What changed in this filing

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Item 1. Financial Statements

2022-04-29 compared with 2021-10-29 · 283 added, 315 removed, 1103 unchanged (35% of the section changed)

2 unchanged sentences

Consolidated Balance Sheets

September 30,

2022 December 31,

27 unchanged sentences

Stockholders’ equity:

Preferred stock, $ 0.01 par value, 2,500,000 shares authorized, no ne issued or outstanding

Common stock, $ 0.01 par value, 25,000,000 shares authorized, 9,325,746 and 9,234,460 shares issued, 8,483,099 and 8,566,960 shares outstanding at September 30, 2021 and December 31, 2020, respectively

Preferred stock, Series A;

$ 0.01 par value, 7 % non-cumulative perpetual preferred stock liquidation preference $ 1,000 per share, 2,500,000 shares authorized, 12,500 and no shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively

Common stock, $ 0.01 par value, 25,000,000 shares authorized, 9,340,223 and 9,326,361 shares issued, 8,488,585 and 8,457,564 shares outstanding at March 31, 2022 and December 31, 2021, respectively

Additional paid-in capital 85,443 85,797

1 unchanged sentence

Accumulated other comprehensive loss ( 7,863 ) ( 1,457 )

Treasury stock, 842,647 and 667,500 shares at September 30, 2021 and December 31, 2020, respectively, at cost

Treasury stock, 851,638 and 868,797 shares at March 31, 2022 and December 31, 2021, respectively, at cost

( 21,637 ) ( 22,031 )

2 unchanged sentences

See accompanying Notes to Unaudited Consolidated Financial Statements.

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First Business Financial Services, Inc.

Consolidated Statements of Income (Unaudited)

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2021 2020 2021 2020

For the Three Months Ended March 31,

(In Thousands, Except Per Share Data)

18 unchanged sentences

Increase in cash surrender value of bank-owned life insurance

357 365 1,056 1,037

Net gain (loss) on sale of securities — — 29 ( 4 )

Swap fees 225 684

11 unchanged sentences

Collateral liquidation costs 16 94

Net loss (gain) on foreclosed properties 6 ( 121 ) 7 329

Impairment of tax credit investments — 113 — 2,066

SBA recourse (benefit) provision ( 69 ) 57 45 53

Loss on early extinguishment of debt — — — 744

Net loss on foreclosed properties 12 3

Other non-interest expense 513 274

8 unchanged sentences

See accompanying Notes to Unaudited Consolidated Financial Statements.

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First Business Financial Services, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2021 2020 2021 2020

For the Three Months Ended March 31,

(In Thousands)

Net income $ 8,672 $ 9,731

Other comprehensive income (loss), before tax

Other comprehensive loss

Securities available-for-sale:

Unrealized securities (losses) gains arising during the period ( 1,457 ) ( 377 ) ( 3,033 ) 3,860

Reclassification adjustment for net (gain) loss realized in net income — — ( 29 ) 4

Unrealized securities losses arising during the period ( 12,481 ) ( 2,238 )

Securities held-to-maturity:

1 unchanged sentence

Interest rate swaps:

Unrealized gains (losses) on interest rate swaps arising during the period 520 389 2,338 ( 3,654 )

Income tax benefit (expense) 238 ( 6 ) 180 ( 62 )

Total other comprehensive (loss) income ( 692 ) 16 ( 522 ) 178

Unrealized gains on interest rate swaps arising during the period 3,869 2,089

Income tax benefit 2,201 36

Total other comprehensive loss ( 6,406 ) ( 105 )

Comprehensive income $ 2,266 $ 9,626

See accompanying Notes to Unaudited Consolidated Financial Statements.

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First Business Financial Services, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

Common Shares Outstanding Common

Common Shares Outstanding Preferred Stock Common

Stock Additional

6 unchanged sentences

Net income — — — — 9,731 — — 9,731

Other comprehensive income

— — — — 663 — 663

Share-based compensation - restricted shares, net

63,684 — 417 — — — 417

Cash dividends ($ 0.165 per share)

— — — ( 1,410 ) — — ( 1,410 )

Treasury stock purchased ( 58,594 ) — — — — ( 1,447 ) ( 1,447 )

Balance at March 31, 2020 8,571,134 $ 92 $ 81,605 $ 130,973 $ ( 685 ) $ ( 16,328 ) $ 195,657

Net income — — — 3,323 — — 3,323

Other comprehensive loss — — — — — ( 105 ) — ( 105 )

Share-based compensation - restricted shares, net 5,357 — 516 — — — 516

Cash dividends ( $ 0.165 per share)

— — — ( 1,414 ) — — ( 1,414 )

Treasury stock purchased ( 1,357 ) — — — — ( 19 ) ( 19 )

Balance at June 30, 2020 8,575,134 $ 92 $ 82,121 $ 132,882 $ ( 1,186 ) $ ( 16,347 ) $ 197,562

Net income — — — 4,293 — — 4,293

Other comprehensive loss — — — — 16 — 16

Share-based compensation - restricted shares, net

( 4,410 ) — 499 — — — 499

Share-based compensation - restricted shares and employee stock purchase plan 84,255 — 1 530 — — — 531

Issuance of common stock under the employee stock purchase plan 1,775 — — 39 — — — 39

Cash dividends ($ 0.18 per share)

1 unchanged sentence

Treasury stock purchased ( 14,795 ) — — — — — ( 326 ) ( 326 )

Balance at September 30, 2020 8,561,714 $ 92 $ 82,620 $ 135,760 $ ( 1,170 ) $ ( 16,517 ) $ 200,785

Common Shares Outstanding Common

Balance at March 31, 2021 8,638,195 $ — $ 93 $ 83,694 $ 148,621 $ ( 1,038 ) $ ( 16,879 ) $ 214,491

Common Shares Outstanding Preferred Stock Common

Stock Additional

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Other comprehensive loss — — — — — ( 6,406 ) — ( 6,406 )

Issuance of preferred stock, net of issuance costs — 11,992 — — — — — 11,992

Share-based compensation - restricted shares and employee stock purchase plan 47,864 — 1 608 — — — 609

Issuance of common stock under the employee stock purchase plan 1,380 — — 40 — — — 40

Treasury stock re-issued — — — ( 1,002 ) — — 1,002 —

Cash dividends ($ 0.1975 per share)

2 unchanged sentences

Balance at March 31, 2022 8,488,585 $ 11,992 $ 94 $ 85,443 $ 177,022 $ ( 7,863 ) $ ( 21,637 ) $ 245,051

Net income — — — 8,235 — — 8,235

Other comprehensive income — — — — 275 — 275

Share-based compensation - restricted shares and employee stock purchase plan 1,421 — 607 — — — 607

Issuance of common stock under the employee stock purchase plan 1,694 — 42 — — — 42

Cash dividends ($ 0.18 per share)

— — — ( 1,556 ) — — ( 1,556 )

Treasury stock purchased ( 23,549 ) — — — — ( 642 ) ( 642 )

Balance at June 30, 2021 8,617,761 $ 93 $ 84,343 $ 155,300 $ ( 763 ) $ ( 17,521 ) $ 221,452

Net income — — — 9,198 — — 9,198

Other comprehensive loss — — — — ( 692 ) — ( 692 )

Share-based compensation - restricted shares and employee stock purchase plan 651 — 578 — — — 578

Issuance of common stock under the employee stock purchase plan 1,490 — 38 — — — 38

Cash dividends ($ 0.18 per share)

— — — ( 1,546 ) — — ( 1,546 )

Treasury stock purchased ( 136,803 ) — — — — ( 3,748 ) ( 3,748 )

Balance at September 30, 2021 8,483,099 $ 93 $ 84,959 $ 162,952 $ ( 1,455 ) $ ( 21,269 ) $ 225,280

See accompanying Notes to Unaudited Consolidated Financial Statements.

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First Business Financial Services, Inc.

Consolidated Statements of Cash Flows (Unaudited)

For the Nine Months Ended September 30,

For the Three Months Ended March 31,

(In Thousands)

3 unchanged sentences

Deferred income taxes, net ( 1,209 ) ( 1,242 )

Impairment of tax credit investments — 2,066

Provision for loan and lease losses ( 855 ) ( 2,068 )

SBA recourse provision 45 53

Derivative credit valuation adjustment — ( 170 )

Depreciation, amortization and accretion, net 1,062 956

Loss on disposal of equipment 68 —

Share-based compensation 609 531

Net (gain) loss on sale of securities ( 29 ) 4

Increase in bank-owned life insurance policies ( 349 ) ( 350 )

3 unchanged sentences

Net loss on foreclosed properties, including impairment valuation 12 3

Loan servicing right impairment valuation ( 78 ) ( 3 )

Excess tax benefit (expense) from share-based compensation 158 ( 7 )

Returns on investments in limited partnerships 147 —

Payments on operating lease liabilities ( 408 ) ( 393 )

Payments received on operating leases 45 39

Net increase in accrued interest receivable and other assets ( 4,834 ) ( 52,492 )

Net decrease (increase) in accrued interest receivable and other assets 93 ( 4,979 )

Net (decrease) increase in accrued interest payable and other liabilities ( 7,031 ) 2,659

3 unchanged sentences

Proceeds from maturities, redemptions, and paydowns of held-to-maturity securities 2,470 1,580

Proceeds from sale of available-for-sale securities 14,955 839

Purchases of available-for-sale securities ( 39,760 ) ( 9,030 )

Proceeds from sale of foreclosed properties 35 —

Net decrease (increase) in loans and leases 23,969 ( 456,933 )

Net increase in loans and leases ( 11,653 ) ( 86,613 )

Investments in limited partnerships ( 362 ) —

Returns of investments in limited partnerships — 60

Investment in historic development entities — ( 259 )

Distribution from historic development entities — 49

Investment in low-income housing ( 1,307 ) —

Investment in Federal Home Loan Bank and Federal Reserve Bank stock ( 6,314 ) ( 13,422 )

Investment in low-income housing entities ( 649 ) ( 1,307 )

Investment in Federal Home Loan Bank stock ( 5,661 ) ( 3,614 )

Proceeds from the sale of Federal Home Loan Bank stock 6,134 2,250

1 unchanged sentence

Purchases of bank-owned life insurance policies ( 25 ) —

Net cash provided (used) in investing activities 14,496 ( 470,059 )

Proceeds from redemption of Trust II stock 315 —

Net cash used in investing activities ( 40,085 ) ( 79,492 )

Financing activities

2 unchanged sentences

Repayment of Federal Home Loan Bank advances ( 464,200 ) ( 269,000 )

Loss on early extinguishment of debt — 744

Proceeds from the Federal Reserve Paycheck Protection Program Lending Facility — 29,605

Net increase in long-term borrowed funds 11,633 41

Proceeds from issuance of subordinated notes payable 20,000 —

Repayment of junior subordinated notes payable ( 10,076 ) —

Net (decrease) increase in long-term borrowed funds ( 1,569 ) 7,954

Cash dividends paid ( 1,670 ) ( 1,541 )

Proceeds from issuance of common stock under ESPP 40 39

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Proceeds from issuance of preferred stock 11,992 —

Purchase of treasury stock ( 608 ) ( 326 )

Net cash provided by financing activities 76,480 74,628

Net increase (decrease) in cash and cash equivalents 53,715 ( 15,374 )

Net increase in cash and cash equivalents 38,493 1,965

Cash and cash equivalents at the beginning of the period 57,110 56,909

4 unchanged sentences

Income taxes paid 17 32

Non-cash investing and financing activities:

Right-of-use assets obtained in exchange for operating lease liabilities 316 190

Transfer from loans and leases to foreclosed properties 145 80

See accompany Notes to Unaudited Consolidated Financial Statements

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Notes to Unaudited Consolidated Financial Statements

8 unchanged sentences

The Bank is subject to competition from other financial institutions and service providers, and is also subject to state and federal regulations.

FBB has the following wholly-owned subsidiaries:

First Business Specialty Finance, LLC (“FBSF”), First Madison Investment Corp.

(“FMIC”), ABKC Real Estate, LLC (“ABKC”), FBB Real Estate 2, LLC (“FBB RE 2”), Rimrock Road Investment Fund, LLC (“Rimrock Road”), BOC Investment, LLC (“BOC”), Mitchell Street Apartments Investment, LLC (“Mitchell Street”), and FBB Tax Credit Investment, LLC (“FBB Tax Credit”).

FMIC is located in and was formed under the laws of the state of Nevada.

As of March 31, 2022, FBB had the following wholly-owned subsidiaries:

First Business Specialty Finance (“FBSF”), First Madison Investment Corp.

(“FMIC”), ABKC Real Estate, LLC (“ABKC”), FBB Real Estate 2, LLC (“FBB RE 2”), BOC Investment, LLC (“BOC”), Mitchell Street Apartments Investment, LLC (“Mitchell Street”), and FBB Tax Credit Investment, LLC (“FBB Tax Credit”).

Basis of Presentation

3 unchanged sentences

All significant intercompany balances and transactions have been eliminated in consolidation.

In accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 810, the Corporation’s ownership interest in FBFS Statutory Trust II (“Trust II”) has not been consolidated into the financial statements.

In accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 810, the Corporation’s ownership interest in FBFS Statutory Trust II (“Trust II”) was not consolidated into the financial statements.

Management of the Corporation is required to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period.

Actual results could differ significantly from those estimates.

Material estimates that could significantly change in the near-term include the value of securities and interest rate swaps, level of the allowance for loan and lease losses, lease residuals, property under operating leases, goodwill, level of the Small Business Administration (“SBA”) recourse reserve, and income taxes.

The results of operations for the three and nine months ended September 30, 2021, are not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, 2021.

The results of operations for the three months ended March 31, 2022, are not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, 2022.

Certain amounts in prior periods may have been reclassified to conform to the current presentation.

3 unchanged sentences

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued ASU No.

2016-13, “ Financial Instruments- Credit Losses (Topic 326), ” which is often referred to as CECL.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No.

2016-13, “ Financial Instruments- Credit Losses (Topic 326), ” which is often referred to as Current Expected Credit Losses (“CECL”).

The ASU replaces the incurred loss impairment methodology for recognizing credit losses with a methodology that reflects all expected credit losses.

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The Corporation has established a cross-functional committee and has implemented a third-party software solution to assist with the adoption of the standard.

Management has gathered all necessary

data and reviewed potential methods to calculate the expected credit losses.

Management is currently calculating sample expected loss computations and developing the allowance methodology and assumptions that will be used under the new standard.

Management has gathered all necessary data and reviewed potential methods to calculate the expected credit losses.

Management is currently calculating sample expected loss computations and developing the allowance

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methodology and assumptions that will be used under the new standard.

Management will continue to progress on its implementation project plan and improve the Corporation’s approach throughout the deferral period.

2 unchanged sentences

Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform.

The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.

The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued.

It is intended to help stakeholders during the global market-wide reference rate transition period.

3 unchanged sentences

The Corporation expects to utilize the LIBOR transition relief allowed under ASU 2020-04 and ASU 2020-01, as applicable, and does not expect such adoption to have a material impact on its accounting and disclosures.

The Corporation will continue to assess the impact as the reference rate transition occurs over the next two years.

In August 2021, the FASB issued Accounting Standards Update (ASU) No.

The Corporation expects to adopt the LIBOR transition relief allowed under this standard, and does not expect such adoption to have a material impact on the consolidated financial statements.

In August 2021, the FASB issued ASU No.

2021-06 “Presentation of Financial Statements (Topic 205), Financial Services-Depository and Lending (Topic 942), and Financial Services-Investment Companies (Topic 946):

6 unchanged sentences

The Corporation is assessing the impact of ASU 2021-06 and its impact on its disclosures.

Note 2 — Other Events

On March 11, 2020, the World Health Organization declared COVID-19, the disease caused by the novel coronavirus, a pandemic as a result of the global spread of the coronavirus illness.

In response to the outbreak, federal and state authorities in the U.S.

introduced various measures to try to limit or slow the spread of the virus, including travel restrictions, nonessential business closures, stay-at-home orders, and strict social distancing.

The Corporation activated its Pandemic Preparedness Plan to protect the health of employees and clients, which included temporarily limiting lobby hours and transitioning the vast majority of the Corporation’s workforce to remote work.

The Corporation did not incur any significant disruptions to its business activities during this time of transition and extended remote work.

The second half of 2020 saw improvements in economic trends, but continued waves of new cases of COVID-19 created continued uncertainty in the economic environment.

However, at the end of the fourth quarter of 2020 and into the first quarter of 2021, the rollout of new vaccines and the ratification of two additional stimulus laws resulted in lower infection rates and significant improvement in the outlook of the economy.

In the second quarter of 2021, the Corporation communicated return to office plans to employees.

Based on the national and local guidelines, the Corporation developed a phased-in approach for returning to the office.

Under this phased-in approach, employees began returning to office in early June 2021.

The return to office included enhanced safety protocols and processes to provide the best working environment possible for employees.

The full long-term impact of the COVID-19 pandemic is unknown and continues to evolve.

It has caused substantial disruption in international and U.S.

economies, markets, and employment.

The outbreak has had a significant adverse impact on certain industries the Corporation serves, including retail, restaurants and food services, hospitality, and entertainment.

As of September 30, 2021, the Corporation’s aggregate outstanding exposure in these segments was $ 189.8 million, or 9.2 % of the Corporation’s gross loans and leases less Paycheck Protection Program (“PPP”) loans.

Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its effects on clients and prospects, and on the national and local economy as a whole, there can be no assurances as to the future effect of the ongoing pandemic on the Corporation’s loan portfolio.

The Corporation provided loan payment deferrals for certain borrowers impacted by COVID-19 who were current in their payments at the inception of the Corporation’s loan modification program.

As of September 30, 2021, the Corporation had five deferral requests outstanding, representing $ 24.1 million in total loans, or 1.2 % of gross loans and leases, excluding PPP loans, compared to $ 27.0 million, or 1.4 % of gross loans and leases, excluding PPP loans as of December 31, 2020.

Of the $ 24.1 million of deferred loans outstanding as of September 30, 2021, $ 23.5 million relate to three hospitality credits which received

principal deferrals and are accruing interest and current on interest payments.

For loans subject to the program, each borrower is required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts will be moved to the end of the loan term.

The loans will not be reported as past due during the deferral period.

On December 27, 2020, the Consolidated Appropriations Act, 2021 (“CAA”) was signed into law.

The CAA is a $2.3 trillion spending bill that combined $900 billion in stimulus relief for the COVID-19 pandemic in the United States with a $1.4 trillion omnibus spending bill for the 2021 federal fiscal year and prevented a government shutdown.

The CAA allowed for a second draw for certain businesses under the PPP.

Like the original program, loan proceeds were available to help fund payroll and group health benefit costs, as well as certain mortgage interest, rent and utilities.

In addition, authorized costs also included COVID-19 related worker protection costs, uninsured property damage costs due to looting or vandalism during 2020 and certain supplier costs and expenses for operations.

The CAA also expanded benefit costs to include group dental, vision, life and disability benefits.

All of these changes are generally retroactive to the original CARES Act, meaning that the changes may be taken into account in processing loan forgiveness with respect to an original PPP loan.

The Corporation accepted and processed applications for second draw PPP loans from January 13, 2021 through the application deadline of May 31, 2021.

As of September 30, 2021, the Corporation had $ 65.9 million in gross PPP loans outstanding and deferred processing fees outstanding of $ 1.4 million.

The processing fees are deferred and recognized over the contractual life of the loan, or accelerated at forgiveness, as an adjustment of yield using the interest method.

During the three and nine months ended September 30, 2021, $ 1.7 million and $ 6.4 million, respectively, was recognized in loans and leases interest income in the unaudited Consolidated Statements of Income.

The SBA provides a guaranty to the lender of 100% of principal and interest, unless the lender violated an obligation under the agreement.

As loan losses are expected to be immaterial, if any, due to the guaranty, management excluded the PPP loans from the allowance for loan and lease losses calculation.

Management funded these short-term loans primarily through a combination of excess cash held at the Federal Reserve and from an increase in in-market deposits.

In March 2022, the FASB issued ASU 2022-02 "Financial Instruments-Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures." The amendments in this update eliminate the accounting guidance for troubled debt restructurings (“TDRs”) by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty.

Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance in paragraphs 310-20-35-9 through 35-11 to determine whether a modification results in a new loan or a continuation of an existing loan.

Additionally, for public business entities, the amendments in this Update require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost in the vintage disclosures required by paragraph 326-20-50-6.

The guidance is effective for the Corporation upon the adoption of ASU 2016-13, January 1, 2023.

The Corporation is currently assessing the impact of ASU 2022-02 on its disclosures and control structure;

however, the Corporation does not expect the adoption of this standard to have a material impact on the consolidated financial statements.

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Note 2 — Earnings per Common Share

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Diluted earnings per share are computed by dividing net income allocated to common shares adjusted for reallocation of undistributed earnings of unvested restricted shares by the weighted average number of shares determined for the basic earnings per common share computation plus the dilutive effect of common stock equivalents using the treasury stock method.

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2021 2020 2021 2020

For the Three Months Ended March 31,

(Dollars in Thousands, Except Share Data)

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The Corporation adopted the 2019 Equity Incentive Plan (the “Plan”) during the quarter ended June 30, 2019.

At the 2021 annual shareholders meeting, an amendment to the 2019 equity plan was approved, increasing the number of shares in the plan by 180,000.

The Plan is administered by the Compensation Committee of the Board of Directors of the Corporation and provides for the grant of equity ownership opportunities through incentive stock options and nonqualified stock options (“Stock Options”), restricted stock, restricted stock units, dividend equivalent units, and any other type of award permitted by the Plan.

As of September 30, 2021, 218,880 shares were available for future grants under the Plan.

The Plan is administered by the Compensation Committee of the Board of Directors (the “Board”) of the Corporation and provides for the grant of equity ownership opportunities through incentive stock options and nonqualified stock options (“Stock Options”), restricted stock, restricted stock units, dividend equivalent units, and any other type of award permitted by the Plan.

As of March 31, 2022, 159,606 shares were available for future grants under the Plan.

Shares covered by awards that expire, terminate, or lapse will again be available for the grant of awards under the Plan.

The Corporation may issue new shares and shares from its treasury stock for shares delivered under the Plan.

Restricted Stock

Under the Plan, the Corporation may grant restricted stock awards, restricted stock units, and other stock-based awards to plan participants, subject to forfeiture upon the occurrence of certain events until the dates specified in the participant’s award agreement.

Under the Plan, the Corporation may grant restricted stock awards (“RSA”), restricted stock units (“RSU”), and other stock-based awards to plan participants, subject to forfeiture upon the occurrence of certain events until the dates specified in the participant’s award agreement.

While restricted stock is subject to forfeiture, restricted stock award participants may exercise full voting rights and will receive all dividends and other distributions paid with respect to the restricted shares.

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Upon vesting of restricted stock, the benefit of tax deductions in excess of recognized compensation expense is reflected as an income tax benefit in the unaudited Consolidated Statements of Income.

The Corporation may issue a combination of performance-based restricted stock units and restricted stock awards to its executive officers.

Vesting of the performance based restricted stock units will be measured on Total Shareholder Return (“TSR”) and Return on Average Equity (“ROAE”) and will cliff-vest after a three-year measurement period based on the Corporation’s performance relative to a custom peer group.

The Corporation may issue a combination of performance-based restricted stock units (“PRSU”) and time-based restricted stock awards to its plan participants.

Vesting of the performance based restricted stock units will be measured on the relative Total Shareholder Return (“TSR”) and relative Return on Equity (“ROE”) and will cliff-vest after a three-year measurement period based on the Corporation’s TSR performance and ROE performance compared to a broad peer group of over 100 banks.

At the end of the performance period, the number of actual shares to be awarded varies between 0% and 200% of target amounts.

The restricted stock awards issued to executive officers will vest ratably over a three-year period.

Compensation expense is recognized for performance-based restricted stock units over the requisite service and performance period of generally three years for the entire expected award on a straight-line basis.

The compensation expense for the awards expected to vest for the percentage of performance-based restricted stock units subject to the ROAE metric will be adjusted if there is a change in the expectation of ROAE.

Compensation expense is recognized for PRSU over the requisite service and performance period of generally three years for the entire expected award

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on a straight-line basis.

The compensation expense for the awards expected to vest for the percentage of performance-based restricted stock units subject to the ROE metric will be adjusted if there is a change in the expectation of ROE.

The compensation expense for the awards expected to vest for the percentage of performance based restricted stock units subject to the TSR metric are never adjusted, and are amortized utilizing the accounting fair value provided using a Monte Carlo pricing model.

Restricted stock activity for the year ended December 31, 2020 and the nine months ended September 30, 2021 was as follows:

Restricted Shares Weighted Average

Restricted stock activity for the year ended December 31, 2021 and the three months ended March 31, 2022 was as follows:

RSA Weighted Average Grant Price PRSU Weighted Average Grant Price RSU Weighted Average Grant Price Total Weighted Average Grant Price

Nonvested balance as of January 1, 2021 143,246 $ 23.04 39,570 $ 28.85 4,988 $ 24.08 187,804 $ 24.29

67,515 22.39 23,550 27.12 2,065 21.68 93,130 23.57

Vested ( 61,384 ) 22.26 — — ( 2,001 ) 22.91 ( 63,385 ) 22.28

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Nonvested balance as of December 31, 2021 141,617 23.06 63,120 28.20 5,052 23.56 209,789 24.62

48,580 33.60 15,825 43.27 335 33.60 64,740 35.96

Vested ( 39,537 ) 23.05 — — ( 1,552 ) 24.17 ( 41,089 ) 23.09

Forfeited ( 716 ) 23.95 — — — — ( 716 ) 23.95

Nonvested balance as of September 30, 2021 216,070 $ 24.55

Nonvested balance as of March 31, 2022 149,944 $ 26.47 78,945 $ 31.22 3,835 $ 25.83 232,724 $ 28.05

Unrecognized compensation cost (in thousands) $ 3,464 $ 1,430 $ 84 $ 4,978

Weighted average remaining recognition period (in years) 2.81 2.19 1.81 2.60

(1) The number of restricted shares/units shown includes the shares that would be granted if the target level of performance is achieved related to the performance based restricted stock units.

The number of shares actually issued may vary.

As of September 30, 2021, the Corporation had $ 3.6 million of unvested compensation expense, which the Corporation expects to recognize over a weighted-average period of approximately 2.2 years.

Employee Stock Purchase Plan

During 2020, an employee stock purchase plan ("ESPP") was approved by the Corporation’s shareholders and is offered to all qualifying employees.

The Company is authorized to issue up to 250,000 shares of common stock under the ESPP.

The Corporation is authorized to issue up to 250,000 shares of common stock under the ESPP.

The plan qualifies as an employee stock purchase plan under section 423 of the Internal Revenue Code of 1986.

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The ESPP is treated as a compensatory item for purposes of share-based compensation expense.

During the nine months ended September 30, 2021, the Corporation issued 4,959 shares of common stock under the ESPP.

As of September 30, 2021, 241,074 shares remained available for issuance under the ESPP.

Share-based compensation expense related to restricted stock included in the unaudited Consolidated Statements of Income was as follows:

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2021 2020 2021 2020

During the three months ended March 31, 2022, the Corporation issued 1,380 shares of common stock under the ESPP.

As of March 31, 2022, 238,122 shares remained available for issuance under the ESPP.

Share-based compensation expense related to restricted stock and ESPP included in the unaudited Consolidated Statements of Income was as follows:

For the Three Months Ended March 31,

(In Thousands)

Share-based compensation expense $ 609 $ 531

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Note 4 — Securities

The amortized cost and fair value of securities available-for-sale and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:

As of September 30, 2021

As of March 31, 2022

Amortized Cost Gross

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Available-for-sale:

treasuries $ 4,971 $ — $ ( 57 ) $ 4,914

government agency securities - government-sponsored enterprises

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$ 205,699 $ 2,072 $ ( 2,069 ) $ 205,702

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The amortized cost and fair value of securities held-to-maturity and the corresponding amounts of gross unrealized gains and losses were as follows:

As of September 30, 2021

As of March 31, 2022

Amortized Cost Gross

22 unchanged sentences

$ 19,746 $ 533 $ ( 3 ) $ 20,276

Treasuries contains treasury bonds issued by the United States Treasury.

government agency securities - government-sponsored enterprises represent securities issued by Federal National Mortgage Association (“FNMA”) and the SBA.

3 unchanged sentences

Other securities represent certificates of deposit of insured banks and savings institutions with an original maturity greater than three months.

There were no sales of available-for-sale securities that occurred during the three months ended September 30, 2021 and seven sales of available-for-sale securities that occurred during the nine months ended September 30, 2021.

There were no sales of available-for-sale securities that occurred during three months ended September 30, 2020 and one sale that occurred during the nine months ended September 30, 2020.

At September 30, 2021 and December 31, 2020, securities with a fair value of $ 44.4 million and $ 73.7 million, respectively, were pledged to secure various obligations, including interest rate swap contracts.

The amortized cost and fair value of securities by contractual maturity at September 30, 2021 are shown below.

There were no sales of available-for-sale securities that occurred during the three months ended March 31, 2022 and 2021.

At March 31, 2022 and December 31, 2021, securities with a fair value of $ 38.7 million and $ 70.3 million, respectively, were pledged to secure various obligations, including interest rate swap contracts and municipal deposits.

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The amortized cost and fair value of securities by contractual maturity at March 31, 2022 are shown below.

Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations with or without call or prepayment penalties.

7 unchanged sentences

$ 236,109 $ 223,631 $ 17,267 $ 17,276

The tables below show the Corporation’s gross unrealized losses and fair value of available-for-sale investments aggregated by investment category and length of time that individual investments were in a continuous loss position at September 30, 2021 and December 31, 2020.

At September 30, 2021, the Corporation held 42 available-for-sale securities that were in an unrealized loss position.

At March 31, 2022, the Corporation held 149 available-for-sale securities that were in an unrealized loss position.

Such securities have not experienced credit rating downgrades;

however, they have primarily declined in value due to the current interest rate environment.

At September 30, 2021, the Corporation held no available-for-sale securities that had been in a continuous unrealized loss position for twelve months or greater.

At March 31, 2022, the Corporation held 10 available-for-sale securities that have been in a continuous unrealized loss position for twelve months or greater.

The Corporation also has not specifically identified available-for-sale securities in a loss position that it intends to sell in the near term and does not believe that it will be required to sell any such securities.

2 unchanged sentences

Based on the Corporation’s evaluation, it is expected that the Corporation will recover the entire amortized cost basis of each security.

Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020.

Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the three months ended March 31, 2022 and 2021.

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A summary of unrealized loss information for securities available-for-sale, categorized by security type and length of time for which the security has been in a continuous unrealized loss position, follows:

As of September 30, 2021

As of March 31, 2022

Less than 12 Months 12 Months or Longer Total

4 unchanged sentences

Available-for-sale:

treasuries $ 4,660 $ 313 $ — $ — $ 4,660 $ 313

government agency securities - government-sponsored enterprises

18 unchanged sentences

Available-for-sale:

treasuries $ 4,914 $ 57 $ — $ — $ 4,914 $ 57

government agency securities - government-sponsored enterprises

2 unchanged sentences

12,568 344 — — 12,568 344

Residential mortgage-backed securities - government issued

12,745 140 — — 12,745 140

Residential mortgage-backed securities - government-sponsored enterprises

41,276 629 4,250 155 45,526 784

Commercial mortgage-backed securities - government issued

2,193 66 — — 2,193 66

The tables below show the Corporation’s gross unrealized losses and fair value of held-to-maturity investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at September 30, 2021 and December 31, 2020.

At September 30, 2021, the Corporation held three held-to-maturity securities that were in an unrealized loss position.

Commercial mortgage-backed securities - government-sponsored enterprises

25,906 568 — — 25,906 568

$ 100,580 $ 1,826 $ 6,662 $ 243 $ 107,242 $ 2,069

At March 31, 2022, the Corporation held 17 held-to-maturity securities that were in an unrealized loss position.

Such securities have not experienced credit rating downgrades;

however, they have primarily declined in value due to the current interest rate environment.

At September 30, 2021, the Corporation held two held-to-maturity securities that had been in a continuous unrealized loss position for twelve months or greater.

It is expected that the Corporation will recover the entire amortized cost basis of each held-to-maturity security based upon an evaluation of aforementioned factors.

Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020.

At March 31, 2022, the Corporation held one held-to-maturity security that had been in a continuous unrealized loss position for twelve months or greater.

It is expected that the Corporation will recover the entire

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amortized cost basis of each held-to-maturity security based upon an evaluation of aforementioned factors.

Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the three months ended March 31, 2022 and 2021.

A summary of unrealized loss information for securities held-to-maturity, categorized by security type and length of time for which the security has been in a continuous unrealized loss position, follows:

As of September 30, 2021

As of March 31, 2022

Less than 12 Months 12 Months or Longer Total

6 unchanged sentences

$ 522 $ 1 $ 270 $ 17 $ 792 $ 18

Residential mortgage-backed securities - government issued

1,990 45 — — 1,990 45

Residential mortgage-backed securities - government-sponsored enterprises

1,585 38 — — 1,585 38

$ 4,097 $ 84 $ 270 $ 17 $ 4,367 $ 101

As of December 31, 2021

7 unchanged sentences

$ — $ — $ 284 $ 3 $ 284 $ 3

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Note 5 — Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses

Loan and lease receivables consist of the following:

September 30,

2022 December 31,

13 unchanged sentences

Commercial and industrial 720,695 730,819

Direct financing leases 16,810 22,331

Direct financing leases, net 14,551 15,743

Consumer and other:

9 unchanged sentences

$ 2,227,580 $ 2,215,072

As of September 30, 2021 and December 31, 2020, the Corporation had $ 65.9 million and $ 228.9 million, respectively, in gross PPP loans outstanding included in the commercial and industrial loan category and deferred processing fees outstanding of $ 1.4 million and $ 3.5 million, respectively, included in deferred loan fees.

As of March 31, 2022 and December 31, 2021, the Corporation had $ 18.5 million and $ 27.9 million, respectively, in gross PPP loans outstanding included in the commercial and industrial loan category and deferred processing fees outstanding of $ 308,000 and $ 557,000 , respectively, included in deferred loan fees.

The processing fees are deferred and recognized over the contractual life of the loan, or accelerated at forgiveness, as an adjustment of yield using the interest method.

2 unchanged sentences

Management funded these short-term loans primarily through a combination of excess cash held at the Federal Reserve and from an increase in in-market deposits.

The total amount of the Corporation’s ownership of SBA loans is comprised of the following:

September 30,

The total amount of the Corporation’s ownership of SBA loans on-balance sheet is comprised of the following:

2022 December 31,

5 unchanged sentences

Total SBA loans $ 93,040 $ 102,858

As of September 30, 2021 and December 31, 2020, $ 1.9 million and $ 9.3 million of SBA loans were considered impaired, respectively.

As of March 31, 2022 and December 31, 2021, $ 1.2 million and $ 1.7 million of SBA loans were considered impaired, respectively.

Loans transferred to third parties consist of the guaranteed portions of SBA loans which the Corporation sold in the secondary market and participation interests in other, non-SBA originated loans.

The total principal amount of the guaranteed portions of SBA loans sold during the three months ended September 30, 2021, and 2020, was $ 5.3 million and $ 7.9 million, respectively.

The total principal amount of the guaranteed portions of SBA loans sold during the nine months ended September 30, 2021, and 2020, was $ 25.0 million and $ 17.2 million, respectively.

Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the three and nine months ended September 30, 2021, and 2020, have been derecognized in the unaudited Consolidated Financial Statements.

The total principal amount of the guaranteed portions of SBA loans sold during the three months ended March 31, 2022, and 2021, was $ 5.6 million and $ 10.6 million, respectively.

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Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the three months ended March 31, 2022, and 2021, have been derecognized in the unaudited Consolidated Financial Statements.

The guaranteed portions of SBA loans were transferred at their fair value and the related gain was recognized upon the transfer as non-interest income in the unaudited Consolidated Financial Statements.

The total outstanding balance of sold SBA loans at September 30, 2021, and December 31, 2020, was $ 90.5 million and $ 79.5 million, respectively.

The total principal amount of transferred participation interests in other, non-SBA originated loans during the three months ended September 30, 2021, and 2020, was $ 18.9 million and $ 7.7 million, respectively.

The total principal amount of transferred participation interests in other, non-SBA originated loans during the nine months ended September 30, 2021, and 2020, was $ 35.8 million and $ 29.9 million, respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer.

The total outstanding balance of sold SBA loans at March 31, 2022, and December 31, 2021, was $ 90.2 million and $ 93.0 million, respectively.

The total principal amount of transferred participation interests in other, non-SBA originated loans during the three months ended March 31, 2022, and 2021, was $ 22.1 million and $ 5.2 million, respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer.

No gain or loss was recognized on participation interests in other, non-SBA originated loans as they were transferred at or near the date of loan origination and the payments received for servicing the portion of the loans participated represents adequate compensation.

The total outstanding balance of these transferred loans at September 30, 2021, and December 31, 2020, was $ 172.2 million and $ 153.6 million, respectively.

As of September 30, 2021, and December 31, 2020, the total amount of the Corporation’s partial ownership of these transferred loans on the unaudited Consolidated Balance Sheets was $ 293.7 million and $ 276.5 million, respectively.

As of September 30, 2021, the non-SBA originated participation portfolio contained no impaired loans.

As of December 31, 2020, the non-SBA originated participation portfolio contained an impaired loan totaling $ 3.0 million with a sold portion of $ 4.2 million.

The total outstanding balance of these transferred loans at March 31, 2022, and December 31, 2021, was $ 186.3 million and $ 195.2 million, respectively.

As of March 31, 2022, and December 31, 2021, the total amount of the Corporation’s partial ownership of these transferred loans on the unaudited Consolidated Balance Sheets was $ 323.1 million and $ 314.5 million, respectively.

As of March 31, 2022 and December 31, 2021, the non-SBA originated participation portfolio contained no impaired loans.

The Corporation does not share in the participant’s portion of any potential charge-offs.

There were no loan participations purchased on the unaudited Consolidated Balance Sheets as of September 30, 2021, and the total of loan participations purchased as of December 31, 2020 was $ 410,000 .

There were no loan participations purchased on the unaudited Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021.

The following tables illustrate ending balances of the Corporation’s loan and lease portfolio, including impaired loans by class of receivable, and considering certain credit quality indicators:

September 30, 2021

March 31, 2022

I II III IV Total

16 unchanged sentences

Category as a % of total portfolio 81.15 % 13.03 % 5.56 % 0.26 % 100.00 %

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December 31, 2021

20 unchanged sentences

The risk rating grades follow a consistent definition and are then applied to specific loan types based on the nature of the loan.

rating is subjective and, depending on the size and nature of the credit, subject to various levels of review and concurrence on the stated risk rating.

Each risk rating is subjective and, depending on the size and nature of the credit, subject to various levels of review and concurrence on the stated risk rating.

In addition to its nine grade risk rating system, the Corporation groups loans into four loan and related risk categories which determine the level and nature of review by management.

10 unchanged sentences

Category IV — Loans and leases in this category are considered to be impaired.

Impaired loans and leases, with the exception of performing troubled debt restructurings, have been placed on non-accrual as management has determined that it is unlikely that the Bank will receive the contractual principal and interest in accordance with the original terms of the agreement.

Impaired loans are individually evaluated to assess the need for the establishment of specific reserves or charge-offs.

Impaired loans and leases, with the exception of performing TDRs, have been placed on non-accrual as management has determined that it is unlikely that the Bank will receive the contractual principal and interest in accordance with the original terms of the agreement.

Impaired loans are

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individually evaluated to assess the need for the establishment of specific reserves or charge-offs.

When analyzing the adequacy of collateral, the Corporation obtains external appraisals at least annually for impaired loans and leases.

3 unchanged sentences

The delinquency aging of the loan and lease portfolio by class of receivable was as follows:

September 30, 2021

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March 31, 2022

Days Past Due 60-89

45 unchanged sentences

Percent of portfolio 0.05 % 0.01 % 0.06 % 0.12 % 99.88 % 100.00 %

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December 31, 2021

46 unchanged sentences

Percent of portfolio 0.09 % 0.03 % 0.07 % 0.19 % 99.81 % 100.00 %

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The Corporation’s total impaired assets consisted of the following:

September 30,

2022 December 31,

19 unchanged sentences

Total impaired assets $ 5,937 $ 6,739

September 30,

2022 December 31,

4 unchanged sentences

Allowance for loan and lease losses to non-accrual loans and leases 421.38 382.76

As of September 30, 2021 and December 31, 2020, $ 857,000 and $ 6.5 million of the non-accrual loans and leases were considered troubled debt restructurings, respectively.

As of September 30, 2021 and December 31, 2020, $ 201,000 and $ 760,000 in specific reserves were allocated to troubled debt restructurings, respectively.

There were no unfunded commitments associated with troubled debt restructured loans and leases as of September 30, 2021.

All loans and leases modified as a troubled debt restructuring are measured for impairment.

As of March 31, 2022 and December 31, 2021, $ 621,000 and $ 627,000 of the non-accrual loans and leases were considered TDRs, respectively.

The Corporation has allocated $ 138,000 and $ 134,000 of specific reserves to TDRs as of March 31, 2022 and December 31, 2021, respectively.

There were no unfunded commitments associated with TDR loans and leases as of March 31, 2022.

All loans and leases modified as TDRs are measured for impairment.

The nature and extent of the impairment of restructured loans, including those which have experienced a default, is considered in the determination of an appropriate level of the allowance for loan and lease losses.

The following table provides the number of loans modified in a troubled debt restructuring and the pre- and post-modification recorded investment by class of receivable:

For the Three Months Ended September 30, For the Nine Months Ended September 30,

Number of Loans Pre-Modification

Investment Post-Modification

Investment Number of Loans Pre-Modification

Investment Post-Modification

(Dollars in Thousands)

Commercial and industrial 1 73 70 2 129 121

Total 1 $ 73 $ 70 2 $ 129 $ 121

For the Three Months Ended September 30, For the Nine Months Ended September 30,

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The following table provides the number of loans modified as a TDR and the pre- and post-modification recorded investment by class of receivable:

For the Three Months Ended March 31,

Number of Loans Pre-Modification

Investment Post-Modification

Investment Number of Loans Pre-Modification

Investment Post-Modification

(Dollars in Thousands)

Commercial real estate:

Commercial real estate — owner occupied

— $ — $ — 2 $ 299 $ 272

Commercial and industrial 1 $ 56 $ 46

Total — $ — $ — 5 $ 6,306 $ 5,861

During the three months ended March 31, 2022, no loans were modified to TDR.

Restructured loan modifications may include payment schedule modifications, interest rate concessions, maturity date extensions, principal reduction, or some combination of these concessions.

During the three and nine months ended September 30, 2021, the modification of terms primarily consisted of payment schedule modifications.

During the three and nine months ended September 30, 2020, the modification of terms primarily consisted of payment schedule modifications or principal reductions.

There was one commercial and industrial loan totaling $ 281,000 modified in a troubled debt restructuring during the previous 12 months which subsequently defaulted during the three and nine months ended September 30, 2021.

There were two commercial and industrial loans totaling $ 703,000 and two owner-occupied commercial real estate loans totaling $ 272,000 modified in a troubled debt restructuring which subsequently defaulted during the three and nine months ended September 30, 2020.

The following represents additional information regarding the Corporation’s impaired loans and leases, including performing troubled debt restructurings, by class:

As of and for the Nine Months Ended September 30, 2021

During the three months ended March 31, 2021, the modification of terms primarily consisted of payment schedule modifications or principal reductions.

There were no loans modified as a TDR during the previous 12 months which subsequently defaulted during the three months ended March 31, 2022 and 2021, respectively.

Additionally, the Corporation continues to work with borrowers impacted by COVID-19 and has provided modifications to include interest only deferrals and principal and interest deferrals.

These modifications are excluded from TDR classification under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators.

As of March 31, 2022, the Corporation had no deferrals outstanding.

As of December 31, 2021, the Corporation had three deferrals outstanding, representing $ 293,000 in total loans.

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The following represents additional information regarding the Corporation’s impaired loans and leases, including performing TDRs, by class:

As of and for the Three Months Ended March 31, 2022

Investment (1)

53 unchanged sentences

(2) Average recorded investment is calculated primarily using daily average balances.

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As of and for the Year Ended December 31, 2021

52 unchanged sentences

(2) Average recorded investment is calculated primarily using daily average balances.

The difference between the recorded investment of loans and leases and the unpaid principal balance of $ 144,000 and $ 14.6 million as of September 30, 2021, and December 31, 2020, respectively, represents partial charge-offs of loans and leases resulting from losses due to the valuation of the collateral securing the loans and leases being below the carrying values of the loans and leases.

Impaired loans and leases also included $ 53,000 and $ 46,000 of loans as of September 30, 2021, and December 31, 2020, respectively, that were performing troubled debt restructurings, and although not on non-accrual, were reported as impaired due to the concession in terms.

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The difference between the recorded investment of loans and leases and the unpaid principal balance of $ 143,000 and $ 145,000 as of March 31, 2022, and December 31, 2021, respectively, represents partial charge-offs of loans and leases resulting from losses due to the appraised value of the collateral securing the loans and leases being below the carrying values of the loans and leases.

Impaired loans and leases also included $ 203,000 and $ 217,000 of loans as of March 31, 2022, and December 31, 2021, respectively, that were performing TDRs, and although not on non-accrual, were reported as impaired due to the concession in terms.

When a loan is placed on non-accrual, interest accrual is discontinued and previously accrued but uncollected interest is deducted from interest income.

7 unchanged sentences

A summary of the activity in the allowance for loan and lease losses by portfolio segment is as follows:

As of and for the Three Months Ended September 30, 2021

As of and for the Three Months Ended March 31, 2022

Real Estate Commercial

8 unchanged sentences

Ending balance $ 13,765 $ 8,912 $ 992 $ 23,669

As of and for the Three Months Ended September 30, 2020

As of and for the Three Months Ended March 31, 2021

Real Estate Commercial

8 unchanged sentences

Ending balance $ 18,445 $ 9,544 $ 993 $ 28,982

As of and for the Nine Months Ended September 30, 2021

Real Estate Commercial

Industrial Consumer

and Other Total

(In Thousands)

Beginning balance $ 17,157 $ 10,593 $ 771 $ 28,521

Charge-offs ( 256 ) ( 3,121 ) ( 25 ) ( 3,402 )

Recoveries 3,804 1,041 7 4,852

Net recoveries (charge-offs) 3,548 ( 2,080 ) ( 18 ) 1,450

Provision for loan and lease losses ( 5,071 ) ( 297 ) 73 ( 5,295 )

Ending balance $ 15,634 $ 8,216 $ 826 $ 24,676

As of and for the Nine Months Ended September 30, 2020

Real Estate Commercial

Industrial Consumer

and Other Total

(In Thousands)

Beginning balance $ 10,852 $ 8,078 $ 590 $ 19,520

Charge-offs ( 27 ) ( 1,414 ) ( 13 ) ( 1,454 )

Recoveries 3 259 2 264

Net charge-offs ( 24 ) ( 1,155 ) ( 11 ) ( 1,190 )

Provision for loan and lease losses 9,352 2,899 236 12,487

Ending balance $ 20,180 $ 9,822 $ 815 $ 30,817

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The following tables provide information regarding the allowance for loan and lease losses and balances by type of allowance methodology.

As of September 30, 2021

As of March 31, 2022

Real Estate Commercial

29 unchanged sentences

Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term.

During 2021, the Corporation extended the term of two of its office spaces by one and three years, resulting in a $ 316,000 increase in the right-of-use assets in exchange for a lease liability.

The Corporation entered into a sublease for office space it vacated in its Kansas City metropolitan area which expires in 2023.

During 2022, the Corporation entered into a new lease in the Southeast Wisconsin market resulting in a $ 1.6 million right-of-use asset.

In addition, the Corporation received a $ 991,000 tenant improvement allowance which is recognized as a lease incentive and deducted from the right-of-use asset.

In 2019, the Corporation entered into a sublease for office space it vacated in its Kansas City metropolitan area which expires in 2023.

During the first quarter 2022, the Corporation amended the sublease agreement, the amendment did not result in any impairment.

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The components of total lease expense were as follows:

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2021 2020 2021 2020

For the Three Months Ended March 31,

(In Thousands)

Operating lease cost

$ 381 $ 373 $ 1,131 $ 1,116

Short-term lease cost

31 52 119 174

Variable lease cost

126 141 365 394

sublease income

1 unchanged sentence

Total lease cost, net

$ 495 $ 538 $ 1,489 $ 1,600

Quantitative information regarding the Corporation’s operating leases was as follows:

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Weighted-average remaining lease term (in years)

9 unchanged sentences

A summary of accrued interest receivable and other assets was as follows:

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

(In Thousands)

3 unchanged sentences

Investment in low-income housing development entity 3,613 2,964

Investment in a community development entity 5,306 5,306

Investment in limited partnerships 11,441 9,874

3 unchanged sentences

Total accrued interest receivable and other assets $ 43,816 $ 39,390

As of March 30, 2022, the Corporation surrendered its common shares for no gain or loss and exited the Trust II entity.

Previously, the Corporation was the sole owner of $ 315,000 of common securities issued by Trust II.

The purpose of Trust II was to complete the sale of $ 10.0 million of 10.50 % fixed rate preferred securities.

Trust II, a wholly owned subsidiary of the Corporation, is not consolidated into the financial statements of the Corporation.

The investment in Trust II of $ 315,000 as of December 31, 2021 is included in accrued interest receivable and other assets.

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Note 8 — Deposits

1 unchanged sentence

Average balances represent year to date averages.

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Balance Average

10 unchanged sentences

Total deposits $ 2,023,694 $ 1,948,812 0.16 $ 1,957,923 $ 1,904,133 0.19

A summary of annual maturities of in-market and wholesale certificates of deposit at September 30, 2021 is as follows:

A summary of annual maturities of in-market and wholesale certificates of deposit at March 31, 2022 is as follows:

(In Thousands)

2 unchanged sentences

Thereafter 2,072

Wholesale deposits include $ 19.6 million and $ 55.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at September 30, 2021, compared to $ 47.5 million and $ 125.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at December 31, 2020.

Deposits include $ 10.0 million and $ 28.7 million of certificates of deposit and wholesale deposits which are denominated in amounts greater than $250,000 at September 30, 2021 and December 31, 2020, respectively.

Wholesale deposits include $ 12.3 million of wholesale certificates of deposit and no non-reciprocal interest-bearing transaction accounts at March 31, 2022, compared to $ 19.6 million and $ 10.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at December 31, 2021.

Deposits include $ 20.9 million and $ 7.9 million of certificates of deposit and wholesale deposits which are denominated in amounts greater than $250,000 at March 31, 2022 and December 31, 2021, respectively.

Note 9 — FHLB Advances, Other Borrowings and Junior Subordinated Notes

1 unchanged sentence

Average balances represent year to date averages.

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Balance Weighted Average

3 unchanged sentences

(Dollars in Thousands)

Federal funds purchased $ — $ — — % $ — $ 71 0.69 %

Federal Reserve PPPLF

— — — — 15,207 0.35

FHLB advances

5 unchanged sentences

— 9,850 20.46 10,076 10,068 11.05

A summary of annual maturities of borrowings at September 30, 2021 is as follows:

$ 414,487 $ 435,241 1.88 $ 413,527 $ 418,783 1.86

(1) Weighted average rate of junior subordinated notes reflects the accelerated amortization of subordinated debt issuance costs as a result of the early redemption of the junior subordinated notes during the first quarter of 2022.

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A summary of annual maturities of borrowings at March 31, 2022 is as follows:

(In Thousands)

2 unchanged sentences

Thereafter 153,324

During the second quarter of 2020, the Corporation tested its ability to borrow from the Federal Reserve Paycheck Protection Program Liquidity Facility (“PPPLF”) in the event funding was required to support the Banks PPP lending efforts.

On April 28, 2020, the Corporation borrowed $ 29.6 million from the PPPLF at a rate of 0.35 %.

As of November 2, 2020, the borrowing was paid in full.

As of September 30, 2021, the Corporation had other borrowings of $ 12.5 million, which consisted of $ 11.5 million of sold loans accounted for as secured borrowings because they did not qualify for true sale accounting, and borrowings associated with our investment in a community development entity.

As of September 30, 2021 and December 31, 2020, the Corporation was in compliance with its debt covenants under its third-party secured senior line of credit.

In September 2008, Trust II completed the sale of $ 10.0 million of 10.50 % fixed rate trust preferred securities (“Trust Preferred

Securities”).

Trust II also issued common securities of $ 315,000 .

Trust II used the proceeds from the offering to purchase $ 10.3 million of 10.50 % junior subordinated notes of the Corporation.

The Trust Preferred Securities are mandatorily redeemable upon the maturity of the junior subordinated notes on September 26, 2038.

As of March 30, 2022 the junior subordinated notes were redeemed and the remaining unamortized debt issuance cost was accelerated due to the early redemption.

As of December 31, 2021 the unamortized debt issuance cost included in junior subordinated notes on the Consolidated Balance Sheets was $ 239,000 .

The Corporation issued a new subordinated note payable as of March 4, 2022.

The principal amount of the newly issued subordinated note payable was $ 20.0 million which qualified as Tier 2 capital.

The subordinated note bears a fixed interest rate of 3.50 % with a maturity date of March 15, 2032.

The subordinated note payable has certain performance debt covenants of which the Corporation was in compliance.

The Corporation may, at its option, redeem the note, in whole or part, at any time after the fifth anniversary of issuance.

As of March 31, 2022, $ 771,000 of debt issuance costs remain in the subordinated note payable balance, of which $ 480,000 is related to the recently issued subordinated note.

As of March 31, 2022, the Corporation had other borrowings of $ 9.7 million, which consisted of sold loans accounted for as secured borrowings because they did not qualify for true sale accounting.

During 2021, the Corporation paid in full the borrowings associated with our investment in a community development entity.

As of March 31, 2022 and December 31, 2021, the Corporation was in compliance with its debt covenants under its third-party secured senior line of credit.

Per the promissory note dated February 19, 2022, the Corporation pays a fee on this line of credit.

During both the nine months ended September 30, 2021 and 2020, the Corporation incurred interest expense of $ 10,000 due to this fee.

During both the three months ended March 31, 2022 and 2021, the Corporation incurred interest expense of $ 3,000 due to this fee.

Note 10 — Preferred Stock

On March 4, 2022, the Corporation issued 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”) in a private placement to institutional investors.

The net proceeds received from the issuance of the Series A Preferred Stock were $ 12.0 million.

The Corporation expects to pay dividends on the Series A Preferred Stock when and if declared by the 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 Secured Overnight Financing Rate (“SOFR”) plus a spread of 539 basis points per annum.

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.

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Note 11 — Commitments and Contingencies

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In addition, the Corporation retains the option to repurchase the sold guaranteed portion of an SBA loan if the loan defaults.

Management has assessed estimated losses inherent in the outstanding guaranteed portions of SBA loans sold in accordance with ASC 450, Contingencies , and determined a recourse reserve based on the probability of future losses for these loans to be $ 760,000 at September 30, 2021, which is reported in accrued interest payable and other liabilities on the unaudited Consolidated Balance Sheets.

Management has assessed estimated losses inherent in the outstanding guaranteed portions of SBA loans sold in accordance with ASC 450, Contingencies , and determined a recourse reserve based on the probability of future losses for these loans to be $ 559,000 at March 31, 2022, which is reported in accrued interest payable and other liabilities on the unaudited Consolidated Balance Sheets.

The summary of the activity in the SBA recourse reserve is as follows:

As of and for the Three Months Ended September 30, As of and for the Nine Months Ended September 30,

2021 2020 2021 2020

As of and for the Three Months Ended March 31,

(In Thousands)

Balance at the beginning of the period $ 635 $ 723

SBA recourse (benefit) provision ( 69 ) 57 45 53

Charge-offs, net — ( 4 ) ( 8 ) ( 338 )

SBA recourse benefit ( 76 ) ( 130 )

Balance at the end of the period $ 559 $ 593

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In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

The Corporation’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The Corporation’s assessment of the significance of a

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particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Assets and liabilities measured at fair value on a recurring basis, segregated by fair value hierarchy level, are summarized below:

September 30, 2021

March 31, 2022

Fair Value Measurements Using

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Securities available-for-sale:

treasuries $ — $ 4,914 $ — $ 4,914

government agency securities - government-sponsored enterprises — 19,935 — 19,935

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Interest rate swaps — 28,283 — 28,283

For assets and liabilities measured at fair value on a recurring basis, there were no transfers between the levels during the three and nine months ended September 30, 2021 or the year ended December 31, 2020 related to the above measurements.

For assets and liabilities measured at fair value on a recurring basis, there were no transfers between the levels during the three months ended March 31, 2022 or the year ended December 31, 2021 related to the above measurements.

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Assets and liabilities measured at fair value on a non-recurring basis, segregated by fair value hierarchy are summarized below:

September 30, 2021

March 31, 2022

Fair Value Measurements Using

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Loan servicing rights — — 1,601 1,601

Impaired loans were written down to the fair value of their underlying collateral less costs to sell of $ 4.0 million and $ 17.2 million at September 30, 2021 and December 31, 2020, respectively, through the establishment of specific reserves or by recording charge-offs when the carrying value exceeded the fair value of the underlying collateral of impaired loans.

Impaired loans were written down to the fair value of their underlying collateral less costs to sell of $ 659,000 and $ 1.0 million at March 31, 2022 and December 31, 2021, respectively, through the establishment of specific reserves or by recording charge-offs when the carrying value exceeded the fair value of the underlying collateral of impaired loans.

Valuation techniques consistent with the market approach, income approach, or cost approach were used to measure fair value.

These techniques included observable inputs for the individual impaired loans being evaluated, such as current appraisals, recent sales of similar assets, or other observable market data, and unobservable inputs, typically when discounts are applied to appraisal values to adjust such values to current market conditions or to reflect net realizable values.

The quantification of unobservable inputs for Level 3 impaired loan values range from 13 % - 90 % as of the measurement date of September 30, 2021.

The quantification of unobservable inputs for Level 3 impaired loan values range from 13 % - 100 % as of the measurement date of March 31, 2022.

The weighted average of those unobservable inputs was 30 %.

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Fair value estimates, methods, and assumptions, consistent with exit price concepts for fair value measurements, are set forth below:

September 30, 2021

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March 31, 2022

Amount Fair Value

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Federal Home Loan Bank advances and other borrowings 414,487 415,169 — 415,169 —

Junior subordinated notes 10,072 8,936 — — 8,936

Accrued interest payable 706 706 706 — —

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N/A = The fair value is not applicable due to restrictions placed on transferability

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Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the unaudited Consolidated Balance Sheets.

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In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and are not considered in the estimates.

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Note 13 — Derivative Financial Instruments

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When evaluating the fair value of its derivative contracts for the effects of non-performance and credit risk, the Corporation considered the impact of netting and any applicable credit enhancements such as collateral postings, thresholds, and guarantees.

As of September 30, 2021, the credit valuation allowance was $85,000 compared to $461,000 as of December 31, 2020.

At September 30, 2021, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was $ 634.0 million.

The Corporation receives fixed rates and pays floating rates based upon LIBOR on the swaps with commercial borrowers.

These interest rate swaps mature between January 2024 and March 2038.

As of March 31, 2022 and December 31, 2021, the credit valuation allowance was $ 191,000 .

The Corporation receives fixed rates and pays floating rates based upon designated benchmark interest rates used on the swaps with commercial borrowers.

Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements.

These commercial borrower swaps were reported on the unaudited Consolidated Balance Sheet as a derivative asset of $ 28.7 million and a derivative liability of $ 6.1 million.

At September 30, 2021, the aggregate amortizing notional value of interest rate swaps with dealer counterparties was also $ 634.0 million.

The Corporation pays fixed rates and receives floating rates based upon LIBOR on the swaps with dealer counterparties.

These interest rate swaps mature in January 2024 through March 2038.

Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and are reported on the unaudited Consolidated Balance Sheet as a net derivative liability of $ 22.6 million.

The Corporation pays fixed rates and receives floating rates based upon designated benchmark interest rates used on the swaps with dealer counterparties.

Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and are reported on the unaudited Consolidated Balance Sheet.

The gross amount of dealer counterparty swaps, without regard to the enforceable master netting agreement, was a gross derivative liability of $ 7.7 million and $ 24.9 million gross derivative asset.

No right of offset existed with dealer counterparty swaps as of September 30, 2021.

No right of offset existed with the dealer counterparty swaps as of March 31, 2022.

All changes in the fair value of these instruments are recorded in other non-interest income.

Given the mirror-image terms of the outstanding derivative portfolio, the change in fair value for the three and nine months ended September 30, 2021 and 2020 had an insignificant impact on the unaudited Consolidated Statements of Income.

Given the mirror-image terms of the outstanding derivative portfolio, the change in fair value for the three months ended March 31, 2022 and 2021 had an insignificant impact on the unaudited Consolidated Statements of Income.

The Corporation also enters into interest rate swaps to manage interest rate risk and reduce the cost of match-funding certain long-term fixed rate loans.

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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 affects earnings.

As of September 30, 2021, the aggregate notional value of interest rate swaps designated as cash flow hedges was $ 114.0 million.

These interest rate swaps mature between December 2021 and December 2027.

A pre-tax unrealized gain of $ 520,000 and $ 2.3 million was recognized in other comprehensive income for the three and nine months ended September 30, 2021, and there was no ineffective portion of these hedges.

Information about the balance sheet location and fair value of the Corporation’s derivative instruments below:

Interest Rate Swap Contracts

Asset Derivatives Liability Derivatives

Balance Sheet Location Fair Value Balance Sheet Location Fair Value

(In Thousands)

A pre-tax unrealized gain of $ 3.9 million was recognized in other comprehensive income for the three months ended March 31, 2022, and there were no ineffective portions of these hedges.

The Corporation 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 derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value.

A pre-tax unrealized loss of $ 50,000 was recognized in other comprehensive income for the three months ended March 31, 2022 and there was no ineffective portion of these hedges.

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As of March 31, 2022

Number of Instruments Notional Amount Weighted Average Maturity (In Years) Fair Value

(Dollars in Thousands)

Included in Derivative assets

Derivatives not designated as hedging instruments

September 30, 2021 Derivatives $ 28,678 Derivatives $ 28,678

December 31, 2020 Derivatives $ 49,377 Derivatives $ 49,377

Interest rate swap agreements on loans with commercial loan customers 18 $ 184,644 7.57 $ 7,710

Interest rate swap agreements on loans with third-party counter parties 79 626,825 8.36 17,201

Derivatives designated as hedging instruments

September 30, 2021 Accumulated other comprehensive income (1)

$ 3,212 Derivatives $ 3,212

December 31, 2020 Accumulated other comprehensive income (1)

$ 5,550 Derivatives $ 5,550

(1) The fair value of derivatives designated as hedging instruments included in accumulated other comprehensive income represent pre-tax amounts, which are reported net of tax on the unaudited Consolidated Balance Sheets.

Interest rate swap related to FHLB borrowings 11 $ 109,400 3.20 $ 1,979

Included in Derivative liabilities

Derivatives not designated as hedging instruments

Interest rate swap agreements on loans with commercial loan customers 61 $ 442,181 8.51 $ 24,911

Derivatives designated as hedging instruments

Interest rate swap related to AFS securities 11 $ 12,500 10.03 $ 50

As of December 31, 2021

Number of Instruments Notional Amount Weighted Average Maturity (In Years) Fair Value

(Dollars in Thousands)

Included in Derivative assets

Derivatives not designated as hedging instruments

Interest rate swap agreements on loans with commercial loan customers 41 $ 411,913 8.18 $ 26,343

Included in Derivative liabilities

Derivatives not designated as hedging instruments

Interest rate swap agreements on loans with commercial loan customers 39 $ 228,676 8.70 $ 6,595

Interest rate swap agreements on loans with third-party counter parties 80 640,589 8.37 19,748

Derivatives designated as hedging instruments

Interest rate swap related to FHLB borrowings 10 $ 106,000 3.17 $ 1,940

Note 14 — Regulatory Capital

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The Corporation regularly reviews and updates, when appropriate, its Capital and Liquidity Action Plan, which is designed to help ensure appropriate capital adequacy, to plan for future capital needs, and to ensure that the Corporation serves as a source of financial strength to the Bank.

The Corporation’s and the Bank’s Boards of Directors and management teams adhere to the appropriate regulatory guidelines on decisions which affect their respective capital positions, including but not limited to, decisions relating to the payment of dividends and increasing indebtedness.

The Corporation’s and the Bank’s Board and management teams adhere to the appropriate regulatory guidelines on decisions which affect their respective capital positions, including but not limited to, decisions relating to the payment of dividends and increasing indebtedness.

As a bank holding company, the Corporation’s ability to pay dividends is affected by the policies and enforcement powers of the Board of Governors of the Federal Reserve system (the “Federal Reserve”).

Federal Reserve guidance urges financial institutions to strongly consider eliminating, deferring, or significantly reducing dividends if:

(i) net income available to common shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividend;

(i) net income available to

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common shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividend;

(ii) the prospective rate of earnings retention is not consistent with the bank holding company’s capital needs and overall current and prospective financial condition;

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Future dividend decisions by the Bank and the Corporation will continue to be subject to compliance with various legal, regulatory, and other restrictions as defined from time to time.

Qualitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of Total Common Equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to adjusted total assets.

Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of Total Common Equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to adjusted total assets.

These risk-based capital requirements presently address credit risk related to both recorded and off-balance sheet commitments and obligations.

As of September 30, 2021, the Corporation’s capital levels exceeded the regulatory minimums and the Bank’s capital levels remained characterized as well capitalized under the regulatory framework.

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As of March 31, 2022, the Corporation’s capital levels exceeded the regulatory minimums and the Bank’s capital levels remained characterized as well capitalized under the regulatory framework.

The following tables summarize both the Corporation’s and the Bank’s capital ratios and the ratios required by their federal regulators:

As of September 30, 2021

As of March 31, 2022

Actual Minimum Required for Capital Adequacy Purposes For Capital Adequacy Purposes Plus Capital Conservation Buffer Minimum Required to Be Well

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First Business Bank 255,286 9.81 104,045 4.00 104,045 4.00 $ 130,056 5.00 %

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements