What changed in this filing

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Item 1. Financial Statements

2022-10-28 compared with 2022-07-29 · 158 added, 140 removed, 1276 unchanged (19% of the section changed)

2 unchanged sentences

Consolidated Balance Sheets

September 30,

2022 December 31,

28 unchanged sentences

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 June 30, 2022 and December 31, 2021, respectively

Common stock, $ 0.01 par value, 25,000,000 shares authorized, 9,367,337 and 9,326,361 shares issued, 8,474,699 and 8,457,564 shares outstanding at June 30, 2022 and December 31, 2021, respectively

Common stock, $ 0.01 par value, 25,000,000 shares authorized, 9,370,888 and 9,326,361 shares issued, 8,432,048 and 8,457,564 shares outstanding at September 30, 2022 and December 31, 2021, respectively

Additional paid-in capital 86,803 85,797

1 unchanged sentence

Accumulated other comprehensive loss ( 16,588 ) ( 1,457 )

Treasury stock, 892,638 and 868,797 shares at June 30, 2022 and December 31, 2021, respectively, at cost

Treasury stock, 938,840 and 868,797 shares at September 30, 2022 and December 31, 2021, respectively, at cost

( 24,532 ) ( 22,031 )

4 unchanged sentences

Consolidated Statements of Income (Unaudited)

For the Three Months Ended June 30, For the Six Months Ended June 30,

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

2022 2021 2022 2021

47 unchanged sentences

Consolidated Statements of Comprehensive Income (Unaudited)

For the Three Months Ended June 30, For the Six Months Ended June 30,

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

2022 2021 2022 2021

1 unchanged sentence

Net income $ 10,826 $ 9,198 $ 30,702 $ 27,165

Other comprehensive (loss) income

Other comprehensive loss

Securities available-for-sale:

Unrealized securities (losses) gains arising during the period ( 7,184 ) 662 ( 19,665 ) ( 1,576 )

Unrealized securities losses arising during the period ( 10,174 ) ( 1,457 ) ( 29,839 ) ( 3,033 )

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

2 unchanged sentences

Interest rate swaps:

Unrealized gains (losses) on interest rate swaps arising during the period 2,175 ( 271 ) 6,044 1,818

Income tax benefit (expense) 1,281 ( 94 ) 3,482 ( 58 )

Total other comprehensive (loss) income ( 3,725 ) 275 ( 10,131 ) 170

Unrealized gains on interest rate swaps arising during the period 3,452 520 9,496 2,338

Income tax benefit 1,719 238 5,201 180

Total other comprehensive loss ( 5,000 ) ( 692 ) ( 15,131 ) ( 522 )

Comprehensive income $ 5,826 $ 8,506 $ 15,571 $ 26,643

26 unchanged sentences

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

Common Shares Outstanding Preferred Stock Common

25 unchanged sentences

Balance at June 30, 2022 8,475,953 $ 11,992 $ 94 $ 86,123 $ 186,302 $ ( 11,588 ) $ ( 23,000 ) $ 249,923

Net income — — — — 10,826 — — 10,826

Other comprehensive loss — — — — — ( 5,000 ) — ( 5,000 )

Share-based compensation - restricted shares and employee stock purchase plan 1,291 — — 651 — — — 651

Issuance of common stock under the employee stock purchase plan 1,006 — — 29 — — — 29

Preferred stock dividends — — — — ( 218 ) — — ( 218 )

Cash dividends ($ 0.1975 per share)

— — — — ( 1,675 ) — — ( 1,675 )

Treasury stock purchased ( 46,202 ) — — — — — ( 1,532 ) ( 1,532 )

Balance at September 30, 2022 8,432,048 $ 11,992 $ 94 $ 86,803 $ 195,235 $ ( 16,588 ) $ ( 24,532 ) $ 253,004

See accompanying Notes to Unaudited Consolidated Financial Statements.

1 unchanged sentence

Consolidated Statements of Cash Flows (Unaudited)

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

(In Thousands)

7 unchanged sentences

Depreciation, amortization and accretion, net 3,088 2,696

Gain on disposal of lease equipment ( 478 ) —

Loss on disposal of equipment — 68

Amortization of low income housing tax credits 552 —

Share-based compensation 1,905 1,716

5 unchanged sentences

Net loss on foreclosed properties, including impairment valuation 27 7

Loan servicing right impairment valuation — ( 78 )

Loan servicing right impairment (recovery) valuation 15 ( 78 )

Excess tax benefit expense from share-based compensation 183 27

3 unchanged sentences

Net increase in accrued interest receivable and other assets ( 4 ) ( 4,789 )

Net increase (decrease) in accrued interest payable and other liabilities 13,658 ( 1,230 )

Net increase in accrued interest payable and other liabilities 1,620 1,455

Net cash provided by operating activities 31,390 24,761

13 unchanged sentences

Purchases of leasehold improvements and equipment, net ( 1,847 ) ( 224 )

Proceeds from sale of leasehold improvements and equipment — 12

Premium payment on bank owned life insurance policies ( 25 ) —

2 unchanged sentences

Financing activities

Net (decrease) increase in deposits ( 88,592 ) 305,191

Net increase in deposits 129,622 48,766

Proceeds from Federal Home Loan Bank advances 2,002,844 624,300

31 unchanged sentences

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

As of June 30, 2022, FBB had the following wholly-owned subsidiaries:

As of September 30, 2022, FBB had the following wholly-owned subsidiaries:

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

10 unchanged sentences

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, and income taxes.

The results of operations for the three and six months ended June 30, 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.

The results of operations for the three and nine months ended September 30, 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.

14 unchanged sentences

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

During the fourth quarter of 2022, management will have the model validated by a third party,

perform a full parallel run, and continue to refine the methodology, processes and internal controls.

Management’s model utilizes national GDP and unemployment as inputs to the reasonable and supportable forecast.

The impact of adopting this ASU cannot be reasonably estimated until model validation and confirmation of qualitative components are complete.

The estimated impact at adoption will depend on the composition, characteristics and quality of the loan portfolio as well as the economic environment and forecasts as of the adoption date.

Management will continue to refine the model based on on-going reviews and parallel calculations up to adoption on January 1, 2023.

In March 2020, the FASB issued ASU No.

6 unchanged sentences

The Corporation continues to implement its transition plan toward cessation of LIBOR and the modification of its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR.

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

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):

Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No.

33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No.

33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants.” This ASU amends the SEC sections of the Codification related to Final Rule Releases No.

33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No.

33-10835, Update to Statistical Disclosures for Bank and Savings and Loan Registrants.

The guidance is effective upon its addition to the FASB codification.

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

In the fourth quarter 2022, the Corporation expects to utilize the LIBOR transition relief allowed under ASU 2020-04 and ASU 2020-01, and does not expect such adoption to have a material impact on its accounting and disclosures.

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

11 unchanged sentences

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 June 30, For the Six Months Ended June 30,

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

2022 2021 2022 2021

16 unchanged sentences

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 June 30, 2022, 154,002 shares were available for future grants under the Plan.

As of September 30, 2022, 149,931 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.

13 unchanged sentences

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, 2021 and the six months ended June 30, 2022 was as follows:

Restricted stock activity for the year ended December 31, 2021 and the nine months ended September 30, 2022 was as follows:

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

7 unchanged sentences

Forfeited ( 4,701 ) 26.50 — — — — ( 4,701 ) 26.50

Nonvested balance as of June 30, 2022 148,718 $ 26.84 57,435 $ 32.89 3,835 $ 24.19 209,988 $ 28.45

Nonvested balance as of September 30, 2022 138,442 $ 27.46 57,435 $ 32.89 6,105 $ 25.92 201,982 $ 28.95

Unrecognized compensation cost (in thousands) $ 2,880 $ 1,046 $ 105 $ 4,031

Weighted average remaining recognition period (in years) 2.48 1.81 1.91 2.29

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

(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.

During the six months ended June 30, 2022, an additional 21,510 were issued related to actual performance results of previously granted awards.

During the nine months ended September 30, 2022, an additional 21,510 were issued related to actual performance results of previously granted awards.

Employee Stock Purchase Plan

5 unchanged sentences

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

During the six months ended June 30, 2022, the Corporation issued 2,634 shares of common stock under the ESPP.

As of June 30, 2022, 238,122 shares remained available for issuance under the ESPP.

During the nine months ended September 30, 2022, the Corporation issued 3,640 shares of common stock under the ESPP.

As of September 30, 2022, 235,862 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 June 30, For the Six Months Ended June 30,

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

2022 2021 2022 2021

3 unchanged sentences

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 June 30, 2022

As of September 30, 2022

Amortized Cost Gross

10 unchanged sentences

Commercial mortgage-backed securities - government-sponsored enterprises 32,934 — ( 5,332 ) 27,602

Other securities

$ 226,402 $ 104 $ ( 29,940 ) $ 196,566

18 unchanged sentences

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 June 30, 2022

As of September 30, 2022

Amortized Cost Gross

Unrealized Gains Gross

Unrealized Losses Fair Value

Unrecognized Gains Gross

Unrecognized Losses Fair Value

(In Thousands)

8 unchanged sentences

Amortized Cost Gross

Unrealized Gains Gross

Unrealized Losses Fair Value

Unrecognized Gains Gross

Unrecognized Losses Fair Value

(In Thousands)

13 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 and six months ended June 30, 2022 and there were seven sales of available-for-sale securities that occurred during the three and six months ended June 30, 2021.

At June 30, 2022 and December 31, 2021, securities with a fair value of $ 39.7 million and $ 70.3 million, respectively, were pledged to secure various obligations, including interest rate swap contracts and municipal deposits.

The amortized cost and fair value of securities by contractual maturity at June 30, 2022 are shown below.

There were no sales of available-for-sale securities that occurred during the three and nine months ended September 30, 2022.

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.

At September 30, 2022 and December 31, 2021, securities with a fair value of $ 36.4 million and $ 70.3 million, respectively, were pledged to secure various obligations, including interest rate swap contracts and municipal deposits.

The amortized cost and fair value of securities by contractual maturity at September 30, 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

$ 226,402 $ 196,566 $ 13,531 $ 13,078

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 June 30, 2022 and December 31, 2021.

At June 30, 2022, the Corporation held 164 available-for-sale securities that were in an unrealized loss position.

At September 30, 2022, the Corporation held 176 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 June 30, 2022, the Corporation held 11 available-for-sale securities that have been in a continuous unrealized loss position for twelve months or greater.

At September 30, 2022, the Corporation held 40 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 six months ended June 30, 2022 and 2021.

Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2022 and 2021.

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 June 30, 2022

As of September 30, 2022

Less than 12 Months 12 Months or Longer Total

39 unchanged sentences

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

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 June 30, 2022 and December 31, 2021.

At June 30, 2022, the Corporation held 23 held-to-maturity securities that were in an unrealized loss position.

At September 30, 2022, the Corporation held 44 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 June 30, 2022, the Corporation held one held-to-maturity security that had been in a

continuous unrealized loss position for twelve months or greater.

At September 30, 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 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 six months ended June 30, 2022 and 2021.

Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the three and nine months ended September 30, 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 June 30, 2022

As of September 30, 2022

Less than 12 Months 12 Months or Longer Total

23 unchanged sentences

Loan and lease receivables consist of the following:

September 30,

2022 December 31,

25 unchanged sentences

$ 2,306,557 $ 2,215,072

As of June 30, 2022 and December 31, 2021, the Corporation had $ 8.3 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 $ 113,000 and $ 557,000 , respectively, included in deferred loan fees.

As of September 30, 2022 and December 31, 2021, the Corporation had $ 2.4 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 $ 52,000 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.

3 unchanged sentences

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

September 30,

2022 December 31,

5 unchanged sentences

Total SBA loans $ 63,609 $ 102,858

As of June 30, 2022 and December 31, 2021, $ 944,000 and $ 1.7 million of SBA loans were considered impaired, respectively.

As of September 30, 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 June 30, 2022, and 2021, was $ 11.9 million and $ 9.0 million, respectively.

The total principal amount of the guaranteed portions of SBA loans sold during the six months ended June 30, 2022, and 2021, was

$ 17.4 million and $ 19.6 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 months ended June 30, 2022, and 2021, 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 September 30, 2022, and 2021, was $ 9.2 million and $ 5.3 million, respectively.

The total principal amount of the guaranteed portions of SBA loans sold during the nine months ended September 30, 2022, and 2021, was $ 26.6 million and $ 25.0 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 months ended September 30, 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 June 30, 2022, and December 31, 2021, was $ 95.9 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 June 30, 2022, and 2021, was $ 23.0 million and $ 11.8 million, respectively.

The total principal amount of transferred participation interests in other, non-SBA originated loans during the six months ended June 30, 2022, and 2021, was $ 45.2 million and $ 16.9 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 September 30, 2022, and December 31, 2021, was $ 96.1 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 September 30, 2022, and 2021, was $ 25.4 million and $ 18.9 million, respectively.

The total principal amount of transferred participation interests in other, non-SBA originated loans during the nine months ended September 30, 2022, and 2021, was $ 70.6 million and $ 35.8 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 June 30, 2022, and December 31, 2021, was $ 199.0 million and $ 195.2 million, respectively.

As of June 30, 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 $ 320.2 million and $ 314.5 million, respectively.

As of June 30, 2022 and December 31, 2021, the non-SBA originated participation portfolio contained no impaired loans.

The total outstanding balance of these transferred loans at September 30, 2022, and December 31, 2021, was $ 210.7 million and $ 195.2 million, respectively.

As of September 30, 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 $ 327.3 million and $ 314.5 million, respectively.

As of September 30, 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 June 30, 2022 and December 31, 2021.

There were no loan participations purchased on the unaudited Consolidated Balance Sheets as of September 30, 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:

June 30, 2022

September 30, 2022

I II III IV Total

59 unchanged sentences

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

June 30, 2022

September 30, 2022

Days Past Due 60-89

94 unchanged sentences

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

September 30,

2022 December 31,

19 unchanged sentences

Total impaired assets $ 3,968 $ 6,739

September 30,

2022 December 31,

4 unchanged sentences

Allowance for loan and lease losses to non-accrual loans and leases 662.36 382.76

As of June 30, 2022 and December 31, 2021, $ 615,000 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 June 30, 2022 and December 31, 2021, respectively.

There were no unfunded commitments associated with TDR loans and leases as of June 30, 2022.

As of September 30, 2022 and December 31, 2021, $ 499,000 and $ 627,000 of the non-accrual loans and leases were considered TDRs, respectively.

The Corporation has allocated $ 143,000 and $ 134,000 of specific reserves to TDRs as of September 30, 2022 and December 31, 2021, respectively.

There were no unfunded commitments associated with TDR loans and leases as of September 30, 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 as a TDR and the pre- and post-modification recorded investment by class of receivable for the three and six months ended June 30, 2021:

For the Three Months Ended June 30, For the Six Months Ended June 30,

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 and nine months ended September 30, 2021:

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

Number of Loans Pre-Modification

4 unchanged sentences

Commercial and industrial 1 $ 73 $ 70 2 $ 129 $ 121

During the three and six months ended June 30, 2022, no loans were modified as a TDR.

During the three and nine months ended September 30, 2022, no loans were modified as a 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 six months ended June 30, 2021, the modification of terms primarily consisted of payment schedule modifications.

There were no loans modified as a TDR during the 12 months ended June 30, 2022 which subsequently defaulted during the three and six months ended June 30, 2022 and one with a recorded investment of $ 269,000 that defaulted during the three and six months ended June 30, 2021.

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

There were no loans modified as a TDR during the 12 months ended September 30, 2022 which subsequently defaulted during the three and nine months ended September 30, 2022 and one with a recorded investment of $ 281,000 that defaulted during the three and nine months ended September 30, 2021.

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

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

As of June 30, 2022, the Corporation had no deferrals outstanding.

As of September 30, 2022, the Corporation had no deferrals outstanding.

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

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

As of and for the Six Months Ended June 30, 2022

As of and for the Nine Months Ended September 30, 2022

Investment (1)

107 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 $ 145,000 as of June 30, 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 $ 188,000 and $ 217,000 of loans as of June 30, 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.

The difference between the recorded investment of loans and leases and the unpaid principal balance of $ 107,000 and $ 145,000 as of September 30, 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 $ 172,000 and $ 217,000 of loans as of September 30, 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 June 30, 2022

As of and for the Three Months Ended September 30, 2022

Real Estate Commercial

8 unchanged sentences

Ending balance $ 12,941 $ 10,512 $ 690 $ 24,143

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

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

Real Estate Commercial

5 unchanged sentences

Recoveries 1,501 128 5 1,634

Net (charge-offs) recoveries ( 165 ) ( 2,161 ) ( 23 ) ( 2,349 )

Net recoveries (charge-offs) 1,494 ( 228 ) 4 1,270

Provision for loan and lease losses ( 2,736 ) 563 ( 96 ) ( 2,269 )

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

As of and for the Six Months Ended June 30, 2022

As of and for the Nine Months Ended September 30, 2022

Real Estate Commercial

5 unchanged sentences

Recoveries 4,259 251 27 4,537

Net recoveries (charge-offs) 4,237 94 19 4,350

Net recoveries 4,259 111 6 4,376

Provision for loan and lease losses ( 6,428 ) 1,988 ( 129 ) ( 4,569 )

Ending balance $ 12,941 $ 10,512 $ 690 $ 24,143

As of and for the Six Months Ended June 30, 2021

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

Real Estate Commercial

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Recoveries 3,804 1,041 7 4,852

Net (charge-offs) recoveries 2,054 ( 1,852 ) ( 22 ) 180

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

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

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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 June 30, 2022

As of September 30, 2022

Real Estate Commercial

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The components of total lease expense were as follows:

For the Three Months Ended June 30, For the Six Months Ended June 30,

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

2022 2021 2022 2021

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Short-term lease cost

38 31 112 119

Variable lease cost

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

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Weighted-average remaining lease term (in years)

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

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

(In Thousands)

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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.

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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Average balances represent year to date averages.

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Balance Average

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Total deposits $ 2,087,545 $ 1,943,303 0.34 $ 1,957,923 $ 1,904,133 0.19

A summary of annual maturities of in-market and wholesale certificates of deposit at June 30, 2022 is as follows:

A summary of annual maturities of in-market and wholesale certificates of deposit at September 30, 2022 is as follows:

(In Thousands)

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Thereafter 2,503

Wholesale deposits include $ 12.3 million of wholesale certificates of deposit and no non-reciprocal interest-bearing transaction accounts at June 30, 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 $ 25.3 million and $ 7.9 million of certificates of deposit and wholesale deposits which are denominated in amounts greater than $250,000 at June 30, 2022 and December 31, 2021, respectively.

Wholesale deposits include $ 128.3 million of wholesale certificates of deposit and $ 30.0 million of non-reciprocal interest-bearing transaction accounts at September 30, 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 $ 50.3 million and $ 7.9 million of certificates of deposit and wholesale deposits which are denominated in amounts greater than $250,000 at September 30, 2022 and December 31, 2021, respectively.

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

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Average balances represent year to date averages.

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Balance Weighted Average

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(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.

A summary of annual maturities of borrowings at June 30, 2022 is as follows:

A summary of annual maturities of borrowings at September 30, 2022 is as follows:

(In Thousands)

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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.

The Trust Preferred Securities were 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.

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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 principal amount of the newly issued subordinated note 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 subordinated note payable has certain financial performance covenants, with which the Corporation was in compliance as of September 30, 2022.

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

As of June 16, 2022, the $ 9.1 million subordinated notes payable that bore a fixed interest rate of 6.00 % were redeemed, and the remaining unamortized debt issuance cost was accelerated due to the early redemption.

As of June 30, 2022, $ 725,000 of debt issuance costs remain in the subordinated note payable balance, of which $ 456,000 is related to the recently issued subordinated note.

As of June 30, 2022, the Corporation had other borrowings of $ 8.2 million, which consisted of sold loans accounted for as secured borrowings because they did not qualify for true sale accounting.

As of June 30, 2022 and December 31, 2021, the Corporation was in compliance with its debt covenants under its third-party secured senior line of credit.

As of September 30, 2022, $ 693,000 of debt issuance costs remain in the subordinated note payable balance, of which $ 433,000 is related to the recently issued subordinated note.

As of September 30, 2022 and December 31, 2021, the Corporation had other borrowings of $ 8.2 million and $ 10.4 million, respectively, which consisted of sold loans accounted for as secured borrowings because they did not qualify for true sale accounting.

As of September 30, 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 six months ended June 30, 2022 and 2021, the Corporation incurred interest expense of $ 6,600 due to this fee.

During both the nine months ended September 30, 2022 and 2021, the Corporation incurred interest expense of $ 10,000 due to this fee.

Note 10 — Preferred Stock

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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.

During the three and six months ended June 30, 2022, the Board of Directors declared a cash preferred stock dividend of $ 246,000 .

During the three and nine months ended September 30, 2022, the Board of Directors declared a cash preferred stock dividend of $ 218,000 and $ 464,000 respectively.

The Series A Preferred Stock is perpetual and has no stated maturity.

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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 $ 673,000 at June 30, 2022, 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 $ 763,000 at September 30, 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 June 30, As of and for the Six Months Ended June 30,

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

2022 2021 2022 2021

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Fair value is defined as the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date and is based on exit prices.

Fair value includes assumptions about risk, such as nonperformance risk in liability fair values, and is a market-based measurement, not an entity-specific measurement.

Fair value includes assumptions about risk,

such as nonperformance risk in liability fair values, and is a market-based measurement, not an entity-specific measurement.

The standard describes three levels of inputs that may be used to measure fair value.

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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 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:

June 30, 2022

September 30, 2022

Fair Value Measurements Using

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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 six months ended June 30, 2022 or the year ended December 31, 2021 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 and nine months ended September 30, 2022 or the year ended December 31, 2021 related to the above measurements.

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

June 30, 2022

September 30, 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 $ 720,000 and $ 1.0 million at June 30, 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.

Impaired loans were written down to the fair value of their underlying collateral less costs to sell of $ 1.3 million and $ 1.0 million at September 30, 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 8 % - 100 % as of the measurement date of June 30, 2022.

The quantification of unobservable inputs for Level 3 impaired loan values range from 8 % - 100 % as of the measurement date of September 30, 2022.

The weighted average of those unobservable inputs was 34 %.

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

June 30, 2022

September 30, 2022

Amount Fair Value

63 unchanged sentences

The Corporation incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.

In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Corporation considers the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

In adjusting the fair value of its derivative

contracts for the effect of nonperformance risk, the Corporation considers the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Fair value estimates are made at a discrete point in time, based on relevant market information and information about the financial instrument.

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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 June 30, 2022 and December 31, 2021, the credit valuation allowance was $ 191,000 .

As of September 30, 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.

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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 $ 3.2 million and $ 40.3 million gross derivative asset.

No right of offset existed with the dealer counterparty swaps as of June 30, 2022.

The gross amount of dealer counterparty swaps, without regard to the enforceable master netting agreement, was a gross derivative liability of $ 66.2 million and no gross derivative assets.

No right of offset existed with the dealer counterparty swaps as of September 30, 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 six months ended June 30, 2022 and 2021 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 and nine months ended September 30, 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.

2 unchanged sentences

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.

A pre-tax unrealized gain of $ 1.7 million and $ 5.7 million was recognized in other comprehensive income for the three and six months ended June 30, 2022, and there were no ineffective portions of these hedges.

A pre-tax unrealized gain of $ 3.2 million and $ 8.9 million was recognized in other comprehensive income for the three and nine months ended September 30, 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.

2 unchanged sentences

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 gain of $ 426,000 and $ 376,000 was recognized in other comprehensive income for the three and six months ended June 30, 2022 and there was no ineffective portion of these hedges.

As of June 30, 2022

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.

A pre-tax unrealized gain of $ 215,000 and $ 592,000 was recognized in other comprehensive income for the three and nine months ended September 30, 2022 and there was no ineffective portion of these hedges.

As of September 30, 2022

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

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Derivatives not designated as hedging instruments

Interest rate swap agreements on loans with commercial loan customers 12 $ 131,393 8.91 $ 3,215

Interest rate swap agreements on loans with third-party counter parties 81 $ 666,218 7.81 $ 66,162

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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;

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;

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

As of June 30, 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.

As of September 30, 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 June 30, 2022

As of September 30, 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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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