FBIZ filing — read by section

Item 1. Financial Statements

Item 1. Financial Statements 
 
 First Business Financial Services, Inc. 
 Consolidated Balance Sheets 
 
 March 31,
2023 December 31,
2022 
 (Unaudited) 
 (In Thousands, Except Share Data) 
 Assets 
 Cash and due from banks $ 26,114 $ 25,811 
 Short-term investments 159,859 76,871 
 Cash and cash equivalents 185,973 102,682 
 Securities available-for-sale, at fair value 236,989 212,024 
 Securities held-to-maturity, at amortized cost 
 11,461 12,635 
 Loans held for sale 
 2,697 2,632 
 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 
 Repossessed assets 89 95 
 Right-of-use assets, net 7,355 7,690 
 Bank-owned life insurance 54,383 54,018 
 Federal Home Loan Bank stock, at cost 13,088 17,812 
 Goodwill and other intangible assets 12,160 12,159 
 Derivatives 54,612 68,581 
 Accrued interest receivable and other assets 67,448 63,107 
 Total assets $ 3,164,411 $ 2,976,611 
 Liabilities and Stockholders’ Equity 
 Deposits $ 2,476,840 $ 2,168,206 
 Federal Home Loan Bank advances and other borrowings 341,859 456,808 
 
 Lease liabilities 9,822 10,175 
 Derivatives 49,012 61,419 
 Accrued interest payable and other liabilities 20,297 19,363 
 Total liabilities 2,897,830 2,715,971 
 
 Stockholders’ equity: 
 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 
 94 94 
 Additional paid-in capital 88,173 87,512 
 Retained earnings 209,008 203,507 
 Accumulated other comprehensive loss ( 13,671 ) ( 15,310 ) 
 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 ) 
 Total stockholders’ equity 266,581 260,640 
 Total liabilities and stockholders’ equity $ 3,164,411 $ 2,976,611 

 
 
 See accompanying Notes to Unaudited Consolidated Financial Statements. 
 
 
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 First Business Financial Services, Inc. 
 Consolidated Statements of Income (Unaudited) 
 For the Three Months Ended March 31, 
 2023 2022 
 (In Thousands, Except Per Share Data) 
 Interest income 
 Loans and leases $ 39,814 $ 23,072 
 Securities 1,590 975 
 Short-term investments 660 188 
 Total interest income 42,064 24,235 
 Interest expense 
 Deposits 12,430 766 
 Federal Home Loan Bank advances and other borrowings 2,929 1,539 
 Junior subordinated notes — 504 
 Total interest expense 15,359 2,809 
 Net interest income 26,705 21,426 
 Provision for credit losses 1,561 ( 855 ) 
 Net interest income after provision for credit losses 25,144 22,281 
 Non-interest income 
 Private wealth management service fees 2,654 2,841 
 Gain on sale of Small Business Administration loans 476 585 
 Service charges on deposits 682 999 
 Loan fees 803 652 
 Increase in cash surrender value of bank-owned life insurance 
 366 349 
 Swap fees 557 225 
 Other non-interest income 2,872 1,735 
 Total non-interest income 8,410 7,386 
 Non-interest expense 
 Compensation 15,908 13,638 
 Occupancy 631 555 
 Professional fees 1,343 1,170 
 Data processing 875 780 
 Marketing 628 500 
 Equipment 295 244 
 Computer software 1,183 1,082 
 FDIC insurance 394 313 
 Other non-interest expense 510 541 
 Total non-interest expense 21,767 18,823 
 Income before income tax expense 11,787 10,844 
 Income tax expense 2,808 2,172 
 Net income 8,979 8,672 
 Preferred stock dividend 219 — 
 Net income available to common shareholders $ 8,760 $ 8,672 
 Earnings per common share 
 Basic $ 1.05 $ 1.02 
 Diluted 1.05 1.02 
 Dividends declared per share 0.2275 0.1975 

 See accompanying Notes to Unaudited Consolidated Financial Statements. 
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 First Business Financial Services, Inc. 
 Consolidated Statements of Comprehensive Income (Unaudited) 
 
 For the Three Months Ended March 31, 
 2023 2022 
 (In Thousands) 
 Net income $ 8,979 $ 8,672 
 Other comprehensive income (loss) 
 Securities available-for-sale: 
 Unrealized securities gains (losses) arising during the period 3,762 ( 12,481 ) 
 
 Securities held-to-maturity: 
 Amortization of net unrealized losses transferred from available-for-sale 2 5 
 Interest rate swaps: 
 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 

 
 
 See accompanying Notes to Unaudited Consolidated Financial Statements. 
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 First Business Financial Services, Inc. 
 Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) 
 
 Common Shares Outstanding Preferred Stock Common
Stock Additional
Paid-in
Capital Retained
Earnings Accumulated
Other
Comprehensive
Loss Treasury
Stock Total 
 (In Thousands, Except Share Data) 
 Balance at January 1, 2022 8,457,564 $ — $ 93 $ 85,797 $ 170,020 $ ( 1,457 ) $ ( 22,031 ) $ 232,422 
 Net income — — — — 8,672 — — 8,672 
 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 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 Common Shares Outstanding Preferred Stock Common
Stock Additional
Paid-in
Capital Retained
Earnings Accumulated
Other
Comprehensive
Loss Treasury
Stock Total 
 (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 income — — — — — 1,639 — 1,639 
 
 
 
 
 Share-based compensation - restricted shares and employee stock purchase plan ( 426 ) — — 634 — — — 634 
 
 Issuance of common stock under the employee stock purchase plan 1,005 — — 27 — — — 27 
 
 Preferred stock dividends — — — — ( 219 ) — — ( 219 ) 
 Cash dividends ($ 0.2275 per share) 
 — — — — ( 1,906 ) — — ( 1,906 ) 
 Treasury stock purchased ( 56,394 ) — — — — — ( 1,860 ) ( 1,860 ) 
 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. 
 
 
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 First Business Financial Services, Inc. 
 Consolidated Statements of Cash Flows (Unaudited) 
 
 For the Three Months Ended March 31, 
 2023 2022 
 (In Thousands) 
 Operating activities 
 Net income $ 8,979 $ 8,672 
 Adjustments to reconcile net income to net cash provided by operating activities: 
 Deferred income taxes, net 312 ( 1,209 ) 
 
 Provision for credit losses 1,561 ( 855 ) 
 
 Depreciation, amortization and accretion, net 912 1,062 
 Share-based compensation 634 609 
 
 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 loans originated for sale 28,049 28,268 
 Gain on sale of loans originated for sale ( 476 ) ( 585 ) 
 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 
 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 
 Investing activities 
 Proceeds from maturities, redemptions, and paydowns of available-for-sale securities 4,574 9,131 
 Proceeds from maturities, redemptions, and paydowns of held-to-maturity securities 1,169 2,470 
 
 Purchases of available-for-sale securities ( 25,924 ) ( 39,760 ) 
 
 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 — 
 Investment in tax credit investments ( 3,090 ) ( 649 ) 
 
 Investment in Federal Home Loan Bank stock ( 11,644 ) ( 5,661 ) 
 Proceeds from the sale of Federal Home Loan Bank stock 16,369 6,134 
 Purchases of leasehold improvements and equipment, net ( 798 ) ( 60 ) 
 
 Purchases of bank-owned life insurance policies — ( 25 ) 
 
 
 
 Proceeds from redemption of Trust II stock — 315 
 Net cash used in investing activities ( 116,346 ) ( 40,085 ) 
 Financing activities 
 Net increase in deposits 308,635 65,771 
 Repayment of Federal Home Loan Bank advances ( 810,350 ) ( 464,200 ) 
 Proceeds from Federal Home Loan Bank advances 701,470 456,800 
 
 
 Proceeds from issuance of subordinated notes payable — 20,000 
 
 Repayment of junior subordinated notes payable — ( 10,076 ) 
 
 Net (decrease) increase in long-term borrowed funds ( 6,069 ) ( 1,569 ) 
 
 
 Cash dividends paid ( 1,906 ) ( 1,670 ) 
 Preferred stock dividends paid ( 219 ) — 
 Proceeds from issuance of common stock under ESPP 27 40 
 

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 Proceeds from issuance of preferred stock — 11,992 
 Purchase of treasury stock ( 1,860 ) ( 608 ) 
 Net cash provided by financing activities 189,728 76,480 
 Net increase in cash and cash equivalents 83,291 38,493 
 Cash and cash equivalents at the beginning of the period 102,682 57,110 
 Cash and cash equivalents at the end of the period $ 185,973 $ 95,603 
 Supplementary cash flow information 
 Cash paid during the period for: 
 Interest paid on deposits and borrowings $ 13,010 $ 3,164 
 Net income taxes (received) paid ( 7 ) 17 
 
 
 
 
 
 
 
 

 See accompany Notes to Unaudited Consolidated Financial Statements 
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 Notes to Unaudited Consolidated Financial Statements 
 
 
 
 Note 1 — Nature of Operations and Summary of Significant Accounting Policies 
 Nature of Operations 
 The accounting and reporting practices of First Business Financial Services, Inc. (“FBFS” or the “Corporation”), through our wholly-owned subsidiary, First Business Bank (“FBB” or the “Bank”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). FBB operates as a commercial banking institution primarily in Wisconsin and the greater Kansas City metropolitan area. The Bank provides a full range of financial services to businesses, business owners, executives, professionals, and high net worth individuals. FBB also offers bank consulting services to community banks. The Bank is subject to competition from other financial institutions and service providers, and is also subject to state and federal regulations. 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”), Mitchell Street Apartments Investment, LLC (“Mitchell Street”), and FBB Tax Credit Investment, LLC (“FBB Tax Credit”). 
 Basis of Presentation 
 The accompanying unaudited Consolidated Financial Statements were prepared in accordance with GAAP and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Corporation’s Consolidated Financial Statements and footnotes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022. The unaudited Consolidated Financial Statements include the accounts of the Corporation and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 
 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 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. Subsequent events have been evaluated through the date of the issuance of the unaudited Consolidated Financial Statements. No significant subsequent events have occurred through this date requiring adjustment to the financial statements or disclosures. 
 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. GAAP. 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. 
 
 
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 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 
 Assets: 
 Loans $ 2,443,215 $ 2,443,215 $ — 
 
 ACL on loans 
 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 
 
 Liabilities: 
 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. 
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 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. 
 
 
 ACL - Loans 
 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. 
 
 
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 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. 
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 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. 2020-04 “Reference Rate Reform (Topic 848): 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 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. In January 2021, the FASB issued ASU 2021-01 which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. 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 
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 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 
 Earnings per common share are computed using the two-class method. Basic earnings per common share are computed by dividing net income allocated to common shares by the weighted-average number of shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include unvested restricted shares. Unvested restricted shares are considered participating securities because holders of these securities receive non-forfeitable dividends, or dividend equivalents, at the same rate as holders of the Corporation’s common stock. 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 March 31, 
 2023 2022 
 (Dollars in Thousands, Except Share Data) 
 Basic earnings per common share 
 Net income $ 8,979 $ 8,672 
 Less: preferred stock dividends 219 — 
 Less: earnings allocated to participating securities 238 255 
 Basic earnings allocated to common shareholders $ 8,522 $ 8,417 
 Weighted-average common shares outstanding, excluding participating securities 
 8,148,525 8,232,142 
 Basic earnings per common share $ 1.05 $ 1.02 
 
 Diluted earnings per common share 
 Earnings allocated to common shareholders, diluted $ 8,522 $ 8,417 
 
 
 
 
 Weighted-average diluted common shares outstanding, excluding participating securities 
 8,148,525 8,232,142 
 Diluted earnings per common share $ 1.05 $ 1.02 

 
 
 
 
 Note 3 — Share-Based Compensation 
 The Corporation adopted the 2019 Equity Incentive Plan (the “Plan”) during the quarter ended June 30, 2019. The Plan is administered by the Compensation Committee of the Board of Directors (the “Board”) of the Corporation and provides for the grant of equity ownership opportunities through incentive stock options and nonqualified stock options (“Stock Options”), restricted stock, restricted stock units, dividend equivalent units, and any other type of award permitted by the Plan. As of March 31, 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. 
 Restricted Stock 
 Under the Plan, the Corporation may grant restricted stock awards (“RSA”), restricted stock units (“RSU”), and other stock-based awards to plan participants, subject to forfeiture upon the occurrence of certain events until the dates specified in the participant’s award agreement. While restricted stock is subject to forfeiture, restricted stock award participants may exercise full voting rights and will receive all dividends and other distributions paid with respect to the restricted shares. 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. Compensation expense for restricted stock is recognized over the requisite service period of generally three or four years for the entire award on a straight-line basis. 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. 
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 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. 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. The compensation expense for the awards expected to vest for the percentage of performance-based restricted stock units subject to the ROE metric will be adjusted if there is a change in the expectation of ROE. The compensation expense for the awards expected to vest for the percentage of performance based restricted stock units subject to the TSR metric are never adjusted, and are amortized utilizing the accounting fair value provided using a Monte Carlo pricing model. 
 Restricted stock activity for the year ended December 31, 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 December 31, 2021 141,617 $ 23.06 63,120 $ 28.20 5,052 $ 23.56 209,789 $ 24.62 
 Granted (1) 
 62,560 34.04 37,335 24.71 3,115 27.95 103,010 30.47 
 Vested ( 62,353 ) 23.21 ( 43,020 ) 18.91 ( 2,062 ) 23.20 ( 107,435 ) 21.49 
 Forfeited ( 8,507 ) 26.15 — — — — ( 8,507 ) 26.15 
 Nonvested balance as of December 31, 2022 133,317 27.95 57,435 32.89 6,105 25.92 196,857 29.32 
 Granted (1) 
 — — 16,780 40.61 43,160 36.42 59,940 37.59 
 Vested ( 44,307 ) 26.02 — — ( 3,048 ) 25.37 ( 47,355 ) 25.98 
 Forfeited ( 1,923 ) 26.73 — — — — ( 1,923 ) 26.73 
 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 
 Weighted average remaining recognition period (in years) 2.32 2.14 3.53 2.64 

 (1) The number of restricted shares/units shown includes the shares that would be granted if the target level of performance is achieved related to the performance based restricted stock units. The number of shares actually issued may vary. 
 Employee Stock Purchase Plan 
 During 2020, an employee stock purchase plan ("ESPP") was approved by the Corporation’s shareholders and is offered to all qualifying employees. The Corporation is authorized to issue up to 250,000 shares of common stock under the ESPP. The plan qualifies as an employee stock purchase plan under section 423 of the Internal Revenue Code of 1986. Under the ESPP, eligible employees may enroll in a three month offer period that begins January, April, July, and October of each year. Employees may elect to purchase a limited number of shares on the Corporation's common stock at 90 % of the fair market value on the last day of the offering period. The ESPP is treated as a compensatory item for purposes of share-based compensation expense. 
 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 March 31, 
 2023 2022 
 (In Thousands) 
 Share-based compensation expense $ 634 $ 609 

 
 
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 Note 4 — Securities 
 The amortized cost and fair value of securities available-for-sale and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows: 
 
 As of March 31, 2023 
 Amortized Cost Gross
Unrealized Gains Gross
Unrealized Losses Fair Value 
 (In Thousands) 
 Available-for-sale: 
 U.S. treasuries $ 4,979 $ — $ ( 454 ) 4,525 
 U.S. government agency securities - government-sponsored enterprises 21,342 63 ( 478 ) 20,927 
 Municipal securities 44,985 167 ( 4,747 ) 40,405 
 
 Residential mortgage-backed securities - government issued 28,634 6 ( 2,136 ) 26,504 
 Residential mortgage-backed securities - government-sponsored enterprises 125,333 84 ( 11,346 ) 114,071 
 Commercial mortgage-backed securities - government issued 3,397 — ( 486 ) 2,911 
 Commercial mortgage-backed securities - government-sponsored enterprises 32,284 — ( 4,638 ) 27,646 
 
 $ 260,954 $ 320 $ ( 24,285 ) $ 236,989 

 
 As of December 31, 2022 
 Amortized Cost Gross
Unrealized Gains Gross
Unrealized Losses Fair Value 
 (In Thousands) 
 Available-for-sale: 
 U.S. treasuries $ 4,977 $ — $ ( 532 ) $ 4,445 
 U.S. government agency securities - government-sponsored enterprises 
 13,666 70 ( 531 ) 13,205 
 Municipal securities 45,088 90 ( 5,867 ) 39,311 
 
 Residential mortgage-backed securities - government issued 21,790 — ( 2,359 ) 19,431 
 Residential mortgage-backed securities - government-sponsored enterprises 
 119,265 — ( 12,942 ) 106,323 
 Commercial mortgage-backed securities - government issued 3,450 — ( 518 ) 2,932 
 Commercial mortgage-backed securities - government-sponsored enterprises 31,515 — ( 5,138 ) 26,377 
 
 $ 239,751 $ 160 $ ( 27,887 ) $ 212,024 

 
 
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 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
Unrecognized Gains Gross
Unrecognized Losses Fair Value 
 (In Thousands) 
 Held-to-maturity: 
 
 Municipal securities $ 6,597 $ 14 $ ( 32 ) $ 6,579 
 
 Residential mortgage-backed securities - government issued 1,520 — ( 88 ) 1,432 
 Residential mortgage-backed securities - government-sponsored enterprises 
 1,338 — ( 68 ) 1,270 
 Commercial mortgage-backed securities - government-sponsored enterprises 2,006 — ( 80 ) 1,926 
 $ 11,461 $ 14 $ ( 268 ) $ 11,207 

 
 As of December 31, 2022 
 Amortized Cost Gross
Unrecognized Gains Gross
Unrecognized Losses Fair Value 
 (In Thousands) 
 Held-to-maturity: 
 
 Municipal securities $ 7,467 $ 7 $ ( 70 ) $ 7,404 
 
 Residential mortgage-backed securities - government issued 1,625 — ( 107 ) 1,518 
 Residential mortgage-backed securities - government-sponsored enterprises 
 1,537 — ( 93 ) 1,444 
 Commercial mortgage-backed securities - government-sponsored enterprises 
 2,006 — ( 102 ) 1,904 
 $ 12,635 $ 7 $ ( 372 ) $ 12,270 

 
 
 U.S. Treasuries contain treasury bonds issued by the United States Treasury. U.S. government agency securities - government-sponsored enterprises represent securities issued by Federal National Mortgage Association (“FNMA”) and the SBA. Municipal securities include securities issued by various municipalities located primarily within Wisconsin and are primarily general obligation bonds that are tax-exempt in nature. Residential and commercial mortgage-backed securities - government issued represent securities guaranteed by the Government National Mortgage Association. Residential and commercial mortgage-backed securities - government-sponsored enterprises include securities guaranteed by the Federal Home Loan Mortgage Corporation, FNMA, and the FHLB. Other securities represent certificates of deposit of insured banks and savings institutions with an original maturity greater than three months. There were no sales of available-for-sale securities that occurred during the three months ended 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. 
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 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. 
 
 Available-for-Sale Held-to-Maturity 
 Amortized Cost Fair Value Amortized Cost Fair Value 
 (In Thousands) 
 Due in one year or less $ 4,499 $ 4,490 $ 2,230 $ 2,225 
 Due in one year through five years 16,383 15,386 3,451 3,425 
 Due in five through ten years 16,426 15,320 916 929 
 Due in over ten years 33,998 30,661 — — 
 71,306 65,857 6,597 6,579 
 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 

 
 
 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 March 31, 2023 and December 31, 2022. 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 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. 
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 A summary of unrealized loss information for securities available-for-sale, categorized by security type and length of time for which the security has been in a continuous unrealized loss position, follows: 
 
 As of March 31, 2023 
 Less than 12 Months 12 Months or Longer Total 
 Fair Value Unrealized
Losses Fair Value Unrealized
Losses Fair Value Unrealized
Losses 
 (In Thousands) 
 Available-for-sale: 
 
 U.S. treasuries $ — $ — $ 4,525 $ 454 $ 4,525 $ 454 
 U.S. government agency securities - government-sponsored enterprises 
 5,989 11 3,033 467 9,022 478 
 Municipal securities 
 1,377 16 36,302 4,731 37,679 4,747 
 
 Residential mortgage-backed securities - government issued 
 7,951 330 11,746 1,806 19,697 2,136 
 Residential mortgage-backed securities - government-sponsored enterprises 
 24,051 681 76,466 10,664 100,517 11,345 
 Commercial mortgage-backed securities - government issued 
 — — 2,910 486 2,910 486 
 Commercial mortgage-backed securities - government-sponsored enterprises 
 905 15 26,741 4,623 27,646 4,638 
 
 $ 40,273 $ 1,053 $ 161,723 $ 23,231 $ 201,996 $ 24,284 

 
 As of December 31, 2022 
 Less than 12 Months 12 Months or Longer Total 
 Fair Value Unrealized
Losses Fair Value Unrealized
Losses Fair Value Unrealized
Losses 
 (In Thousands) 
 Available-for-sale: 
 
 U.S. treasuries $ — $ — $ 4,446 $ 532 $ 4,446 $ 532 
 U.S. government agency securities - government-sponsored enterprises 
 — — 2,969 531 2,969 531 
 Municipal securities 
 26,759 3,132 10,133 2,735 36,892 5,867 
 
 Residential mortgage-backed securities - government issued 
 9,624 436 9,807 1,923 19,431 2,359 
 Residential mortgage-backed securities - government-sponsored enterprises 
 71,474 6,433 34,849 6,509 106,323 12,942 
 Commercial mortgage-backed securities - government issued 
 1,236 112 1,696 406 2,932 518 
 Commercial mortgage-backed securities - government-sponsored enterprises 
 7,758 984 18,619 4,154 26,377 5,138 
 
 $ 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 March 31, 2023 and December 31, 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 
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 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 Unrecognized
Losses Fair Value Unrecognized
Losses Fair Value Unrecognized
Losses 
 (In Thousands) 
 Held-to-maturity: 
 
 
 Municipal securities 
 $ 3,701 $ 17 $ 335 $ 15 $ 4,036 $ 32 
 Residential mortgage-backed securities - government issued 
 — — 1,432 88 1,432 88 
 Residential mortgage-backed securities - government-sponsored enterprises 
 226 14 1,044 54 1,270 68 
 Commercial mortgage-backed securities - government-sponsored enterprises 1,926 80 — — 1,926 80 
 $ 5,853 $ 111 $ 2,811 $ 157 $ 8,664 $ 268 

 
 As of December 31, 2022 
 Less than 12 Months 12 Months or Longer Total 
 Fair Value Unrecognized
Losses Fair Value Unrecognized
Losses Fair Value Unrecognized
Losses 
 (In Thousands) 
 Held-to-maturity: 
 
 
 Municipal securities 
 $ 6,035 $ 52 $ 267 $ 18 $ 6,302 $ 70 
 
 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 
 impaired. 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. 
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 Note 5 — Loans and Allowance for Credit Losses 
 
 
 Loan and lease receivables consist of the following: 
 
 March 31,
2023 December 31,
2022 
 (In Thousands) 
 Commercial real estate: 
 Commercial real estate — owner occupied 
 $ 233,725 $ 268,354 
 Commercial real estate — non-owner occupied 
 675,087 687,091 
 Construction 212,916 218,751 
 Multi-family 
 384,043 350,026 
 1-4 family 
 23,404 17,728 
 Total commercial real estate 
 1,529,175 1,541,950 
 Commercial and industrial 963,328 853,327 
 Consumer and other 46,773 47,938 
 Total gross loans and leases receivable 
 2,539,276 2,443,215 
 Less: 
 Allowance for credit losses 26,140 24,230 
 Deferred loan fees ( 87 ) 149 
 Loans and leases receivable, net 
 $ 2,513,223 $ 2,418,836 

 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 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 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 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 March 31, 2023 and December 31, 2022. 
 
 
 
 
 
 
 
 
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 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 
 Category 
 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 
 Category 
 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 
 
 Construction 
 Category 
 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 
 
 Multi-family 
 Category 
 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 
 
 1-4 family 
 Category 
 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 
 

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 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 
 Category 
 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 
 Category 
 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. The Corporation primarily uses a nine grade risk rating system to monitor the ongoing credit quality of its loans and leases. The risk rating grades follow a consistent definition and are then applied to specific loan types based on the nature of the loan. Each risk rating is subjective and, depending on the size and nature of the credit, subject to various levels of review and concurrence on the stated risk rating. In addition to its nine grade risk rating system, the Corporation groups loans into four loan and related risk categories which determine the level and nature of review by management. 
 Category I — Loans and leases in this category are performing in accordance with the terms of the contract and generally exhibit no immediate concerns regarding the security and viability of the underlying collateral, financial stability of the borrower, integrity or strength of the borrowers’ management team, or the industry in which the borrower operates. The Corporation monitors Category I loans and leases through payment performance, continued maintenance of its personal relationships with such borrowers, and continued review of such borrowers’ compliance with the terms of their respective agreements. 
 Category II — Loans and leases in this category are beginning to show signs of deterioration in one or more of the Corporation’s core underwriting criteria such as financial stability, management strength, industry trends, or collateral values. Management will place credits in this category to allow for proactive monitoring and resolution with the borrower to possibly mitigate the area of concern and prevent further deterioration or risk of loss to the Corporation. Category II loans are considered performing but are monitored frequently by the assigned business development officer and by asset quality review committees. 
 Category III — Loans and leases in this category are identified by management as warranting special attention. However, the balance in this category is not intended to represent the amount of adversely classified assets held by the Bank. Category III loans and leases generally exhibit undesirable characteristics, such as evidence of adverse financial trends and conditions, managerial problems, deteriorating economic conditions within the related industry, or evidence of adverse public filings and may exhibit collateral shortfall positions. Management continues to believe that it will collect all contractual principal and interest in accordance with the original terms of the contracts relating to the loans and leases in this category, and therefore Category III loans are considered performing with no specific reserves established for this category. 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 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. When 
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 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. 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: 
 March 31, 2023 
 30-59
Days Past Due 60-89
Days Past Due Greater
Than 90
Days Past Due Total Past Due Current Total Loans and Leases 
 (Dollars in Thousands) 
 Performing loans and leases 
 Commercial real estate: 
 Owner occupied $ — $ — $ — $ — $ 233,725 $ 233,725 
 Non-owner occupied — — — — 675,087 675,087 
 Construction — — — — 212,916 212,916 
 Multi-family — — — — 384,043 384,043 
 1-4 family — — — — 23,376 23,376 
 Commercial and industrial 2,440 103 — 2,543 957,401 959,944 
 Consumer and other — — — — 46,773 46,773 
 Total 2,440 103 — 2,543 2,533,321 2,535,864 
 Non-performing loans and leases 
 Commercial real estate: 
 Owner occupied — — — — — — 
 Non-owner occupied — — — — — — 
 Construction — — — — — — 
 Multi-family — — — — — — 
 1-4 family — — — — 28 28 
 Commercial and industrial 72 478 2,068 2,618 766 3,384 
 Consumer and other — — — — — — 
 Total 72 478 2,068 2,618 794 3,412 
 Total loans and leases 
 Commercial real estate: 
 Owner occupied — — — — 233,725 233,725 
 Non-owner occupied — — — — 675,087 675,087 
 Construction — — — — 212,916 212,916 
 Multi-family — — — — 384,043 384,043 
 1-4 family — — — — 23,404 23,404 
 Commercial and industrial 2,512 581 2,068 5,161 958,167 963,328 
 Consumer and other — — — — 46,773 46,773 
 Total $ 2,512 $ 581 $ 2,068 $ 5,161 $ 2,534,115 $ 2,539,276 
 Percent of portfolio 0.10 % 0.02 % 0.08 % 0.20 % 99.80 % 100.00 % 

 
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 December 31, 2022 
 30-59
Days Past Due 60-89
Days Past Due Greater
Than 90
Days Past Due Total Past Due Current Total Loans and Leases 
 (Dollars in Thousands) 
 Performing loans and leases 
 Commercial real estate: 
 Owner occupied $ — $ — $ — $ — $ 268,354 $ 268,354 
 Non-owner occupied 215 — — 215 686,876 687,091 
 Construction — — — — 218,751 218,751 
 Multi-family — — — — 350,026 350,026 
 1-4 family — — — — 17,698 17,698 
 Commercial and industrial 1,437 403 — 1,840 847,858 849,698 
 Consumer and other — — — — 47,938 47,938 
 Total 1,652 403 — 2,055 2,437,501 2,439,556 
 Non-performing loans and leases 
 Commercial real estate: 
 Owner occupied — — — — — — 
 Non-owner occupied — — — — — — 
 Construction — — — — — — 
 Multi-family — — — — — — 
 1-4 family — — — — 30 30 
 Commercial and industrial 439 126 2,464 3,029 600 3,629 
 Other — — — — — — 
 Total 439 126 2,464 3,029 630 3,659 
 Total loans and leases 
 Commercial real estate: 
 Owner occupied — — — — 268,354 268,354 
 Non-owner occupied 215 — — 215 686,876 687,091 
 Construction — — — — 218,751 218,751 
 Multi-family — — — — 350,026 350,026 
 1-4 family — — — — 17,728 17,728 
 Commercial and industrial 1,876 529 2,464 4,869 848,458 853,327 
 Consumer and other — — — — 47,938 47,938 
 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 % 

 
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 The Corporation’s total non-performing assets consisted of the following: 
 
 March 31,
2023 December 31,
2022 
 (In Thousands) 
 Non-performing loans and leases 
 Commercial real estate: 
 Commercial real estate — owner occupied $ — $ — 
 Commercial real estate — non-owner occupied — — 
 Construction — — 
 Multi-family — — 
 1-4 family 28 30 
 Total non-performing commercial real estate 28 30 
 Commercial and industrial 3,384 3,629 
 Consumer and other — — 
 Total non-performing loans and leases 3,412 3,659 
 Repossessed assets, net 89 95 
 Total non-performing assets $ 3,501 $ 3,754 
 
 

 
 March 31,
2023 December 31,
2022 
 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 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. 
 
 
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 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 
 Recorded
Investment (1) 
 Unpaid
Principal
Balance Individual
Reserve Average
Recorded
Investment (2) 
 Foregone
Interest
Income Interest
Income
Recognized Net
Foregone
Interest
Income 
 (In Thousands) 
 With no individual reserve recorded: 
 Commercial real estate: 
 Owner occupied $ — $ — $ — $ — $ — $ — $ — 
 Non-owner occupied — — — — — — — 
 Construction 
 — — — — — — — 
 Multi-family — — — — — — — 
 1-4 family 28 33 — 29 1 4 ( 3 ) 
 Commercial and industrial 1,009 1,009 — 1,842 23 36 ( 13 ) 
 Consumer and other — — — — — — — 
 Total 1,037 1,042 — 1,871 24 40 ( 16 ) 
 With individual reserve recorded: 
 Commercial real estate: 
 Owner occupied — — — — — — — 
 Non-owner occupied — — — — — — — 
 Construction — — — — — — — 
 Multi-family — — — — — — — 
 1-4 family — — — — — — — 
 Commercial and industrial 2,375 2,375 1,622 1,665 54 — 54 
 Consumer and other — — — — — — — 
 Total 2,375 2,375 1,622 1,665 54 — 54 
 Total: 
 Commercial real estate: 
 Owner occupied — — — — — — — 
 Non-owner occupied — — — — — — — 
 Construction — — — — — — — 
 Multi-family — — — — — — — 
 1-4 family 28 33 — 29 1 4 ( 3 ) 
 Commercial and industrial 3,384 3,384 1,622 3,507 77 36 41 
 Consumer and other — — — — — — — 
 Grand total $ 3,412 $ 3,417 $ 1,622 $ 3,536 $ 78 $ 40 $ 38 

 (1) The recorded investment represents the unpaid principal balance net of any partial charge-offs. 
 (2) Average recorded investment is calculated primarily using daily average balances. 
 25 

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 As of and for the Year Ended December 31, 2022 
 Recorded 
 Investment (1) 
 Unpaid
Principal
Balance Individual
Reserve Average 
 Recorded 
 Investment (2) 
 Foregone
Interest
Income Interest
Income
Recognized Net
Foregone
Interest
Income 
 (In Thousands) 
 With no individual reserve recorded: 
 Commercial real estate: 
 Owner occupied $ — $ — $ — $ 180 $ 14 $ 759 $ ( 745 ) 
 Non-owner occupied — — — — — 1 ( 1 ) 
 Construction — — — — — 47 ( 47 ) 
 Multi-family — — — — — — — 
 1-4 family 30 35 — 112 8 41 ( 33 ) 
 Commercial and industrial 1,037 1,037 — 3,153 277 587 ( 310 ) 
 Consumer and other — — — — — — — 
 Total 1,067 1,072 — 3,445 299 1,435 ( 1,136 ) 
 With individual reserve recorded: 
 Commercial real estate: 
 Owner occupied — — — — — — — 
 Non-owner occupied — — — — — — — 
 Construction — — — — — — — 
 Multi-family — — — — — — — 
 1-4 family — — — — — — — 
 Commercial and industrial 2,592 2,612 1,650 1,454 101 1 100 
 Consumer and other — — — — — — — 
 Total 2,592 2,612 1,650 1,454 101 1 100 
 Total: 
 Commercial real estate: 
 Owner occupied — — — 180 14 759 ( 745 ) 
 Non-owner occupied — — — — — 1 ( 1 ) 
 Construction — — — — — 47 ( 47 ) 
 Multi-family — — — — — — — 
 1-4 family 30 35 — 112 8 41 ( 33 ) 
 Commercial and industrial 3,629 3,649 1,650 4,607 378 588 ( 210 ) 
 Consumer and other — — — — — — — 
 Grand total $ 3,659 $ 3,684 $ 1,650 $ 4,899 $ 400 $ 1,436 $ ( 1,036 ) 

 (1) The recorded investment represents the unpaid principal balance net of any partial charge-offs. 
 (2) Average recorded investment is calculated primarily using daily average balances. 
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 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. Cash payments collected on non-accrual loans are first applied to such loan’s principal. Foregone interest represents the interest that was contractually due on the loan but not received or recorded. 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. 
 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; 
 • 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; 
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 • 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 
 
 
 ACL Activity 
 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
and
Industrial Consumer
and Other Total 
 (In Thousands) 
 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 ) 
 Recoveries — 1 — — — 95 11 107 
 Net recoveries (charge-offs) — 1 — — — ( 71 ) 11 ( 59 ) 
 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 
 Components: 
 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
and
Industrial Consumer and Other Total 
 (In Thousands) 
 Beginning balance $ 15,110 $ 8,413 $ 813 $ 24,336 
 Charge-offs — ( 22 ) — ( 22 ) 
 Recoveries 116 84 10 210 
 Net recoveries (charge-offs) 116 62 10 188 
 Provision for credit losses ( 1,461 ) 437 169 ( 855 ) 
 Ending balance $ 13,765 $ 8,912 $ 992 $ 23,669 

 
 
 ACL Summary 
 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. 
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 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
and
Industrial Consumer
and Other Total 
 (In Thousands) 
 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 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 
 Commercial Real Estate Commercial
and
Industrial Consumer
and Other Total 
 (In Thousands) 
 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 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 

 
 
 
 
 
 Note 6 — Leases 
 The Corporation leases various office spaces and specialized lending production offices under non-cancellable operating leases which expire on various dates through 2033. The Corporation also leases office equipment. The Corporation recognizes a right-of-use asset and an operating lease liability for all leases, with the exception of short-term leases. Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term. 
 In 2019, the Corporation entered into a sublease for office space it vacated in its Kansas City metropolitan area which expires in 2023. During the first quarter 2022, the Corporation amended the sublease agreement and the amendment did not result in any impairment. 
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 The components of total lease expense were as follows: 
 
 For the Three Months Ended March 31, 
 2023 2022 
 (In Thousands) 
 Operating lease cost 
 $ 382 $ 383 
 Short-term lease cost 
 63 37 
 Variable lease cost 
 150 126 
 Less: sublease income 
 ( 45 ) ( 45 ) 
 Total lease cost, net 
 $ 550 $ 501 

 
 
 Quantitative information regarding the Corporation’s operating leases was as follows: 
 
 March 31, 2023 December 31, 2022 
 Weighted-average remaining lease term (in years) 
 8.10 8.06 
 Weighted-average discount rate 
 3.46 % 3.40 % 

 The following maturity analysis shows the undiscounted cash flows due on the Corporation’s operating lease liabilities: 
 
 (In Thousands) 
 2023 $ 1,110 
 2024 1,527 
 2025 1,408 
 2026 1,400 
 2027 1,428 
 Thereafter 4,689 
 Total undiscounted cash flows 11,562 
 Discount on cash flows ( 1,740 ) 
 Total lease liability $ 9,822 

 
 
 
 
 
 Note 7 — Other Assets 
 A summary of accrued interest receivable and other assets was as follows: 
 
 March 31, 2023 December 31, 2022 
 (In Thousands) 
 Accrued interest receivable $ 10,072 $ 9,403 
 Net deferred tax asset 11,458 11,711 
 Investment in historic development entities 2,176 2,176 
 Investment in low-income housing development entity 16,168 13,514 
 
 Investment in limited partnerships 14,912 13,599 
 Prepaid expenses 5,213 3,821 
 Other assets 7,449 8,883 
 Total accrued interest receivable and other assets $ 67,448 $ 63,107 

 
 
 30 

 
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 Note 8 — Deposits 
 The composition of deposits is shown below. Average balances represent year-to-date averages. 
 
 March 31, 2023 December 31, 2022 
 Balance Average
Balance Average Rate Balance Average
Balance Average Rate 
 (Dollars in Thousands) 
 Non-interest-bearing transaction accounts 
 $ 471,904 $ 497,769 — % $ 537,107 $ 566,230 — % 
 Interest-bearing transaction accounts 
 612,500 567,435 2.71 576,601 503,668 0.79 
 Money market accounts 662,157 699,314 2.57 698,505 761,469 0.82 
 Certificates of deposit 308,191 236,083 3.59 153,757 97,448 1.39 
 Wholesale deposits 422,088 187,785 4.21 202,236 48,825 3.31 
 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 March 31, 2023 is as follows: 
 
 (In Thousands) 
 Maturities during the year ended December 31, 
 2023 $ 454,902 
 2024 55,606 
 2025 14,946 
 2026 50,824 
 2027 74,397 
 Thereafter 14,604 
 $ 665,279 

 
 
 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 
 The composition of borrowed funds is shown below. Average balances represent year-to-date averages. 
 
 March 31, 2023 December 31, 2022 
 Balance Weighted Average
Balance Weighted
Average Rate Balance Weighted Average
Balance Weighted
Average Rate 
 (Dollars in Thousands) 
 Federal funds purchased $ — $ 11 5.29 % $ — $ 14 7.42 % 
 
 FHLB advances 
 307,500 398,109 2.47 416,380 414,191 1.70 
 Line of credit — — — — 85 2.78 
 Other borrowings — 2,433 8.22 6,088 8,624 5.23 
 Subordinated notes payable 34,359 34,350 4.83 34,340 35,095 5.06 
 Junior subordinated notes (1) 
 — — — — 2,429 20.75 
 $ 341,859 $ 434,903 2.69 $ 456,808 $ 460,438 2.12 

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 (1) Weighted average rate of junior subordinated notes reflects the accelerated amortization of subordinated debt issuance costs as a result of the early redemption of the junior subordinated notes during the first quarter of 2022. 
 A summary of annual maturities of borrowings at March 31, 2023 is as follows: 
 
 (In Thousands) 
 Maturities during the year ended December 31, 
 2023 $ 128,000 
 2024 35,500 
 2025 56,000 
 2026 60,000 
 2027 28,000 
 Thereafter 34,359 
 $ 341,859 

 
 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 
 On March 4, 2022, the Corporation issued 12,500 shares, or $ 12.5 million in aggregate liquidation preference, of 7.0 % Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A, par value $ 0.01 per share, with a liquidation preference of $ 1,000 per share (the “Series A Preferred Stock”) in a private placement to institutional investors. The net proceeds received from the issuance of the Series A Preferred Stock were $ 12.0 million. 
 
 
 The Corporation expects to pay dividends on the Series A Preferred Stock when and if declared by the Board, at a fixed rate of 7.0 % per annum, payable quarterly, in arrears, on March 15, June 15, September 15 and December 15 of each year up to, but excluding, March 15, 2027. For each dividend period from and including March 15, 2027, dividends will be paid at a floating rate of Three-Month Term 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. The Corporation may redeem the Series A Preferred Stock at its option at a redemption price equal to $ 1,000 per share, plus any declared and unpaid dividends (without regard to any undeclared dividends), subject to regulatory approval, on or after March 15, 2027 or within 90 days following a regulatory capital treatment event, in accordance with the terms of the Series A Preferred Stock. 
 
 Note 11 — Commitments and Contingencies 
 In the normal course of business, various legal proceedings involving the Corporation are pending. Management, based upon advice from legal counsel, does not anticipate any significant losses as a result of these actions. Management believes that any liability arising from any such proceedings currently existing or threatened will not have a material adverse effect on the Corporation’s financial position, results of operations, and cash flows. 
 
 
 The Corporation sells the guaranteed portions of SBA 7(a) and 504 loans, as well as participation interests in other, non-SBA originated, loans to third parties. The Corporation has a continuing involvement in each of the transferred lending arrangements by way of relationship management and servicing the loans, as well as being subject to normal and customary requirements of the SBA loan program and standard representations and warranties related to sold amounts. In the event of a loss resulting from default and a determination by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Corporation, the SBA may require the Corporation to repurchase the loan, deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of the principal loss related to the deficiency from the Corporation. The Corporation must comply with applicable SBA regulations in order to maintain the guaranty. In addition, the Corporation retains the option to repurchase the sold guaranteed portion of an SBA loan if the loan defaults. 
 
 
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 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 March 31, 
 2023 2022 
 (In Thousands) 
 Balance at the beginning of the period $ 441 $ 635 
 SBA recourse provision ( 18 ) ( 76 ) 
 
 Balance at the end of the period $ 423 $ 559 

 
 
 
 Note 12 — Fair Value Disclosures 
 The Corporation determines the fair values of its financial instruments based on the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. 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. The standard describes three levels of inputs that may be used to measure fair value. 
 Level 1 — Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date. 
 
 
 Level 2 — Level 2 inputs are inputs, other than quoted prices included with Level 1, that are observable for the asset or liability either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. 
 Level 3 — Level 3 inputs are supported by little or no market activity and are significant to the fair value of the assets or liabilities. 
 In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Corporation’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. 
 33 

 Table of Contents 

 Assets and liabilities measured at fair value on a recurring basis, segregated by fair value hierarchy level, are summarized below: 
 
 March 31, 2023 
 Fair Value Measurements Using 
 Level 1 Level 2 Level 3 Total 
 (In Thousands) 
 Assets: 
 Securities available-for-sale: 
 U.S. treasuries $ — $ 4,525 $ — $ 4,525 
 U.S. government agency securities - government-sponsored enterprises — 20,927 — 20,927 
 Municipal securities — 40,405 — 40,405 
 Residential mortgage-backed securities - government issued — 26,504 — 26,504 
 Residential mortgage-backed securities - government-sponsored enterprises — 114,072 — 114,072 
 Commercial mortgage-backed securities - government issued — 2,910 — 2,910 
 Commercial mortgage-backed securities - government-sponsored enterprises — 27,646 — 27,646 
 
 Interest rate swaps — 54,612 — 54,612 
 Liabilities: 
 Interest rate swaps — 49,012 — 49,012 

 
 December 31, 2022 
 Fair Value Measurements Using 
 Level 1 Level 2 Level 3 Total 
 (In Thousands) 
 Assets: 
 Securities available-for-sale: 
 U.S. treasuries $ — $ 4,445 $ — $ 4,445 
 U.S. government agency securities - government-sponsored enterprises — 13,205 — 13,205 
 Municipal securities — 39,311 — 39,311 
 Residential mortgage-backed securities - government issued — 19,431 — 19,431 
 Residential mortgage-backed securities - government-sponsored enterprises — 106,323 — 106,323 
 Commercial mortgage-backed securities - government issued — 2,932 — 2,932 
 Commercial mortgage-backed securities - government-sponsored enterprises — 26,377 — 26,377 
 
 Interest rate swaps — 68,581 — 68,581 
 Liabilities: 
 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 months ended March 31, 2023 or the year ended December 31, 2022 related to the above measurements. 
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 Table of Contents 

 Assets and liabilities measured at fair value on a non-recurring basis, segregated by fair value hierarchy are summarized below: 
 
 March 31, 2023 
 Fair Value Measurements Using 
 Level 1 Level 2 Level 3 Total 
 (In Thousands) 
 Collateral-dependent loans $ — $ — $ 782 $ 782 
 Repossessed assets — — 89 89 
 Loan servicing rights — — 1,492 1,492 

 
 December 31, 2022 
 Fair Value Measurements Using 
 Level 1 Level 2 Level 3 Total 
 (In Thousands) 
 Impaired loans $ — $ — $ 1,022 $ 1,022 
 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 $ 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 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. 
 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. When SBA loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. The servicing rights are subsequently measured using the amortization method, which requires amortization into interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. 
 The Corporation periodically reviews this portfolio for impairment and engages a third-party valuation firm to assess the fair value of the overall servicing rights portfolio. Loan servicing rights do not trade in an active, open market with readily observable prices. While sales of loan servicing rights do occur, the precise terms and conditions typically are not readily available to allow for a “quoted price for similar assets” comparison. Accordingly, the Corporation utilizes an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of its loan servicing rights. The valuation model incorporates prepayment assumptions to project loan servicing rights cash flows based on the current interest rate scenario, which is then discounted to estimate an expected fair value of the loan servicing rights. The valuation model considers portfolio characteristics of the underlying serviced portion of the SBA loans and uses the following significant unobservable inputs: (1) constant prepayment rate (“CPR”) assumptions based on the SBA sold pools historical CPR as quoted in Bloomberg and (2) a discount rate. Due to the nature of the valuation inputs, loan servicing rights are classified in Level 3 of the fair value hierarchy. 
 Fair Value of Financial Instruments 
 The Corporation is required to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions, consistent with exit price concepts for fair value measurements, are set forth below: 
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 Table of Contents 

 
 March 31, 2023 
 Carrying
Amount Fair Value 
 Total Level 1 Level 2 Level 3 
 (In Thousands) 
 Financial assets: 
 Cash and cash equivalents $ 185,973 $ 185,973 $ 185,973 $ — $ — 
 Securities available-for-sale 236,989 236,989 — 236,989 — 
 Securities held-to-maturity 11,461 11,207 — 11,207 — 
 Loans held for sale 2,697 2,900 — 2,900 — 
 Loans and lease receivables, net 2,513,223 2,488,510 — — 2,488,510 
 Federal Home Loan Bank stock 
 13,088 N/A N/A N/A N/A 
 Accrued interest receivable 10,072 10,072 10,072 — — 
 Interest rate swaps 54,612 54,612 — 54,612 — 
 Financial liabilities: 
 Deposits 2,476,840 2,475,307 1,811,562 663,745 — 
 Federal Home Loan Bank advances and other borrowings 341,859 326,058 — 326,058 — 
 
 Accrued interest payable 6,228 6,228 6,228 — — 
 Interest rate swaps 49,012 49,012 — 49,012 — 
 Off-balance sheet items: 
 Standby letters of credit 169 169 — — 169 
 

 N/A = The fair value is not applicable due to restrictions placed on transferability 
 
 December 31, 2022 
 Carrying
Amount Fair Value 
 Total Level 1 Level 2 Level 3 
 (In Thousands) 
 Financial assets: 
 Cash and cash equivalents $ 102,682 $ 102,682 $ 102,682 $ — $ — 
 Securities available-for-sale 212,024 212,024 — 212,024 — 
 Securities held-to-maturity 12,635 12,270 — 12,270 — 
 Loans held for sale 2,632 2,829 — 2,829 — 
 Loans and lease receivables, net 2,418,836 2,394,702 — — 2,394,702 
 Federal Home Loan Bank stock 
 17,812 N/A N/A N/A N/A 
 Accrued interest receivable 9,403 9,403 9,403 — — 
 Interest rate swaps 68,581 68,543 — 68,543 — 
 Financial liabilities: 
 Deposits 2,168,206 2,167,444 1,827,215 340,229 — 
 Federal Home Loan Bank advances and other borrowings 
 456,808 440,242 — 440,242 — 
 
 Accrued interest payable 4,053 4,053 4,053 — — 
 Interest rate swaps 61,419 61,419 — 61,419 — 
 Off-balance sheet items: 
 Standby letters of credit 184 184 — — 184 
 

 N/A = The fair value is not applicable due to restrictions placed on transferability 
 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, 
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 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. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Corporation. 
 Securities: The fair value measurements of investment securities are determined by a third-party pricing service which considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, credit information, and the securities’ terms and conditions, among other things. The fair value measurements are subject to independent verification by another pricing source on a quarterly basis to review for reasonableness. Any significant differences in pricing are reviewed with appropriate members of management who have the relevant technical expertise to assess the results. The Corporation has determined that these valuations are classified in Level 2 of the fair value hierarchy. When the independent pricing service does not provide a fair value measurement for a particular security, the Corporation will estimate the fair value based on specific information about each security. Fair values derived in this manner are classified in Level 3 of the fair value hierarchy. 
 
 
 Loans Held for Sale: Loans held for sale, which consist of the guaranteed portions of SBA 7(a) loans, are carried at the lower of cost or estimated fair value. The estimated fair value is based on what secondary markets are currently offering for portfolios with similar characteristics. 
 Interest Rate Swaps: The carrying amount and fair value of existing derivative financial instruments are based upon independent valuation models, which use widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative contract. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. 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. 
 Limitations: Fair value estimates are made at a discrete point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holding of a particular financial instrument. Because no market exists for a significant portion of the Corporation’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 
 Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and are not considered in the estimates. 
 
 
 
 Note 13 — Derivative Financial Instruments 
 The Corporation offers interest rate swap products directly to qualified commercial borrowers. The Corporation economically hedges client derivative transactions by entering into offsetting interest rate swap contracts executed with a third party. Derivative transactions executed as part of this program are not considered hedging instruments and are marked-to-market through earnings each period. The derivative contracts have mirror-image terms, which results in the positions’ changes in fair value offsetting through earnings each period. The credit risk and risk of non-performance embedded in the fair value calculations is different between the dealer counterparties and the commercial borrowers which may result in a difference in the changes in the fair value of the mirror-image swaps. The Corporation incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the counterparty’s risk in the fair value measurements. 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 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 
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 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 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 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. 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 instruments are designated as cash flow hedges as the receipt of floating rate interest from the counterparty is used to manage interest rate risk associated with forecasted issuances of short-term FHLB advances. 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 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. The objective of the hedge is to protect the Corporation against changes in fair value due to changes in benchmark interest rates. The instruments are designated as fair value hedges as the changes in the fair value of the interest rate swap are expected to offset changes in the fair value of the hedged item attributable to changes in the SOFR swap rate, the designated benchmark interest rate. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. 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 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 
 (Dollars in Thousands) 
 Included in Derivative assets 
 Derivatives not designated as hedging instruments 
 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 
 Interest rate swap related to AFS securities 11 $ 12,500 9.03 $ 426 
 Interest rate swap related to FHLB borrowings 10 106,400 2.88 5,174 
 Included in Derivative liabilities 
 Derivatives not designated as hedging instruments 
 Interest rate swap agreements on loans with commercial loan clients 76 $ 644,071 6.72 $ 49,012 
 
 
 
 

 
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 As of December 31, 2022 
 Number of Instruments Notional Amount Weighted Average Maturity (In Years) Fair Value 
 (Dollars in Thousands) 
 Included in Derivative assets 
 Derivatives not designated as hedging instruments 
 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 
 
 
 The Corporation and the Bank are subject to various regulatory capital requirements administered by Federal and Wisconsin banking agencies. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions on the part of regulators, that if undertaken, could have a direct material effect on the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory practices. The Corporation’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The Corporation regularly reviews and updates, when appropriate, its Capital and Liquidity Action Plan, which is designed to help ensure appropriate capital adequacy, to plan for future capital needs, and to ensure that the Corporation serves as a source of financial strength to the Bank. The Corporation’s and the Bank’s Board and management teams adhere to the appropriate regulatory guidelines on decisions which affect their respective capital positions, including but not limited to, decisions relating to the payment of dividends and increasing indebtedness. 
 As a bank holding company, the Corporation’s ability to pay dividends is affected by the policies and enforcement powers of the Board of Governors of the Federal Reserve system (the “Federal Reserve”). Federal Reserve guidance urges financial institutions to strongly consider eliminating, deferring, or significantly reducing dividends if: (i) net income available to common shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividend; (ii) the prospective rate of earnings retention is not consistent with the bank holding company’s capital needs and overall current and prospective financial condition; 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 (“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: (i) render the Corporation unable to pay its debts as they become due in the usual course of business, or (ii) result in the Corporation’s assets being less than the sum of its total liabilities plus the amount needed to satisfy the preferential rights upon dissolution of any shareholders with preferential rights superior to those shareholders receiving the dividend. 
 The Bank is also subject to certain legal, regulatory, and other restrictions on their ability to pay dividends to the Corporation. As a bank holding company, the payment of dividends by the Bank to the Corporation is one of the sources of funds the Corporation could use to pay dividends, if any, in the future and to make other payments. 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 
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 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 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 March 31, 2023 
 Actual (1) 
 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 
 Amount Ratio Amount Ratio Amount Ratio Amount Ratio 
 (Dollars in Thousands) 
 Total capital
(to risk-weighted assets) 
 Consolidated $ 331,220 11.04 % $ 240,008 8.00 % $ 315,011 10.50 % N/A N/A 
 First Business Bank 331,500 11.05 239,963 8.00 314,951 10.50 $ 299,954 10.00 % 
 Tier 1 capital
(to risk-weighted assets) 
 Consolidated $ 270,197 9.01 % $ 180,006 6.00 % $ 255,009 8.50 % N/A N/A 
 First Business Bank 304,851 10.16 179,972 6.00 254,961 8.50 $ 239,963 8.00 % 
 Common equity tier 1 capital
(to risk-weighted assets) 
 Consolidated $ 258,205 8.61 % $ 135,005 4.50 % $ 210,007 7.00 % N/A N/A 
 First Business Bank 304,851 10.16 134,979 4.50 209,968 7.00 $ 194,970 6.50 % 
 Tier 1 leverage capital
(to adjusted assets) 
 Consolidated $ 270,197 9.00 % $ 120,047 4.00 % $ 120,047 4.00 % N/A N/A 
 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. 
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 As of December 31, 2022 
 Actual 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 
 Amount Ratio Amount Ratio Amount Ratio Amount Ratio 
 (Dollars in Thousands) 
 Total capital
(to risk-weighted assets) 
 Consolidated $ 323,893 11.26 % $ 230,180 8.00 % $ 302,111 10.50 % N/A N/A 
 First Business Bank 323,021 11.22 230,367 8.00 302,357 10.50 $ 287,959 10.00 % 
 Tier 1 capital
(to risk-weighted assets) 
 Consolidated $ 264,843 9.20 % $ 172,635 6.00 % $ 244,566 8.50 % N/A N/A 
 First Business Bank 298,312 10.36 172,775 6.00 244,765 8.50 $ 230,367 8.00 % 
 Common equity tier 1 capital
(to risk-weighted assets) 
 Consolidated $ 252,851 8.79 % $ 129,476 4.50 % $ 201,407 7.00 % N/A N/A 
 First Business Bank 298,312 10.36 129,581 4.50 201,571 7.00 $ 187,173 6.50 % 
 Tier 1 leverage capital
(to adjusted assets) 
 Consolidated $ 264,843 9.17 % $ 115,464 4.00 % $ 115,464 4.00 % N/A N/A 
 First Business Bank 298,312 10.34 115,402 4.00 115,402 4.00 $ 144,252 5.00 % 

 
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.
FIRST BUSINESS FINANCIAL SERVICES, INC. 10-Q

Item 1. Financial Statements
