What changed in this filing

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Item 1. Financial Statements

2023-10-27 compared with 2023-07-28 · 143 added, 104 removed, 1205 unchanged (17% of the section changed)

2 unchanged sentences

Consolidated Balance Sheets

September 30,

2023 December 31,

25 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 June 30, 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 September 30, 2023 and December 31, 2022, respectively

11,992 11,992

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

Common stock, $ 0.01 par value, 25,000,000 shares authorized, 9,418,413 and 9,371,078 shares issued, 8,315,186 and 8,362,085 shares outstanding at September 30, 2023 and December 31, 2022, respectively

Additional paid-in capital 89,947 87,512

1 unchanged sentence

Accumulated other comprehensive loss ( 14,234 ) ( 15,310 )

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

Treasury stock, 1,103,227 and 1,008,993 shares at September 30, 2023 and December 31, 2022, respectively, at cost

( 30,110 ) ( 27,155 )

4 unchanged sentences

Consolidated Statements of Income (Unaudited)

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

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

2023 2022 2023 2022

19 unchanged sentences

Increase in cash surrender value of bank-owned life insurance 376 359 1,106 1,057

363 350 729 698

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

25 unchanged sentences

Consolidated Statements of Comprehensive Income (Unaudited)

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

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

2023 2022 2023 2022

4 unchanged sentences

Unrealized securities losses arising during the period ( 6,194 ) ( 10,174 ) ( 6,446 ) ( 29,839 )

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

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

Securities held-to-maturity:

35 unchanged sentences

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

Net income — — — — 10,826 — — 10,826

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

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

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

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

Cash dividends ($ 0.1975 per share)

— — — — ( 1,675 ) — — ( 1,675 )

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

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

Common Shares Outstanding Preferred Stock Common

26 unchanged sentences

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

Net income — — — — 9,941 — — 9,941

Other comprehensive loss — — — — — ( 357 ) — ( 357 )

Share-based compensation - restricted shares and employee stock purchase plan ( 702 ) — — 643 — — — 643

Issuance of common stock under the employee stock purchase plan 1,134 — — 32 — — — 32

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

Cash dividends ($ 0.2275 per share)

— — — — ( 1,892 ) — — ( 1,892 )

Treasury stock purchased ( 711 ) — — — — — ( 23 ) ( 23 )

Balance at September 30, 2023 8,315,186 $ 11,992 $ 95 $ 89,947 $ 223,068 $ ( 14,234 ) $ ( 30,110 ) $ 280,758

See accompanying Notes to Unaudited Consolidated Financial Statements.

1 unchanged sentence

Consolidated Statements of Cash Flows (Unaudited)

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

(In Thousands)

8 unchanged sentences

Net loss on disposal of fixed assets 73 —

Gain on disposal of lease equipment — ( 478 )

Amortization of tax credit investments 2,882 552

4 unchanged sentences

Net loss on repossessed assets 9 27

Loan servicing right impairment valuation — 15

Return on investment in limited partnerships 3,542 314

22 unchanged sentences

Financing activities

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

Net increase in deposits 488,801 129,622

Repayment of Federal Home Loan Bank advances ( 1,536,255 ) ( 1,993,844 )

Proceeds from Federal Home Loan Bank advances 1,434,375 2,002,844

Proceeds from issuance of subordinated notes payable — 20,000

Repayment of subordinated notes payable — ( 9,090 )

Proceeds from issuance of subordinated notes and debentures

15,000 20,000

Repayment of subordinated notes and debentures

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

26 unchanged sentences

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

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

As of September 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 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.

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

14 unchanged sentences

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

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

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

2023 2022 2023 2022

14 unchanged sentences

Note 3 — Share-Based Compensation

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

The Corporation initially 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, 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.

As of September 30, 2023, 328,787 shares were available for future grants under the Plan, as amended.

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

15 unchanged sentences

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

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

Restricted stock activity for the year ended December 31, 2022 and the nine months ended September 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 ( 3,340 ) 29.00 — — ( 180 ) 36.42 ( 3,520 ) 29.37

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

Nonvested balance as of September 30, 2023 74,477 $ 28.60 56,155 $ 35.70 55,437 $ 33.98 186,069 $ 32.34

Unrecognized compensation cost (in thousands) $ 1,509 $ 1,091 $ 1,510 $ 4,110

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.

During the nine months ended September 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 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.

During the nine months ended September 30, 2023, the Corporation issued 3,183 shares of common stock under the ESPP.

As of September 30, 2023, 231,783 shares remained available for issuance under the ESPP.

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

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

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

2023 2022 2023 2022

3 unchanged sentences

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

As of June 30, 2023

As of September 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 June 30, 2023

As of September 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.

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.

The Corporation sold no available-for-sale securities during the three months ended September 30, 2023 and 16 available-for-sale securities during the nine months ended September 30, 2023.

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

At September 30, 2023 and December 31, 2022, securities with a fair value of $ 43.3 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 September 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

$ 306,291 $ 272,163 $ 8,689 $ 8,213

The tables below show the Corporation’s gross unrealized losses and fair value of available-for-sale investments aggregated by investment category and length of time that individual investments were in a continuous loss position at June 30, 2023 and December 31, 2022.

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.

At September 30, 2023, the Corporation held 183 available-for-sale securities that were in an unrealized loss position, 153 of which 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.

1 unchanged sentence

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 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;

For the three and nine months ended September 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 June 30, 2023

As of September 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 June 30, 2023 and December 31, 2022.

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.

At September 30, 2023, the Corporation held 30 held-to-maturity securities that were in an unrealized loss position, 24 of which 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.

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, 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.

Accordingly, no credit loss provision was recorded in the unaudited Consolidated Statements of Income for the three and nine months ended September 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 June 30, 2023

As of September 30, 2023

Less than 12 Months 12 Months or Longer Total

29 unchanged sentences

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

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.

As of January 1, 2023 and September 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

Loan and lease receivables consist of the following:

September 30,

2023 December 31,

19 unchanged sentences

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

The total principal amount of the guaranteed portions of SBA loans sold during the three months ended June 30, 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 total principal amount of the guaranteed portions of SBA loans sold during the three months ended September 30, 2023, and 2022, was $ 10.7 million and $ 9.2 million, respectively.

The total principal amount of the guaranteed portions of SBA loans sold during the nine months ended September 30, 2023, and 2022, was $ 20.5 million and $ 26.6 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 and nine months ended September 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 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.

The total outstanding balance of sold SBA loans at September 30, 2023, and December 31, 2022, was $ 91.1 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 September 30, 2023, and 2022, was $ 39.2 million and $ 25.4 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 nine months ended September 30, 2023, and 2022, was $ 93.9 million and $ 70.6 million, respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer.

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

The total outstanding balance of these transferred loans at June 30, 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 total outstanding balance of these transferred loans at September 30, 2023, and December 31, 2022, was $ 265.2 million and $ 222.9 million, respectively.

As of September 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 $ 362.9 million and $ 339.0 million, respectively.

As of September 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 June 30, 2023 and December 31, 2022.

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

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

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

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

26 unchanged sentences

Total $ — $ 8,161 $ 2,710 $ 2,378 $ 451 $ 2,965 $ 7,570 $ 24,235

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

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

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

11 unchanged sentences

Total $ 6,102 $ 9,068 $ 3,266 $ 12,588 $ 2,162 $ 3,579 $ 8,043 $ 44,808

I $ 421,936 $ 414,010 $ 300,702 $ 303,508 $ 133,653 $ 564,713 $ 491,166 $ 2,629,688

II 1,005 8,967 866 2,525 19,993 11,982 8,537 53,875

III 945 9,024 5,134 6,136 9,893 24,182 7,353 62,667

IV 592 5,325 1,272 425 126 339 9,549 $ 17,628

Total $ 424,478 $ 437,326 $ 307,974 $ 312,594 $ 163,665 $ 601,216 $ 516,605 $ 2,763,858

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.

10 unchanged sentences

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.

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.

3 unchanged sentences

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

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

When 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.

2 unchanged sentences

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

June 30, 2023

September 30, 2023

Days Past Due 60-89

70 unchanged sentences

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

September 30,

2023 December 31,

13 unchanged sentences

Total non-performing assets $ 17,689 $ 3,754

September 30,

2023 December 31,

5 unchanged sentences

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

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.

There were two commercial and industrial loans for a total of $ 716,000 modified during the three and nine months ended September 30, 2023.

The modifications consisted of payment deferrals.

These loans are included in total non-performing loans and are currently 25 and 117 days past due, respectively.

No loans were modified during the three and nine ended September 30, 2022.

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 nine months ended September 30, 2023 and 2022.

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

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

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

As of and for the Nine Months Ended September 30, 2023

Investment (1)

75 unchanged sentences

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

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

The difference between the recorded investment of loans and leases and the unpaid principal balance of $ 9,000 and $ 26,000 as of September 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.

23 unchanged sentences

• 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 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.

As of September 30, 2023, the Corporation selected a forecast which forecasts unemployment between 3.89% and 4.10% and GDP growth change between 1.06% and 1.87% over the next four quarters.

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

12 unchanged sentences

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 June 30, 2023

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

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

11 unchanged sentences

Total ACL $ 1,573 $ 5,267 $ 2,361 $ 3,522 $ 248 $ 17,566 $ 499 $ 31,036

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

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

Commercial Real Estate Commercial

7 unchanged sentences

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

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

As of and for the Nine Months Ended September 30, 2023

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

12 unchanged sentences

Total ACL $ 1,573 $ 5,267 $ 2,361 $ 3,522 $ 248 $ 17,566 $ 499 $ 31,036

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

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

Commercial Real Estate Commercial

7 unchanged sentences

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

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

Loans collectively evaluated for credit losses in the following tables include all performing loans at September 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 June 30, 2023

As of September 30, 2023

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

32 unchanged sentences

The components of total lease expense were as follows:

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

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

2023 2022 2023 2022

3 unchanged sentences

Short-term lease cost

36 38 145 112

Variable lease cost

5 unchanged sentences

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

June 30, 2023 December 31, 2022

September 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:

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

(In Thousands)

10 unchanged sentences

Average balances represent year-to-date averages.

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Balance Average

10 unchanged sentences

Total deposits $ 2,657,007 $ 2,358,814 2.76 $ 2,168,206 $ 1,977,640 0.67

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

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

(In Thousands)

2 unchanged sentences

Thereafter 14,609

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.

Wholesale deposits include $ 357.7 million and $ 110.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at September 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

As of September 30, 2023, the notional amount of derivatives designated as cash flow hedges totaled $ 256.3 million with a weighted average remaining maturity of 4.4 years and a weighted average rate of 3.79 %.

Certificates of deposit and wholesale deposits denominated in amounts greater than $250,000 were $ 109.0 million at September 30, 2023 and $ 81.6 million at December 31, 2022.

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

The composition of borrowed funds is shown below.

Average balances represent year-to-date averages.

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Balance Weighted Average

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Other borrowings — 802 8.31 6,088 8,624 5.23

Subordinated notes payable 34,408 34,368 4.83 34,340 35,095 5.06

Subordinated notes and debentures

49,391 34,495 4.84 34,340 35,095 5.06

Junior subordinated notes (1)

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$ 363,891 $ 404,264 2.75 $ 456,808 $ 460,438 2.12

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

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

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

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

(In Thousands)

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Thereafter 89,391

The Corporation issued new subordinated debentures as of September 29, 2023.

The aggregate principal amount of the newly issued subordinated debentures was $ 15.0 million which qualified as Tier 2 capital.

The subordinated debentures bear a fixed interest rate of 8.0 % with a maturity date of September 29, 2033.

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

As of September 30, 2023, $ 608,000 of debt issuance costs remain in the subordinated note and debenture payable balance, of which $ 50,000 is related to the recently issued subordinated debentures.

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

As of September 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.

As of September 30, 2023, the notional amount of derivatives designated as cash flow hedges totaled $ 96.4 million with a weighted average remaining maturity of 2.7 years and a weighted average rate of 1.78 %.

As of September 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 and six months ended June 30,

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

During the three and nine months ended September 30, 2023, the Board of Directors declared an aggregate preferred stock dividend of $ 218,000 and $ 656,000 , 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 $ 752,000 at June 30, 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 $ 983,000 at September 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 June 30, As of and for the Six Months Ended June 30,

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

2023 2022 2023 2022

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

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

Fair value includes assumptions about risk,

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

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

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

June 30, 2023

September 30, 2023

Fair Value Measurements Using

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Interest rate swaps — 61,419 — 61,419

For assets and liabilities measured at fair value on a recurring basis, there were no transfers between the levels during the three and six months ended June 30, 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 nine months ended September 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:

June 30, 2023

September 30, 2023

Fair Value Measurements Using

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Loan servicing rights — — 1,491 1,491

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.

Collateral-dependent loans were written down to the fair value of their underlying collateral less costs to sell of $ 2.6 million and $ 1.0 million at September 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 10 % - 100 % as of the measurement date of June 30, 2023.

The quantification of unobservable inputs for Level 3 impaired loan values range from 10 % - 100 % as of the measurement date of September 30, 2023.

The weighted average of those unobservable inputs was 41 %.

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

June 30, 2023

September 30, 2023

Amount Fair Value

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

As of September 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.

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

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

The gross amount of dealer counterparty swaps, without regard to the enforceable master netting agreement, was a gross derivative asset of $ 78.7 million and gross liability of $ 291,000 as of September 30, 2023.

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

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The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affect earnings.

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.

A pre-tax unrealized gain of $ 5.3 million and $ 7.5 million was recognized in other comprehensive income for the three and nine months ended September 30, 2023 and there were no ineffective portions of the hedges.

A pre-tax unrealized gain of $ 3.2 million and $ 8.9 million was recognized in other comprehensive income for the three and nine months ended September 30, 2022 and there were no ineffective portions of the hedges.

The Corporation also enters into interest rate swaps to mitigate market value volatility on certain long-term fixed securities.

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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

A pre-tax unrealized gain of $ 421,000 and $ 353,000 was recognized in other comprehensive income for the three and nine months ended September 30, 2023 and there was no ineffective portion of these hedges.

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

As of September 30, 2023

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

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

As of June 30, 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 September 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 June 30, 2023

As of September 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