What changed in this filing

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Item 1. Financial Statements

2024-04-26 compared with 2023-10-27 · 249 added, 371 removed, 977 unchanged (39% of the section changed)

2 unchanged sentences

Consolidated Balance Sheets

September 30,

2024 December 31,

25 unchanged sentences

Stockholders’ equity:

Preferred stock, $ 0.01 par value, 2,500,000 shares authorized, 12,500 shares of 7 % non-cumulative perpetual preferred stock, Series A, outstanding at September 30, 2023 and December 31, 2022, respectively

Preferred stock, $ 0.01 par value, 2,500,000 shares authorized, 12,500 shares of 7 % non-cumulative perpetual preferred stock, Series A, outstanding at March 31, 2024 and December 31, 2023, respectively

11,992 11,992

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

Common stock, $ 0.01 par value, 25,000,000 shares authorized, 9,426,316 and 9,418,463 shares issued, 8,306,573 and 8,314,778 shares outstanding at March 31, 2024 and December 31, 2023, respectively

Additional paid-in capital 91,312 90,616

1 unchanged sentence

Accumulated other comprehensive loss ( 12,176 ) ( 13,717 )

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

Treasury stock, 1,119,743 and 1,103,685 shares at March 31, 2024 and December 31, 2023, respectively, at cost

( 30,705 ) ( 30,126 )

4 unchanged sentences

Consolidated Statements of Income (Unaudited)

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

2023 2022 2023 2022

For the Three Months Ended March 31,

(In Thousands, Except Per Share Data)

7 unchanged sentences

Federal Home Loan Bank advances and other borrowings 2,435 2,929

Junior subordinated notes — — — 504

Total interest expense 26,272 15,359

35 unchanged sentences

Consolidated Statements of Comprehensive Income (Unaudited)

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

2023 2022 2023 2022

For the Three Months Ended March 31,

(In Thousands)

Net income $ 8,848 $ 8,979

Other comprehensive (loss) income

Other comprehensive income

Securities available-for-sale:

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

Unrealized securities (losses) gains arising during the period ( 2,861 ) 3,762

Reclassification adjustment for net loss realized in net income 8 —

2 unchanged sentences

Interest rate swaps:

Unrealized gains on interest rate swaps arising during the period 5,713 3,452 7,844 9,496

Income tax benefit (expense) 123 1,719 ( 371 ) 5,201

Total other comprehensive (loss) income ( 357 ) ( 5,000 ) 1,076 ( 15,131 )

Unrealized gains (losses) on interest rate swaps arising during the period

4,922 ( 1,562 )

Income tax expense ( 529 ) ( 563 )

Total other comprehensive income 1,541 1,639

Comprehensive income $ 10,389 $ 10,618

9 unchanged sentences

(In Thousands, Except Share Data)

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

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

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

Net income — — — — 8,979 — — 8,979

Other comprehensive loss — — — — — ( 6,406 ) — ( 6,406 )

Issuance of preferred stock, net of issuance costs — 11,992 — — — — — 11,992

Share-based compensation - restricted shares and employee stock purchase plan 47,864 — 1 608 — — — 609

Issuance of common stock under the employee stock purchase plan 1,380 — — 40 — — — 40

Treasury stock re-issued — — — ( 1,002 ) — — 1,002 —

Cash dividends ($ 0.1975 per share)

— — — — ( 1,670 ) — — ( 1,670 )

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

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

Net income — — — — 11,204 — — 11,204

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

Share-based compensation - restricted shares and employee stock purchase plan 27,114 — — 645 — — — 645

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

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

Cash dividends ( $ 0.1975 per share)

— — — — ( 1,678 ) — — ( 1,678 )

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

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

Net income — — — — 10,826 — — 10,826

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

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

Share-based compensation - restricted shares and employee stock purchase plan ( 426 ) — — 634 — — — 634

4 unchanged sentences

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

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

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

Common Shares Outstanding Preferred Stock Common

6 unchanged sentences

Balance at December 31, 2023 8,314,778 $ 11,992 $ 95 $ 90,616 $ 230,728 $ ( 13,717 ) $ ( 30,126 ) $ 289,588

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

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

Net income — — — — 8,848 — — 8,848

7 unchanged sentences

Balance at March 31, 2024 8,306,573 $ 11,992 $ 95 $ 91,312 $ 237,270 $ ( 12,176 ) $ ( 30,705 ) $ 297,788

Net income — — — — 8,337 — — 8,337

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

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

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

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

Cash dividends ($ 0.2275 per share)

— — — — ( 1,889 ) — — ( 1,889 )

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

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

Net income — — — — 9,941 — — 9,941

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

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

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

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

Cash dividends ($ 0.2275 per share)

— — — — ( 1,892 ) — — ( 1,892 )

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

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

See accompanying Notes to Unaudited Consolidated Financial Statements.

1 unchanged sentence

Consolidated Statements of Cash Flows (Unaudited)

For the Nine Months Ended September 30,

For the Three Months Ended March 31,

(In Thousands)

3 unchanged sentences

Deferred income taxes, net 2,268 312

Impairment of tax credit investments — ( 351 )

Provision for credit losses 2,326 1,561

3 unchanged sentences

Gain on disposal of lease equipment — 1

Net loss on sale of securities

Amortization of tax credit investments 1,296 436

4 unchanged sentences

Net loss on repossessed assets 86 6

Loan servicing right impairment valuation — 15

Return on investment in limited partnerships 644 1,690

1 unchanged sentence

Net payments on operating lease liabilities ( 385 ) ( 355 )

Net decrease in accrued interest receivable and other assets ( 8,825 ) ( 4 )

Net increase in accrued interest payable and other liabilities 7,474 1,620

Net increase (decrease) in accrued interest receivable and other assets

977 ( 5,738 )

Net (decrease) increase in accrued interest payable and other liabilities

( 8,263 ) 1,766

Net cash provided by operating activities 8,683 9,909

4 unchanged sentences

Purchases of available-for-sale securities ( 39,332 ) ( 25,924 )

Proceeds from sale of repossessed assets 25 37

Net increase in loans and leases ( 61,454 ) ( 96,356 )

3 unchanged sentences

Distribution from tax credit investments 57 —

Proceeds from sale of tax credit

Investment in Federal Home Loan Bank stock ( 1,284 ) ( 11,644 )

1 unchanged sentence

Purchases of leasehold improvements and equipment, net ( 397 ) ( 798 )

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

Proceeds from redemption of Trust II stock — 315

Proceeds from sale of leasehold improvements and equipment 30 —

Net cash used in investing activities ( 82,728 ) ( 116,346 )

Financing activities

Net increase in deposits 488,801 129,622

Net (decrease) increase in deposits

( 41,373 ) 308,635

Repayment of Federal Home Loan Bank advances ( 95,450 ) ( 810,350 )

Proceeds from Federal Home Loan Bank advances 146,200 701,470

Proceeds from issuance of subordinated notes and debentures

15,000 20,000

Repayment of subordinated notes and debentures

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

Net decrease in long-term borrowed funds ( 6,037 ) ( 3,064 )

Net increase (decrease) in long-term borrowed funds

Cash dividends paid ( 2,087 ) ( 1,906 )

1 unchanged sentence

Proceeds from issuance of common stock under ESPP 31 27

Proceeds from issuance of preferred stock — 11,992

Purchase of treasury stock ( 579 ) ( 1,860 )

Net cash provided by financing activities 6,575 189,728

Net increase in cash and cash equivalents 30,233 53,855

Net (decrease) increase in cash and cash equivalents

( 67,470 ) 83,291

Cash and cash equivalents at the beginning of the period 139,510 102,682

17 unchanged sentences

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

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

As of March 31, 2024, FBB had the following wholly-owned subsidiaries:

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

8 unchanged sentences

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

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

The results of operations for the three months ended March 31, 2024, are not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, 2024.

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

1 unchanged sentence

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

The Corporation has not changed its significant accounting and reporting policies from those disclosed in the Corporation’s Form 10-K for the year ended December 31, 2022 and updates from the adoption of new accounting standards disclosed in the Corporation’s Form 10-Q for the quarter ended March 31, 2023.

The Corporation has not changed its significant accounting and reporting policies from those disclosed in the Corporation’s Form 10-K for the year ended December 31, 2023.

Recent Accounting Pronouncements

3 unchanged sentences

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

The Corporation is assessing the impact of this standard.

The ASU is effective for annual and interim periods beginning after December 15, 2023.

The Corporation adopted the standard effective January 1, 2024.

The implementation did not have a material effect on the Consolidated Financial Statements.

In October 2023, the FASB issued ASU No.

2023-06, “Disclosure Improvements:

Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative.” This update is intended to improve the relevance and usefulness of financial information for investors and other users by incorporating certain SEC disclosure requirements into the FASB Accounting Standards Codification.

This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023.

The adoption of this standard did not have a material effect on the Consolidated Financial Statements.

In November 2023, the FASB issued ASU No.

2023-07, “Segment Reporting (Topic 820):

Improvements to Reportable Segment Disclosures.” This update is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses.

This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2024.

The Corporation is assessing the impact of the standard.

In December 2023, the FASB issued ASU No.

2023-09, “Income Taxes (Topic 740):

Improvements to Income Tax Disclosures.” This update enhances the transparency and decision usefulness of income tax disclosures by providing better information regarding exposure to potential changes in jurisdictional tax legislation and related forecasting and cash flow opportunities.

This update is effective for fiscal years beginning after December 15, 2024.

The Corporation is assessing the impact of the standard.

Note 2 — Earnings per Common Share

4 unchanged sentences

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

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

2023 2022 2023 2022

For the Three Months Ended March 31,

(Dollars in Thousands, Except Share Data)

15 unchanged sentences

The Plan is administered by the Compensation Committee of the Board of Directors (the “Board”) of the Corporation and provides for the grant of equity ownership opportunities through incentive stock options and nonqualified stock options, restricted stock, restricted stock units, dividend equivalent units, and any other type of award permitted by the Plan.

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

As of March 31, 2024, 274,242 shares were available for future grants under the Plan, as amended.

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

1 unchanged sentence

Under the Plan, the Corporation may grant restricted stock awards (“RSA”), restricted stock units (“RSU”), and other stock-based awards to plan participants, subject to forfeiture upon the occurrence of certain events until the dates specified in the participant’s award agreement.

While restricted stock is subject to forfeiture, restricted stock award participants may exercise full voting rights and will receive all dividends and other distributions paid with respect to the restricted shares.

While restricted stock is subject to forfeiture, RSA participants may exercise full voting rights and will receive all dividends and other distributions paid with respect to the restricted shares.

RSUs do not have voting rights.

4 unchanged sentences

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

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

performance compared to a broad peer group of over 100 banks.

Vesting of the PRSU will be measured on the relative Total Shareholder Return (“TSR”) and relative Return on Average Equity (“ROAE”) for issuances prior to 2023 or Return on Average Common Equity (“ROACE”) for issuances after 2022, and will cliff-vest after a three-year measurement period based on the Corporation’s TSR performance and ROAE or ROACE performance compared to a broad peer group of over 100 banks.

At the end of the performance period, the number of actual shares to be awarded varies between 0% and 200% of target amounts.

2 unchanged sentences

The compensation expense for the awards expected to vest for the percentage of performance-based restricted stock units subject to the ROAE or ROACE metric will be adjusted if there is a change in the expectation of ROAE or ROACE.

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

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

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

Restricted stock activity for the year ended December 31, 2023 and the three months ended March 31, 2024 was as follows:

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

7 unchanged sentences

Forfeited ( 5,085 ) 30.33 — — ( 3,875 ) 36.30 ( 8,960 ) 32.91

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

Nonvested balance as of March 31, 2024 34,655 $ 29.81 73,180 $ 37.37 85,873 $ 34.92 193,708 $ 34.93

Unrecognized compensation cost (in thousands) $ 911 $ 1,559 $ 2,709 $ 5,179

Weighted average remaining recognition period (in years) 1.59 2.15 3.20 2.60

(1) The number of restricted shares/units shown includes the shares that would be granted if the target level of performance is achieved related to the performance based restricted stock units.

(1) The number of restricted shares/units shown includes the shares that would be granted if the target level of performance is achieved related to the PRSU.

The number of shares actually issued may vary.

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

Employee Stock Purchase Plan

During 2020, an employee stock purchase plan ("ESPP") was approved by the Corporation’s shareholders and is offered to all qualifying employees.

The Corporation is authorized to issue up to 250,000 shares of common stock under the ESPP.

1 unchanged sentence

Under the ESPP, eligible employees may enroll in a three month offer period that begins January, April, July, and October of each year.

Employees may elect to purchase a limited number of shares on the Corporation's common stock at 90 % of the fair market value on the last day of the offering period.

Employees may elect to purchase a limited number of shares of the Corporation's common stock at 90 % of the fair market value on the last day of the offering period.

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

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

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

During the three months ended March 31, 2024, the Corporation issued 913 shares of common stock under the ESPP.

As of March 31, 2024, 229,725 shares remained available for issuance under the ESPP.

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

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

2023 2022 2023 2022

For the Three Months Ended March 31,

(In Thousands)

2 unchanged sentences

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

As of September 30, 2023

As of March 31, 2024

Amortized Cost Gross

28 unchanged sentences

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

As of September 30, 2023

As of March 31, 2024

Amortized Cost Gross

27 unchanged sentences

Residential and commercial mortgage-backed securities - government-sponsored enterprises include securities guaranteed by the Federal Home Loan Mortgage Corporation, FNMA, and the FHLB.

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

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

At September 30, 2023 and December 31, 2022, securities with a fair value of $ 43.3 million and $ 35.9 million, respectively, were pledged to secure various obligations, including interest rate swap contracts and municipal deposits.

The amortized cost and fair value of securities by contractual maturity at September 30, 2023 are shown below.

The Corporation sold five available-for-sale securities during the three months ended March 31, 2024.

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

At March 31, 2024 and December 31, 2023, securities with a fair value of $ 33.0 million and $ 45.4 million, respectively, were pledged to secure various obligations, including interest rate swap contracts and municipal deposits.

The amortized cost and fair value of securities by contractual maturity at March 31, 2024 are shown below.

Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations with or without call or prepayment penalties.

10 unchanged sentences

$ 339,042 $ 314,114 $ 8,131 $ 7,848

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

At September 30, 2023, the Corporation held 183 available-for-sale securities that were in an unrealized loss position, 153 of which have been in a continuous unrealized loss position for twelve months or greater.

The Corporation also has not specifically identified available-for-sale securities in a loss position that it intends to sell in the near term and does not believe that it will be required to sell any such securities.

At March 31, 2024, the Corporation held 182 available-for-sale securities that were in an unrealized loss position, 159 of which have been in a continuous unrealized loss position for twelve months or greater.

The Corporation has not specifically identified available-for-sale securities in a loss position that it intends to sell in the near term and does not believe that it will be required to sell any such securities.

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

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

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

For the three months ended March 31, 2024 and 2023, management concluded that in all instances securities with fair value less than carrying value was due to market and other factors;

thus, no credit loss provision was required.

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

As of September 30, 2023

As of March 31, 2024

Less than 12 Months 12 Months or Longer Total

39 unchanged sentences

$ 47,366 $ 495 $ 164,447 $ 22,969 $ 211,813 $ 23,464

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

At September 30, 2023, the Corporation held 30 held-to-maturity securities that were in an unrealized loss position, 24 of which have been in a continuous unrealized loss position for twelve months or greater.

At March 31, 2024, the Corporation held 25 held-to-maturity securities that were in an unrealized loss position, 21 of which have been in a continuous loss position for twelve months or greater.

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

The assessment includes review of credit ratings,

identification of delinquency and evaluation of market factors.

The assessment includes review of credit ratings, identification of

delinquency and evaluation of market factors.

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

Accordingly, no credit loss provision was recorded in the unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2023 and 2022.

Accordingly, no credit loss provision was recorded in the unaudited Consolidated Statements of Income for the three months ended March 31, 2024 and 2023.

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

As of September 30, 2023

As of March 31, 2024

Less than 12 Months 12 Months or Longer Total

27 unchanged sentences

$ 1,424 $ 4 $ 6,316 $ 248 $ 7,740 $ 252

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

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

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

Note 5 — Loans and Allowance for Credit Losses

Note 5 — Loans, Lease Receivables, and Allowance for Credit Losses

Loan and lease receivables consist of the following:

September 30,

2024 December 31,

14 unchanged sentences

2,910,590 2,850,018

Allowance for credit losses 29,331 24,230

Allowance for loan losses 32,799 31,275

Deferred loan fees and costs, net ( 274 ) ( 243 )

2 unchanged sentences

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

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

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

Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the three and nine months ended September 30, 2023, and 2022, have been derecognized in the unaudited Consolidated Financial Statements.

The total principal amount of the guaranteed portions of SBA loans sold during the three months ended March 31, 2024, and 2023, was $ 2.1 million and $ 5.0 million, respectively.

Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the three months ended March 31, 2024, and 2023, have been derecognized in the unaudited Consolidated Financial Statements.

The guaranteed portions of SBA loans were transferred at their fair value and the related gain was recognized upon the transfer as non-interest income in the unaudited Consolidated Financial Statements.

The total outstanding balance of sold SBA loans at September 30, 2023, and December 31, 2022, was $ 91.1 million and $ 88.5 million, respectively.

The total principal amount of transferred participation interests in other, non-SBA originated loans during the three months ended September 30, 2023, and 2022, was $ 39.2 million and $ 25.4 million, respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer.

The total principal amount of transferred participation interests in other, non-SBA originated loans during the nine months ended September 30, 2023, and 2022, was $ 93.9 million and $ 70.6 million, respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer.

The total outstanding balance of sold SBA loans at March 31, 2024, and December 31, 2023, was $ 80.8 million and $ 84.2 million, respectively.

The total principal amount of transferred participation interests in other, non-SBA originated loans during the three months ended March 31, 2024, and 2023, was $ 34.8 million and $ 22.6 million, respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer.

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

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

As of September 30, 2023, and December 31, 2022, the total amount of the Corporation’s partial ownership of these transferred loans on the unaudited Consolidated Balance Sheets was $ 362.9 million and $ 339.0 million, respectively.

As of September 30, 2023 and December 31, 2022, the non-SBA originated participation portfolio contained no non-performing loans.

The total outstanding balance of these transferred loans at March 31, 2024, and December 31, 2023, was $ 302.8 million and $ 279.5 million, respectively.

As of March 31, 2024, and December 31, 2023, the total amount of the Corporation’s partial ownership of these transferred loans on the unaudited Consolidated Balance Sheets was $ 376.8 million and $ 367.4 million, respectively.

As of March 31, 2024 and December 31, 2023, the non-SBA originated participation portfolio contained no non-performing loans.

The Corporation does not share in the participant’s portion of any potential charge-offs.

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

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

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

March 31, 2024 Term Loans Amortized Cost Basis by Origination Year

(In Thousands) 2024 2023 2022 2021 2020 Prior Revolving Loans Amortized Cost Basis Total

26 unchanged sentences

Total $ 599 $ 4,231 $ 7,395 $ 2,642 $ 2,340 $ 3,024 $ 7,251 $ 27,482

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

March 31, 2024 Term Loans Amortized Cost Basis by Origination Year

(In Thousands) 2024 2023 2022 2021 2020 Prior Revolving Loans Amortized Cost Basis Total

16 unchanged sentences

Total $ 123,574 $ 571,109 $ 394,703 $ 285,906 $ 295,137 $ 721,454 $ 518,707 $ 2,910,590

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

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

Commercial real estate — owner occupied

I $ 31,637 $ 43,156 $ 38,803 $ 44,704 $ 22,078 $ 72,774 $ 451 $ 253,603

II — — — 260 — — — 260

III — — — — — 2,616 — 2,616

IV — — — — — — — —

Total $ 31,637 $ 43,156 $ 38,803 $ 44,964 $ 22,078 $ 75,390 $ 451 $ 256,479

Commercial real estate — non-owner occupied

I $ 71,857 $ 76,689 $ 72,660 $ 78,212 $ 66,262 $ 314,970 $ 32,478 $ 713,128

II — — 2,302 2,252 19,838 16,274 — 40,666

III — — — — — 19,700 — 19,700

IV — — — — — — — —

Total $ 71,857 $ 76,689 $ 74,962 $ 80,464 $ 86,100 $ 350,944 $ 32,478 $ 773,494

I $ 63,660 $ 83,161 $ 8,542 $ 744 $ 433 $ 6,528 $ 15,011 $ 178,079

II — — 9,289 5,712 — — — 15,001

III — — — — — — — —

IV — — — — — — — —

Total $ 63,660 $ 83,161 $ 17,831 $ 6,456 $ 433 $ 6,528 $ 15,011 $ 193,080

I $ 84,932 $ 41,068 $ 70,054 $ 113,294 $ 22,925 $ 115,243 $ 3,013 $ 450,529

II — — — — — — — —

III — — — — — — — —

IV — — — — — — — —

Total $ 84,932 $ 41,068 $ 70,054 $ 113,294 $ 22,925 $ 115,243 $ 3,013 $ 450,529

I $ 4,242 $ 7,684 $ 2,672 $ 2,359 $ 443 $ 2,805 $ 6,062 $ 26,267

II — — — — — — — —

III — — — — — — — —

IV — — — — — 22 — 22

Total $ 4,242 $ 7,684 $ 2,672 $ 2,359 $ 443 $ 2,827 $ 6,062 $ 26,289

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

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

Commercial and industrial

I $ 302,612 $ 144,167 $ 85,504 $ 38,164 $ 20,151 $ 26,490 $ 415,301 $ 1,032,389

II 1,496 5,280 785 353 94 219 5,706 13,933

III 1,093 7,168 1,882 5,919 3,861 3,957 15,058 38,938

IV 1,482 6,519 1,319 321 133 1,644 9,157 20,575

Total $ 306,683 $ 163,134 $ 89,490 $ 44,757 $ 24,239 $ 32,310 $ 445,222 $ 1,105,835

Consumer and other

I $ 5,920 $ 8,786 $ 3,167 $ 12,193 $ 2,049 $ 3,485 $ 8,712 $ 44,312

II — — — — — — — —

III — — — — — — — —

IV — — — — — — — —

Total $ 5,920 $ 8,786 $ 3,167 $ 12,193 $ 2,049 $ 3,485 $ 8,712 $ 44,312

I $ 564,860 $ 404,711 $ 281,402 $ 289,670 $ 134,341 $ 542,295 $ 481,028 $ 2,698,307

II 1,496 5,280 12,376 8,577 19,932 16,493 5,706 69,860

III 1,093 7,168 1,882 5,919 3,861 26,273 15,058 61,254

IV 1,482 6,519 1,319 321 133 1,666 9,157 $ 20,597

Total $ 568,931 $ 423,678 $ 296,979 $ 304,487 $ 158,267 $ 586,727 $ 510,949 $ 2,850,018

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

21 unchanged sentences

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

September 30, 2023

March 31, 2024

Days Past Due 60-89

2 unchanged sentences

(Dollars in Thousands)

Performing loans and leases

Commercial real estate:

Owner occupied $ — $ — $ — $ — $ 236,058 $ 236,058

Non-owner occupied — — — — 753,517 753,517

Construction — — — — 211,828 211,828

Multi-family — — — — 409,714 409,714

1-4 family — — — — 24,211 24,211

Commercial and industrial 1,874 1,269 — 3,143 1,062,951 1,066,094

Consumer and other — — — — 44,808 44,808

Total 1,874 1,269 — 3,143 2,743,087 2,746,230

Non-performing loans and leases

Commercial real estate:

Owner occupied — — — — — —

Non-owner occupied — — — — — —

Construction — — — — — —

Multi-family — — — — — —

1-4 family — — — — 24 24

Commercial and industrial 408 1,406 5,184 6,998 10,606 17,604

Consumer and other — — — — — —

Total 408 1,406 5,184 6,998 10,630 17,628

Total loans and leases

14 unchanged sentences

(Dollars in Thousands)

Performing loans and leases

Commercial real estate:

Owner occupied $ — $ — $ — $ — $ 268,354 $ 268,354

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

Construction — — — — 218,751 218,751

Multi-family — — — — 350,026 350,026

1-4 family — — — — 17,698 17,698

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

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

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

Non-performing loans and leases

Commercial real estate:

Owner occupied — — — — — —

Non-owner occupied — — — — — —

Construction — — — — — —

Multi-family — — — — — —

1-4 family — — — — 30 30

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

Other — — — — — —

Total 439 126 2,464 3,029 630 3,659

Total loans and leases

9 unchanged sentences

Percent of portfolio 0.12 % 0.04 % 0.64 % 0.80 % 99.20 % 100.00 %

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

September 30,

2023 December 31,

The following tables present the amortized cost basis of loans on non-accrual status and loans past due over 89 days still accruing as of:

March 31, 2024

Non-accrual With No Allowance for Credit Loss

Non-accrual With Allowance for Credit Loss

Loans Past Due Over 89 Days Still Accruing

(In Thousands)

Non-performing loans and leases

Commercial real estate:

4 unchanged sentences

1-4 family 20 — —

Total non-performing commercial real estate 24 30

Total commercial real estate

Commercial and industrial 9,305 10,504 —

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

September 30,

Total non-accrual loans and leases

$ 9,325 $ 10,504 $ —

December 31, 2023

Total non-performing loans and leases to gross loans and leases 0.64 % 0.15 %

Total non-performing assets to total 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

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

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

The modifications consisted of payment deferrals.

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

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

There were no loans to borrowers experiencing financial distress that were modified during the previous 12 months and which subsequently defaulted during the three and nine months ended September 30, 2023 and 2022.

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

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

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

Investment (1)

Balance Individual

Reserve Average

Investment (2)

Income Interest

Recognized Net

Non-accrual With No Allowance for Credit Loss

Loans Past Due Over 89 Days Still Accruing

(In Thousands)

With no individual reserve recorded:

Commercial real estate:

Owner occupied $ — $ — $ — $ — $ — $ — $ —

Non-owner occupied — — — — — — —

— — — — — — —

Multi-family — — — — — — —

1-4 family 24 29 — 27 3 17 ( 14 )

Commercial and industrial 11,357 11,361 — 4,263 436 70 366

Consumer and other — — — — — — —

Total 11,381 11,390 — 4,290 439 87 352

With individual reserve recorded:

Commercial real estate:

Owner occupied — — — — — — —

Non-owner occupied — — — — — — —

Construction — — — — — — —

Multi-family — — — — — — —

1-4 family — — — — — — —

Commercial and industrial 6,247 6,247 3,982 3,412 265 21 244

Consumer and other — — — — — — —

Total 6,247 6,247 3,982 3,412 265 21 244

Commercial real estate:

Owner occupied — — — — — — —

Non-owner occupied — — — — — — —

Commercial real estate — owner occupied $ — $ — $ —

Commercial real estate — non-owner occupied — — —

Construction — — —

1 unchanged sentence

1-4 family — 22 —

Total commercial real estate

Commercial and industrial 9,690 10,885 —

Consumer and other — — —

Grand total $ 17,628 $ 17,637 $ 3,982 $ 7,702 $ 704 $ 108 $ 596

(1) The recorded investment represents the unpaid principal balance net of any partial charge-offs.

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

As of and for the Year Ended December 31, 2022

Investment (1)

Balance Individual

Reserve Average

Investment (2)

Income Interest

Recognized Net

Total non-accrual loans and leases

$ 9,690 $ 10,907 $ —

2024 December 31,

Total non-accrual loans and leases to gross loans and leases

0.68 % 0.72 %

Allowance for credit losses to gross loans and leases 1.19 1.16

Allowance for credit losses to non-accrual loans and leases

174.64 160.21

The following table presents the amortized cost basis of the non-accrual, collateral-dependent commercial and industrial loans as of:

2024 December 31,

(In Thousands)

With no individual reserve recorded:

Commercial real estate:

Owner occupied $ — $ — $ — $ 180 $ 14 $ 759 $ ( 745 )

Non-owner occupied — — — — — 1 ( 1 )

Construction — — — — — 47 ( 47 )

Multi-family — — — — — — —

1-4 family 30 35 — 112 8 41 ( 33 )

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

Consumer and other — — — — — — —

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

With individual reserve recorded:

Commercial real estate:

Owner occupied — — — — — — —

Non-owner occupied — — — — — — —

Construction — — — — — — —

Multi-family — — — — — — —

1-4 family — — — — — — —

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

Consumer and other — — — — — — —

Inventory $ 1,120 $ 8,879

Equipment 4,753 3,740

Real Estate 140 46

Accounts Receivable 6,359 278

Other 1,191 1,348

Total $ 13,563 $ 14,291

Commercial real estate:

Owner occupied — — — 180 14 759 ( 745 )

Non-owner occupied — — — — — 1 ( 1 )

Construction — — — — — 47 ( 47 )

Multi-family — — — — — — —

1-4 family 30 35 — 112 8 41 ( 33 )

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

Consumer and other — — — — — — —

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

(1) The recorded investment represents the unpaid principal balance net of any partial charge-offs.

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

The difference between the recorded investment of loans and leases and the unpaid principal balance of $ 9,000 and $ 26,000 as of September 30, 2023, and December 31, 2022, respectively, represents partial charge-offs of loans and leases resulting from losses due to the value of the collateral securing the loans and leases being below the carrying values of the loans and leases.

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

Cash payments collected on non-accrual loans are first applied to such loan’s principal.

Foregone interest represents the interest that was contractually due on the loan but not received or recorded.

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

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

There were six commercial and industrial loans for a total of $ 1.1 million and two commercial real estate non-owner occupied loans for a total of $ 5.9 million modified during the three months ended March 31, 2024.

The modifications consisted of payment deferrals and modified loan repayment schedules.

Of these modified loans, two are included in total non-performing loans and are currently between zero and 300 days past due as of March 31, 2024.

No loans were modified during the three months ended March 31, 2023.

There was one commercial and industrial loan to borrowers experiencing financial distress for a total of $ 283,000 that was modified during the previous 12 months and which subsequently defaulted during three months ended March 31, 2024.

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

There were no unfunded commitments associated with loans modified for borrowers experiencing financial distress as of March 31, 2024.

Allowance for Credit Losses

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

A provision for credit losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors as discussed within Note 1 – Nature of Operations and Summary of Significant Accounting Policies included in the Corporation’s Form 10-Q for the period ended March 31, 2023.

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

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

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

Quantitative Considerations

10 unchanged sentences

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

This analysis is updated annually.

This analysis is updated semi-annually.

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

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

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

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

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

As of December 31, 2023, the Corporation selected a forecast which estimates unemployment between 3.89% and 4.04% and GDP growth change between 1.29% and 2.32% over the next four quarters.

As of March 31, 2024, the Corporation selected a forecast which estimates unemployment between 3.96% and 4.10% and GDP growth change between 1.43% and 2.99% over the next four quarters.

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

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

11 unchanged sentences

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

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

As of and for the Three Months Ended March 31, 2024

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

8 unchanged sentences

Ending balance $ 1,576 $ 6,202 $ 2,537 $ 3,599 $ 312 $ 19,914 $ 489 $ 34,629

Allowance for loan losses 1,556 5,209 1,441 3,512 228 16,946 439 29,331

Allowance for unfunded credit commitments 17 58 920 10 20 620 60 1,705

Allowance for credit losses on loans

1,562 6,164 1,515 3,588 282 19,250 438 32,799

Allowance for credit losses on unfunded credit commitments

14 38 1,022 11 30 664 51 1,830

Total ACL $ 1,576 $ 6,202 $ 2,537 $ 3,599 $ 312 $ 19,914 $ 489 $ 34,629

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

Commercial Real Estate Commercial

Industrial Consumer and Other Total

(In Thousands)

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

Charge-offs — ( 33 ) ( 21 ) ( 54 )

Recoveries 23 50 8 81

Net recoveries 23 17 ( 13 ) 27

Provision for credit losses ( 492 ) 629 ( 125 ) 12

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

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

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

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

Industrial Consumer

and Other Total

Industrial Consumer and Other Total

(In Thousands)

6 unchanged sentences

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

Allowance for loan losses 1,556 5,209 1,441 3,512 228 16,946 439 29,331

Allowance for unfunded credit commitments 17 58 920 10 20 620 60 1,705

Allowance for credit losses on loans

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

Allowance for credit losses on unfunded credit commitments

20 51 701 9 20 557 52 1,410

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

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

Commercial Real Estate Commercial

Industrial Consumer and Other Total

(In Thousands)

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

Charge-offs — ( 140 ) ( 21 ) ( 161 )

Recoveries 4,259 251 27 4,537

Net recoveries (charge-offs) 4,259 111 6 4,376

Provision for credit losses ( 6,428 ) 1,988 ( 129 ) ( 4,569 )

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

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

Loans collectively evaluated for credit losses in the following tables include all performing loans at March 31, 2024 and December 31, 2023.

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

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

As of September 30, 2023

As of March 31, 2024

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

11 unchanged sentences

As of December 31, 2023

Commercial Real Estate Commercial

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

Industrial Consumer

15 unchanged sentences

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

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

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

The components of total lease expense were as follows:

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

2023 2022 2023 2022

For the Three Months Ended March 31,

(In Thousands)

Operating lease cost

$ 338 $ 382 $ 1,088 $ 1,147

Short-term lease cost

36 38 145 112

Variable lease cost

139 142 436 408

sublease income

— ( 45 ) ( 75 ) ( 134 )

Total lease cost, net

$ 513 $ 517 $ 1,594 $ 1,533

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

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Weighted-average remaining lease term (in years)

9 unchanged sentences

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

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

(In Thousands)

2 unchanged sentences

Investment in historic development entities 2,393 2,393

Investment in low-income housing development entity 21,744 13,514

Investment in low-income housing development entities

31,471 33,303

Investment in limited partnerships 15,566 15,027

2 unchanged sentences

Total accrued interest receivable and other assets $ 90,344 $ 91,058

For the three months ended March 31, 2024 and 2023, the Corporation amortized tax credit investments of $ 1.3 million and $ 436,000 respectively, and recognized tax credits and other benefits for the three months ended March 31, 2024 and 2023 of $ 1.7 million and $ 586,000 , respectively, within the income tax expense on the unaudited consolidated statements of income.

Note 8 — Deposits

1 unchanged sentence

Average balances represent year-to-date averages.

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Balance Average

10 unchanged sentences

Total deposits $ 2,755,406 $ 2,803,989 3.40 $ 2,796,779 $ 2,444,438 2.92

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

A summary of annual maturities of core and wholesale certificates of deposit at March 31, 2024 is as follows:

(In Thousands)

2 unchanged sentences

Thereafter 2,072

Wholesale deposits include $ 357.7 million and $ 110.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at September 30, 2023, compared to $ 187.2 million and $ 15.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at December 31, 2022.

Wholesale deposits include $ 407.6 million and $ 50.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at March 31, 2024, compared to $ 407.7 million and $ 50.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at December 31, 2023.

The Corporation has entered into derivative contracts hedging a portion of the certificates of deposit included in the 2024 maturities above.

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

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

As of March 31, 2024, the notional amount of derivatives designated as cash flow hedges totaled $ 306.3 million with a weighted average remaining maturity of 3.7 years and a weighted average rate of 3.95 %.

Certificates of deposit and wholesale deposits denominated in amounts greater than $250,000 were $ 102.2 million at March 31, 2024 and $ 120.2 million at December 31, 2023.

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

1 unchanged sentence

Average balances represent year-to-date averages.

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Balance Weighted Average

10 unchanged sentences

49,458 49,438 5.78 49,396 38,250 5.16

Junior subordinated notes (1)

$ 381,718 $ 336,765 2.89 $ 330,916 $ 390,881 2.79

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

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

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

A summary of annual maturities of borrowings at March 31, 2024 is as follows:

(In Thousands)

2 unchanged sentences

Thereafter 69,458

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

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

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

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

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

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

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

As of March 31, 2024 and December 31, 2023, the Corporation had other borrowings of $ 10,000 and $ 20,000 , respectively, which consisted of sold tax credit investments accounted for as secured borrowings because they did not qualify for true sale accounting.

The Corporation has entered into derivative contracts hedging a portion of the borrowings included in the 2024 maturities above.

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

As of September 30, 2023 and December 31, 2022, the Corporation was in compliance with its debt covenants under its third-party secured senior line of credit.

As of March 31, 2024, the notional amount of derivatives designated as cash flow hedges totaled $ 88.4 million with a weighted average remaining maturity of 2.4 years and a weighted average rate of 1.66 %.

As of March 31, 2024 and December 31, 2023, the Corporation was in compliance with its debt covenants under its third-party secured senior line of credit.

On February 20, 2024, the credit line was renewed for one additional year with pricing terms of 1-month term SOFR + 2.36% and a maturity date of February 19, 2025 .

4 unchanged sentences

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 Board of Directors declared an aggregate preferred stock dividend of $ 218,000 and $ 656,000 , respectively.

During the three months ended March 31, 2024, the Board of Directors declared an aggregate preferred stock dividend of $ 219,000 .

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

4 unchanged sentences

Management believes that any liability arising from any such proceedings currently existing or threatened will not have a material adverse effect on the Corporation’s financial position, results of operations, and cash flows.

As of March 31, 2024, the Corporation is obligated to fund $ 3.4 million related to an equity investment.

The funding took place in April 2024.

The Corporation sells the guaranteed portions of SBA 7(a) and 504 loans, as well as participation interests in other, non-SBA originated, loans to third parties.

3 unchanged sentences

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

Management has assessed estimated losses inherent in the outstanding guaranteed portions of SBA loans sold in accordance with ASC 450, Contingencies , and determined a recourse reserve based on the probability of future losses for these loans to be $ 983,000 at September 30, 2023, which is reported in accrued interest payable and other liabilities on the unaudited Consolidated Balance Sheets.

Management has assessed estimated losses inherent in the outstanding guaranteed portions of SBA loans sold in accordance with ASC 450, Contingencies , and determined a recourse reserve based on the probability of future losses for these loans to be $ 1.1 million at March 31, 2024, which is reported in accrued interest payable and other liabilities on the unaudited Consolidated Balance Sheets.

The summary of the activity in the SBA recourse reserve is as follows:

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

2023 2022 2023 2022

As of and for the Three Months Ended March 31,

(In Thousands)

Balance at the beginning of the period $ 955 $ 441

SBA recourse provision 242 96 565 134

Charge-offs, net ( 11 ) ( 6 ) ( 23 ) ( 6 )

SBA recourse provision (benefit) 126 ( 18 )

Balance at the end of the period $ 1,081 $ 423

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

Fair value includes assumptions about risk,

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

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

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

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Level 3 — Level 3 inputs are supported by little or no market activity and are significant to the fair value of the assets or liabilities.

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

input that is significant to the fair value measurement in its entirety.

The Corporation’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

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

September 30, 2023

March 31, 2024

Fair Value Measurements Using

25 unchanged sentences

Interest rate swaps — 51,949 — 51,949

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

For assets and liabilities measured at fair value on a recurring basis, there were no transfers between the levels during the three months ended March 31, 2024 or the year ended December 31, 2023 related to the above measurements.

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

September 30, 2023

March 31, 2024

Fair Value Measurements Using

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(In Thousands)

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

Collateral-dependent loans $ — $ — $ 4,917 $ 4,917

Repossessed assets — — 247 247

Loan servicing rights — — 1,356 1,356

Collateral-dependent loans were written down to the fair value of their underlying collateral less costs to sell of $ 2.6 million and $ 1.0 million at September 30, 2023 and December 31, 2022, respectively, through the establishment of specific reserves or by recording charge-offs when the carrying value exceeded the fair value of the underlying collateral of impaired loans.

Collateral-dependent loans were written down to the fair value of their underlying collateral less costs to sell of $ 5.2 million and $ 4.9 million at March 31, 2024 and December 31, 2023, respectively, through the establishment of specific reserves or by recording charge-offs when the carrying value exceeded the fair value of the underlying collateral of individually evaluated loans.

Valuation techniques consistent with the market approach, income approach, or cost approach were used to measure fair value.

These techniques included observable inputs for the individual impaired loans being evaluated, such as current appraisals, recent sales of similar assets, or other observable market data, and unobservable inputs, typically when discounts are applied to appraisal values to adjust such values to current market conditions or to reflect net realizable values.

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

These techniques included observable inputs for the collateral dependent loans being evaluated, such as current appraisals, recent sales of similar assets, or other observable market data, and unobservable inputs, typically when discounts are applied to appraisal values to adjust such values to current market conditions or to reflect net realizable values.

The quantification of unobservable inputs for Level 3 individually evaluated loan values range from 10 % - 100 % as of the measurement date of March 31, 2024.

The weighted average of those unobservable inputs was 51 %.

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

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

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

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

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

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

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

September 30, 2023

March 31, 2024

Amount Fair Value

79 unchanged sentences

When evaluating the fair value of its derivative contracts for the effects of non-performance and credit risk, the Corporation considered the impact of netting and any applicable credit enhancements such as collateral postings, thresholds, and guarantees.

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

As of March 31, 2024 and December 31, 2023, the credit valuation allowance was $ 117,000 .

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

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

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

No right of offset existed with the dealer counterparty swaps as of September 30, 2023.

All changes in the fair value of these instruments are recorded in other non-interest income.

Given the mirror-image terms of the outstanding derivative portfolio, the change in fair value for the three and nine months ended September 30, 2023 and 2022 had an insignificant impact on the unaudited Consolidated Statements of Income.

The gross amount of dealer counterparty swaps, without regard to the enforceable master netting agreement, was a gross derivative asset of $ 61.1 million and gross derivative liability of $ 2.8 million as of March 31, 2024.

No right of offset existed with the dealer counterparty swaps as of March 31, 2024.

All changes in fair value of these instruments are recorded in other non-interest income.

Given the mirror-image terms of the outstanding derivative portfolio, the change in fair value for the three months ended March 31, 2024 and 2023 had an insignificant impact on the unaudited Consolidated Statements of Income.

The Corporation also enters into interest rate swaps to manage interest rate risk and reduce the cost of match-funding certain long-term fixed rate loans.

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

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

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

A pre-tax unrealized gain of $ 4.8 million was recognized in other comprehensive income for the three months ended March 31, 2024 and there were no ineffective portions of the hedges.

A pre-tax unrealized loss of $ 1.4 million was recognized in other comprehensive income for the three months ended March 31, 2023 and there were no ineffective portions of the hedges.

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

The objective of the hedge is to protect the Corporation against changes in fair value due to changes in benchmark interest rates.

The instruments are designated as fair value hedges as the changes in the fair value of the interest rate swap are expected to offset changes in the fair value of the hedged item attributable to changes in the SOFR swap rate, the designated benchmark interest

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.

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.

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

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

As of September 30, 2023

A pre-tax unrealized gain of $ 140,000 was recognized in other comprehensive income for the three months ended March 31, 2024 and there was no ineffective portion of these hedges.

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

As of March 31, 2024

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

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Interest rate swap agreements on loans with commercial loan clients 81 $ 689,702 5.96 $ 51,138

Derivatives designated as hedging instruments

Interest rate swap related to wholesale funding 29 $ 306,255 3.89 $ 811

Note 14 — Regulatory Capital

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amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The Corporation regularly reviews and updates, when appropriate, its Capital and Liquidity Action Plan, which is designed to help ensure appropriate capital adequacy, to plan for future capital needs, and to ensure that the Corporation serves as a source of financial strength to the Bank.

The Corporation regularly reviews and updates, when appropriate, its Capital and Liquidity Action Plans, which is designed to help ensure appropriate capital adequacy, to plan for future capital needs, and to ensure that the Corporation serves as a source of financial strength to the Bank.

The Corporation’s and the Bank’s Board and management teams adhere to the appropriate regulatory guidelines on decisions which affect their respective capital positions, including but not limited to, decisions relating to the payment of dividends and increasing indebtedness.

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

As of September 30, 2023, the Corporation’s capital levels exceeded the regulatory minimums and the Bank’s capital levels remained characterized as well capitalized under the regulatory framework.

As of March 31, 2024, the Corporation’s capital levels exceeded the regulatory minimums and the Bank’s capital levels remained characterized as well capitalized under the regulatory framework.

The following tables summarize both the Corporation’s and the Bank’s capital ratios and the ratios required by their federal regulators:

As of September 30, 2023

As of March 31, 2024

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

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First Business Bank 349,624 9.86 141,889 4.00 141,889 4.00 $ 177,361 5.00 %

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

Risk-weighted assets were also adjusted accordingly.

As of December 31, 2023

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

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

Capitalized Under Prompt Corrective Action Requirements

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First Business Bank 343,604 9.87 139,262 4.00 139,262 4.00 $ 174,077 5.00 %

(1) 2024 and 2023 capital amounts include $677,000 and $1.0 million, respectively, of additional stockholders’ equity as elected by the Corporation and permitted by federal banking regulatory agencies related to the adoption of ASC 326.

Risk-weighted assets were also adjusted accordingly.

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

What changed 10-Q

Item 1. Financial Statements