—
Commercial and industrial
(2,331
)
(3,800
)
Consumer and other
—
(10
)
Total charge-offs
(2,331
)
(3,810
)
Recoveries:
Commercial real estate:
Commercial real estate — owner occupied
—
2
Commercial real estate — non-owner occupied
—
—
Construction and land development
—
—
Multi-family
—
—
1-4 family
7
6
Commercial and industrial
161
390
Consumer and other
—
—
Total recoveries
168
398
Net charge-offs
(2,163
)
(3,412
)
Provision for credit losses
2,960
2,659
Allowance at end of period
$
38,489
$
36,515
Components:
Allowance for credit losses on loans
$
36,631
$
35,236
Allowance for credit losses on unfunded credit commitments
1,858
1,279
Total ACL
$
38,489
$
36,515
Annualized net charge offs (recoveries) as a percentage of average gross loans and leases
0.25
%
0.43
%
Liquidity and Capital Resources
The Corporation expects to meet its liquidity needs through existing cash on hand, established cash flow sources, its third-party senior line of credit, and dividends received from the Bank. While the Bank is subject to certain generally applicable regulatory limitations regarding its ability to pay dividends to the Corporation, we do not believe that the Corporation will be adversely affected by these dividend limitations. The Corporation’s principal liquidity requirements at March 31, 2026 were the interest payments due on subordinated notes and debentures and cash dividends payable to both common and preferred stockholders. The capital ratios of the Bank met all applicable regulatory capital adequacy requirements in effect on March 31, 2026. The Corporation’s Board and management teams adhere to the appropriate regulatory guidelines on decisions which affect their capital positions, including but not limited to, decisions relating to the payment of dividends and increasing indebtedness.
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The Bank maintains liquidity by obtaining funds from several sources. The Bank’s primary sources of funds are principal and interest payments on loans receivable and mortgage-related securities, deposits, and other borrowings, such as federal funds, and FHLB advances. The scheduled payments of loans and mortgage-related securities are generally a predictable source of funds. Deposit flows and loan prepayments, however, are influenced by market interest rates, economic and industry conditions, and competition.
Sources of liquidity
As of
(in thousands)
March 31,
2026
December 31,
2025
September 30,
2025
June 30,
2025
March 31,
2025
Short-term investments
$
104,565
$
8,714
$
8,074
$
72,520
$
136,033
Collateral value of unencumbered
pledged loans
968,320
992,398
906,042
893,499
973,494
Market value of unencumbered securities
387,700
388,474
376,783
347,196
324,365
Readily accessible liquidity
1,460,585
1,389,586
1,290,899
1,313,215
1,433,892
Fed fund lines
45,000
45,000
45,000
45,000
45,000
Excess brokered CD capacity 1
806,268
775,851
732,951
645,843
477,468
Total liquidity
$
2,311,853
$
2,210,437
$
2,068,850
$
2,004,058
$
1,956,360
Total uninsured deposits, net of collateralized deposits
1,177,731
1,151,521
1,028,307
1,001,519
1,046,003
(1) Bank internal policy limits brokered CDs to 50% of total bank funding when combined with value of unencumbered pledged loans.
We view readily accessible liquidity as a critical measure of our ability to meet our cash and collateral obligations. We define our readily accessible liquidity as the total of our short-term investments, our unencumbered securities available-for-sale, and our unencumbered pledged loans. Our readily accessible liquidity increased $71.0 million from December 31, 2025 due primarily to an increase in short-term investments. Any excess funds not used for loan funding or satisfying other cash obligations were maintained as part of our readily accessible liquidity in our interest-bearing accounts with the FRB, as we value the safety and soundness provided by the FRB. We plan to utilize excess liquidity to fund loan and lease portfolio growth, pay down maturing debt, allow run off of maturing wholesale certificates of deposit or invest in securities to maintain adequate liquidity.
We had $1.019 billion of outstanding wholesale funds at March 31, 2026, compared to $904.7 million of wholesale funds as of December 31, 2025, which represented 26.7% and 25.3%, respectively, of ending balance total bank funding. Wholesale funds include FHLB advances and brokered deposits. Total bank funding is defined as total deposits plus FHLB advances. We are committed to raising core deposits while utilizing wholesale funds to mitigate interest rate risk. Wholesale funds continue to be an efficient and cost effective source of funding for the Bank and allows it to gather funds across a larger geographic base at price levels and maturities that are more attractive than local time deposits when required to raise a similar level of core deposits within a short time period. Access to such deposits and borrowings allows us the flexibility to refrain from pursuing single service deposit relationships in markets that have experienced unfavorable pricing levels. The administrative costs associated with wholesale funds are considerably lower than those that would be incurred to administer a similar level of core deposits with a similar maturity structure. Term wholesale funds are stable as each issuance has a structured maturity date and may only be redeemed in certain limited circumstances. Non-maturity wholesale deposits are also stable as the Bank has developed relationships with reliable providers and the term of the deposit is typically agreed upon by both parties. During the time frames necessary to accumulate wholesale funds in an orderly manner, we will use short-term FHLB advances to meet our temporary funding needs. The short-term FHLB advances will typically have terms of one week to one month to cover the overall expected funding demands.
We will continue to use term wholesale funds in specific maturity periods, typically three to five years, needed to effectively mitigate the interest rate risk measured through our asset/liability management process or in shorter time periods if core deposit balances decline. In order to provide for ongoing liquidity and funding, none of our wholesale certificates of deposit allow for withdrawal at the option of the depositor before the stated maturity date and FHLB advances have contractual maturity terms. The Bank limits the percentage of wholesale funds to total bank funds in accordance with liquidity policies approved by its Board. The Bank was in compliance with its policy limits as of March 31, 2026.
The Bank was able to access the wholesale funding market as needed at rates and terms comparable to market standards during the quarter ended March 31, 2026. In the event that there is a disruption in the availability of wholesale funds at maturity, the
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Bank has managed the maturity structure, in compliance with our approved liquidity policy, so at least one year of maturities could be funded through readily accessible liquidity. These potential funding sources include deposits maintained at the FRB or Federal Reserve Discount Window utilizing currently unencumbered securities and acceptable loans as collateral. As of March 31, 2026, the accessible liquidity was in excess of the stated policy minimum. We believe the Bank will also have access to the unused federal funds lines, cash flows from borrower repayments, and cash flows from security maturities. The Bank also has the ability to raise local market deposits by offering attractive rates to generate the level required to fulfill its liquidity needs.
The Corporation has a shelf registration statement on file with the Securities and Exchange Commission that would allow the Corporation to offer and sell, from time to time and in one or more offerings, up to $100.0 million in aggregate initial offering price of common and preferred stock, debt securities, warrants, units, or depository shares, or any combination thereof. The Corporation has in recent years, and may from time to time in the future, raise capital through the sale of debt or equity securities in private placements exempt from registration under federal securities laws .
During the three months ended March 31, 2026, operating activities resulted in a net cash inflow of $3.1 million, which included net income of $12.2 million. Net cash used by investing activities for the three months ended March 31, 2026 was $138.5 million primarily due to net loan disbursements, investments made in securities available for sale, and additional investments in tax credit investments. Net cash provided by financing activities was $233.1 million for the three months ended March 31, 2026 primarily due to a net increase in deposits and FHLB advances. Please refer to the Unaudited Consolidated Statements of Cash Flows included in PART I., Item 1 for further details regarding significant sources of cash flow for the Corporation.
Contractual Obligations and Off-Balance Sheet Arrangements
As of March 31, 2026, there were no material changes to our contractual obligations and off-balance sheet arrangements disclosed in our Annual Report on Form 10-K for the year ended December 31, 2025. We continue to believe that we have adequate capital and liquidity accessible from various sources to fund projected contractual obligations and commitments.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.