What changed in this filing

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Item 1. Financial Statements

2023-04-28 compared with 2022-10-28 · 453 added, 498 removed, 936 unchanged (50% of the section changed)

2 unchanged sentences

Consolidated Balance Sheets

September 30,

2023 December 31,

7 unchanged sentences

Loans held for sale

Loans and leases receivable, net of allowance for loan and lease losses of $ 24,143 and $ 24,336 , respectively

Loans and leases receivable, net of allowance for credit losses of $ 26,140 and $ 24,230 , respectively

2,513,223 2,418,836

Premises and equipment, net 4,933 4,340

Foreclosed properties 151 164

Repossessed assets 89 95

Right-of-use assets, net 7,355 7,690

8 unchanged sentences

Federal Home Loan Bank advances and other borrowings 341,859 456,808

Junior subordinated notes — 10,076

Lease liabilities 9,822 10,175

3 unchanged sentences

Stockholders’ equity:

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 September 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

Preferred stock, $ 0.01 par value, 2,500,000 shares authorized, 12,500 shares of 7 % non-cumulative perpetual preferred stock, Series A, outstanding at each March 31, 2023 and December 31, 2022

11,992 11,992

Common stock, $ 0.01 par value, 25,000,000 shares authorized, 9,371,657 and 9,371,078 shares issued, 8,306,270 and 8,362,085 shares outstanding at March 31, 2023 and December 31, 2022, respectively

Additional paid-in capital 88,173 87,512

1 unchanged sentence

Accumulated other comprehensive loss ( 13,671 ) ( 15,310 )

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

Treasury stock, 1,065,387 and 1,008,993 shares at March 31, 2023 and December 31, 2022, respectively, at cost

( 29,015 ) ( 27,155 )

4 unchanged sentences

Consolidated Statements of Income (Unaudited)

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

2022 2021 2022 2021

For the Three Months Ended March 31,

(In Thousands, Except Per Share Data)

10 unchanged sentences

Net interest income 26,705 21,426

Provision for loan and lease losses 12 ( 2,269 ) ( 4,569 ) ( 5,295 )

Net interest income after provision for loan and lease losses 25,872 23,492 75,540 69,033

Provision for credit losses 1,561 ( 855 )

Net interest income after provision for credit losses 25,144 22,281

Non-interest income

4 unchanged sentences

Increase in cash surrender value of bank-owned life insurance

359 357 1,057 1,056

Net gain on sale of securities — — — 29

Swap fees 557 225

24 unchanged sentences

Consolidated Statements of Comprehensive Income (Unaudited)

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

2022 2021 2022 2021

For the Three Months Ended March 31,

(In Thousands)

Net income $ 8,979 $ 8,672

Other comprehensive loss

Other comprehensive income (loss)

Securities available-for-sale:

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 )

Unrealized securities gains (losses) arising during the period 3,762 ( 12,481 )

Securities held-to-maturity:

1 unchanged sentence

Interest rate swaps:

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 )

Unrealized (losses) gains on interest rate swaps arising during the period ( 1,562 ) 3,869

Income tax (expense) benefit ( 563 ) 2,201

Total other comprehensive income (loss) 1,639 ( 6,406 )

Comprehensive income $ 10,618 $ 2,266

12 unchanged sentences

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 loss — — — — — 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

Common Shares Outstanding Preferred Stock Common

5 unchanged sentences

(In Thousands, Except Share Data)

Balance at December 31, 2022 8,362,085 $ 11,992 $ 94 $ 87,512 $ 203,507 $ ( 15,310 ) $ ( 27,155 ) $ 260,640

Cumulative change in accounting principle — — — — ( 1,353 ) — — ( 1,353 )

Balance at January 1, 2023 8,362,085 11,992 94 87,512 202,154 ( 15,310 ) ( 27,155 ) 259,287

Net income — — — — 8,979 — — 8,979

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)

— — — — ( 1,670 ) — — ( 1,670 )

Treasury stock purchased ( 18,223 ) — — — — — ( 608 ) ( 608 )

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

Net income — — — — 11,204 — — 11,204

Other comprehensive income — — — — — 1,639 — 1,639

5 unchanged sentences

Treasury stock purchased ( 56,394 ) — — — — — ( 1,860 ) ( 1,860 )

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

Balance at March 31, 2023 8,306,270 11,992 94 88,173 209,008 ( 13,671 ) ( 29,015 ) 266,581

See accompanying Notes to Unaudited Consolidated Financial Statements.

1 unchanged sentence

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 312 ( 1,209 )

Impairment of tax credit investments ( 351 ) —

Provision for loan and lease losses ( 4,569 ) ( 5,295 )

Derivative credit valuation adjustment — ( 376 )

Provision for credit losses 1,561 ( 855 )

Depreciation, amortization and accretion, net 912 1,062

Gain on disposal of lease equipment ( 478 ) —

Loss on disposal of equipment — 68

Amortization of low income housing tax credits 552 —

Share-based compensation 634 609

Net gain on sale of securities — ( 29 )

Increase in bank-owned life insurance policies ( 1,057 ) ( 1,056 )

Gain on disposal of lease equipment 1 —

Amortization of tax credit investments 436 —

Bank-owned life insurance policy income ( 366 ) ( 349 )

Origination of loans for sale ( 27,639 ) ( 26,531 )

Sale of SBA loans originated for sale 99,499 63,805

Sale of loans originated for sale 28,049 28,268

Gain on sale of loans originated for sale ( 476 ) ( 585 )

Net loss on foreclosed properties, including impairment valuation 27 7

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

Net loss on repossessed assets 6 12

Return on investment in limited partnerships 1,690 147

Excess tax benefit expense from share-based compensation 137 158

Returns on investments in limited partnerships 314 —

Payments on operating lease liabilities ( 1,230 ) ( 1,187 )

Payments received on operating leases 134 126

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

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

Net payments on operating lease liabilities ( 355 ) ( 363 )

Net (decrease) increase in accrued interest receivable and other assets ( 5,738 ) 93

Net increase (decrease) in accrued interest payable and other liabilities 1,766 ( 7,031 )

Net cash provided by operating activities 9,909 2,098

2 unchanged sentences

Proceeds from maturities, redemptions, and paydowns of held-to-maturity securities 1,169 2,470

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

Purchases of available-for-sale securities ( 25,924 ) ( 39,760 )

Proceeds from sale of foreclosed properties 37 —

Net (increase) decrease in loans and leases ( 86,487 ) 23,969

Proceeds from sale of repossessed assets — 35

Net increase in loans and leases ( 96,356 ) ( 11,653 )

Investments in limited partnerships ( 650 ) ( 362 )

Returns of investments in limited partnerships 4 —

Distribution from historic development entities 474 57

Investment in low-income housing entities ( 11,146 ) ( 1,307 )

Investment in tax credit investments ( 3,090 ) ( 649 )

Investment in Federal Home Loan Bank stock ( 11,644 ) ( 5,661 )

1 unchanged sentence

Purchases of leasehold improvements and equipment, net ( 798 ) ( 60 )

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

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

Proceeds from redemption of Trust II stock — 315

2 unchanged sentences

Net increase in deposits 308,635 65,771

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

Repayment of Federal Home Loan Bank advances ( 810,350 ) ( 464,200 )

Repayment of subordinated notes payable ( 9,090 ) —

Proceeds from Federal Home Loan Bank advances 701,470 456,800

Proceeds from issuance of subordinated notes payable — 20,000

13 unchanged sentences

Interest paid on deposits and borrowings $ 13,010 $ 3,164

Income taxes paid 3,263 9,958

Non-cash investing and financing activities:

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

Transfer from loans and leases to foreclosed properties 50 145

Net income taxes (received) paid ( 7 ) 17

See accompany Notes to Unaudited Consolidated Financial Statements

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

As of March 31, 2023, FBB had 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”), BOC Investment, LLC (“BOC”), Mitchell Street Apartments Investment, LLC (“Mitchell Street”), and FBB Tax Credit Investment, LLC (“FBB Tax Credit”).

(“FMIC”), ABKC Real Estate, LLC (“ABKC”), FBB Real Estate 2, LLC (“FBB RE 2”), 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”) was not consolidated into the financial statements.

As of March 30, 2022, the Bank’s trust preferred securities were redeemed and Trust II was subsequently dissolved.

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, and income taxes.

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.

Material estimates that could significantly change in the near-term include the value of securities and interest rate swaps, level of the allowance for credit losses, lease residuals, property under operating leases, goodwill, and income taxes.

The results of operations for the three months ended March 31, 2023, are not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, 2023.

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

1 unchanged sentence

No significant subsequent events have occurred through this date requiring adjustment to the financial statements or disclosures.

The Corporation has not changed its significant accounting and reporting policies from those disclosed in the Corporation’s Form 10-K for the year ended December 31, 2021.

Recent Accounting Pronouncements

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.

The ASU also requires consideration of a broader range of information to inform credit loss estimates, including such factors as past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, and any other financial asset not excluded from the scope under which the Corporation has the contractual right to receive cash.

Entities will apply the amendments in the ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.

In November 2019, the FASB issued ASU No.

2019-10, “ Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842).

” The ASU delays the effective date for the credit losses standard from January 1, 2020 to January 1, 2023 for certain entities, including certain Securities and Exchange Commission filers, public business entities, and private companies.

As a smaller reporting company, the Corporation is eligible for the delay and has deferred adoption.

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

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.

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

Adoption of new accounting standards

ASU 2016 - 13

On January 1, 2023, the Corporation adopted ASU 2016-03 Financial Instruments - Credit losses (“ASC 326”):

Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology.

The measurement expected credit losses under CECL methodology is applicable to financial assets measured at amortized cost, included loan receivables and held-to-maturity debit securities.

It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with ASC 842 on leases.

In addition, ASC 326 made changes to the accounting for available for sale and held to maturity debt securities.

The Corporation adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures.

Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable U.S.

The Corporation recorded a net decrease to retained earnings of $ 1.4 million as of January 1, 2023 for the cumulative effect of adopting ASC 326.

The transition adjustment to allowance for credit losses (“ACL”) includes $ 1.3 million related to off-balance sheet credit exposures and $ 484,000 related to loans.

The following table illustrates the impact of ASC 326:

January 1, 2023

(In thousands) As Reported Under ASC 326 Pre-ASC 326 Adoption Impact of ASC 326 Adoption

Loans $ 2,443,215 $ 2,443,215 $ —

Commercial real estate — owner occupied 1,548 1,766 ( 218 )

Commercial real estate — non-owner occupied 4,811 5,108 ( 297 )

Construction 1,755 1,646 109

Multi-family 2,243 2,634 ( 391 )

1-4 family 147 207 ( 60 )

Commercial and industrial 13,762 12,403 1,359

Consumer and other 448 466 ( 18 )

Total ACL on loans $ 24,714 $ 24,230 $ 484

Net deferred tax asset $ 12,176 $ 11,711 $ 465

ACL on unfunded credit commitments $ 1,334 $ — $ 1,334

Stockholders’ equity:

$ 259,287 $ 260,640 $ ( 1,353 )

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

For AFS debt securities in an unrealized loss position, the Corporation first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income.

For AFS debt securities that do not meet the aforementioned criteria, the Corporation evaluates whether the decline in fair value has resulted from credit losses or other factors.

In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors.

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.

If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.

Any decline in fair value that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes.

Changes in the ACL are recorded as a provision for (or recovery of) credit loss expense.

Losses are charged against allowance when management believes that uncollectibility of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable on AFS debt securities totaled $ 1.0 million at March 31, 2023 and is excluded from the estimate of credit losses.

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

Management measures expected credit losses on HTM debt securities on a collective basis by major security type.

Accrued interest receivable on HTM debt securities totaled $ 74,000 at March 31, 2023 and is excluded from the estimate of credit losses.

The HTM securities portfolio includes residential mortgaged backed securities (“MBS”) commercial MBS, and municipal securities.

All residential and commercial MBS are U.S.

government issued or U.S.

government sponsored and substantially all municipal bonds are rated A or above.

The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.

At the time of adoption, the estimated reserve was immaterial.

The ACL is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans.

Loans are charged off against the allowance when management believes that the uncollectibility of a loan balance is confirmed.

Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

Historical credit loss experience provides the basis for the estimation of expected credit losses.

Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as changes in external conditions, such as changes in unemployment rates, property values, or other relevant factors.

Accrued interest receivable on loans totaled $ 8.9 million at March 31, 2023 and is excluded from the estimate of credit losses.

ACL - Loans - Collectively Evaluated

The ACL is measured on a collective pool basis when similar risk characteristics exist.

The Corporation has identified the following portfolio segments:

Commercial Real Estate:

Commercial real estate portfolio segments utilize substantially similar processes and controls.

Due to the collateral types, availability of data, and results of the Loss Driver Analysis (“LDA”), management utilizes a unique forecast model for each portfolio segment along with a separate analysis of subjective factors.

• Construction - Loans secured by real estate used to finance land development or construction.

• 1-4 Family - Loans secured by 1-4 family residential property

• Multi-family - Loans secured by multi-family residential property

• Owner Occupied - Loans secured by nonfarm, nonresidential owner-occupied property

• Non-owner Occupied - Loans secured by other nonfarm, nonresidential property

Commercial and Industrial Lending:

Commercial and industrial lending is a portfolio segment where management uses a common forecast due to common risk management, similarity in collateral types, availability of data, and results of the LDA.

Management has distinct processes, controls, and procedures which enable more precise development of subjective factors at the pool level.

• Commercial - Loans to small- to medium-sized companies in our primary markets in Wisconsin, Kansas, and Missouri, predominantly through lines of credit and term loans to businesses with annual sales of up to $150 million.

• Asset Based Lending - Products include revolving lines of credit and term loans for strategic acquisitions, capital expenditures, working capital, bank debt refinancing, debt restructuring, and corporate turnaround strategies.

• Floorplan - Floor plan financing for independent auto dealerships nationwide.

• SBA - Loans originated in accordance with the guidelines of the Small Business Administration (“SBA”).

As the Corporation prefers to sell the guaranteed portion, the on-balance sheet loans are primarily unguaranteed.

• Equipment finance - Loans and leases secured by a broad range of equipment to commercial clients in a variety of industries.

Consumer and other - Consumer loans consisting of marketable security loans, home equity, first and second mortgages, and other personal loans for executives and high net-worth individuals.

The Corporation uses a unique forecast model and subjective factors for this portfolio segment due to the client type and data availability.

Measures of the allowance for credit losses are as follows:

Portfolio Segment Pool Measurement Method Loss Driver

Commercial real estate

Owner occupied Discounted Cash Flow National unemployment, National GDP

Non-owner occupied Discounted Cash Flow National unemployment, National GDP

Construction Discounted Cash Flow National unemployment, National GDP

Multi-family Discounted Cash Flow National unemployment, National GDP

1-4 Family Discounted Cash Flow National unemployment, National GDP

Commercial and industrial

Commercial Discounted Cash Flow National unemployment, National GDP

ABL Discounted Cash Flow National unemployment, National GDP

Floorplan Discounted Cash Flow National unemployment, National GDP

SBA Weighted Average Remaining Maturity N/A

Equipment Finance Discounted Cash Flow National unemployment, National GDP

Consumer and other Discounted Cash Flow National unemployment, National GDP

The Corporation utilized a discounted cash flow (DCF) or Weighted Average Remaining Maturity (WARM) method to estimate the quantitative portion of the allowance for credit losses for loans evaluated on a collective pooled basis.

For each segment, a LDA was performed in order to identify loss drivers and create a regression model for use in forecasting cash flows.

For all DCF-based pools, the LDA analyses utilized the Corporation’s and peer data from the Federal Financial Institutions Examination Council's (“FFIEC”) Call Report filings.

In creating the DCF model, the Corporation has established a one-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average.

Due to the infrequency of losses, the Corporation elected to use peer data for a more statistically sound calculation.

Key inputs into the DCF model include loan-level detail, including the amortized cost basis of individual loans, payment structure, loss history, and forecasted loss drivers.

The Corporation utilizes a third party to provide economic forecasts under various scenarios, which are assessed quarterly considering the scenarios in the context of the current economic environment and presumed risk of loss.

Expected credit losses are estimated over the contractual term of the loans, adjusted for prepayments when appropriate.

The contractual term excludes extensions, renewals, and modifications unless the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Corporation.

Additional key assumptions in the DCF model include the probability of default (“PD”), loss given default (“LGD”), and prepayment/curtailment rates.

The Corporation utilizes the model-driven PD and a LGD derived using a method referred to as Frye Jacobs.

The Frye Jacobs method is a mathematical formula that traces the relationship between LGD and PD over time and projects the LGD based on the level of PD forecasted.

In all cases, the Frye Jacobs method is utilized to calculate LGDs during the forecast period, reversion period and long-term historical average.

Prepayment and curtailment rates were calculated through third party studies of the Corporation’s own data.

When the DCF method is used to determine the allowance for credit losses, management adjusts the effective interest rate used to discount expected cash flows to incorporate expected prepayments.

For the WARM-based SBA pool, Corporation-specific data was used to develop the model assumptions.

The Corporation developed a reasonable and supportable estimate for the remaining maturity and estimated loss through analysis of historical data.

The remaining maturity calculation excludes loans originated under the Paycheck Protection Program as such loans are inconsistent with the current portfolio composition.

The quarterly loss rate data includes 2017 to current as the SBA lending policies and procedures were realigned in 2016 following the acquisition of Alterra Bank.

Only the unguaranteed portion of the SBA loans are assessed via WARM.

The risk of a failed guarantee claim is captured under ASC 450 contingency accounting.

Qualitative factors for DCF and WARM methodologies include the following:

• The Corporation’s lending policies and procedures, including changes in lending strategies, underwriting standards and practices for collections, write-offs, and recoveries;

• Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the Corporation operates that affect the collectability of financial assets;

• The experience, ability, and depth of the Corporation’s lending, investment, collection, and other relevant management and staff;

• The volume of past due financial assets, the volume of non-performing assets, and the volume and severity of adversely classified or graded assets;

• The existence and effect of industry concentrations of credit;

• The nature and volume of the portfolio segment or class;

• The quality of the Corporation’s credit review function and;

• The effect of other external factors such as the regulatory, legal and technological environments, competition, and events such as natural disasters or pandemics

ACL - Loans - Individually Evaluated

Loans that do not share risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation.

The Corporation has determined that any loans which have been placed on non-performing status will be individually evaluated.

Individual analysis will establish a specific reserve for loans in scope.

Specific reserves on non-performing loans are typically based on management’s best estimate of the fair value of collateral securing these loans, adjusted for selling costs as appropriate.

ACL - Off-Balance Sheet Credit Exposures

The Corporation estimates expected credit losses over the contractual period in which the Corporation is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Corporation.

The allowance for credit losses on off-balance sheet credit exposure is adjusted as a provision for credit loss expense.

The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.

Funding rates are based on a historical analysis of the Corporation’s portfolio, while estimates of credit losses are determined using the same loss rates as funded loans.

Regulatory capital

As permitted by the federal banking regulatory agencies, the Corporation has elected the option to delay the impact of the day one adoption of ASC 326.

The transition adjustments of $ 1.4 million will be phased into the regulatory capital calculations over a three year period, with 25% of the adjustment recognized in 2023, 50% of the adjustment recognized in 2024, 75% of the adjustment recognized in 2025, and 100% of the adjustment recognized in 2026.

ASU 2022-02 Troubled Debt Restructurings

Concurrent with the adoption of ASU 2016-03, the Corporation adopted ASU 2022-02 "Financial Instruments-Credit Losses (“ASC 326”):

Troubled Debt Restructurings and Vintage Disclosures", as amended.

The update eliminates 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.

ASU 2020-04 Reference Rate Reform

In March 2020, the FASB issued ASU No.

1 unchanged sentence

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 the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued.

The accounting standards update (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.

1 unchanged sentence

The guidance is effective for all entities as of March 12, 2020 through December 31, 2022.

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.

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):

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.

The Corporation has adopted the standard and utilized the LIBOR transition relief allowed under ASU 2020-04 and ASU 2020-01.

The impact was immaterial as all

transactions enacted under LIBOR were able to be transitioned to another referenced (predominately Secured Overnight Financing Rate “SOFR”).

Certain contracts were transitioned in 2023.

In all cases, the Corporation was able to meet the criteria for practical expedients and there was no impact on the financial results.

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,

2022 2021 2022 2021

For the Three Months Ended March 31,

(Dollars in Thousands, Except Share Data)

15 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 September 30, 2022, 149,931 shares were available for future grants under the Plan.

As of March 31, 2023, 76,795 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.

2 unchanged sentences

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.

Restricted stock units do not have voting rights and are provided dividend equivalents.

RSUs do not have voting rights.

RSUs granted prior to 2023 are provided dividend equivalents concurrent with dividends paid to shareholders while RSUs granted in 2023 and after will accrue dividend equivalents payable upon vesting.

The restricted stock granted under the Plan is typically subject to a vesting period.

1 unchanged sentence

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 (“PRSU”) and time-based restricted stock awards to its plan participants.

The Corporation may also issue performance-based restricted stock units (“PRSU”).

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.

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

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

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

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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 nine months ended September 30, 2022 was as follows:

Restricted stock activity for the year ended December 31, 2022 and the three months ended March 31, 2023 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

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

62,560 34.04 37,335 24.71 3,115 27.95 103,010 30.47

5 unchanged sentences

Forfeited ( 1,923 ) 26.73 — — — — ( 1,923 ) 26.73

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

Nonvested balance as of March 31, 2023 87,087 $ 28.95 74,215 $ 34.63 46,217 $ 35.76 207,519 $ 32.50

Unrecognized compensation cost (in thousands) $ 2,111 $ 1,513 $ 1,595 $ 5,219

2 unchanged sentences

The number of shares actually issued may vary.

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 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.

During the three months ended March 31, 2023, the Corporation issued 1,005 shares of common stock under the ESPP.

As of March 31, 2023, 233,961 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 September 30, For the Nine Months Ended September 30,

2022 2021 2022 2021

For the Three Months Ended March 31,

(In Thousands)

2 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 September 30, 2022

As of March 31, 2023

Amortized Cost Gross

26 unchanged sentences

Commercial mortgage-backed securities - government-sponsored enterprises 31,515 — ( 5,138 ) 26,377

Other securities

$ 239,751 $ 160 $ ( 27,887 ) $ 212,024

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

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, 2022

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

As of March 31, 2023

Amortized Cost Gross

22 unchanged sentences

$ 12,635 $ 7 $ ( 372 ) $ 12,270

Treasuries contains treasury bonds issued by the United States Treasury.

Treasuries contain 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 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.

There were no sales of available-for-sale securities that occurred during the three months ended March 31, 2023 and 2022.

At March 31, 2023 and December 31, 2022, securities with a fair value of $ 47.7 million and $ 35.9 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 March 31, 2023 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

71,306 65,857 6,597 6,579

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, 2022 and December 31, 2021.

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 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.

Residential mortgage-backed securities 153,967 140,576 2,858 2,702

Commercial mortgage-backed securities 35,681 30,556 2,006 1,926

$ 260,954 $ 236,989 $ 11,461 $ 11,207

At March 31, 2023, the Corporation held 177 available-for-sale securities that were in an unrealized loss position.

At March 31, 2023, the Corporation held 147 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.

The Corporation reviews its securities on a quarterly basis to monitor its exposure to other-than-temporary impairment.

Consideration is given to such factors as the length of time and extent to which the security has been in an unrealized loss position, changes in security ratings, and an evaluation of the present value of expected future cash flows, if necessary.

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, 2022 and 2021.

The Corporation reviews its securities on a quarterly basis to assess declines in fair value for credit losses.

Consideration is given to such factors as the credit rating of the borrower, market conditions such as current interest rates, any adverse conditions specific to the security, and delinquency status on contractual payments.

For the three months ended March 31, 2023 and 2022, management concluded that in all instances securities with fair value less than carrying value was due to market and other factors;

thus, no credit loss provision was required.

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, 2022

As of March 31, 2023

Less than 12 Months 12 Months or Longer Total

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$ 116,851 $ 11,097 $ 82,519 $ 16,790 $ 199,370 $ 27,887

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, 2022 and December 31, 2021.

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 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 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 September 30, 2022

At March 31, 2023, the Corporation held 32 held-to-maturity securities that were in an unrealized loss position.

Management assesses HTM securities for credit losses on a quarterly basis.

The assessment includes review of credit ratings, identification of delinquency and evaluation of market factors.

Based on this analysis, management concludes the

decline in fair value is due to market factors.

Accordingly, no credit loss provision was recorded in the unaudited Consolidated Statements of Income for the three months ended March 31, 2023 and 2022.

A summary of unrecognized 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 March 31, 2023

Less than 12 Months 12 Months or Longer Total

Fair Value Unrealized

Losses Fair Value Unrealized

Fair Value Unrecognized

Losses Fair Value Unrecognized

(In Thousands)

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Less than 12 Months 12 Months or Longer Total

Fair Value Unrealized

Losses Fair Value Unrealized

Fair Value Unrecognized

Losses Fair Value Unrecognized

(In Thousands)

2 unchanged sentences

$ 6,035 $ 52 $ 267 $ 18 $ 6,302 $ 70

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

Residential mortgage-backed securities - government issued

1,518 107 — — 1,518 107

Residential mortgage-backed securities - government-sponsored enterprises

1,444 93 — — 1,444 93

Commercial mortgage-backed securities - government-sponsored enterprises 1,904 102 — — 1,904 102

$ 10,901 $ 354 $ 267 $ 18 $ 11,168 $ 372

On January 1, 2023, the Corporation adopted ASU 2016-13, which replaced the legacy GAAP other-than-temporary impairment (“OTTI”) model with a credit loss model.

ASU 2016-13 requires an allowance on lifetime expected credit losses on held to maturity debt securities.

As of January 1, 2023 and March 31, 2023, the Corporation estimated the expected credit losses to be immaterial based on the composition of the securities portfolio.

The credit loss model under ASU 2016-13, applicable to AFS debt securities, requires the recognition of credit losses through an allowance account, but retains the concept from the OTTI model that credit losses are recognized once securities become

See Note 1, “Summary of Significant Accounting Policies” to the consolidated financial statement included in this

Form 10-Q, for a discussion of the impact of the adoption of ASU 2016-13.

Note 5 — Loans and Allowance for Credit Losses

Loan and lease receivables consist of the following:

September 30,

2023 December 31,

5 unchanged sentences

675,087 687,091

Land development

49,458 42,792

162,051 179,841

Construction 212,916 218,751

384,043 350,026

3 unchanged sentences

Commercial and industrial 963,328 853,327

Direct financing leases, net 11,109 15,743

Consumer and other 46,773 47,938

Home equity and second mortgages

40,710 35,518

Total consumer and other

46,123 39,741

Total gross loans and leases receivable

2,539,276 2,443,215

Allowance for loan and lease losses 24,143 24,336

Allowance for credit losses 26,140 24,230

Deferred loan fees ( 87 ) 149

1 unchanged sentence

$ 2,513,223 $ 2,418,836

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.

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 at all, 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.

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

September 30,

2022 December 31,

(In Thousands)

SBA 7(a) loans $ 34,723 $ 33,223

SBA 504 loans 26,279 41,394

SBA Express loans and lines of credit 231 387

SBA PPP loans 2,376 27,854

Total SBA loans $ 63,609 $ 102,858

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 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 total principal amount of the guaranteed portions of SBA loans sold during the three months ended March 31, 2023, and 2022, was $ 5.0 million and $ 5.6 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 March 31, 2023, and 2022, 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, 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.

The total outstanding balance of sold SBA loans at March 31, 2023, and December 31, 2022, was $ 88.0 million and $ 88.5 million, respectively.

The total principal amount of transferred participation interests in other, non-SBA originated loans during the three months ended March 31, 2023, and 2022, was $ 22.6 million and $ 22.1 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, 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 total outstanding balance of these transferred loans at March 31, 2023, and December 31, 2022, was $ 236.6 million and $ 222.9 million, respectively.

As of March 31, 2023, and December 31, 2022, the total amount of the Corporation’s partial ownership of these transferred loans on the unaudited Consolidated Balance Sheets was $ 353.3 million and $ 339.0 million, respectively.

As of March 31, 2023 and December 31, 2022, the non-SBA originated participation portfolio contained no non-performing 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, 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, 2022

I II III IV Total

(Dollars in Thousands)

Commercial real estate:

Commercial real estate — owner occupied $ 248,115 $ 4,830 $ 13,044 $ — $ 265,989

Commercial real estate — non-owner occupied 602,701 28,347 26,927 — 657,975

Land development 49,341 117 — — 49,458

Construction 151,169 — 10,882 — 162,051

Multi-family 324,731 8,051 — — 332,782

1-4 family 15,336 1,310 — 32 16,678

Total commercial real estate 1,391,393 42,655 50,853 32 1,484,933

Commercial and industrial 744,625 8,737 31,897 3,724 788,983

Direct financing leases, net 9,167 415 1,466 61 11,109

Consumer and other:

Home equity and second mortgages 4,173 1,198 42 — 5,413

Other 40,710 — — — 40,710

Total consumer and other 44,883 1,198 42 — 46,123

Total gross loans and leases receivable $ 2,190,068 $ 53,005 $ 84,258 $ 3,817 $ 2,331,148

Category as a % of total portfolio 93.96 % 2.27 % 3.61 % 0.16 % 100.00 %

December 31, 2021

I II III IV Total

(Dollars in Thousands)

Commercial real estate:

There were no loan participations purchased on the unaudited Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022.

The following table illustrates ending balances of the Corporation’s loan and lease portfolio, including non-performing loans by class of receivable, and considering certain credit quality indicators:

March 31, 2023 Term Loans Amortized Cost Basis by Origination Year

(In Thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total

Commercial real estate — owner occupied

I $ 3,712 $ 35,695 $ 28,605 $ 47,436 $ 23,386 $ 82,799 $ 1,541 $ 223,174

II — — 625 802 — 1,310 — 2,737

III — — — 5,132 — 2,682 — 7,814

IV — — — — — — — —

Total $ 3,712 $ 35,695 $ 29,230 $ 53,370 $ 23,386 $ 86,791 $ 1,541 $ 233,725

Commercial real estate — non-owner occupied

Land development 42,291 501 — — 42,792

Construction 140,181 9,077 30,583 — 179,841

Multi-family 300,589 8,217 11,266 — 320,072

1-4 family 14,012 158 402 339 14,911

Total commercial real estate 1,315,127 53,811 85,003 687 1,454,628

I $ 8,945 $ 67,653 $ 74,530 $ 53,133 $ 64,228 $ 310,632 $ 33,571 $ 612,692

II — — — 1,293 6,187 10,653 — 18,133

III — — — — 19,708 24,554 — 44,262

IV — — — — — — — —

Total $ 8,945 $ 67,653 $ 74,530 $ 54,426 $ 90,123 $ 345,839 $ 33,571 $ 675,087

I $ 45 $ 62,211 $ 59,338 $ 38,867 $ 451 $ 30,566 $ 21,438 $ 212,916

II — — — — — — — —

III — — — — — — — —

IV — — — — — — — —

Total $ 45 $ 62,211 $ 59,338 $ 38,867 $ 451 $ 30,566 $ 21,438 $ 212,916

I $ 32,389 $ 35,629 $ 50,672 $ 114,782 $ 23,198 $ 124,160 $ 3,213 $ 384,043

II — — — — — — — —

III — — — — — — — —

IV — — — — — — — —

Total $ 32,389 $ 35,629 $ 50,672 $ 114,782 $ 23,198 $ 124,160 $ 3,213 $ 384,043

I $ — $ 8,880 $ 2,747 $ 2,415 $ 467 $ 3,391 $ 5,378 $ 23,278

II — — — — — 98 — 98

III — — — — — — — —

IV — — — — — 28 — 28

Total $ — $ 8,880 $ 2,747 $ 2,415 $ 467 $ 3,517 $ 5,378 $ 23,404

March 31, 2023 Term Loans Amortized Cost Basis by Origination Year

(In Thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total

Commercial and industrial

Direct financing leases, net 10,892 105 4,647 99 15,743

I $ 79,070 $ 190,328 $ 109,529 $ 52,885 $ 28,114 $ 39,127 $ 397,987 $ 897,040

II 223 6,174 918 2,762 946 198 10,965 22,186

III — 2,664 5,812 10,801 6,622 5,837 8,982 40,718

IV — 1,134 1,003 539 338 370 — 3,384

Total $ 79,293 $ 200,300 $ 117,262 $ 66,987 $ 36,020 $ 45,532 $ 417,934 $ 963,328

Consumer and other

Home equity and second mortgages 3,925 231 67 — 4,223

Other 35,385 133 — — 35,518

Total consumer and other 39,310 364 67 — 39,741

Total gross loans and leases receivable $ 2,051,452 $ 60,223 $ 122,681 $ 6,575 $ 2,240,931

Category as a % of total portfolio 91.55 % 2.69 % 5.47 % 0.29 % 100.00 %

I $ 4,609 $ 9,563 $ 3,460 $ 13,365 $ 2,330 $ 4,414 $ 9,032 $ 46,773

II — — — — — — — —

III — — — — — — — —

IV — — — — — — — —

Total $ 4,609 $ 9,563 $ 3,460 $ 13,365 $ 2,330 $ 4,414 $ 9,032 $ 46,773

Each credit is evaluated for proper risk rating upon origination, at the time of each subsequent renewal, upon receipt and evaluation of updated financial information from the Corporation’s borrowers, or as other circumstances dictate.

13 unchanged sentences

Category III loans are monitored by management and asset quality review committees on a monthly basis.

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

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

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.

Category IV — Loans and leases in this category are non-performing loans.

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.

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

analyzing the adequacy of collateral, the Corporation obtains external appraisals at least annually.

External appraisals are obtained from the Corporation’s approved appraiser listing and are independently reviewed to monitor the quality of such appraisals.

To the extent a collateral shortfall position is present, a specific reserve or charge-off will be recorded to reflect the magnitude of the impairment.

To the extent a collateral shortfall position is present, a specific reserve or charge-off will be recorded.

Loans and leases in this category are monitored by management and asset quality review committees on a monthly basis.

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

September 30, 2022

March 31, 2023

Days Past Due 60-89

Days Past Due Greater

Than 90 Days Past Due Total Past Due Current Total Loans and Leases

Days Past Due Total Past Due Current Total Loans and Leases

(Dollars in Thousands)

Accruing loans and leases

Performing loans and leases

Commercial real estate:

1 unchanged sentence

Non-owner occupied — — — — 675,087 675,087

Land development — — — — 49,458 49,458

Construction — — — — 212,916 212,916

2 unchanged sentences

Commercial and industrial 2,440 103 — 2,543 957,401 959,944

Direct financing leases, net 27 — — 27 11,021 11,048

Consumer and other — — — — 46,773 46,773

Home equity and second mortgages — — — — 5,413 5,413

Other — — — — 40,710 40,710

Total 2,440 103 — 2,543 2,533,321 2,535,864

Non-accruing loans and leases

Non-performing loans and leases

Commercial real estate:

1 unchanged sentence

Non-owner occupied — — — — — —

Land development — — — — — —

Construction — — — — — —

2 unchanged sentences

Commercial and industrial 72 478 2,068 2,618 766 3,384

Direct financing leases, net — — 61 61 — 61

Consumer and other — — — — — —

Home equity and second mortgages — — — — — —

Other — — — — — —

Total 72 478 2,068 2,618 794 3,412

3 unchanged sentences

Non-owner occupied — — — — 675,087 675,087

Land development — — — — 49,458 49,458

Construction — — — — 212,916 212,916

2 unchanged sentences

Commercial and industrial 2,512 581 2,068 5,161 958,167 963,328

Direct financing leases, net 27 — 61 88 11,021 11,109

Consumer and other — — — — 46,773 46,773

Home equity and second mortgages — — — — 5,413 5,413

Other — — — — 40,710 40,710

Total $ 2,512 $ 581 $ 2,068 $ 5,161 $ 2,534,115 $ 2,539,276

3 unchanged sentences

Days Past Due Greater

Than 90 Days Past Due Total Past Due Current Total Loans and Leases

Days Past Due Total Past Due Current Total Loans and Leases

(Dollars in Thousands)

Accruing loans and leases

Performing loans and leases

Commercial real estate:

1 unchanged sentence

Non-owner occupied 215 — — 215 686,876 687,091

Land development — — — — 42,792 42,792

Construction — — — — 218,751 218,751

2 unchanged sentences

Commercial and industrial 1,437 403 — 1,840 847,858 849,698

Direct financing leases, net 281 14 — 295 15,349 15,644

Consumer and other — — — — 47,938 47,938

Home equity and second mortgages — — — — 4,223 4,223

Other — — — — 35,518 35,518

Total 1,652 403 — 2,055 2,437,501 2,439,556

Non-accruing loans and leases

Non-performing loans and leases

Commercial real estate:

1 unchanged sentence

Non-owner occupied — — — — — —

Land development — — — — — —

Construction — — — — — —

2 unchanged sentences

Commercial and industrial 439 126 2,464 3,029 600 3,629

Direct financing leases, net — — 84 84 15 99

Consumer and other:

Home equity and second mortgages — — — — — —

Other — — — — — —

4 unchanged sentences

Non-owner occupied 215 — — 215 686,876 687,091

Land development — — — — 42,792 42,792

Construction — — — — 218,751 218,751

2 unchanged sentences

Commercial and industrial 1,876 529 2,464 4,869 848,458 853,327

Direct financing leases, net 281 14 84 379 15,364 15,743

Consumer and other — — — — 47,938 47,938

Home equity and second mortgages — — — — 4,223 4,223

Other — — — — 35,518 35,518

Total $ 2,091 $ 529 $ 2,464 $ 5,084 $ 2,438,131 $ 2,443,215

Percent of portfolio 0.09 % 0.02 % 0.10 % 0.21 % 99.79 % 100.00 %

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

September 30,

The Corporation’s total non-performing assets consisted of the following:

2023 December 31,

(In Thousands)

Non-accrual loans and leases

Non-performing loans and leases

Commercial real estate:

1 unchanged sentence

Commercial real estate — non-owner occupied — —

Land development — —

Construction — —

1 unchanged sentence

1-4 family 28 30

Total non-accrual commercial real estate 32 687

Total non-performing commercial real estate 28 30

Commercial and industrial 3,384 3,629

Direct financing leases, net 61 99

Consumer and other — —

Home equity and second mortgages — —

Total non-accrual consumer and other loans — —

Total non-accrual loans and leases 3,645 6,358

Foreclosed properties, net 151 164

Total non-performing loans and leases 3,412 3,659

Repossessed assets, net 89 95

Total non-performing assets $ 3,501 $ 3,754

Performing troubled debt restructurings 172 217

Total impaired assets $ 3,968 $ 6,739

September 30,

2023 December 31,

Total non-accrual loans and leases to gross loans and leases 0.16 % 0.28 %

Total non-performing assets to total gross loans and leases plus foreclosed properties, net 0.16 0.29

Total non-performing loans and leases to gross loans and leases 0.13 % 0.15 %

Total non-performing assets to total gross loans and leases plus repossessed assets, net 0.14 0.15

Total non-performing assets to total assets 0.11 0.13

Allowance for loan and lease losses to gross loans and leases 1.04 1.09

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

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 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

Investment Post-Modification

Investment Number of Loans Pre-Modification

Investment Post-Modification

(Dollars in Thousands)

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

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 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 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 Nine Months Ended September 30, 2022

Allowance for credit losses to gross loans and leases 1.08 0.99

Allowance for credit losses to non-performing loans and leases 807.44 662.20

Occasionally, the Corporation modifies loans to borrowers in financial distress.

During the three months ended March 31, 2023 and 2022, no loans to borrowers experiencing financial distress were modified.

There were no loans to borrowers experiencing financial distress that were modified during the previous 12 months and which subsequently defaulted during the three months ended March 31, 2023 and 2022.

There were no unfunded commitments associated with loans modified for borrowers experiencing financial distress as of March 31, 2023.

The following represents additional information regarding the Corporation’s non-performing loans and leases, by portfolio segment:

As of and for the Three Months Ended March 31, 2023

Investment (1)

Balance Impairment

Balance Individual

Reserve Average

3 unchanged sentences

(In Thousands)

With no impairment reserve recorded:

With no individual reserve recorded:

Commercial real estate:

1 unchanged sentence

Non-owner occupied — — — — — — —

Land development

— — — — — — —

— — — — — 47 ( 47 )

Multi-family — — — — — — —

1 unchanged sentence

Commercial and industrial 1,009 1,009 — 1,842 23 36 ( 13 )

Direct financing leases, net — — — 13 — 2 ( 2 )

Consumer and other — — — — — — —

Home equity and second mortgages

— — — — — — —

Other — — — — — — —

Total 1,037 1,042 — 1,871 24 40 ( 16 )

With impairment reserve recorded:

With individual reserve recorded:

Commercial real estate:

1 unchanged sentence

Non-owner occupied — — — — — — —

Land development

— — — — — — —

Construction — — — — — — —

2 unchanged sentences

Commercial and industrial 2,375 2,375 1,622 1,665 54 — 54

Direct financing leases, net 61 61 54 54 2 — 2

Consumer and other — — — — — — —

Home equity and second mortgages

— — — — — — —

Other — — — — — — —

Total 2,375 2,375 1,622 1,665 54 — 54

2 unchanged sentences

Non-owner occupied — — — — — — —

Land development

— — — — — — —

Construction — — — — — — —

2 unchanged sentences

Commercial and industrial 3,384 3,384 1,622 3,507 77 36 41

Direct financing leases, net 61 61 54 67 2 2 —

Consumer and other — — — — — — —

Home equity and second mortgages — — — — — — —

Other — — — — — — —

Grand total $ 3,412 $ 3,417 $ 1,622 $ 3,536 $ 78 $ 40 $ 38

3 unchanged sentences

Investment (1)

Balance Impairment

Balance Individual

Reserve Average

3 unchanged sentences

(In Thousands)

With no impairment reserve recorded:

With no individual reserve recorded:

Commercial real estate:

1 unchanged sentence

Non-owner occupied — — — — — 1 ( 1 )

Land development — — — 7 — — —

Construction — — — — — 47 ( 47 )

2 unchanged sentences

Commercial and industrial 1,037 1,037 — 3,153 277 587 ( 310 )

Direct financing leases, net 15 15 — 2 1 — 1

Consumer and other — — — — — — —

Home equity and second mortgages

— — — 40 7 9 ( 2 )

Other — — — 8 23 — 23

Total 1,067 1,072 — 3,445 299 1,435 ( 1,136 )

With impairment reserve recorded:

With individual reserve recorded:

Commercial real estate:

1 unchanged sentence

Non-owner occupied — — — — — — —

Land development — — — — — — —

Construction — — — — — — —

2 unchanged sentences

Commercial and industrial 2,592 2,612 1,650 1,454 101 1 100

Direct financing leases, net 84 84 66 50 4 — 4

Consumer and other — — — — — — —

Home equity and second mortgages

— — — — — — —

Other — — — — — — —

Total 2,592 2,612 1,650 1,454 101 1 100

2 unchanged sentences

Non-owner occupied — — — — — 1 ( 1 )

Land development — — — 7 — — —

Construction — — — — — 47 ( 47 )

2 unchanged sentences

Commercial and industrial 3,629 3,649 1,650 4,607 378 588 ( 210 )

Direct financing leases, net 99 99 66 52 5 — 5

Consumer and other — — — — — — —

Home equity and second mortgages

— — — 40 7 9 ( 2 )

Other — — — 8 23 — 23

Grand total $ 3,659 $ 3,684 $ 1,650 $ 4,899 $ 400 $ 1,436 $ ( 1,036 )

1 unchanged sentence

(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 $ 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.

The difference between the recorded investment of loans and leases and the unpaid principal balance of $ 5,000 and $ 26,000 as of March 31, 2023, and December 31, 2022, 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.

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

2 unchanged sentences

To the extent the amount of principal on a non-accrual loan is fully collected and additional cash is received, the Corporation will recognize interest income.

To determine the level and composition of the allowance for loan and lease losses, the Corporation categorizes the portfolio into segments with similar risk characteristics.

First, the Corporation evaluates loans and leases for potential impairment classification.

The Corporation analyzes each loan and lease determined to be impaired on an individual basis to determine a specific reserve based upon the estimated value of the underlying collateral for collateral-dependent loans, or alternatively, the present value of expected cash flows.

The Corporation applies historical trends from established risk factors to each category of loans and leases that has not been individually evaluated for the purpose of establishing the general portion of the allowance.

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, 2022

Real Estate Commercial

Industrial Consumer

and Other Total

(In Thousands)

Beginning balance $ 13,410 $ 9,866 $ 828 $ 24,104

Charge-offs — ( 33 ) ( 21 ) ( 54 )

Recoveries 23 50 8 81

Net recoveries (charge-offs) 23 17 ( 13 ) 27

Provision for loan and lease losses ( 492 ) 629 ( 125 ) 12

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

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

Real Estate Commercial

Allowance for Credit Losses

The ACL is an estimate of the expected credit losses on financial assets measured at amortized cost, which is measured using relevant information about past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets.

A provision for credit losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors as discussed within Note 1 – Nature of Operations and Summary of Significant Accounting Policies included in this Form 10-Q.

During the first quarter of 2023, the Corporation adopted ASU 2016-13, including the CECL methodology for estimating the ACL.

This standard was adopted using a modified retrospective approach on January 1, 2023, resulting in a $ 484,000 increase to the ACL and a $ 1.3 million increase to the unfunded credit commitments reserve.

A cumulative effect adjustment resulting in an $ 1.4 million decrease to retained earnings and a $ 465,000 increase to deferred tax assets was also recorded as of the adoption of ASU 2016-13.

Quantitative Considerations

The ACL is primarily calculated utilizing a DCF model.

Key inputs and assumptions used in this model are discussed below:

• Forecast model - For each portfolio segment, an LDA was performed in order to identify appropriate loss drivers and create a regression model for use in forecasting cash flows.

The LDA analysis utilized peer FFIEC Call Report data for all pools.

The Corporation plans to update the LDA annually.

• Probability of default – PD is the probability that an asset will be in default within a given time frame.

The Corporation has defined default as when a charge-off has occurred, a loan goes to non-accrual status, or a loan is greater than 90 days past due.

The forecast model is utilized to estimate PDs.

• Loss given default – LGD is the percentage of the asset not expected to be collected due to default.

The LGD is derived from using a method referred to as Frye Jacobs which uses industry data.

• Prepayments and curtailments – Prepayments and curtailments are calculated based on the Corporation’s own data.

This analysis is updated annually.

• Forecast and reversion – the Corporation has established a one-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average.

• Economic forecast – the Corporation utilizes a third party to provide economic forecasts under various scenarios, which are assessed against economic indicators and management’s observations in the market.

As of January 1, 2023, the date of CECL adoption, the Corporation selected a forecast which forecasts unemployment between 3.8% and 4.15% and GDP growth change between 0.13% and 1.14% during the next four quarters.

As of March 31, 2023, the Corporation selected a forecast which forecasts unemployment between 3.95% and 4.73% and GDP growth change between 0.37% and 1.85% over the next four quarters.

Following the forecast period, the model reverts to long-term averages over four quarters.

Management believes that the resulting quantitative reserve appropriately balances economic indicators with identified risks.

Qualitative Considerations

In addition to the quantitative model, management considers the need for qualitative adjustment for risks not considered in the DCF.

Factors that are considered by management in determining loan collectability and the appropriate level of the ACL are listed below:

• The Corporation’s lending policies and procedures, including changes in lending strategies, underwriting standards and practices for collections, write-offs, and recoveries;

• The experience, ability, and depth of the Corporation’s lending, investment, collection, and other relevant management and staff;

• The volume of past due financial assets, the volume of non-performing assets, and the volume and severity of adversely classified or graded assets;

• The existence and effect of industry concentrations of credit;

• The nature and volume of the portfolio segment or class;

• The quality of the Corporation’s credit review function;

• The effect of other external factors such as the regulatory, legal and technological environments, competition, and events such as natural disasters or pandemics

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

As of and for the Three Months Ended March 31, 2023

Owner Occupied Non-Owner Occupied Construction Multi-Family 1-4 Family Commercial

Industrial Consumer

2 unchanged sentences

Beginning balance $ 1,766 $ 5,108 $ 1,646 $ 2,634 $ 207 $ 12,403 $ 466 $ 24,230

Impact of adopting ASC 326 ( 204 ) ( 242 ) 796 ( 386 ) ( 45 ) 1,873 26 1,818

Charge-offs — — — — — ( 166 ) — ( 166 )

1 unchanged sentence

Net recoveries (charge-offs) — 1 — — — ( 71 ) 11 ( 59 )

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 Nine Months Ended September 30, 2022

Real Estate Commercial

Industrial Consumer

and Other Total

(In Thousands)

Beginning balance $ 15,110 $ 8,413 $ 813 $ 24,336

Charge-offs — ( 140 ) ( 21 ) ( 161 )

Recoveries 4,259 251 27 4,537

Net recoveries 4,259 111 6 4,376

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

Provision for credit losses 94 99 ( 155 ) 653 59 700 111 1,561

Ending balance $ 1,656 $ 4,966 $ 2,287 $ 2,901 $ 221 $ 14,905 $ 614 $ 27,550

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

Real Estate Commercial

Industrial Consumer

and Other Total

Allowance for loan losses 1,636 4,915 1,586 2,892 201 14,348 562 26,140

Allowance for unfunded credit commitments 20 51 701 9 20 557 52 1,410

Total ACL $ 1,656 $ 4,966 $ 2,287 $ 2,901 $ 221 $ 14,905 $ 614 $ 27,550

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

Commercial Real Estate Commercial

Industrial Consumer and Other Total

(In Thousands)

3 unchanged sentences

Net recoveries (charge-offs) 116 62 10 188

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

Provision for credit losses ( 1,461 ) 437 169 ( 855 )

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

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

As of September 30, 2022

Real Estate Commercial

Loans collectively evaluated for credit losses in the following tables include all performing loans at March 31, 2023 and December 31, 2022.

Loans individually evaluated for credit losses include all non-performing loans.

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

As of March 31, 2023

Owner Occupied Non-Owner Occupied Construction Multi-Family 1-4 Family Commercial

Industrial Consumer

1 unchanged sentence

(In Thousands)

Allowance for loan and lease losses:

Collectively evaluated for impairment $ 12,941 $ 8,811 $ 690 $ 22,442

Individually evaluated for impairment — 1,701 — 1,701

Allowance for credit losses:

Collectively evaluated for credit losses $ 1,636 $ 4,915 $ 1,586 $ 2,892 $ 201 $ 12,726 $ 562 $ 24,518

Individually evaluated for credit loss — — — — — 1,622 — 1,622

Total $ 1,636 $ 4,915 $ 1,586 $ 2,892 $ 201 $ 14,348 $ 562 $ 26,140

Loans and lease receivables:

Collectively evaluated for impairment $ 1,484,901 $ 796,307 $ 46,123 $ 2,327,331

Individually evaluated for impairment 32 3,785 — 3,817

Collectively evaluated for credit losses $ 233,725 $ 675,087 $ 212,916 $ 384,043 $ 23,376 $ 959,944 $ 46,773 $ 2,535,864

Individually evaluated for credit loss — — — — 28 3,384 — 3,412

Total $ 233,725 $ 675,087 $ 212,916 $ 384,043 $ 23,404 $ 963,328 $ 46,773 $ 2,539,276

As of December 31, 2022

Real Estate Commercial

Commercial Real Estate Commercial

Industrial Consumer

1 unchanged sentence

(In Thousands)

Allowance for loan and lease losses:

Collectively evaluated for impairment $ 15,110 $ 6,908 $ 813 $ 22,831

Individually evaluated for impairment — 1,505 — 1,505

Allowance for credit losses:

Collectively evaluated for credit losses $ 11,361 $ 10,753 $ 466 $ 22,580

Individually evaluated for credit loss — 1,650 — 1,650

Total $ 11,361 $ 12,403 $ 466 $ 24,230

Loans and lease receivables:

Collectively evaluated for impairment $ 1,453,941 $ 740,674 $ 39,741 $ 2,234,356

Individually evaluated for impairment 687 5,888 — 6,575

Collectively evaluated for credit losses $ 1,541,920 $ 849,542 $ 47,938 $ 2,439,400

Individually evaluated for credit loss 30 3,785 — 3,815

Total $ 1,541,950 $ 853,327 $ 47,938 $ 2,443,215

5 unchanged sentences

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

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.

1 unchanged sentence

The components of total lease expense were as follows:

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

2022 2021 2022 2021

For the Three Months Ended March 31,

(In Thousands)

Operating lease cost

$ 382 $ 381 $ 1,147 $ 1,131

Short-term lease cost

38 31 112 119

Variable lease cost

142 126 408 365

sublease income

1 unchanged sentence

Total lease cost, net

$ 517 $ 495 $ 1,533 $ 1,489

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

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Weighted-average remaining lease term (in years)

9 unchanged sentences

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

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

(In Thousands)

4 unchanged sentences

Investment in limited partnerships 14,912 13,599

Investment in Trust II — 315

Prepaid expenses 5,213 3,821

1 unchanged sentence

Total accrued interest receivable and other assets $ 67,448 $ 63,107

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

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.

Note 8 — Deposits

1 unchanged sentence

Average balances represent year-to-date averages.

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Balance Average

10 unchanged sentences

Total deposits $ 2,476,840 $ 2,188,386 2.27 $ 2,168,206 $ 1,977,640 0.67

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

A summary of annual maturities of in-market and wholesale certificates of deposit at March 31, 2023 is as follows:

(In Thousands)

2 unchanged sentences

Thereafter 14,604

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.

Wholesale deposits include $ 357.1 million and $ 65.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at March 31, 2023, compared to $ 187.2 million and $ 15.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at December 31, 2022.

Certificates of deposit and wholesale deposits denominated in amounts greater than $250,000 were $ 153.3 million at March 31, 2023 and $ 81.6 million at December 31, 2022.

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

1 unchanged sentence

Average balances represent year-to-date averages.

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Balance Weighted Average

13 unchanged sentences

(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 September 30, 2022 is as follows:

A summary of annual maturities of borrowings at March 31, 2023 is as follows:

(In Thousands)

2 unchanged sentences

Thereafter 34,359

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 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.

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

As of December 31, 2022, the Corporation had other borrowings of $ 6.1 million, which consisted of sold loans accounted for as secured borrowings because they did not qualify for true sale accounting.

As of March 31, 2023, the Corporation had no other borrowings following the first quarter repurchase of the sold loans.

As of March 31, 2023 and December 31, 2022, the Corporation was in compliance with its debt covenants under its third-party secured senior line of credit.

On February 20, 2023, the credit line was renewed for one additional year with pricing terms of 1-month term SOFR + 2.36% and a maturity date of February 19, 2024 .

Note 10 — Preferred Stock

2 unchanged sentences

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.

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.

For each dividend period from and including March 15, 2027, dividends will be paid at a floating rate of Three-Month Term SOFR plus a spread of 539 basis points per annum.

During the three months ended March 31, 2023, the Board of Directors declared an aggregate preferred stock dividend of $ 219,000 .

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 $ 763,000 at September 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 $ 423,000 at March 31, 2023, 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,

2022 2021 2022 2021

As of and for the Three Months Ended March 31,

(In Thousands)

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SBA recourse provision ( 18 ) ( 76 )

Charge-offs, net ( 6 ) — ( 6 ) ( 8 )

Balance at the end of the period $ 423 $ 559

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

September 30, 2022

March 31, 2023

Fair Value Measurements Using

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Commercial mortgage-backed securities - government-sponsored enterprises — 27,646 — 27,646

Other securities — — — —

Interest rate swaps — 54,612 — 54,612

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Commercial mortgage-backed securities - government-sponsored enterprises — 26,377 — 26,377

Other securities — 2,228 — 2,228

Interest rate swaps — 68,581 — 68,581

Interest rate swaps — 61,419 — 61,419

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.

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, 2023 or the year ended December 31, 2022 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:

September 30, 2022

March 31, 2023

Fair Value Measurements Using

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(In Thousands)

Impaired loans $ — $ — $ 1,321 $ 1,321

Foreclosed properties — — 151 151

Collateral-dependent loans $ — $ — $ 782 $ 782

Repossessed assets — — 89 89

Loan servicing rights — — 1,492 1,492

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Impaired loans $ — $ — $ 1,022 $ 1,022

Foreclosed properties — — 164 164

Repossessed assets — — 95 95

Loan servicing rights — — 1,491 1,491

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.

Impaired loans were written down to the fair value of their underlying collateral less costs to sell of $ 782,000 and $ 1.0 million at March 31, 2023 and December 31, 2022, 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 September 30, 2022.

The quantification of unobservable inputs for Level 3 impaired loan values range from 25 % - 100 % as of the measurement date of March 31, 2023.

The weighted average of those unobservable inputs was 66 %.

The majority of the impaired loans are considered collateral dependent loans or are supported by an SBA guaranty.

Foreclosed properties, upon initial recognition, are remeasured and reported at fair value through a charge-off to the allowance for loan and lease losses, if deemed necessary, based upon the fair value of the foreclosed property.

The fair value of a foreclosed property, upon initial recognition, is estimated using a market approach or based on observable market data, typically a current appraisal, or based upon assumptions specific to the individual property or equipment, such as management applied discounts used to further reduce values to a net realizable value when observable inputs become stale.

Repossessed assets, upon initial recognition, are remeasured and reported at fair value through a charge-off to the allowance for credit losses, if deemed necessary, based upon the fair value of the repossessed asset.

The fair value of a repossessed asset, upon initial recognition, is estimated using a market approach or based on observable market data, typically a current appraisal, or based upon assumptions specific to the individual property or equipment, such as management applied discounts used to further reduce values to a net realizable value when observable inputs become stale.

Loan servicing rights represent the asset retained upon sale of the guaranteed portion of certain SBA loans.

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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, 2022

March 31, 2023

Amount Fair Value

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456,808 440,242 — 440,242 —

Junior subordinated notes 10,076 8,844 — — 8,844

Accrued interest payable 4,053 4,053 4,053 — —

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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.

In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.

In cases where quoted market prices are not available,

fair values are based on estimates using present value or other valuation techniques.

Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.

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

As of March 31, 2023 and December 31, 2022, the credit valuation allowance was $ 38,000 .

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.

Commercial borrower swaps are completed independently with each borrower and are not subject

to master netting arrangements.

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 $ 66.2 million and no gross derivative assets.

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

The gross amount of dealer counterparty swaps, without regard to the enforceable master netting agreement, was a gross derivative asset of $ 49.0 million and gross liability of $ 3.3 million as of March 31, 2023.

No right of offset existed with the dealer counterparty swaps as of March 31, 2023.

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, 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 months ended March 31, 2023 and 2022 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.

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.

A pre-tax unrealized loss of $ 1.4 million was recognized in other comprehensive income for the three months ended March 31, 2023 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.

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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.

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

A pre-tax unrealized loss of $ 175,000 was recognized in other comprehensive income for the three months ended March 31, 2023 and there was no ineffective portion of these hedges.

A pre-tax unrealized loss of $ 50,000 was recognized in other comprehensive income for the three months ended March 31, 2022.

As of March 31, 2023

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 third-party counter parties 81 $ 666,218 7.81 $ 66,162

Interest rate swap agreements on loans with commercial loan clients 10 $ 143,681 7.34 $ 3,254

Interest rate swap agreements on loans with third-party counterparties 86 $ 787,752 6.84 $ 45,758

Derivatives designated as hedging instruments

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Derivatives not designated as hedging instruments

Interest rate swap agreements on loans with commercial loan customers 81 $ 666,218 7.81 $ 66,162

Interest rate swap agreements on loans with commercial loan clients 76 $ 644,071 6.72 $ 49,012

As of December 31, 2022

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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 commercial loan clients 2 $ 65,352 4.83 $ 1,010

Interest rate swap agreements on loans with third-party counter parties 84 744,233 7.37 60,409

Derivatives designated as hedging instruments

Interest rate swap related to AFS securities 11 $ 12,500 9.28 $ 602

Interest rate swap related to FHLB borrowings 11 116,400 2.88 6,560

Included in Derivative liabilities

Derivatives not designated as hedging instruments

Interest rate swap agreements on loans with commercial loan clients 82 $ 678,881 7.61 $ 61,419

Note 14 — Regulatory Capital

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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:

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;

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or (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital ratios.

Management intends, when appropriate under regulatory guidelines, to consult with the Federal Reserve Bank of Chicago and provide it with information on the Corporation’s then-current and prospective earnings and capital position in advance of declaring any cash dividends.

Management intends, when appropriate under regulatory guidelines, to consult with the Federal Reserve Bank (“FRB”) of Chicago and provide it with information on the Corporation’s then-current and prospective earnings and capital position in advance of declaring any cash dividends.

As a Wisconsin corporation, the Corporation is subject to the limitations of the Wisconsin Business Corporation Law, which prohibit the Corporation from paying dividends if such payment would:

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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.

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.

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, 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 March 31, 2023, 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, 2022

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

As of March 31, 2023

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

Capitalized Under Prompt Corrective Action Requirements

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First Business Bank 304,851 10.16 120,026 4.00 120,026 4.00 $ 150,033 5.00 %

(1) 2023 capital amounts include $1.0 million of additional stockholders’ equity as elected by the Corporation and permitted by federal banking regulatory agencies.

Risk-weighted assets were also adjusted accordingly.

As of December 31, 2022

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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