What changed in this filing

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Item 1. Financial Statements

2023-07-28 compared with 2023-04-28 · 196 added, 276 removed, 1113 unchanged (30% of the section changed)

9 unchanged sentences

Securities held-to-maturity, at amortized cost

11,461 12,635

Loans held for sale

18 unchanged sentences

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

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 June 30, 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

Common stock, $ 0.01 par value, 25,000,000 shares authorized, 9,417,981 and 9,371,078 shares issued, 8,315,465 and 8,362,085 shares outstanding at June 30, 2023 and December 31, 2022, respectively

Additional paid-in capital 89,272 87,512

1 unchanged sentence

Accumulated other comprehensive loss ( 13,877 ) ( 15,310 )

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

Treasury stock, 1,102,516 and 1,008,993 shares at June 30, 2023 and December 31, 2022, respectively, at cost

( 30,087 ) ( 27,155 )

4 unchanged sentences

Consolidated Statements of Income (Unaudited)

For the Three Months Ended March 31,

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

2023 2022 2023 2022

(In Thousands, Except Per Share Data)

18 unchanged sentences

Increase in cash surrender value of bank-owned life insurance

363 350 729 698

Net loss on sale of securities ( 45 ) — ( 45 ) —

Swap fees 977 471 1,534 697

24 unchanged sentences

Consolidated Statements of Comprehensive Income (Unaudited)

For the Three Months Ended March 31,

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

2023 2022 2023 2022

(In Thousands)

Net income $ 8,337 $ 11,204 $ 17,316 $ 19,876

Other comprehensive income (loss)

Other comprehensive (loss) income

Securities available-for-sale:

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

Unrealized securities losses arising during the period ( 4,015 ) ( 7,184 ) ( 252 ) ( 19,665 )

Reclassification adjustment for net gain realized in net income 45 — 45 —

Securities held-to-maturity:

1 unchanged sentence

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 )

Unrealized gains on interest rate swaps arising during the period 3,693 2,175 2,131 6,044

Income tax benefit (expense) 70 1,281 ( 494 ) 3,482

Total other comprehensive (loss) income ( 206 ) ( 3,725 ) 1,433 ( 10,131 )

Comprehensive income $ 8,131 $ 7,479 $ 18,749 $ 9,745

20 unchanged sentences

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

Net income — — — — 11,204 — — 11,204

Other comprehensive loss — — — — — ( 3,725 ) — ( 3,725 )

Share-based compensation - restricted shares and employee stock purchase plan 25,860 — — 645 — — — 645

Issuance of common stock under the employee stock purchase plan 1,254 — — 35 — — — 35

Preferred stock dividends — — — — ( 246 ) — — ( 246 )

Cash dividends ( $ 0.1975 per share)

— — — — ( 1,678 ) — — ( 1,678 )

Treasury stock purchased ( 41,000 ) — — — — — ( 1,363 ) ( 1,363 )

Balance at June 30, 2022 8,474,699 $ 11,992 $ 94 $ 86,123 $ 186,302 $ ( 11,588 ) $ ( 23,000 ) $ 249,923

Common Shares Outstanding Preferred Stock Common

17 unchanged sentences

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

Net income — — — — 8,337 — — 8,337

Other comprehensive loss — — — — — ( 206 ) — ( 206 )

Share-based compensation - restricted shares and employee stock purchase plan 45,280 — 1 1,071 — — — 1,072

Issuance of common stock under the employee stock purchase plan 1,044 — — 28 — — — 28

Preferred stock dividends — — — — ( 219 ) — — ( 219 )

Cash dividends ($ 0.2275 per share)

— — — — ( 1,889 ) — — ( 1,889 )

Treasury stock purchased ( 37,129 ) — — — — — ( 1,072 ) ( 1,072 )

Balance at June 30, 2023 8,315,465 $ 11,992 $ 95 $ 89,272 $ 215,237 $ ( 13,877 ) $ ( 30,087 ) $ 272,632

See accompanying Notes to Unaudited Consolidated Financial Statements.

1 unchanged sentence

Consolidated Statements of Cash Flows (Unaudited)

For the Three Months Ended March 31,

For the Six Months Ended June 30,

(In Thousands)

3 unchanged sentences

Deferred income taxes, net 510 ( 1,695 )

Impairment of tax credit investments — ( 351 )

Provision for credit losses 3,793 ( 4,582 )

1 unchanged sentence

Share-based compensation 1,706 1,254

Gain on disposal of lease equipment 1 —

Net loss on disposal of fixed assets 73 —

Amortization of tax credit investments 870 —

7 unchanged sentences

Net payments on operating lease liabilities ( 709 ) ( 727 )

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 decrease in accrued interest receivable and other assets ( 9,513 ) ( 13,814 )

Net increase in accrued interest payable and other liabilities 3,307 13,658

Net cash provided by operating activities 22,461 16,777

2 unchanged sentences

Proceeds from maturities, redemptions, and paydowns of held-to-maturity securities 2,797 5,761

Proceeds from sale of available-for-sale securities 5,084 —

Purchases of available-for-sale securities ( 57,281 ) ( 43,231 )

4 unchanged sentences

Investment in tax credit investments ( 9,598 ) ( 5,937 )

Distribution from tax credit investments 33 282

Investment in Federal Home Loan Bank stock ( 24,375 ) ( 23,370 )

5 unchanged sentences

Financing activities

Net increase in deposits 308,635 65,771

Net increase (decrease) in deposits 360,646 ( 88,592 )

Repayment of Federal Home Loan Bank advances ( 1,228,050 ) ( 1,228,543 )

1 unchanged sentence

Proceeds from issuance of subordinated notes payable — 20,000

Repayment of subordinated notes payable — ( 9,090 )

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

Net (decrease) increase in long-term borrowed funds ( 6,069 ) ( 1,569 )

Net decrease in long-term borrowed funds ( 6,020 ) ( 3,020 )

Cash dividends paid ( 3,795 ) ( 3,348 )

10 unchanged sentences

Interest paid on deposits and borrowings $ 30,478 $ 5,707

Net income taxes (received) paid ( 7 ) 17

Net income taxes paid (received) 1,192 ( 31 )

Non-cash investing and financing activities:

Transfer of loans to repossessed assets — 17

See accompany Notes to Unaudited Consolidated Financial Statements

7 unchanged sentences

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.

FBB also offers bank consulting services to community financial institutions.

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:

As of June 30, 2023, FBB had the following wholly-owned subsidiaries:

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

8 unchanged sentences

Material estimates that could significantly change in the near-term include the value of securities and interest rate swaps, level of the allowance for 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.

The results of operations for the three and six months ended June 30, 2023, are not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, 2023.

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

1 unchanged sentence

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

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

Adoption of new accounting standards

ASU 2016 - 13

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

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

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

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

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

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

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

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

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

The following table illustrates the impact of ASC 326:

January 1, 2023

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

Loans $ 2,443,215 $ 2,443,215 $ —

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

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

Construction 1,755 1,646 109

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

1-4 family 147 207 ( 60 )

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

Consumer and other 448 466 ( 18 )

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

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

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

Stockholders’ equity:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

All residential and commercial MBS are U.S.

government issued or U.S.

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

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

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

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

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

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

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

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

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

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

ACL - Loans - Collectively Evaluated

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

The Corporation has identified the following portfolio segments:

Commercial Real Estate:

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

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

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

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

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

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

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

Commercial and Industrial Lending:

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

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

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

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

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

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

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

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

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

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

Measures of the allowance for credit losses are as follows:

Portfolio Segment Pool Measurement Method Loss Driver

Commercial real estate

Owner occupied Discounted Cash Flow National unemployment, National GDP

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

Construction Discounted Cash Flow National unemployment, National GDP

Multi-family Discounted Cash Flow National unemployment, National GDP

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

Commercial and industrial

Commercial Discounted Cash Flow National unemployment, National GDP

ABL Discounted Cash Flow National unemployment, National GDP

Floorplan Discounted Cash Flow National unemployment, National GDP

SBA Weighted Average Remaining Maturity N/A

Equipment Finance Discounted Cash Flow National unemployment, National GDP

Consumer and other Discounted Cash Flow National unemployment, National GDP

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Qualitative factors for DCF and WARM methodologies include the following:

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

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

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

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

• The existence and effect of industry concentrations of credit;

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

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

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

ACL - Loans - Individually Evaluated

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

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

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

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

ACL - Off-Balance Sheet Credit Exposures

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

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

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

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

Regulatory capital

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

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

ASU 2022-02 Troubled Debt Restructurings

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

Troubled Debt Restructurings and Vintage Disclosures", as amended.

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

ASU 2020-04 Reference Rate Reform

In March 2020, the FASB issued ASU No.

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

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.

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 and updates from the adoption of new accounting standards disclosed in the Corporation’s Form 10-Q for the quarter ended March 31, 2023.

Recent Accounting Pronouncements

In March 2023, the Financial Accounting Standards Board issued Accounting Standards Update No.

2023-02 “Investments-Equity Method and Joint Ventures (Topic 323):

Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force).” The amendments in this Update permit reporting entities to elect to account for their tax equity investments, regardless of the program from which the income tax credits are received, using the proportional amortization method if certain conditions are met.

A reporting entity may make an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis rather than electing to apply the proportional amortization method at the reporting entity level or to individual investments.

The Corporation is assessing the impact of this standard.

Note 2 — Earnings per Common Share

4 unchanged sentences

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

For the Three Months Ended March 31,

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

2023 2022 2023 2022

(Dollars in Thousands, Except Share Data)

14 unchanged sentences

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.

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, restricted stock, restricted stock units, dividend equivalent units, and any other type of award permitted by the Plan.

As of June 30, 2023, 328,085 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.

8 unchanged sentences

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.

Vesting of the performance-based restricted stock units will be measured on the relative Total Shareholder Return (“TSR”) and relative Return on Average Equity (“ROAE”) for issuances prior to 2023 or Return on Average Common Equity (“ROACE”) for issuances after 2022, and will cliff-vest after a three-year measurement period based on the Corporation’s TSR performance and ROAE or ROACE

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.

1 unchanged sentence

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 ROAE or ROACE metric will be adjusted if there is a change in the expectation of ROAE or ROACE.

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:

Restricted stock activity for the year ended December 31, 2022 and the six months ended June 30, 2023 was as follows:

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

7 unchanged sentences

Forfeited ( 2,638 ) 27.79 — — ( 180 ) 36.42 ( 2,818 ) 28.34

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

Nonvested balance as of June 30, 2023 77,465 $ 28.56 56,155 $ 35.70 55,437 $ 33.98 189,057 $ 32.27

Unrecognized compensation cost (in thousands) $ 1,790 $ 1,303 $ 1,682 $ 4,775

2 unchanged sentences

The number of shares actually issued may vary.

During the six months ended June 30, 2023, an additional 18,060 were issued related to actual performance results of previously granted awards.

Employee Stock Purchase Plan

5 unchanged sentences

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

During the 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.

During the six months ended June 30, 2023, the Corporation issued 2,049 shares of common stock under the ESPP.

As of June 30, 2023, 232,917 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,

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

2023 2022 2023 2022

(In Thousands)

2 unchanged sentences

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

As of March 31, 2023

As of June 30, 2023

Amortized Cost Gross

28 unchanged sentences

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

As of June 30, 2023

Amortized Cost Gross

27 unchanged sentences

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.

The amortized cost and fair value of securities by contractual maturity at March 31, 2023 are shown below.

The Corporation sold 16 available-for-sale securities during the three and six months ended June 30, 2023 and none during the three and six months ended June 30, 2022.

At June 30, 2023 and December 31, 2022, securities with a fair value of $ 46.0 million and $ 35.9 million, respectively, were pledged to secure various obligations, including interest rate swap contracts and municipal deposits.

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

10 unchanged sentences

$ 281,560 $ 253,626 $ 9,830 $ 9,469

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.

At June 30, 2023, the Corporation held 180 available-for-sale securities that were in an unrealized loss position.

At June 30, 2023, the Corporation held 144 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.

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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;

For the three and six months ended June 30, 2023 and 2022, management concluded that in all instances securities with fair value less than carrying value was due to market and other factors;

thus, no credit loss provision was required.

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

As of March 31, 2023

As of June 30, 2023

Less than 12 Months 12 Months or Longer Total

39 unchanged sentences

$ 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.

At June 30, 2023, the Corporation held 34 held-to-maturity securities that were in an unrealized loss position.

At June 30, 2023, the Corporation held 15 held-to-maturity securities that have been in a continuous unrealized loss position for twelve months or greater.

Management assesses held-to-maturity securities for credit losses on a quarterly basis.

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

Based on this analysis, management concludes the

decline in fair value is due to market factors.

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

Based on this analysis, management concludes the decline in fair value is due to market factors, specifically changes in interest rates.

Accordingly, no credit loss provision was recorded in the unaudited Consolidated Statements of Income for the three and six months ended June 30, 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

As of June 30, 2023

Less than 12 Months 12 Months or Longer Total

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

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

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

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

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

As of January 1, 2023 and June 30, 2023, the Corporation estimated the expected credit losses to be immaterial based on the composition of the securities portfolio.

Note 5 — Loans and Allowance for Credit Losses

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Allowance for credit losses 28,115 24,230

Deferred loan fees ( 87 ) 149

Deferred loan fees and costs, net ( 142 ) 149

Loans and leases receivable, net

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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 total principal amount of the guaranteed portions of SBA loans sold during the three months ended June 30, 2023, and 2022, was $ 4.9 million and $ 11.9 million, respectively.

The total principal amount of the guaranteed portions of SBA loans sold during the six months ended June 30, 2023, and 2022, was $ 9.8 million and $ 17.4 million, respectively.

Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the three and six months ended June 30, 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.

The total outstanding balance of sold SBA loans at June 30, 2023, and December 31, 2022, was $ 87.7 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 June 30, 2023, and 2022, was $ 32.0 million and $ 23.0 million, respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer.

The total principal amount of transferred participation interests in other, non-SBA originated loans during the six months ended June 30, 2023, and 2022, was $ 54.7 million and $ 45.2 million, respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer.

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

The total outstanding balance of these transferred loans at 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 total outstanding balance of these transferred loans at June 30, 2023, and December 31, 2022, was $ 252.7 million and $ 222.9 million, respectively.

As of June 30, 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 $ 355.7 million and $ 339.0 million, respectively.

As of June 30, 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.

There were no loan participations purchased on the unaudited Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022.

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

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

June 30, 2023 Term Loans Amortized Cost Basis by Origination Year

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

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Total $ — $ 8,274 $ 2,727 $ 2,397 $ 459 $ 3,198 $ 6,008 $ 23,063

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

June 30, 2023 Term Loans Amortized Cost Basis by Origination Year

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

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

March 31, 2023

June 30, 2023

Days Past Due 60-89

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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.

During the three and six months ended June 30, 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 and six months ended June 30, 2023 and 2022.

There were no unfunded commitments associated with loans modified for borrowers experiencing financial distress as of June 30, 2023.

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

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

As of and for the Six Months Ended June 30, 2023

Investment (1)

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

The difference between the recorded investment of loans and leases and the unpaid principal balance of $ 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.

The difference between the recorded investment of loans and leases and the unpaid principal balance of $ 6,000 and $ 26,000 as of June 30, 2023, and December 31, 2022, respectively, represents partial charge-offs of loans and leases resulting from losses due to the 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.

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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.

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Quantitative Considerations

The ACL is primarily calculated utilizing a DCF model.

The ACL is primarily calculated utilizing a discounted cash flow (“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.

• Forecast model - For each portfolio segment, a loss driver analysis (“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.

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• 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.

As of June 30, 2023, the Corporation selected a forecast which forecasts unemployment between 3.81% and 4.58% and GDP growth change between 0.66% and 1.39% over the next four quarters.

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

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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

As of and for the Three Months Ended June 30, 2023

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

3 unchanged sentences

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

Charge-offs — — — — — ( 329 ) — ( 329 )

Recoveries 2 — — — 21 220 2 245

Net recoveries (charge-offs) 2 — — — 21 ( 109 ) 2 ( 84 )

Provision for credit losses 63 275 6 525 7 1,427 ( 72 ) 2,231

Ending balance $ 1,721 $ 5,241 $ 2,293 $ 3,426 $ 249 $ 16,223 $ 544 $ 29,697

Allowance for loan losses 1,703 5,182 1,483 3,414 228 15,624 481 28,115

Allowance for unfunded credit commitments 18 59 810 12 21 599 63 1,582

Total ACL $ 1,721 $ 5,241 $ 2,293 $ 3,426 $ 249 $ 16,223 $ 544 $ 29,697

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

Commercial Real Estate Commercial

Industrial Consumer and Other Total

(In Thousands)

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

Charge-offs — ( 85 ) — ( 85 )

Recoveries 4,121 117 9 4,247

Net recoveries 4,121 32 9 4,162

Provision for credit losses ( 4,476 ) 922 ( 173 ) ( 3,727 )

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

As of and for the Six Months Ended June 30, 2023

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

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

7 unchanged sentences

Total ACL $ 1,721 $ 5,241 $ 2,293 $ 3,426 $ 249 $ 16,223 $ 544 $ 29,697

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

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

Commercial Real Estate Commercial

7 unchanged sentences

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

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

Loans collectively evaluated for credit losses in the following tables include all performing loans at June 30, 2023 and December 31, 2022.

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

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

As of March 31, 2023

As of June 30, 2023

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

29 unchanged sentences

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.

In June 2023, the Corporation relocated its Kansas City metropolitan area office resulting in a $ 2.6 million right-of-use asset and $ 3.7 million lease liability.

The Corporation received a $ 1.1 million tenant improvement allowance related to this lease, which is recognized as a lease incentive and deducted from the right-of-use asset.

The components of total lease expense were as follows:

For the Three Months Ended March 31,

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

2023 2022 2023 2022

(In Thousands)

Operating lease cost

$ 367 $ 382 $ 750 $ 765

Short-term lease cost

Variable lease cost

147 140 297 266

sublease income

1 unchanged sentence

Total lease cost, net

$ 530 $ 514 $ 1,080 $ 1,015

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

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Weighted-average remaining lease term (in years)

9 unchanged sentences

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

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

(In Thousands)

10 unchanged sentences

Average balances represent year-to-date averages.

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Balance Average

10 unchanged sentences

Total deposits $ 2,528,852 $ 2,278,812 2.54 $ 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:

A summary of annual maturities of in-market and wholesale certificates of deposit at June 30, 2023 is as follows:

(In Thousands)

2 unchanged sentences

Thereafter 14,604

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.

Wholesale deposits include $ 355.1 million and $ 100.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at June 30, 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.

The Corporation has entered into derivative contracts hedging a portion of the certificates of deposit included in the 2023 maturities above.

As of June 30, 2023, the notional amount of derivatives designated as cash flow hedges totaled $ 153.1 million with a weighted average remaining maturity of 6.2 years and a weighted average rate of 3.44 %.

Certificates of deposit and wholesale deposits denominated in amounts greater than $250,000 were $ 113.1 million at June 30, 2023 and $ 81.6 million at December 31, 2022.

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

1 unchanged sentence

Average balances represent year-to-date averages.

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Balance Weighted Average

13 unchanged sentences

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

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

A summary of annual maturities of borrowings at June 30, 2023 is as follows:

(In Thousands)

3 unchanged sentences

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.

As of June 30, 2023, the Corporation had no other borrowings.

The Corporation has entered into derivative contracts hedging a portion of the borrowings included in the 2023 maturities above.

As of June 30, 2023, the notional amount of derivatives designated as cash flow hedges totaled $ 106.5 million with a weighted average remaining maturity of 2.7 years and a weighted average rate of 1.73 %.

As of June 30, 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 .

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For each dividend period from and including March 15, 2027, dividends will be paid at a floating rate of Three-Month Term 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 .

During the three and six months ended June 30,

2023, the Board of Directors declared an aggregate preferred stock dividend of $ 219,000 and $ 438,000 , respectively.

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

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

Management has assessed estimated losses inherent in the outstanding guaranteed portions of SBA loans sold in accordance with ASC 450, Contingencies , and determined a recourse reserve based on the probability of future losses for these loans to be $ 423,000 at March 31, 2023, which is reported in accrued interest payable and other liabilities on the unaudited Consolidated Balance Sheets.

Management has assessed estimated losses inherent in the outstanding guaranteed portions of SBA loans sold in accordance with ASC 450, Contingencies , and determined a recourse reserve based on the probability of future losses for these loans to be $ 752,000 at June 30, 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,

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

2023 2022 2023 2022

(In Thousands)

1 unchanged sentence

SBA recourse provision 341 114 323 38

Charge-offs, net ( 12 ) — ( 12 ) —

Balance at the end of the period $ 752 $ 673 $ 752 $ 673

12 unchanged sentences

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

March 31, 2023

June 30, 2023

Fair Value Measurements Using

25 unchanged sentences

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.

For assets and liabilities measured at fair value on a recurring basis, there were no transfers between the levels during the three and six months ended June 30, 2023 or the year ended December 31, 2022 related to the above measurements.

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

March 31, 2023

June 30, 2023

Fair Value Measurements Using

11 unchanged sentences

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.

Collateral-dependent loans were written down to the fair value of their underlying collateral less costs to sell of $ 1.7 million and $ 1.0 million at June 30, 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 quantification of unobservable inputs for Level 3 impaired loan values range from 10 % - 100 % as of the measurement date of June 30, 2023.

The weighted average of those unobservable inputs was 36 %.

16 unchanged sentences

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

March 31, 2023

June 30, 2023

Amount Fair Value

43 unchanged sentences

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

In cases where quoted market prices are not available,

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

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

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

16 unchanged sentences

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

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

In adjusting the fair value of its derivative

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

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

13 unchanged sentences

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 .

As of June 30, 2023 and December 31, 2022, the credit valuation allowance was $ 38,000 .

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

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

to master netting arrangements.

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

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

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

The gross amount of dealer counterparty swaps, without regard to the enforceable master netting agreement, was a gross derivative 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.

The gross amount of dealer counterparty swaps, without regard to the enforceable master netting agreement, was a gross derivative asset of $ 61.1 million and gross liability of $ 1.8 million as of June 30, 2023.

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

Given the mirror-image terms of the outstanding derivative portfolio, the change in fair value for the three and six months ended June 30, 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 instruments are designated as cash flow hedges as the receipt of floating rate interest from the counterparty is used to manage interest rate risk related to cash outflows attributable to future wholesale deposit or short-term FHLB advance borrowings.

A pre-tax unrealized gain of $ 3.6 million and $ 2.2 million was recognized in other comprehensive income for the three and six months ended June 30, 2023 and there were no ineffective portions of the hedges.

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

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

A pre-tax unrealized gain of $ 107,000 and a pre-tax unrealized loss of $ 68,000 was recognized in other comprehensive income for the three and six months ended June 30, 2023 and there was no ineffective portion of these hedges.

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

As of June 30, 2023

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

6 unchanged sentences

Interest rate swap related to AFS securities 11 $ 12,500 8.78 $ 534

Interest rate swap related to FHLB borrowings 10 106,400 2.88 5,174

Interest rate swap related to wholesale funding 29 312,655 4.22 8,759

Included in Derivative liabilities

10 unchanged sentences

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

Interest rate swap related to wholesale funding 11 116,400 2.88 6,560

Included in Derivative liabilities

4 unchanged sentences

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’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.

11 unchanged sentences

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

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

adjusted total assets.

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.

As of June 30, 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

As of June 30, 2023

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

42 unchanged sentences

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

What changed 10-Q

Item 1. Financial Statements