FIRST BUSINESS FINANCIAL SERVICES, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations General Unless otherwise indicated or unless the context requires otherwise, all references in this Report to the “Corporation,” “we,” “us,” “our,” or similar references mean First Business Financial Services, Inc. together with our subsidiary. “FBB” or the “Bank” refers to our subsidiary, First Business Bank. Forward-Looking Statements This report may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which reflect our current views with respect to future events and financial performance. Forward-looking statements are not based on historical information, but rather are related to future operations, strategies, financial results, or other developments. Forward-looking statements are based on management’s expectations as well as certain assumptions and estimates made by, and information available to, management at the time the statements are made. Such statements are subject to risks and uncertainties, including among other things: • Adverse changes in the economy or business conditions, either nationally or in our markets including, without limitation, inflation, supply chain issues, labor shortages, or any future public health epidemics. • Competitive pressures among depository and other financial institutions nationally and in our markets. • Increases in defaults by borrowers and other delinquencies. • Our ability to manage growth effectively, including the successful expansion of our client support, administrative infrastructure, and internal management systems. • Fluctuations in interest rates and market prices. • Changes in legislative or regulatory requirements applicable to us and our subsidiaries. • Changes in tax requirements, including tax rate changes, new tax laws, and revised tax law interpretations. • Fraud, including client and system failure or breaches of our network security, including our internet banking activities. • Failure to comply with the applicable SBA regulations in order to maintain the eligibility of the guaranteed portions of SBA loans. • Recent volatility in the banking sector may result in new legislation, regulations or policy changes that could subject the Corporation and the Bank to increased government regulation and supervision. • The proportion of the Corporation’s deposit account balances that exceed FDIC insurance limits may expose the Bank to enhanced liquidity risk. • The Corporation may be subject to increases in FDIC insurance assessments as a result of the recent bank failures. These risks could cause actual results to differ materially from what we have anticipated or projected. These risk factors and uncertainties should be carefully considered by our shareholders and potential investors. See Part I, Item 1A — Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2022, Part II, Item 1A — Risk Factors of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, and in this report, below, for discussion relating to risk factors impacting us. Investors should not place undue reliance on any such forward-looking statements, which speak only as of the date made. These factors could affect our financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods. Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, we caution that, while our management believes such assumptions or bases are reasonable and are made in good faith, assumed facts or bases can vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. Where, in any forward-looking statement, an expectation or belief is expressed as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be achieved or accomplished. We do not intend to, and specifically disclaim any obligation to, update any forward-looking statements. The following discussion and analysis is intended as a review of significant events and factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with the unaudited Consolidated Financial Statements and the Notes thereto presented in this Form 10-Q. 39 Table of Contents Overview We are a registered bank holding company incorporated under the laws of the State of Wisconsin and are engaged in the commercial banking business through our wholly-owned banking subsidiary, FBB. All of our operations are conducted through FBB and First Business Specialty Finance, LLC (“FBSF”), a wholly-owned subsidiary of FBB. We operate as a business bank focusing on delivering a full line of commercial banking products and services tailored to meet the specific needs of small and medium-sized businesses, business owners, executives, professionals, and high net worth individuals. Our products and services include those for business banking, private wealth, and bank consulting. Within business banking, we offer commercial lending, asset-based lending, accounts receivable financing, equipment financing, floorplan financing, vendor financing, SBA lending and servicing, treasury management services, and company retirement plans. Our private wealth management services include trust and estate administration, financial planning, investment management, and private banking for executives and owners of our business banking clients and others. Our bank consulting experts provide investment portfolio administrative services, asset liability management services, and asset liability management process validation for other financial institutions. We do not utilize a branch network to attract retail clients. Our operating model is predicated on deep client relationships, financial expertise, and an efficient, centralized administration function delivering best in class client satisfaction. Our focused model allows experienced staff to provide the level of financial expertise needed to develop and maintain long-term relationships with our clients. Financial Performance Summary Results as of and for the three and nine months ended September 30, 2023 include: • Net income available to common shareholders totaled $9.7 million, or diluted earnings per share of $1.17, for the three months ended September 30, 2023, compared to $10.6 million, or diluted earnings per share of $1.25, for the same period in 2022. Net income available to common shareholders totaled $26.6 million, or diluted earnings per share of $3.19, for the nine months ended September 30, 2023, compared to $30.2 million, or diluted earnings per share of $3.57, for the same period in 2022. • Annualized return on average assets (“ROAA”) for the three months ended September 30, 2023 measured 1.19% compared to 1.54% for the same period in 2022. Annualized ROAA for the nine months ended September 30, 2023 measured 1.13% compared to 1.49% for the same period in 2022. • Return on average common equity (“ROACE”) is defined as net income available to common shareholders divided by average equity less average preferred stock, if any. ROACE was 14.62% for the three months ended September 30, 2023, compared to 17.44% for the same period in 2022. ROACE was 13.72% for the nine months ended September 30, 2023, compared to 16.97% for the same period in 2022. • Pre-tax, pre-provision (“PTPP”) adjusted earnings, which excludes certain one-time and discrete items, and PTPP ROAA for the three months ended September 30, 2023 were $14.1 million and 1.72%, respectively, compared to $14.2 million and 2.05% in the same period in 2022. PTPP and PTPP ROAA were $40.9 million and 1.74%, respectively, for the nine months ended September 30, 2023, compared to $34.9 million and 1.72% in the same period in 2022. • Fees in lieu of interest, defined as prepayment fees, asset-based loan fees, non-accrual interest, and loan fee amortization, totaled $582,000 for the three months ended September 30, 2023, compared to $807,000 for the same period in 2022. Fees in lieu of interest totaled $2.2 million for the nine months ended September 30, 2023, compared to $4.0 million for the same period in 2022. • Net interest margin was 3.76% for the three months ended September 30, 2023 compared to 4.01% for the same period in 2022. Adjusted net interest margin, which excludes certain one-time and volatile items including fees in lieu of interest, was 3.66% for the three months ended September 30, 2023, compared to 3.89% for the same period in 2022. Net interest margin was 3.81% for the nine months ended September 30, 2023 compared to 3.71% for the same period in 2022. Adjusted net interest margin, which excludes certain one-time and volatile items, was 3.68% for the nine months ended September 30, 2023, compared to 3.53% for the same period in 2022. • Top line revenue, defined as net interest income plus non-interest income, totaled $37.0 million for the three months ended September 30, 2023, compared to $34.1 million in the same period in 2022. Top line revenue totaled $107.3 million for the nine months ended September 30, 2023, compared to $93.4 million in the same period in 2022. • Effective tax rate, including the benefit from Low-Income Housing Tax Credits, was 17.3% for the three months ended September 30, 2023 compared to 22.9% for the same period in 2022. Effective tax rate, including the benefit from Low-Income Housing Tax Credits, was 21.0% for the nine months ended September 30, 2023 compared to 22.6% for the same period in 2022. • Provision for credit losses was an expense of $1.8 million for the three months ended September 30, 2023 compared to $12,000 for the same period in 2022. Provision for credit losses was an expense of $5.6 million for the nine months ended September 30, 2023 compared to a benefit of $4.6 million for the same period in 2022. 40 Table of Contents • Total assets at September 30, 2023 increased $442.2 million, or 19.8% annualized, to $3.419 billion from $2.977 billion at December 31, 2022. • Period-end gross loans and leases receivable increased $320.6 million, or 17.5% annualized, to $2.764 billion as of September 30, 2023 compared to $2.443 billion as of December 31, 2022. Average gross loans and leases of $2.593 billion increased $314.6 million, or 13.8%, for the nine months ended September 30, 2023, compared to $2.278 billion for the same period in 2022. • Non-performing assets were $17.7 million and 0.52% of total assets as of September 30, 2023, compared to $3.8 million and 0.13% of total assets as of December 31, 2022. • The allowance for credit losses, including reserve for unfunded credit commitments, increased $6.8 million compared to December 31, 2022. The allowance for credit losses increased to 1.12% of total loans, compared to 0.99% at December 31, 2022. • Period-end in-market deposits at September 30, 2023 increased $223.3 million, or 15.1% annualized, to $2.189 billion from $1.966 billion as of December 31, 2022. Average in-market deposits of $2.048 billion increased $126.3 million, or 6.6%, for the nine months ended September 30, 2023, compared to $1.921 billion for the same period in 2022. • Private wealth and trust assets u nder management and administration increased by $254.6 million, or 12.8% annualized, to $2.915 billion at September 30, 2023, compared to $2.660 billion at December 31, 2022. Private wealth trust assets under management and administration increased $422.0 million, or 16.9%, compared to the same period in 2022. Results of Operations Top Line Revenue Top line revenue, comprised of net interest income and non-interest income, increased $2.9 million, or 8.6%, for the three months ended September 30, 2023, compared to the same period in 2022, due to a 10.5% and 2.8% increase in net interest income and non-interest income, respectively. The increase in net interest income was driven by an increase in average loans and leases outstanding. The increase in non-interest income was due to an increase in trust fee income, gains on the sale of SBA loans, and commercial loan swap fee income, partially offset by a reduction in income from investments in mezzanine funds and service charges on deposits. Top line revenue increased $13.8 million, or 14.8%, for the nine months ended September 30, 2023, compared to the same period in 2022, due to a 17.0% and 7.8% increase in net interest income and non-interest income, respectively. The increase in net interest income was driven by an increase in net interest margin and average loans and leases outstanding. The increase in non-interest income was due to an increase trust fee income, commercial loan swap fee income, loan fee income, and income from investments in mezzanine funds, partially offset by a reduction in gains on the sale of SBA loans and service charges on deposits. The components of top line revenue were as follows: For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 $ Change % Change 2023 2022 $ Change % Change (Dollars in Thousands) Net interest income $ 28,596 $ 25,884 $ 2,712 10.5% $ 83,049 $ 70,971 $ 12,078 17.0% Non-interest income 8,430 8,197 233 2.8 24,214 22,455 1,759 7.8 Top line revenue $ 37,026 $ 34,081 $ 2,945 8.6 $ 107,263 $ 93,426 $ 13,837 14.8 Annualized Return on Average Assets (“ROAA”) and Annualized Return on Average Common Equity (“ROACE”) ROAA for the three and nine months ended September 30, 2023 decreased to 1.19% and 1.13%, respectively, compared to 1.54% and 1.49% for the three and nine months ended September 30, 2022, respectively. The decrease in ROAA was due to an increase in credit loss provision and operating expenses, partially offset by an increase in top line revenue. We consider ROAA a critical metric to measure the profitability of our organization and how efficiently our assets are deployed. ROAA also allows us to better benchmark our profitability to our peers without the need to consider different degrees of leverage which can ultimately influence return on equity measures. ROACE for the three and nine months ended September 30, 2023 was 14.62% and 13.72%, respectively, compared to 17.44% and 16.97% for the three and nine months ended September 30, 2022, respectively. The reasons for the change in ROACE are consistent with the net income variance explanation as discussed under ROAA above. We view ROACE as an 41 Table of Contents important measurement for monitoring profitability and continue to focus on improving our return to our shareholders by enhancing the overall profitability of our client relationships, controlling our expenses, and minimizing our costs of credit. ROAA and ROACE for the nine months ended September 30, 2022 were both favorably impacted by net recoveries of $4.4 million. Efficiency Ratio and Pre-Tax, Pre-Provision Adjusted Earnings Efficiency ratio measured 61.96% and 61.89% for the three and nine months ended September 30, 2023, respectively, compared to 58.46% and 62.61% for the three and nine ended September 30, 2022, respectively, as the percentage increase in top line revenue exceeded the percentage increase in operating expense resulting in positive operating leverage in the year-to-date period of comparison. Efficiency ratio is a non-GAAP measure representing operating expense, which is non-interest expense excluding the effects of the SBA recourse benefit or provision, impairment of tax credit investments, net gains or losses on repossessed assets, amortization of other intangible assets, and other discrete items, if any, divided by operating revenue, which is equal to net interest income plus non-interest income less realized net gains or losses on securities, if any. PTPP adjusted earnings for three and nine months ended September 30, 2023 was $14.1 million and $40.9 million, respectively, compared to $14.2 million and $34.9 million for the three and nine months ended September 30, 2022, respectively. PTPP adjusted earnings is defined as operating revenue less operating expense. The decrease in PTPP for the three months ended was primarily driven by an increase in operating expenses, partially offset by an increase in average loans and leases outstanding. The increase in PTPP for the nine months ended was primarily driven by an increase in average loans and leases outstanding and net interest margin expansion, partially offset by an increase in operating expenses as the Corporation continued to invest to achieve its strategic growth objectives. In the judgment of the Corporation’s management, the adjustments made to non-interest expense and non-interest income allow investors and analysts to better assess the Corporation’s operating expenses in relation to its core operating revenue by removing the volatility associated with certain one-time items and other discrete items. PTPP adjusted earnings allows management to benchmark performance of our model to our peers without the influence of the credit loss provision and tax considerations, which will ultimately influence other traditional financial measurements, including ROAA and ROACE. The information provided below reconciles the efficiency ratio to its most comparable GAAP measure. 42 Table of Contents Please refer to the Non-Interest Income and Non-Interest Expense sections below for discussion on additional drivers of the year-over-year change in the efficiency ratio and PTPP adjusted earnings. For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 $ Change % Change 2023 2022 $ Change % Change (Dollars in Thousands) Total non-interest expense $ 23,189 $ 20,028 $ 3,161 15.8% $ 66,987 $ 58,307 $ 8,680 14.9% Less: Net (gain) loss on repossessed assets 4 7 (3) (42.9) 8 27 (19) NM SBA recourse provision 242 96 146 152.1 565 134 431 NM Tax credit investment impairment recovery — — — NM — (351) 351 NM Total operating expense (a) $ 22,943 $ 19,925 $ 3,018 15.1 $ 66,414 $ 58,497 $ 7,917 13.5 Net interest income $ 28,596 $ 25,884 $ 2,712 10.5 $ 83,049 $ 70,971 $ 12,078 17.0 Total non-interest income 8,430 8,197 233 2.8 24,214 22,455 1,759 7.8 Less: Net loss on sale of securities — — — NM (45) — (45) NM Adjusted non-interest income 8,430 8,197 233 2.8 24,259 22,455 1,804 8.0 Operating revenue (b) $ 37,026 $ 34,081 $ 2,945 8.6 $ 107,308 $ 93,426 $ 13,882 14.9 Efficiency ratio 61.96 % 58.46 % 61.89 % 62.61 % Pre-tax, pre-provision adjusted earnings (b-a) $ 14,083 $ 14,156 $ (73) (0.5) $ 40,894 $ 34,929 $ 5,965 17.1 Average total assets $ 3,276,240 $ 2,758,961 $ 517,279 18.7 $ 3,130,426 $ 2,714,309 $ 416,117 15.3 Pre-tax, pre-provision adjusted return on average assets 1.72 % 2.05 % 1.74 % 1.72 % We believe the Corporation will generate positive operating leverage on an annual basis and progress towards enhancing the long-term efficiency ratio at a measured pace as we focus on strategic initiatives directed toward revenue growth, process improvement, and automation. The Corporation’s recent improvement during the period of comparison is due to the rising interest rate environment, and related expansion of net interest margin coupled with strong loan and in-market deposit growth. Net Interest Income Net interest income levels depend on the amount of and yield on interest-earning assets as compared to the amount of and rate paid on interest-bearing liabilities. Net interest income is sensitive to changes in market rates of interest and the asset/liability management processes to prepare for and respond to such changes. 43 Table of Contents The following table provides information with respect to (1) the change in net interest income attributable to changes in rate (changes in rate multiplied by prior volume) and (2) the change in net interest income attributable to changes in volume (changes in volume multiplied by prior rate) for the three and nine months ended September 30, 2023 compared to the same period in 2022. The change in net interest income attributable to changes in rate and volume (changes in rate multiplied by changes in volume) has been allocated to the rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each. Increase (Decrease) for the Three Months Ended September 30, Increase (Decrease) for the Nine Months Ended September 30, 2023 Compared to 2022 2023 Compared to 2022 Rate Volume Net Rate Volume Net (In Thousands) Interest-earning assets Commercial real estate and other mortgage loans (1) $ 6,869 $ 1,474 $ 8,343 $ 22,286 $ 2,756 $ 25,042 Commercial and industrial loans (1) 4,067 5,142 9,209 16,101 11,509 27,610 Consumer and other loans (1) 168 (26) 142 448 (72) 376 Total loans and leases receivable 11,104 6,590 17,694 38,835 14,193 53,028 Mortgage-related securities 542 224 766 1,642 251 1,893 Other investment securities 176 91 267 362 142 504 FHLB and FRB Stock 311 (277) 34 291 (27) 264 Short-term investments 300 94 394 1,273 152 1,425 Total net change in income on interest-earning assets 12,433 6,722 19,155 42,403 14,711 57,114 Interest-bearing liabilities Transaction accounts 5,041 728 5,769 13,861 607 14,468 Money market accounts 4,475 (214) 4,261 12,898 (372) 12,526 Certificates of deposit 1,664 982 2,646 4,560 2,980 7,540 Wholesale deposits 237 3,709 3,946 373 8,862 9,235 Total deposits 11,417 5,205 16,622 31,692 12,077 43,769 FHLB advances 1,889 (1,945) (56) 2,840 (685) 2,155 Other borrowings (23) (100) (123) (35) (349) (384) Junior subordinated notes (2) — — — (504) — (504) Total net change in expense on interest-bearing liabilities 13,283 3,160 16,443 33,993 11,043 45,036 Net change in net interest income $ (850) $ 3,562 $ 2,712 $ 8,410 $ 3,668 $ 12,078 (1) The average balances of loans and leases include non-performing loans and leases and loans held for sale. (2) The rate column for the nine months ended September 30, 2022 included $236,000 in accelerated amortization of debt issuance costs. 44 Table of Contents The tables below show our average balances, interest, average yields/rates, net interest margin, and the spread between the combined average yields earned on interest-earning assets and average rates on interest-bearing liabilities for the three and nine months ended September 30, 2023 and 2022. The average balances are derived from average daily balances. For the Three Months Ended September 30, 2023 2022 Average Balance Interest Average Yield/Rate (4) Average Balance Interest Average Yield/Rate (4) (Dollars in Thousands) Interest-earning assets Commercial real estate and other mortgage loans (1) $ 1,605,464 $ 25,623 6.38 % $ 1,486,530 $ 17,280 4.65 % Commercial and industrial loans (1) 1,059,512 21,635 8.17 780,533 12,426 6.37 Consumer and other loans (1) 46,875 610 5.21 49,558 468 3.78 Total loans and leases receivable (1) 2,711,851 47,868 7.06 2,316,621 30,174 5.21 Mortgage-related securities (2) 204,291 1,681 3.29 168,433 915 2.17 Other investment securities (3) 67,546 517 3.06 51,812 250 1.93 FHLB and FRB stock 14,770 323 8.75 18,167 289 6.36 Short-term investments 40,318 552 5.48 27,912 158 2.26 Total interest-earning assets 3,038,776 50,941 6.71 2,582,945 31,786 4.92 Non-interest-earning assets 237,464 176,016 Total assets $ 3,276,240 $ 2,758,961 Interest-bearing liabilities Transaction accounts $ 731,529 6,774 3.70 $ 486,704 1,005 0.83 Money market accounts 657,183 5,871 3.57 746,227 1,610 0.86 Certificates of deposit 282,674 2,986 4.23 113,529 340 1.20 Wholesale deposits 410,494 4,172 4.07 36,702 226 2.46 Total interest-bearing deposits 2,081,880 19,803 3.80 1,383,162 3,181 0.92 FHLB advances 342,117 2,117 2.48 432,528 2,173 2.01 Other borrowings 34,745 425 4.89 42,800 548 5.12 Total interest-bearing liabilities 2,458,742 22,345 3.64 1,858,490 5,902 1.27 Non-interest-bearing demand deposit accounts 434,330 584,535 Other non-interest-bearing liabilities 105,079 60,705 Total liabilities 2,998,151 2,503,730 Stockholders’ equity 278,089 255,231 Total liabilities and stockholders’ equity $ 3,276,240 $ 2,758,961 Net interest income $ 28,596 $ 25,884 Interest rate spread 3.07 % 3.65 % Net interest-earning assets $ 580,034 $ 724,455 Net interest margin 3.76 % 4.01 % Average interest-earning assets to average interest-bearing liabilities 123.59 % 138.98 % Return on average assets (4) 1.19 1.54 Return on average equity (4) 14.62 17.44 Average equity to average assets 8.49 9.25 Non-interest expense to average assets (4) 2.83 2.90 (1) The average balances of loans and leases include non-performing loans and leases and loans held for sale. Interest income related to non-performing loans and leases is recognized when collected. Interest income includes net loan fees in lieu of interest. (2) Includes amortized cost basis of assets available-for-sale and held-to-maturity. (3) Yields on tax-exempt municipal securities are not presented on a tax-equivalent basis in this table. (4) Represents annualized yields/rates. 45 Table of Contents For the Nine Months Ended September 30, 2023 2022 Average Balance Interest Average Yield/Rate (4) Average Balance Interest Average Yield/Rate (4) (Dollars in Thousands) Interest-earning assets Commercial real estate and other mortgage loans (1) $ 1,556,988 $ 71,011 6.08 % $ 1,472,930 $ 45,969 4.16 % Commercial and industrial loans (1) 988,359 59,213 7.99 755,254 31,603 5.58 Consumer and other loans (1) 47,594 1,738 4.87 50,149 1,362 3.62 Total loans and leases receivable (1) 2,592,941 131,962 6.79 2,278,333 78,934 4.62 Mortgage-related securities (2) 193,196 4,372 3.02 176,654 2,479 1.87 Other investment securities (3) 61,396 1,229 2.67 52,324 725 1.85 FHLB and FRB stock 15,904 952 7.98 16,523 688 5.55 Short-term investments 43,437 1,652 5.07 29,509 227 1.03 Total interest-earning assets 2,906,874 140,167 6.43 2,553,343 83,053 4.34 Non-interest-earning assets 223,552 160,966 Total assets $ 3,130,426 $ 2,714,309 Interest-bearing liabilities Transaction accounts $ 657,155 16,070 3.26 $ 507,402 1,602 0.42 Money market accounts 663,284 14,984 3.01 765,839 2,458 0.43 Certificates of deposit 271,684 8,049 3.95 80,093 509 0.85 Wholesale deposits 311,038 9,671 4.14 21,838 436 2.66 Total interest-bearing deposits 1,903,161 48,774 3.42 1,375,172 5,005 0.49 FHLB advances 368,913 7,030 2.54 422,576 4,875 1.54 Other borrowings 35,351 1,314 4.96 44,719 1,698 5.06 Junior subordinated notes (5) — — — 3,247 504 20.69 Total interest-bearing liabilities 2,307,425 57,118 3.30 1,845,714 12,082 0.87 Non-interest-bearing demand deposit accounts 455,653 568,131 Other non-interest-bearing liabilities 96,883 53,685 Total liabilities 2,859,961 2,467,530 Stockholders’ equity 270,465 246,779 Total liabilities and stockholders’ equity $ 3,130,426 $ 2,714,309 Net interest income $ 83,049 $ 70,971 Interest rate spread 3.13 % 3.46 % Net interest-earning assets $ 599,449 $ 707,629 Net interest margin 3.81 % 3.71 % Average interest-earning assets to average interest-bearing liabilities 125.98 % 138.34 % Return on average assets (4) 1.13 1.49 Return on average equity (4) 13.72 16.97 Average equity to average assets 8.64 9.09 Non-interest expense to average assets (4) 2.85 2.86 (1) The average balances of loans and leases include non-performing loans and leases and loans held for sale. Interest income related to non-performing loans and leases is recognized when collected. Interest income includes net loan fees in lieu of interest. (2) Includes amortized cost basis of assets available-for-sale and held-to-maturity. (3) Yields on tax-exempt municipal securities are not presented on a tax-equivalent basis in this table. (4) Represents annualized yields/rates. (5) The rate column for the nine months ended September 30, 2022 included $236,000 in accelerated amortization of debt issuance costs. 46 Table of Contents The change in yield of the respective interest-earning asset or the rate paid on interest-bearing liability compared to the change in short-term market rates is commonly referred to as a beta. The table below displays the beta calculations for loans and leases, total interest earning assets, in-market deposits, interest-bearing deposits and total interest-bearing liabilities for the three and nine months ended September 30, 2023 and 2022. Additionally, adjusted total loans and leases and total interest-earning assets excludes the volatile impact of fees in lieu of interest. For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 Asset and Liability Beta Analysis Average Yield/Rate (4) Increase (Decrease) Average Yield/Rate (3) Increase (Decrease) Total loans and leases receivable (a) 7.06 % 5.21 % 1.85 % 6.79 % 4.62 % 2.17 % Total interest-earning assets (b) 6.71 % 4.92 % 1.79 % 6.43 % 4.34 % 2.09 % Adjusted total loans and leases receivable (1)(c) 6.97 % 5.07 % 1.90 % 6.67 % 4.39 % 2.28 % Adjusted total interest-earning assets (1)(d) 6.63 % 4.80 % 1.83 % 6.33 % 4.13 % 2.20 % Total in-market deposits (e) 2.97 % 0.61 % 2.36 % 2.55 % 0.32 % 2.23 % Total bank funding (f) 3.07 % 0.89 % 2.18 % 2.73 % 0.56 % 2.17 % Net interest margin (g) 3.76 % 4.01 % (0.25) % 3.81 % 3.71 % 0.10 % Adjusted net interest margin (h) 3.66 % 3.89 % (0.23) % 3.68 % 3.53 % 0.15 % Effective fed funds rate (3)(i) 5.26 % 2.18 % 3.08 % 4.92 % 1.03 % 3.89 % Beta Calculations: Total loans and leases receivable (a)/(i) 60.08 % 55.78 % Total interest-earning assets (b)/(i) 57.89 % 53.77 % Adjusted total loans and leases receivable (1)(c)/(i) 61.82 % 58.61 % Adjusted total interest-earning assets (1)(d)/(i) 59.46 % 56.53 % Total in-market deposits (e)/(i) 76.62 % 57.33 % Total bank funding (2)(f)/(i) 70.78 % 55.78 % Net interest margin (g)/(i) (8.12) % 2.57 % Adjusted net interest margin (h)/(i) (7.47) % 3.86 % (1) Excluding fees in lieu of interest. (2) Total bank funding represents total deposits plus FHLB advances. (3) Board of Governors of the Federal Reserve System (US), Effective Federal Funds Rates [DFF] retrieved from FRED, Federal Reserve Bank of St. Louis. (4) Represents annualized yields/rates. Comparison of Net Interest Income for the Three and Nine Months Ended September 30, 2023 and 2022 Net interest income increased $2.7 million, or 10.5%, and $12.1 million, or 17.0%, during the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022. The increase in net interest income reflected an increase in average gross loans and leases, partially offset by a reduction in fees in lieu of interest. Fees in lieu of interest, which vary from quarter to quarter, totaled $582,000 and $2.2 million for the three and nine months ended September 30, 2023, respectively, compared to $807,000 and $4.0 million for the same period in 2022. Excluding fees in lieu of interest, net interest income for the three and nine months ended September 30, 2023 increased $2.9 million, or 11.7%, and $13.9 million, or 20.7%, respectively. Average gross loans and leases for the three and nine months ended September 30, 2023 increased $395.2 million, or 17.1%, and $314.6 million, or 13.8%, respectively, compared to the three and nine months ended September 30, 2022. 47 Table of Contents The yield on average loans and leases for the three and nine months ended September 30, 2023 was 7.06% and 6.79%, respectively, compared to 5.21% and 4.62% for the three and nine months ended September 30, 2022. Excluding the impact of loan fees in lieu of interest, the yield on average loans and leases for the three and nine months ended September 30, 2023 was 6.97% and 6.67%, respectively, compared to 5.07% and 4.39% for the three and nine months ended September 30, 2022. The yield on average interest-earning assets for the three and nine months ended September 30, 2023 measured 6.71% and 6.43%, respectively, compared to 4.92% and 4.34% for the three and nine months ended September 30, 2022. Excluding loan fees in lieu of interest, the yield on average interest-earning assets for the three and nine months ended September 30, 2023 was 6.63% and 6.33%, respectively, compared to 4.80% and 4.13% for the three and nine months ended September 30, 2022. The increase in yields was primarily due to rising rates on variable-rate loans, following the Federal Open Market Committee’s (“FOMC”) decision to raise the target Fed Funds rate 225 basis points over the period of comparison, as well as the reinvestment of cash flows from the securities and fixed-rate loan portfolios in a rising rate environment. The daily average effective federal funds rate for the three and nine months ended September 30, 2023 increased 308 and 389 basis points, compared to the same period in 2022. This equates to an interest-earning asset beta of 59.46% and 56.53%, respectively, for the three and nine months ended September 30, 2023. The rate paid on average interest-bearing in-market deposits for the three and nine months ended September 30, 2023 increased to 3.74% and 3.27%, respectively, from 0.88% and 0.45% for the three and nine months ended September 30, 2022. The average rate paid on total interest-bearing liabilities for the three and nine months ended September 30, 2023 increased to 3.64% and 3.30%, respectively, from 1.27% and 0.87% for the three and nine months ended September 30, 2022. Total interest-bearing liabilities include interest-bearing deposits, federal funds purchased, FHLB advances, subordinated and junior subordinated notes and debentures payable, and other borrowings. The average rates paid increased due to the increase in short-term market rates and the replacement of maturing wholesale funds at higher fixed rates. This equates to an interest-bearing liability beta of 76.78% and 62.39%, respectively, for the three and nine months ended September 30, 2023. Net interest margin decreased to 3.76% and increased to 3.81%, respectively, for the three and nine months ended September 30, 2023, compared to 4.01% and 3.71% for the three and nine months ended September 30, 2022. The primary driver of the reduction for the three months ended in net interest margin was mainly due to a decrease in fees in lieu of interest and an increase in funding costs, partially offset by an increase in earning asset yields. The primary driver of improved net interest margin for the nine months ended was the aforementioned increase in earning asset yields, partially offset by corresponding increase in funding costs. . Adjusted net interest margin measured 3.66% and 3.68%, respectively, for the three and nine months ended September 30, 2023, compared to 3.89% and 3.53% for the three and nine months ended September 30, 2022. Adjusted net interest margin is a non-GAAP measure representing net interest income excluding the impact of fees in lieu of interest, and other recurring, but volatile, components of net interest margin divided by average interest-earning assets less other recurring, but volatile, components of average interest-earning assets. Management believes its success in growing in-market deposits, disciplined loan pricing, and increased production in existing higher-yielding commercial lending products will allow the Corporation to achieve a net interest margin that supports our long-term profitability goals. However, the collection of loan fees in lieu of interest is an expected source of volatility to quarterly net interest income and net interest margin. In addition, net interest margin may also experience volatility due to events such as the collection of interest on loans previously in non-accrual status or the accumulation of significant short-term deposit inflows. Management anticipates deposit betas may continue to rise and net interest margin may continue to decline at a gradual pace in coming quarters as the Federal Open Market Committee approaches a terminal federal funds rate. Based on current trends, we believe our net interest margin should stabilize above our current strategic plan goal of 3.50%. Provision for Credit Losses We determine our provision for credit losses pursuant to our allowance for credit loss methodology, which was updated on January 1, 2023, for the adoption of ASC 326. It is based on a reasonable and supportable forecast as well as considerations for composition, risk, and performance indicators in our credit portfolio. Refer to Allowance for Credit Losses , below, for further information regarding our allowance for credit loss methodology. 48 Table of Contents The Corporation recognized $1.8 million and $5.6 million of provision expense for the three and nine months ended September 30, 2023, respectively, compared to expense of $12,000 and benefit of $4.6 million for the three and nine months ended September 30, 2022. The provision expense for the three months ended September 30, 2023 was primarily due to a $1.3 million increase in specific reserves, an increase of $817,000 related to loan growth, and a $506,000 increase due to qualitative factors, partially offset by a $1.4 million benefit due to the improved economic outlook in our model forecast. Similar to the second quarter, the increase in specific reserves, charge-offs, and qualitative factors was primarily related to the Equipment Finance and SBA Lending loan pools, which management believes is consistent with the cyclical nature of these commercial lending niches. The provision expense for the nine months ended September 30, 2023 was primarily due to a $2.3 million increase in specific reserves, an increase of $3.0 million related to loan growth, and a $465,000 increase due to qualitative factors, partially offset by $1.2 million benefit due to the improved economic outlook in our model forecast. The provision benefit for the nine months ended September 30, 2022 was primarily due to a net recovery of $4.4 million. The following table shows the components of the provision for credit losses for the three and nine months ended September 30, 2023 compared to the same periods in 2022. For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 (In Thousands) Change in qualitative factor changes $ 506 $ 132 $ 465 $ (469) Change in quantitative factor changes (1,372) (940) (1,193) (1,082) Charge-offs 562 54 1,057 161 Recoveries (84) (81) (435) (4,537) Change in reserves on individually evaluated loans, net 1,265 447 2,322 196 Change due to loan growth, net 817 400 3,023 1,162 Change in unfunded credit commitment reserves 123 — 371 — Total provision for credit losses $ 1,817 $ 12 $ 5,610 $ (4,569) The addition of specific reserves on individually evaluated loans represents new specific reserves established when collateral shortfalls or government guaranty deficiencies are present, while the release of specific reserves represents the reduction of previously established reserves that are no longer required. Changes in the allowance for credit losses due to qualitative factor changes reflect management’s evaluation of the level of risk within the portfolio based upon several factors for each portfolio segment. Charge-offs in excess of previously established specific reserves require an additional provision for credit losses to maintain the allowance for credit losses at a level deemed appropriate by management. This amount is net of the release of any specific reserve that may have already been provided. Refer to Asset Quality , below, for further information regarding the overall credit quality of our loan and lease portfolio. Comparison of Non-Interest Income for the Three and Nine Months Ended September 30, 2023 and 2022 Non-Interest Income Non-interest income increased $233,000, or 2.8%, to $8.4 million for the three months ended September 30, 2023 compared to $8.2 million for the same period in 2022. The increase in total non-interest income for the three months ended September 30, 2023 was due to increases in private wealth fee income, commercial loan swap fee income, and gains on sale of SBA loans. These favorable variances were partially offset by a decrease in other non-interest income, driven by a decrease in mezzanine fund investment income, and a decrease in services charges on deposits. Non-interest income for the nine months ended September 30, 2023 increased $1.8 million, or 7.8%, to $24.2 million compared to $22.5 million for the same period in 2022. The increase in total non-interest income for the nine months ended September 30, 2023 was driven by an increase in other non-interest income, led by mezzanine fund investment income, and an increase in commercial loan swap fee income, private wealth fee income, and loan fee income. These favorable variances were partially offset by a decrease in gains on the sale of SBA loans and service charges on deposits. Management continues to focus on revenue growth from multiple non-interest income sources in order to maintain a diversified revenue stream through greater contributions from fee-based revenues. Total non-interest income accounted for 22.8% and 22.6% of total revenues for the three and nine months ended September 30, 2023, respectively, compared to 24.1% and 24.0% for the three and nine months ended September 30, 2022, respectively. 49 Table of Contents The components of non-interest income were as follows: For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 $ Change % Change 2023 2022 $ Change % Change (Dollars in Thousands) Private wealth management services fee income $ 2,945 $ 2,618 $ 327 12.5% $ 8,492 $ 8,311 $ 181 2.2% Gain on sale of SBA loans 851 732 119 16.3 1,771 2,269 (498) (21.9) Service charges on deposits 835 1,018 (183) (18.0) 2,283 3,058 (775) (25.3) Loan fees 786 814 (28) (3.4) 2,495 2,163 332 15.3 Increase in cash surrender value of bank-owned life insurance 376 359 17 4.7 1,106 1,057 49 4.6 Net loss on sale of securities — — — NM (45) — (45) NM Swap fees 992 341 651 190.9 2,526 1,038 1,488 143.4 Other non-interest income 1,645 2,315 (670) (28.9) 5,586 4,559 1,027 22.5 Total non-interest income $ 8,430 $ 8,197 $ 233 2.8 $ 24,214 $ 22,455 $ 1,759 7.8 Fee income ratio (1) 22.8 % 24.1 % 22.6 % 24.0 % (1) Fee income ratio is fee income, per the above table, divided by top line revenue (defined as net interest income plus non-interest income). Private wealth management service fees increased $327,000, or 12.5%, and $181,000, or 2.2%, for the three and nine months ended September 30, 2023, compared to the same period in 2022. Private wealth management fee income is primarily driven by the amount of assets under management and administration, as well as the mix of business at different fee structures, and can be positively or negatively influenced by the timing and magnitude of volatility within the capital markets. As of September 30, 2023, private wealth and trust assets under m anagement and administration totaled $2.915 billion, increasing $422.0 million , or 16.9%, compared to $2.493 billion as of September 30, 2022, as an increase in market values was bolstered by new client relationships and new money from existing clients. Commercial loan interest rate swap fee income increased $651,000, or 190.9%, and $1.5 million, or 143.4%, for the three and nine months ended September 30, 2023, respectively, compared to the same period in 2022. We originate commercial real estate loans in which we offer clients a floating rate and an interest rate swap. The client’s swap is then offset with a counter-party dealer. The execution of these transactions generates swap fee income. The aggregate amortizing notional value of interest rate swaps with various borrowers was $908.6 million as of September 30, 2023, compared to $744.2 million and $666.2 million as of December 31, 2022 and September 30, 2022, respectively. Interest rate swaps can be an attractive product for our commercial borrowers, although associated fee income can be variable from period to period based on loan activity and the interest rate environment in any given quarter. Other non-interest income decreased $670,000, or 28.9%, and increased $1.0 million, or 22.5%, for the three and nine months ended September 30, 2023, respectively, compared to the same period in 2022. The decrease and increase for the three and nine months ended September 30, 2023, respectively, was primarily due to the timing of returns from the Corporation’s investments in mezzanine funds. Service charges on deposits decreased $183,000, or 18.0%, and $775,000, or 25.3%, respectively, for the three and nine months ended September 30, 2023, compared to the same period in 2022. The decrease was driven by an increase in the earnings credit rate which was adjusted with the rising rate environment. Treasury management business development efforts remain robust as gross treasury management service charges, net of waived fees, increased $183,000, or 13.6%, and $557,000, or 14.3%, for the three and nine months ended September 30, 2023, compared to the same period in 2022. Management believes growth in gross analyzed service charges is a strong indicator of success for the Corporation given the direct correlation to adding and expanding core business relationships. Gain on sale of SBA loans increased $119,000, or 16.3%, and decreased $498,000, or 21.9%, for the three and nine months ended September 30, 2023, respectively, compared to the same period in 2022. The increase over the prior year quarter was due to an increase in loan sales volume . The decrease for the year-to-date period was driven by lower sales volume . Loan fees decreased by $28,000, or 3.4%, and increased $332,000, or 15.3%, for the three and nine months ended September 30, 2023, respectively, compared to the same period in 2022. The decrease for the three months ended was primarily 50 Table of Contents due to a decrease in Asset-Based Lending audit fee income. The increase for the nine months ended was due to an increase in equipment financing and floorplan financing activity generating additional service fee income. Comparison of Non-Interest Expense for the Three and Nine Months Ended September 30, 2023 and 2022 Non-Interest Expense Non-interest expense for the three and nine months ended September 30, 2023 increased by $3.2 million, or 15.8%, and $8.7 million, or 14.9%, respectively compared to the same period in 2022. Operating expense, which excludes certain one-time and discrete items as defined in the Efficiency Ratio table above, increased $3.0 million, or 15.1%, and $7.9 million, or 13.5%, respectively, for the three and nine months ended September 30, 2023, compared to the same period in 2022. The increase in operating expense was primarily due to an increase in all major categories led by compensation, FDIC insurance, and other non-interest expense. The components of non-interest expense were as follows : For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 $ Change % Change 2023 2022 $ Change % Change (Dollars in Thousands) Compensation $ 15,573 $ 14,817 $ 756 5.1 % $ 46,610 $ 42,475 $ 4,135 9.7 % Occupancy 575 566 9 1.6 1,809 1,689 120 7.1 Professional fees 1,429 1,203 226 18.8 4,012 3,671 341 9.3 Data processing 953 719 234 32.5 2,889 2,391 498 20.8 Marketing 758 543 215 39.6 2,165 1,713 452 26.4 Equipment 349 253 96 37.9 1,000 732 268 36.6 Computer software 1,289 1,128 161 14.3 3,668 3,327 341 10.2 FDIC insurance 680 230 450 195.7 1,653 840 813 96.8 Other non-interest expense 1,583 569 1,014 178.2 3,181 1,469 1,712 116.5 Total non-interest expense $ 23,189 $ 20,028 $ 3,161 15.8 $ 66,987 $ 58,307 $ 8,680 14.9 Total operating expense (1) $ 22,943 $ 19,925 $ 3,018 15.1 $ 66,414 $ 58,497 $ 7,917 13.5 Full-time equivalent employees 348 335 348 335 (1) Total operating expense represents total non-interest expense, adjusted to exclude the impact of discrete items as previously defined in the non-GAAP efficiency ratio calculation, above. Compensation expense for the three and nine months ended September 30, 2023 increased $756,000, or 5.1%, and $4.1 million, or 9.7%, respectively, compared to the three and nine months ended September 30, 2022. The increase for the three months ended September 30, 2023 reflects annual merit and market increases, to remain competitive in a wage inflation environment, an expanded workforce, an increase in incentive compensation due to outstanding production, partially offset by lower projected annual cash bonus program accrual. In addition, the increase for the nine months ended September 30, 2023 was also driven by payment of, and payroll taxes paid on, a record annual cash bonus earned in 2022 but paid in 2023. Successful hiring efforts to secure talent resulted in average full-time equivalent employees for the three months ended September 30, 2023 increasing to 349, up 4.8%, compared to 333 for the three months ended September 30, 2022. Other non-interest expense for the three and nine months ended September 30, 2023 increased $1.0 million, or 178.2%, and $1.7 million, or 116.5%, respectively, compared to the three and nine months ended September 30, 2022. The increase for both periods was primarily due to an increase in liquidation expenses related to an Asset-Based Lending relationship, an increase in SBA recourse provision, and an increase in travel expenses. FDIC insurance for the three and nine months ended September 30, 2023 increased $450,000, or 195.7%, and $813,000, or 96.8%, respectively, compared to the three and nine months ended September 30, 2022. The increase was primarily due to asset growth, an increase in the assessment rate due to a broad 2 basis point increase by the agency, and an increase in the usage of brokered deposits, in lieu of FHLB advances, commensurate with our funding strategy to match-fund fixed-rate loans. 51 Table of Contents Marketing expense increased $215,000, or 39.6%, and $452,000, or 26.4%, for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022. The increase during the three and nine months ended September 30, 2023 was primarily due to an increase in business development efforts and advertising projects related to our expanded sales force and national footprint. Data processing increased $234,000, or 32.5%, and $498,000, or 20.8%, for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022, primarily due to an increase in core processing costs commensurate with loan and deposit account growth, as well as various project implementations.. Professional fees increased $226,000, or 18.8%, and $341,000, or 9.3%, for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022. The increase was primarily due to an increase in recruiting expense, audit expenses, legal expense, and a general increase in other professional consulting services for various projects. Income Taxes Income tax expense totaled $7.4 million for the nine months ended September 30, 2023 compared to $9.0 million for the nine months ended September 30, 2022. Income tax expense included a $1.1 million net benefit from tax credit investments, compared to a $155,000 benefit in the prior year period. The effective tax rate, including the benefit from Low-Income Housing Tax Credits, for the nine months ended September 30, 2023 was 21.0% compared to 22.6% for the same period in 2022. The Corporation expects to report an effective tax rate between 21% and 22% for 2023 and between 20% and 21% for 2024. Generally, the provision for income taxes is determined by applying an estimated annual effective income tax rate to income before taxes and adjusting for discrete items. The rate is based on the most recent annualized forecast of pre-tax income, book versus tax differences and tax credits, if any. If we conclude that a reliable estimated annual effective tax rate cannot be determined, the actual effective tax rate for the year-to-date period may be used. We re-evaluate the income tax rates each quarter. Therefore, the current projected effective tax rate for the entire year may change. Financial Condition General Total assets increased by $442.2 million, or 14.9%, to $3.419 billion as of September 30, 2023 compared to $2.977 billion at December 31, 2022. The increase in total assets was primarily driven by an increase in cash, loans and leases receivable, and available-for-sale securities. Total liabilities increased by $422.1 million, or 15.5%, to $3.138 billion at September 30, 2023 compared to $2.716 billion at December 31, 2022. The increase in total liabilities was principally due to an increase in deposits. Total stockholders’ equity increased by $20.1 million, or 7.7%, to $280.8 million at September 30, 2023 compared to $260.6 million at December 31, 2022. The increase in total stockholders’ equity was due to retention of earnings partially offset by dividends paid to common stockholders, stock repurchased, and cumulative change in accounting principal for ASC 326. Cash and Cash Equivalents Cash and cash equivalents include short-term investments and cash and due from banks. Cash and due from banks decreased $2.5 million to $23.3 million at September 30, 2023 from $25.8 million at December 31, 2022. Short-term investments increased by $32.7 million to $109.6 million at September 30, 2023 from $76.9 million at December 31, 2022. Our short-term investments primarily consist of interest-bearing deposits held at the FRB. We value the safety and soundness provided by the FRB, and therefore, we incorporate short-term investments in our readily accessible liquidity program. As of September 30, 2023 and December 31, 2022, interest-bearing deposits held at the FRB were $109.2 million and $76.5 million, respectively. 52 Table of Contents Securities Total securities, including available-for-sale and held-to-maturity, increased by $56.2 million, or 25.0%, to $280.9 million, or 8.2% of total assets at September 30, 2023 compared to $224.7 million, or 7.5% of total assets at December 31, 2022. During the nine months ended September 30, 2023 the Corporation recognized unrealized losses of $6.4 million before income taxes through other comprehensive income, compared to unrealized losses of $29.8 million for the same period in 2022. The unrealized losses in the prior year period were solely driven by the increase in interest rates. As of September 30, 2023 and December 31, 2022, our overall securities portfolio, including available-for-sale securities and held-to-maturity securities, had an estimated weighted-average expected maturity of 5.3 years and 6.3 years, respectively. Our investment philosophy remains as stated in our most recent Annual Report on Form 10-K. We use a third-party pricing service as our primary source of market prices for our securities portfolio. On a quarterly basis, we validate the reasonableness of prices received from this source through independent verification, data integrity validation primarily through comparison of current price to an expectation-based analysis of movement in prices based upon the changes in the related yield curves, and other market factors. We did not recognize any credit losses in the securities portfolio as of September 30, 2023. Loans and Leases Receivable Period-end loans and leases receivable, net of allowance for credit losses, increased by $315.8 million, or 17.4% annualized to $2.735 billion at September 30, 2023 from $2.419 billion at December 31, 2022 driven by commercial loan growth. Management does not believe this level of loan growth is sustainable and expects growth to moderate in subsequent quarters. Additionally, management expects to evaluate loan sale strategies as a means of adding to and further diversifying fee income. Due to the adoption of ASC 326, the current year included a change to our portfolio segmentation. The balances as of September 30, 2023 reflect reclassifications of $43 million to commercial and industrial from commercial real estate and $7 million from consumer and other to commercial real estate. Including the reclassification impact of adopting ASC 326 in the prior period of comparison, C&I loans increased $186.5 million, or 27.7% annualized, to $1.084 billion. The increase was due to growth across the majority of the Bank’s C&I products and geographies. Management does not believe this level of C&I loan growth is sustainable and expects growth to moderate to lower double-digit levels in subsequent quarters. Including the reclassification impact of adopting ASC 326 in the prior period of comparison, total commercial real estate (“CRE”) loans increased $128.7 million, or 11.4% annualized, to $1.635 billion. The increase was primarily due to an increase in non-owner occupied CRE and multi-family loans.. Including the reclassification impact of adopting ASC 326 in the prior period of comparison, CRE loans represented 59.2% and 61.7% of our total loans as of September 30, 2023 and December 31, 2022, respectively. The decline in CRE concentration in the period of comparison is the result of management’s success in expanding the Bank’s various C&I products across both its local and national footprints. As of September 30, 2023, 14.4% of the CRE loans were owner-occupied CRE, compared to 15.2% as of December 31, 2022. We consider owner-occupied CRE more characteristic of the Corporation’s C&I portfolio as, in general, the client’s primary source of repayment is the cash flow from the operating entity occupying the commercial real estate property. We continue to actively pursue C&I loans across the Corporation as this segment of our loan and lease portfolio provides an attractive yield commensurate with an appropriate level of credit risk and creates opportunities for in-market deposit, treasury management, and private wealth management relationships which generate additional fee revenue. Additionally, management expects to evaluate loan sales strategies as a means of adding to and further diversifying fee income. Underwriting of new credit is primarily through approval from a serial sign-off or committee process and is a key component of our operating philosophy. Business development officers have no individual lending authority. To monitor the ongoing credit quality of our loans and leases, each credit is evaluated for proper risk rating using a nine grade risk rating system at the time of origination, subsequent renewal, evaluation of updated financial information from our borrowers, or as other circumstances dictate. While we continue to experience competition from banks operating in our primary geographic areas, we remain committed to our underwriting standards and will not deviate from those standards for the sole purpose of growing our loan and lease portfolio. We continue to expect our new loan and lease activity to be adequate to replace normal amortization, allowing us to continue growing in future years. The types of loans and leases we originate and the various risks associated with these originations remain consistent with information previously outlined in our most recent Annual Report on Form 10-K. 53 Table of Contents Deposits Deposit composition As of (in thousands) September 30, 2023 June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 Non-interest-bearing transaction accounts $ 430,011 $ 419,294 $ 471,904 $ 537,107 $ 564,141 Interest-bearing transaction accounts 779,789 719,198 612,500 576,601 461,883 Money market accounts 694,199 641,969 662,157 698,505 742,545 Certificates of deposit 285,265 293,283 308,191 153,757 160,655 Wholesale deposits 467,743 455,108 422,088 202,236 158,321 Total deposits $ 2,657,007 $ 2,528,852 $ 2,476,840 $ 2,168,206 $ 2,087,545 Uninsured deposits $ 916,083 $ 867,397 $ 974,242 $ 967,465 $ 1,007,935 Less: uninsured deposits collateralized by pledged assets 28,873 37,670 32,468 14,326 34,264 Total uninsured, net collateralized deposits $ 887,210 $ 829,727 $ 941,774 $ 953,139 $ 973,671 % of total deposits 33.4 % 32.8 % 38.0 % 44.0 % 46.6 % As of September 30, 2023, total period-end deposits increased by $488.8 million to $2.657 billion from $2.168 billion at December 31, 2022, primarily due to a $265.5 million, $203.2 million, and $131.5 million increase in wholesale deposits, interest bearing transaction accounts, and certificate of deposit accounts, partially offset by a decrease in non-interest-bearing transaction accounts and money market accounts of $107.1 million and $4.3 million, respectively. The large increase in wholesale deposits is primarily driven by a shift from FHLB advances to wholesale deposits to manage interest rate risk and increase excess liquidity. As of September 30, 2023, total period-end in-market deposits increased $223.3 million, or 15.1% annualized, to $2.189 billion, compared to $1.966 billion at December 31, 2022. Growth in interest-bearing transaction accounts and certificates of deposits, driven by client movement into extended insurance products, was partially offset by a decrease in non-interest-bearing transaction accounts and money market accounts. Management believes the Bank’s deposit-centric sales strategy, led by treasury management sales, will contribute to a net increase in deposits; however, period-end deposit balances associated with in-market relationships will fluctuate based upon maturity of time deposits, client demands for the use of their cash, and our ability to maintain existing and new client relationships. Our strategic efforts remain focused on adding in-market deposit relationships. We measure the success of in-market deposit gathering efforts based on the number and average balances of our deposit accounts as compared to ending balances due to the variability of some of our larger relationships. The Bank’s average in-market deposits, consisting of all transaction accounts, money market accounts, and certificates of deposit, increased $126.3 million, or 6.6%, to $2.048 billion for the nine months ended September 30, 2023 compared to $1.921 billion for the nine months ended September 30, 2022. FHLB Advances and Other Borrowings As of September 30, 2023, FHLB advances and other borrowings decreased by $92.9 million, or 20.3%, to $363.9 million from $456.8 million at December 31, 2022. As deposit balances have increased, we have been able to reduce our usage of FHLB advances. In addition, we have strategically reduced our usage of FHLB advances in favor of wholesale deposits to increase the Bank’s readily available liquidity. We will continue to utilize FHLB advances and wholesale deposits to manage interest rate risk, liquidity, and contingency funding. As of September 30, 2023, the Corporation had no other borrowings. As of December 31, 2022, the Corporation had other borrowings of $6.1 million which consisted of sold loans which were accounted for as a secured borrowing because they did not qualify for true sale accounting. On September 29, 2023, the Corporation completed the private placement of $15.0 million in new subordinated debentures which qualify as Tier 2 capital. The proceeds of the issuance will support the Bank’s growth strategy and general corporate purposes. 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. 54 Table of Contents Consistent with our funding philosophy to manage interest rate risk, we will use the most efficient and cost effective source of wholesale funds. We will utilize FHLB advances to the extent we maintain an adequate level of excess borrowing capacity for liquidity and contingency funding purposes and pricing remains favorable in comparison to the wholesale deposit alternative. We will use FHLB advances and/or brokered certificates of deposit in specific maturity periods needed, typically three to five years, to match-fund fixed rate loans and effectively mitigate the interest rate risk measured through our asset/liability management process and to support asset growth initiatives while taking into consideration our operating goals and desired level of usage of wholesale funds. Please refer to the section entitled Liquidity and Capital Resources , below, for further information regarding our use and monitoring of wholesale funds. Preferred Stock The Corporation has 12,500 shares, or $12.5 million in aggregate liquidation preference, of 7.0% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, with a liquidation preference of $1,000 per share (the “Series A Preferred Stock”) outstanding as of September 30, 2023 and December 31, 2022. The Corporation expects to pay dividends on the Series A Preferred Stock when and if declared by its Board, at a fixed rate of 7.0% per annum, payable quarterly, in arrears, on March 15, June 15, September 15 and December 15 of each year up to, but excluding, March 15, 2027. For each dividend period from and including March 15, 2027, dividends will be paid at a floating rate of Three-Month Term SOFR plus a spread of 539 basis points per annum. During the three and nine months ended September 30, 2023, the Corporation paid $218,000 and $656,000, respectively, in preferred cash dividends with respect to the Series A Preferred Stock. The Series A Preferred Stock is perpetual and has no stated maturity. The Corporation may redeem the Series A Preferred Stock at its option at a redemption price equal to $1,000 per share, plus any declared and unpaid dividends (without regard to any undeclared dividends), subject to regulatory approval, on or after March 15, 2027 or within 90 days following a regulatory capital treatment event, in accordance with the terms of the Series A Preferred Stock. 55 Table of Contents Derivatives The Board approved Bank policies allow the Bank to participate in hedging strategies or to use financial futures, options, forward commitments, or interest rate swaps. The Bank utilizes, from time to time, derivative instruments in the course of its asset/liability management. The Corporation’s derivative financial instruments, under which the Corporation is required to either receive cash from or pay cash to counterparties depending on changes in interest rates applied to notional amounts, are carried at fair value on the consolidated balance sheets. As of September 30, 2023, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was approximately $908.6 million, compared to $744.2 million as of December 31, 2022. We receive fixed rates and pay floating rates based upon designated benchmark interest rates on the swaps with commercial borrowers. These swaps mature between May 2024 and March 2040. Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements. As of September 30, 2023, the commercial borrower swaps were reported on the Consolidated Balance Sheet as a derivative asset of $291,000 and liability of $78.7 million compared to a derivative asset of $1.0 million and liability of $61.4 million as of December 31, 2022. On the offsetting swap contracts with dealer counterparties, we pay fixed rates and receive floating rates based upon designated benchmark interest rates. These interest rate swaps also have maturity dates between May 2024 and March 2040. Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and were reported on the Consolidated Balance Sheet as a net derivative asset of $78.4 million as of September 30, 2023, compared to a net derivative liability of $60.4 million as of December 31, 2022. The gross amount of dealer counterparty swaps as of September 30, 2023, without regard to the enforceable master netting agreement, was a gross derivative asset of $78.7 million, compared to a gross derivative liability of $1.0 million and gross derivative asset of $61.4 million as of December 31, 2022. 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 affect earnings. As of September 30, 2023, the aggregate notional value of interest rate swaps designated as cash flow hedges was $352.7 million. These interest rate swaps mature between December 2023 and March 2034. 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, respectively, and there was no ineffective portion of these hedges. The Corporation also enters into interest rate swaps to mitigate market value volatility on certain long-term fixed securities. The objective of the hedge is to protect the Corporation against changes in fair value due to changes in benchmark interest rates. The instruments are designated as fair value hedges as the changes in the fair value of the interest rate swap are expected to offset changes in the fair value of the hedged item attributable to changes in the SOFR swap rate, the designated benchmark interest rate. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affect earnings. As of September 30, 2023, the aggregate notional value of interest rate swaps designated as fair value hedges was $12.5 million. These interest rate swaps mature between February 2031 and October 2034. A pre-tax unrealized gain of $421,000 and loss of $353,000 was recognized in other comprehensive income for the three and nine months ended September 30, 2023, respectively, and there was no ineffective portion of these hedges. For further information and discussion of our derivatives, see Note 13 — Derivative Financial Instruments of the Consolidated Financial Statements. 56 Table of Contents Asset Quality Non-performing Assets Total non-performing assets consisted of the following at September 30, 2023 and December 31, 2022, respectively: September 30, 2023 December 31, 2022 (Dollars in Thousands) Non-performing loans and leases Commercial real estate: Commercial real estate - owner occupied $ — $ — Commercial real estate - non-owner occupied — — Construction — — Multi-family — — 1-4 family 24 30 Total non-performing commercial real estate 24 30 Commercial and industrial 17,604 3,629 Consumer and other — — Total non-performing loans and leases 17,628 3,659 Repossessed assets, net 61 95 Total non-performing assets 17,689 3,754 Total non-performing loans and leases to gross loans and leases 0.64 % 0.15 % Total non-performing assets to gross loans and leases plus repossessed assets, net 0.64 0.15 Total non-performing assets to total assets 0.52 0.13 Allowance for credit losses to gross loans and leases 1.12 0.99 Allowance for credit losses to non-performing loans and leases 176.06 662.20 Non-performing loans increased $14.0 million, to $17.6 million at September 30, 2023, compared to $3.7 million at December 31, 2022. The Corporation’s non-performing loans as a percentage of total gross loans and leases measured 0.64% and 0.15% at September 30, 2023 and December 31, 2022, respectively. The recent elevation in non-performing assets was driven by Equipment Finance and Asset-Based Lending (ABL) pools within the C&I portfolio segment. We continue to expect full repayment related to the second quarter $10.9 million ABL loan in default. Excluding this credit, non-performing assets totaled $8.1 million, or 0.24% of total assets in the current quarter and $4.9 million, or 0.15% of total assets in the prior quarter. The increase in the Equipment Finance pool, for which defaults and liquidations are not atypical, was due to a cyclical increase in past-due balances. We use a wide variety of available metrics to assess the overall asset quality of the portfolio and no one metric is used independently to make a final conclusion as to the asset quality of the portfolio. Non-performing assets as a percentage of total assets was 0.52% and 0.13% at September 30, 2023 and December 31, 2022, respectively. As of September 30, 2023 and December 31, 2022, the payment performance of our loans and leases did not point to any new areas of concern, as approximately 99.36% and 99.85%, respectively, of the total portfolio at the end of each period was in a current payment status. We also monitor asset quality through our established categories as defined in Note 5 – Loans and Allowance for Credit Losses of the Consolidated Financial Statements. As we continue to actively monitor the credit quality of our loan and lease portfolios, we may identify additional loans and leases for which the borrowers or lessees are having difficulties making the required principal and interest payments based upon factors including, but not limited to, the inability to sell the underlying collateral, inadequate cash flow from the operations of the underlying businesses, liquidation events, or bankruptcy filings. We proactively work with our loan borrowers experiencing financial difficulty to find meaningful solutions to difficult situations that are in the best interests of the Bank. As of September 30, 2023, as well as in all previous reporting periods, there were no loans over 90 days past due and still accruing interest. Loans and leases greater than 90 days past due are placed on non-accrual status and individually evaluated for reserve requirement. Cash received while a loan or a lease is on non-accrual status is generally applied solely 57 Table of Contents against the outstanding principal. If collectability of the contractual principal and interest is not in doubt, payments received may be applied to both interest due on a cash basis and principal. The following represents additional information regarding our non-performing loans and leases: As of and for the Nine Months Ended September 30, As of and for the Year Ended December 31, 2023 2022 2022 (In Thousands) Individually evaluated loans and leases with no specific reserves required $ 11,381 $ 1,028 $ 1,067 Individually evaluated loans and leases with specific reserves required 6,247 2,789 2,592 Total individually evaluated loans and leases 17,628 3,817 3,659 Less: Specific reserves (included in allowance for credit losses) 3,982 1,701 1,650 Net non-performing loans and leases $ 13,646 $ 2,116 $ 2,009 Average non-performing loans and leases $ 7,702 $ 5,532 $ 4,899 Foregone interest income attributable to non-performing loans and leases $ 704 $ 312 $ 400 Less: Interest income recognized on non-performing loans and leases 108 1,057 1,436 Net foregone interest income on non-performing loans and leases $ 596 $ (745) $ (1,036) Allowance for Credit Losses The allowance for credit losses, including unfunded commitment reserves, increased $6.8 million, or 28.1%, to $31.0 million as of September 30, 2023 from $24.2 million as of December 31, 2022. The allowance for credit losses as a percentage of gross loans and leases increased to 1.12% as of September 30, 2023 from 0.99% as of December 31, 2022 under the incurred loss model. During the first quarter of 2023, the Corporation adopted ASU 2016-13, including the CECL methodology for estimating the ACL. This standard was adopted using a modified retrospective approach on January 1, 2023, resulting in a $484,000 increase to the ACL and a $1.3 million increase to the unfunded credit commitments reserve. In addition to the adoption of ASU 2016-13, the increase in allowance for credit losses as a percent of gross loans and leases was principally due to loan growth, increase in specific reserves, and changes to quantitative and qualitative model factors. During the nine months ended September 30, 2023, we recorded net charge-offs on individually evaluated loans and leases of $622,000, comprised of $1,057,000 of charge-offs and $435,000 of recoveries. We will continue to experience some level of periodic charge-offs in the future as exit strategies are considered and executed. Loans and leases with previously established specific reserves, may ultimately result in a charge-off under a variety of scenarios. As of September 30, 2023 and December 31, 2022, our ratio of allowance for credit losses to total non-performing loans and leases was 176.06% and 662.20%, respectively. This ratio decreased because of the $10.9 million ABL loan downgraded to non-performing as of June 30, 2023. This loan is fully collateralized and required no specific reserve. Non-performing loans and leases exhibit weaknesses that inhibit repayment in compliance with the original terms of the note or lease; however, the evaluation of non-performing loans and leases may not always result in a specific reserve included in the allowance for credit losses. As part of the underwriting process, as well as our ongoing monitoring efforts, we try to ensure that we have sufficient collateral to protect our interest in the related loan or lease. As a result of this practice, a significant portion of our outstanding balance of non-performing loans or leases may not require additional specific reserves or require only a minimal amount of required specific reserve. Management is proactive in recording charge-offs to bring loans to their net realizable value in situations where it is determined with certainty that we will not recover the entire amount of our principal. This practice may lead to a lower allowance for credit loss to non-performing loans and leases ratio as compared to our peers or industry expectations. As asset quality strengthens, our allowance for credit losses is measured more through collective characteristics of our portfolio rather than through specific identification and we would therefore expect this ratio to rise. Conversely, if we identify further impaired loans, this ratio could fall if the impaired loans are adequately collateralized and therefore require no specific or general reserve. Given our business practices and evaluation of our existing loan and lease portfolio, we believe this coverage ratio is appropriate for the probable losses inherent in our loan and lease portfolio as of September 30, 2023. 58 Table of Contents To determine the level and composition of the allowance for credit losses, we break out the portfolio by segments with similar risk characteristics. First, we evaluate loans and leases for non-performing classification. We analyze each loan and lease identified as non-performing on an individual basis to determine a specific reserve based upon the estimated value of the underlying collateral for collateral-dependent loans, or alternatively, the present value of expected cash flows. For efficiency, smaller dollar value loans within the Equipment Finance pool are reserved based on a past-due criteria. All loans not evaluated individually are evaluated collectively as part of a portfolio segment or portfolio segment and class. These collective evaluations utilized a reasonable and supportable forecast which includes projections of credit losses based on one of two established methods: discounted cash flow or weighted average remaining maturity. Each model includes a set of assumptions which are evaluated not less than annually by management. Further, the methodology also focuses on evaluation of several qualitative factors for each portfolio segment or portfolio segment and class, including but not limited to: product growth rates, management’s ongoing review and grading of the loan and lease portfolios, consideration of delinquency experience, changes in the size of the loan and lease portfolios, level of loans and leases subject to more frequent review by management, changes in underlying collateral, concentrations in specific industries, and other qualitative factors that could affect credit losses. When it is determined that we will not receive our entire contractual principal or the loss is confirmed, we record a charge against the allowance for credit loss reserve to bring the loan or lease to its net realizable value. Many of the impaired loans are collateral dependent. It is typically part of our process to obtain appraisals on impaired loans and leases that are primarily secured by real estate. As we complete new appraisals and/or market evaluations, in specific situations current fair values collateralizing certain impaired loans are inadequate to support the entire amount of the outstanding debt. As a result of our review process, we have concluded an appropriate allowance for credit losses for the existing loan and lease portfolio was $31.0 million, or 1.12% of gross loans and leases, at September 30, 2023. However, given ongoing complexities with current workout situations and the uncertainty surrounding future economic conditions, further charge-offs, and increased provisions for credit losses may be recorded if additional facts and circumstances lead us to a different conclusion. In addition, various federal and state regulatory agencies review the allowance for credit losses. These agencies could require certain loan and lease balances to be classified differently or charged off when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination. 59 Table of Contents A summary of the activity in the allowance for credit losses follows: As of and for the Three Months Ended September 30, As of and for the Nine Months Ended September 30, 2023 2022 2023 2022 (Dollars in Thousands) Allowance at beginning of period $ 29,697 $ 24,104 $ 24,230 $ 24,336 Impact of adoption of ASC 326 — — 1,818 — Charge-offs: Commercial real estate: Commercial real estate — owner occupied — — — — Commercial real estate — non-owner occupied — — — — Construction — — — — Multi-family — — — — 1-4 family — — — — Commercial and industrial (562) (33) (1,057) (140) Consumer and other — (21) — (21) Total charge-offs (562) (54) (1,057) (161) Recoveries: Commercial real estate: Commercial real estate — owner occupied 3 23 5 4,258 Commercial real estate — non-owner occupied — — 1 1 Construction — — — — Multi-family — — — — 1-4 family 9 — 30 — Commercial and industrial 72 50 386 251 Consumer and other — 8 13 27 Total recoveries 84 81 435 4,537 Net recoveries (478) 27 (622) 4,376 Provision for credit losses 1,817 12 5,610 (4,569) Allowance at end of period $ 31,036 $ 24,143 $ 31,036 $ 24,143 Components: Allowance for loan losses $ 29,331 $ 24,143 $ 29,331 $ 24,143 Allowance for unfunded credit commitments 1,705 — 1,705 — Total ACL $ 31,036 $ 24,143 $ 31,036 $ 24,143 Annualized net charge offs (recoveries) as a percent of average gross loans and leases 0.07 % — % 0.03 % (0.26) % 60 Table of Contents Liquidity and Capital Resources The Corporation expects to meet its liquidity needs through existing cash on hand, established cash flow sources, its third-party senior line of credit, and dividends received from the Bank. While the Bank is subject to certain generally applicable regulatory limitations regarding its ability to pay dividends to the Corporation, we do not believe that the Corporation will be adversely affected by these dividend limitations. The Corporation’s principal liquidity requirements at September 30, 2023 were the interest payments due on subordinated notes and debentures and cash dividends payable to both common and preferred stockholders. The capital ratios of the Bank met all applicable regulatory capital adequacy requirements in effect on September 30, 2023, and continue to meet the heightened requirements imposed by Basel III, including the capital conservation buffer. The Corporation’s Board and management teams adhere to the appropriate regulatory guidelines on decisions which affect their capital positions, including but not limited to, decisions relating to the payment of dividends and increasing indebtedness. The Bank maintains liquidity by obtaining funds from several sources. The Bank’s primary sources of funds are principal and interest payments on loans receivable and mortgage-related securities, deposits, and other borrowings, such as federal funds, and FHLB advances. The scheduled payments of loans and mortgage-related securities are generally a predictable source of funds. Deposit flows and loan prepayments, however, are greatly influenced by general interest rates, economic and industry conditions, and competition. Sources of liquidity As of (in thousands) September 30, 2023 June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 Short-term investments $ 109,612 $ 80,510 $ 159,859 $ 76,871 $ 86,707 Collateral value of unencumbered pledged loans 315,067 265,884 296,393 184,415 289,513 Market value of unencumbered securities 236,618 217,074 200,332 188,353 173,013 Readily available liquidity 661,297 563,468 656,584 449,639 549,233 Fed fund lines 45,000 45,000 45,000 45,000 45,000 Excess brokered CD capacity 1 1,090,864 1,017,590 1,027,869 1,162,241 1,100,369 Total liquidity $ 1,797,161 $ 1,626,058 $ 1,729,453 $ 1,656,880 $ 1,694,602 Total uninsured, net collateralized deposits 887,210 829,727 941,774 953,139 973,671 (1) Bank internal policy limits brokered CDs to 50% of total bank funding when combined with FHLB advances. We view readily accessible liquidity as a critical element to meet our cash and collateral obligations. We define our readily accessible liquidity as the total of our short-term investments, our unencumbered securities available-for-sale, and our unencumbered pledged loans. Our readily accessible liquidity increased quarter over quarter. At September 30, 2023 and December 31, 2022, the Bank had $109.2 million and $76.5 million on deposit with the FRB recorded in short-term investments, respectively. Any excess funds not used for loan funding or satisfying other cash obligations were maintained as part of our readily accessible liquidity in our interest-bearing accounts with the FRB, as we value the safety and soundness provided by the FRB. We plan to utilize excess liquidity to fund loan and lease portfolio growth, pay down maturing debt, allow run off of maturing wholesale certificates of deposit or invest in securities to maintain adequate liquidity at an improved margin. We had $782.2 million of outstanding wholesale funds at September 30, 2023, compared to $618.6 million of wholesale funds as of December 31, 2022, which represented 26.3% and 23.9%, respectively, of ending balance total bank funding. Wholesale funds include FHLB advances, brokered certificates of deposit, and deposits gathered from internet listing services. Total bank funding is defined as total deposits plus FHLB advances. We are committed to raising in-market deposits while utilizing wholesale funds to mitigate interest rate risk. Wholesale funds continue to be an efficient and cost effective source of funding for the Bank and allows it to gather funds across a larger geographic base at price levels and maturities that are more attractive than local time deposits when required to raise a similar level of in-market deposits within a short time period. Access to such deposits and borrowings allows us the flexibility to refrain from pursuing single service deposit relationships in markets that have experienced unfavorable pricing levels. In addition, the administrative costs associated with wholesale funds are considerably lower than those that would be incurred to administer a similar level of local deposits with a similar maturity structure. Wholesale funds are also stable as each issuance has a structured maturity date and may only be redeemed in certain limited circumstances. During the time frames necessary to accumulate wholesale funds in an orderly manner, we will use short-term FHLB advances to meet our temporary funding needs. The short-term FHLB advances will typically have terms of one week to one month to cover the overall expected funding demands. 61 Table of Contents Period-end in-market deposits increased $223.3 million as of September 30, 2023, compared to December 31, 2022. The increase in in-market deposits was principally due to a $203.2 million and $131.5 million increase in interest bearing transaction accounts and certificates of deposits, respectively. This increase was partially offset by a $107.1 million and $4.3 million decrease in non-interest bearing deposit accounts and money market accounts, respectively. While non-interest transaction accounts declined $107.1 million from December 31, 2022 to June 30, 2023, we observed a $10.7 million increase during third quarter which may indicate a bottom to the trend. Nonetheless, we will continue to use wholesale funds in specific maturity periods, typically three to five years, needed to effectively mitigate the interest rate risk measured through our asset/liability management process or in shorter time periods if in-market deposit balances decline. In order to provide for ongoing liquidity and funding, none of our wholesale certificates of deposit allow for withdrawal at the option of the depositor before the stated maturity (with the exception of deposits accumulated through the internet listing service which have the same early withdrawal privileges and fees as do our other in-market deposits) and FHLB advances with contractual maturity terms. The Bank limits the percentage of wholesale funds to total bank funds in accordance with liquidity policies approved by its Board. The Bank was in compliance with its policy limits as of September 30, 2023. The Bank was able to access the wholesale funding market as needed at rates and terms comparable to market standards during the quarter ended September 30, 2023. In the event that there is a disruption in the availability of wholesale funds at maturity, the Bank has managed the maturity structure, in compliance with our approved liquidity policy, so at least one year of maturities could be funded through readily accessible liquidity. These potential funding sources include deposits maintained at the FRB or Federal Reserve Discount Window utilizing currently unencumbered securities and acceptable loans as collateral. As of September 30, 2023, the available liquidity was in excess of the stated policy minimum. We believe the Bank will also have access to the unused federal funds lines, cash flows from borrower repayments, and cash flows from security maturities. The Bank also has the ability to raise local market deposits by offering attractive rates to generate the level required to fulfill its liquidity needs. The Corporation has a shelf registration statement on file with the Securities and Exchange Commission that would allow the Corporation to offer and sell, from time to time and in one or more offerings, up to $75.0 million in aggregate initial offering price of common and preferred stock, debt securities, warrants, subscription rights, units, or depository shares, or any combination thereof. During the nine months ended September 30, 2023, operating activities resulted in a net cash inflow of $39.0 million, which included net income of $27.3 million. Net cash used by investing activities for the nine months ended September 30, 2023 was $395.4 million primarily due to net loan disbursements, investments made in securities available for sale, and additional investments in federal home loan bank stock. Net cash provided by financing activities was $386.7 million for the nine months ended September 30, 2023 primarily due to a net increase in deposits, partially offset by the repayment of FHLB advances. Please refer to the Consolidated Statements of Cash Flows included in PART I., Item 1 for further details regarding significant sources of cash flow for the Corporation. Contractual Obligations and Off-Balance Sheet Arrangements As of September 30, 2023, there were no material changes to our contractual obligations and off-balance sheet arrangements disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022. We continue to believe that we have adequate capital and liquidity available from various sources to fund projected contractual obligations and commitments.