What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-04-26 compared with 2023-10-27 · 302 added, 364 removed, 430 unchanged (61% of the section changed)

8 unchanged sentences

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.

• Adverse changes in the economy or business conditions, either nationally or in our markets including, without limitation, inflation, economic downturn, labor shortages, wage pressures, and the adverse effects of public health events on the global, national, and local economy.

• Competitive pressures among depository and other financial institutions nationally and in our markets.

6 unchanged sentences

• 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.

• Ongoing 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.

• The Corporation may be subject to increases in FDIC insurance assessments.

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.

See Part I, Item 1A — Risk Factors in our Annual Report on Form 10-K for the year ended December 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.

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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.

• 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.

Results as of and for the three months ended March 31, 2024 include:

• Net income available to common shareholders totaled $8.6 million, or diluted earnings per share of $1.04, for the three months ended March 31, 2024, compared to $8.8 million, or diluted earnings per share of $1.05, for the same period in 2023.

• Annualized return on average assets (“ROAA”) for the three months ended March 31, 2024 measured 0.98% compared to 1.17% for the same period in 2023.

• Return on average common equity (“ROACE”) is defined as net income available to common shareholders divided by average equity less average preferred stock.

ROACE was 12.24% for the three months ended March 31, 2024, compared to 13.96% for the same period in 2023.

• Pre-tax, pre-provision (“PTPP”) adjusted earnings, which excludes certain one-time and discrete items, and PTPP ROAA for the three months ended March 31, 2024 were $13.1 million and 1.49%, respectively, compared to $13.3 million and 1.79% in the same period in 2023.

• Fees in lieu of interest, defined as prepayment fees, asset-based loan fees, non-accrual interest, and loan fee amortization, totaled $793,000 for the three months ended March 31, 2024, compared to $651,000 for the same period in 2023.

• Net interest margin was 3.58% for the three months ended March 31, 2024 compared to 3.86% for the same period in 2023.

Adjusted net interest margin, which excludes certain one-time and volatile items including fees in lieu of interest, was 3.43% for the three months ended March 31, 2024, compared to 3.74% for the same period in 2023.

• Top line revenue, defined as net interest income plus non-interest income, totaled $36.3 million for the three months ended March 31, 2024, compared to $35.1 million in the same period in 2023.

• Effective tax rate, including the benefit from Low-Income Housing Tax Credits, was 16.5% for the three months ended March 31, 2024 compared to 23.8% for the same period in 2023.

• Provision for credit losses was an expense of $2.3 million for the three months ended March 31, 2024 compared to an expense of $1.6 million for the same period in 2023.

• Total assets at March 31, 2024 increased $23.5 million, or 2.7% annualized, to $3.531 billion from $3.508 billion at December 31, 2023.

• Period-end gross loans and leases receivable increased $60.6 million, or 8.5% annualized, to $2.911 billion as of March 31, 2024 compared to $2.850 billion as of December 31, 2023.

Average gross loans and leases of $2.887 billion increased $406.3 million, or 16.4%, for the three months ended March 31, 2024, compared to $2.481 billion for the same period in 2023.

• Non-performing assets were $20.1 million and 0.57% of total assets as of March 31, 2024, compared to $20.8 million and 0.59% of total assets as of December 31, 2023.

• The allowance for credit losses, including reserve for unfunded credit commitments, increased $1.6 million compared to December 31, 2023.

The allowance for credit losses increased to 1.19% of total loans, compared to 1.16% at December 31, 2023.

• 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.

• Period-end core deposits at March 31, 2024 decreased $41.2 million to $2.298 billion from $2.339 billion as of December 31, 2023.

Average core deposits of $2.346 billion increased $345.9 million, or 17.3%, for the three months ended March 31, 2024, compared to $2.001 billion for the same period in 2023.

• Private wealth and trust assets u nder management and administration increased by $198.7 million , or 25.5% annualized, to $3.320 billion at March 31, 2024, compared to $3.122 billion at December 31, 2023.

Private wealth trust assets under management and administration increased $516.1 million, or 18.4%, compared to the same period in 2023.

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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.

Top line revenue, comprised of net interest income and non-interest income, increased $1.2 million, or 3.3%, for the three months ended March 31, 2024, compared to the same period in 2023, due to a 10.5% increase in net interest income partially offset by a 19.7% decrease in non-interest income.

The increase in net interest income was driven by an increase in average loans and leases outstanding partially offset by net interest margin compression.

The decrease in non-interest income was due to decreases in returns on investments in mezzanine funds, commercial loan swap fee income, and gains on the sale of SBA loans, partially offset by an increase in trust fee income 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

For the Three Months Ended March 31,

2024 2023 $ Change % Change

(Dollars in Thousands)

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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.

ROAA for the three months ended March 31, 2024 decreased to 0.98%, compared to 1.17% for the three months ended March 31, 2023.

The decrease in ROAA was due to increases in credit loss provision and operating expenses and a decrease in non interest income, partially offset by an increase in net interest income.

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.

ROACE for the three months ended March 31, 2024 was 12.24%, compared to 13.96% for the three months ended March 31, 2023.

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

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.

We view ROACE as an 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.

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.

Efficiency ratio measured 63.76% for the three months ended March 31, 2024, compared to 62.02% for the three ended March 31, 2023, respectively, as the percentage increase in operating expenses exceeded the percentage increase in top line revenue resulting in negative quarterly operating leverage compared to the prior year period.

The percentage increase in operating revenue was negatively impacted by net interest margin compression during the periods 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, 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 months ended March 31, 2024 was $13.1 million, compared to $13.3 million for the three months ended March 31, 2023, 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.

The decrease in PTPP for the three months ended March 31, 2024 was primarily driven by an increase in operating expenses and net interest margin compression.

The decrease in non-interest income was partially offset by an increase in net interest income driven by growth in average loans and leases outstanding.

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.

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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

For the Three Months Ended March 31,

2024 2023 $ Change % Change

(Dollars in Thousands)

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SBA recourse provision 126 (18) 144 NM

Tax credit investment impairment recovery — — — NM — (351) 351 NM

Total operating expense (a) $ 23,130 $ 21,779 $ 1,351 6.2

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Total non-interest income 6,757 8,410 (1,653) (19.7)

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

Net loss on sale of securities (8) — (8) NM

Adjusted non-interest income 6,765 8,410 (1,645) (19.6)

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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

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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.

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 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 months ended March 31, 2024 compared to the same period in 2023.

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

Increase (Decrease) for the Three Months Ended March 31,

2024 Compared to 2023

Rate Volume Net

(In Thousands)

5 unchanged sentences

Consumer and other loans (1)

168 (26) 142 448 (72) 376

Total loans and leases receivable 4,577 7,158 11,735

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Other borrowings 73 177 250

Junior subordinated notes (2)

— — — (504) — (504)

Total net change in expense on interest-bearing liabilities

2 unchanged sentences

(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.

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,

Balance Interest Average

Yield/Rate (4)

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)

Return on average equity (4)

Average equity to average assets 8.49 9.25

Non-interest expense to average assets (4)

(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.

For the Nine Months Ended September 30,

For the Three Months Ended March 31,

Balance Interest Average

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Other borrowings 49,457 718 5.81 36,794 468 5.09

Junior subordinated notes (5)

— — — 3,247 504 20.69

Total interest-bearing liabilities 2,697,337 26,272 3.90 2,125,519 15,359 2.89

22 unchanged sentences

(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.

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.

The table below displays the beta calculations for loans and leases, total interest earning assets, core deposits, interest-bearing deposits and total interest-bearing liabilities for the three months ended March 31, 2024 and 2023.

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

For the Three Months Ended March 31,

Asset and Liability Beta Analysis Average Yield/Rate (4)

Increase (Decrease) Average Yield/Rate (3)

Increase (Decrease)

7 unchanged sentences

6.68 % 5.99 % 0.69 %

Total in-market deposits (e)

Total core deposits (e)

3.28 % 2.09 % 1.19 %

9 unchanged sentences

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 core deposits (e)/(i)

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 unchanged sentences

(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.

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.

Comparison of Net Interest Income for the Three Months Ended March 31, 2024 and 2023

Net interest income increased $2.8 million, or 10.5%, during the three months ended March 31, 2024, compared to the three months ended March 31, 2023.

The increase in net interest income reflected an increase in average gross loans and leases and fees in lieu of interest, partially offset by net interest margin compression.

Fees in lieu of interest, which vary from quarter to quarter, totaled $793,000 for the three months ended March 31, 2024, compared to $651,000 for the same period in 2023.

Excluding fees in lieu of interest, net interest income for the three months ended March 31, 2024 increased $2.7 million, or 10.2%.

Average gross loans and leases for the three months ended March 31, 2024 increased $406.3 million, or 16.4%, compared to the three months ended March 31, 2023.

The yield on average loans and leases for the three months ended March 31, 2024 was 7.14%, compared to 6.42% for the three months ended March 31, 2023.

Excluding the impact of loan fees in lieu of interest, the yield on average loans and leases for the three months ended March 31, 2024 was 7.03%, compared to 6.31% for the three months ended March 31, 2023.

The yield on average interest-earning assets for the three months ended March 31, 2024 measured 6.77%, compared to 6.09% for the three months ended March 31, 2023.

Excluding loan fees in lieu of interest, the yield on average interest-earning assets for the three months ended March 31, 2024 was 6.68%, compared to 5.99% for the three months ended March 31, 2023.

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 50 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.

The daily average effective federal funds rate for the three months ended March 31, 2024 increased 82 basis points, compared to the same period in 2023.

This equates to an interest-earning asset beta of 83.83%, for the three months ended March 31, 2024.

The rate paid on average interest-bearing core deposits for the three months ended March 31, 2024 increased to 4.04%, from 2.78% for the three months ended March 31, 2023.

The average rate paid on total interest-bearing liabilities for the three months ended March 31, 2024 increased to 3.90%, from 2.89% for the three months ended March 31, 2023.

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.

The average rates paid increased due to the increase in short-term market rates, the replacement of maturing wholesale funds at higher fixed rates, and client movement from non-interest bearing to interest bearing core deposit products.

This equates to an interest-bearing liability beta of 122.63%, for the three months ended March 31, 2024.

Net interest margin decreased to 3.58% for the three months ended March 31, 2024, compared to 3.86% for the three months ended March 31, 2023.

The primary driver of the reduction in net interest margin was increased funding costs, partially offset by an increase in earning asset yields.

Adjusted net interest margin measured 3.43% for the three months ended March 31, 2024, compared to 3.74% for the three months ended March 31, 2023.

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.

Management believes its success in growing core 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%.

Management believes net interest margin is nearing a floor.

In the current interest rate environment, we expect net interest margin will approach our previous long-term target of 3.50%.

Over time, we expect our net interest margin to increase towards our new long-term target range of 3.60% to 3.65%.

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.

We determine our provision for credit losses pursuant to our allowance for credit loss methodology.

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.

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

The Corporation recognized $2.3 million of provision expense for the three months ended March 31, 2024 compared to expense of $1.6 million for the three months ended March 31, 2023.

The provision expense for the three months ended March 31, 2024 consisted of a $740,000 increase due to qualitative factors, net charge-offs of $694,000, a $629,000 increase in specific reserves, and an increase of $354,000 related to loan growth;

partially offset by a $199,000 benefit due to the improved economic outlook in our model forecast.

The increase in qualitative factors was driven primarily by higher-than-target growth in several loan portfolios.

Similar to the second half of 2023, the additional specific reserves and charge-offs were primarily related to defaults by transportation and logistics borrowers in our Equipment Finance loan portfolio, which management believes is consistent with the cyclical nature of this industry.

The Company expects continued stress within this group of borrowers in 2024.

The following table shows the components of the provision for credit losses for the three months ended March 31, 2024 compared to the same periods in 2023.

For the Three Months Ended March 31,

(In Thousands)

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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

Comparison of Non-Interest Income for the Three Months Ended March 31, 2024 and 2023

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.

Non-interest income decreased $1.7 million, or 19.7%, to $6.8 million for the three months ended March 31, 2024 compared to $8.4 million for the same period in 2023.

The decrease in total non-interest income for the three months ended March 31, 2024 was due to decreases in mezzanine fund investment income, commercial loan swap fee income, and gains on sale of SBA loans, partially offset by an increase in Private Wealth fee income 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.

Contribution from fee-based revenue sources can be variable and driven by changes in the interest rate environment, client activity, and the value of underlying investments.

Total non-interest income accounted for 18.6% of total revenues for the three months ended March 31, 2024, compared to 23.9% for the three months ended March 31, 2023.

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

For the Three Months Ended March 31,

2024 2023 $ Change % Change

(Dollars in Thousands)

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412 366 46 12.6

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

Net loss on sale of securities (8) — (8) NM

Swap fees 198 557 (359) (64.5)

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(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.

Private Wealth fee income increased $457,000, or 17.2%, for the three months ended March 31, 2024, compared to the same period in 2023.

Private Wealth 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 March 31, 2024, private wealth and trust assets under m anagement and administration totaled $3.320 billion , increasing $516.1 million , or 18.4%, compared to $2.804 billion as of March 31, 2023, as an increase in market values was bolstered by new client relationships and new money from existing clients.

Other non-interest income decreased $1.8 million, or 63.0%, for the three months ended March 31, 2024, compared to the same period in 2023.

The decrease for the three months ended March 31, 2024, was primarily due to the timing of returns from the Corporation’s investments in mezzanine funds.

Commercial loan interest rate swap fee income decreased $359,000, or 64.5%, for the three months ended March 31, 2024, compared to the same period in 2023.

We originate commercial real estate loans in which we offer clients a floating rate and an interest rate swap.

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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.

The aggregate amortizing notional value of interest rate swaps with various borrowers was $938.7 million as of March 31, 2024, compared to $939.2 million and $787.8 million as of December 31, 2023 and March 31, 2023,

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.

Gain on sale of SBA loans decreased $281,000, or 59.0%, for the three months ended March 31, 2024, compared to the same period in 2023.

Management expects the SBA loan sales pipeline to build throughout the year as production increases and previously closed commitments fully fund and become eligible for sale.

Service charges on deposits increased $258,000, or 37.8%, for the three months ended March 31, 2024, compared to the same period in 2023, driven by new and expanded core deposit relationships.

Treasury management business development efforts remain robust as gross treasury management service charges increased $130,000, or 9.2% for the three months ended March 31, 2024, compared to the same period in 2023.

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

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

Comparison of Non-Interest Expense for the Three Months Ended March 31, 2024 and 2023

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.

Non-interest expense for the three months ended March 31, 2024 increased by $1.6 million, or 7.2%, compared to the same period in 2023.

Operating expense, which excludes certain one-time and discrete items as defined in the Efficiency Ratio table above, increased $1.4 million, or 6.2%, for the three months ended March 31, 2024, compared to the same period in 2023.

The increase in operating expense was primarily due to an increase in most major categories.

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

For the Three Months Ended March 31,

2024 2023 $ Change % Change

(Dollars in Thousands)

14 unchanged sentences

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.

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 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.

Compensation expense for the three months ended March 31, 2024 increased $249,000, or 1.6%, compared to the three months ended March 31, 2023.

The increase in compensation expense was primarily due to an increase in average FTEs and annual merit increases and promotions.

These increases were partially offset by a decrease in incentive compensation due to relatively lower production and a decrease in 401k expense.

Excluding incentive compensation and 401k expense, which can vary, compensation for the three months ended March 31, 2024 increased $761,000, or 5.5%, compared to the three months ended March 31, 2023 which is more in line with our recent annual market and merit increases.

Successful hiring efforts to secure talent resulted in average full-time equivalent employees for the three months ended March 31, 2024 increasing to 346, up 1.8%, compared to 340 for the three months ended March 31, 2023.

Computer software expense increased $235,000, or 19.9%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023.

The increase was primarily due to continued investment in technology to support the Company’s growth initiatives.

Professional fees increased $228,000, or 17.0%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023.

The increase was primarily due to an increase in recruiting expense and an increase in other professional consulting services for various projects.

FDIC insurance for the three months ended March 31, 2024 increased $216,000, or 54.8%, compared to the three months ended March 31, 2023.

The increase was primarily due to asset growth 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.

Marketing expense increased $190,000, or 30.3%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023.

The increase was primarily due to an increase in business development efforts and advertising projects commensurate with the Company’s growth initiatives.

Data processing increased $143,000, or 16.3%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily due to an increase in core processing costs commensurate with loan and deposit account growth, private wealth and trust asset growth, and various project implementations.

Other non-interest expense for the three months ended March 31, 2024 increased $288,000, or 56.5%, compared to the three months ended March 31, 2023.

The increase was primarily due to an increase in SBA recourse provision, travel expenses, and other loan related costs, partially offset by a decrease in liquidation expenses.

Income tax expense totaled $1.8 million for the three months ended March 31, 2024 compared to $2.8 million for the three months ended March 31, 2023.

Income tax expense included a $376,000 net benefit from tax credit investments, compared to a $149,000 benefit in the prior year period.

The effective tax rate, including the benefit from Low-Income Housing Tax Credits, for the three months ended March 31, 2024 was 16.5% compared to 23.8% for the same period in 2023.

The Corporation expects to report an effective tax rate between 17% and 19% 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.

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Financial Condition

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.

Total assets increased by $23.5 million, or 0.7%, to $3.531 billion as of March 31, 2024 compared to $3.508 billion at December 31, 2023.

The increase in total assets was primarily driven by an increase in loans and leases receivable and available-for-sale securities, partially offset by a reduction in short-term investments.

Total liabilities increased by $15.3 million, or 0.5%, to $3.234 billion at March 31, 2024 compared to $3.218 billion at December 31, 2023.

The increase in total liabilities was principally due to an increase in FHLB advances partially offset by a reduction in deposits.

Total stockholders’ equity increased by $8.2 million, or 2.8%, to $297.8 million at March 31, 2024 compared to $289.6 million at December 31, 2023.

The increase in total stockholders’ equity was due to retention of earnings and unrealized gains on interest rate swaps, partially offset by dividends paid to common and preferred stockholders and unrealized losses on available-for-sale securities.

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.

Cash and due from banks decreased $7.3 million to $25.1 million at March 31, 2024 from $32.3 million at December 31, 2023.

Short-term investments decreased by $60.2 million to $47.0 million at March 31, 2024 from $107.2 million at December 31, 2023.

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.

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.

As of March 31, 2024 and December 31, 2023, interest-bearing deposits held at the FRB were $46.6 million and $106.8 million, respectively.

Total securities, including available-for-sale and held-to-maturity, increased by $16.7 million, or 5.5%, to $322.2 million, or 9.1% of total assets at March 31, 2024 compared to $305.5 million, or 8.7% of total assets at December 31, 2023.

During the three months ended March 31, 2024 the Corporation recognized unrealized losses of $2.9 million before income taxes through other comprehensive income, compared to unrealized gains of $3.8 million for the same period in 2023.

The unrealized losses in the current period were driven by the increase in interest rates.

As of March 31, 2024 and December 31, 2023, 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 5.6 years, respectively.

Our investment philosophy remains as stated in our most recent Annual Report on Form 10-K.

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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.

We did not recognize any credit losses in the securities portfolio as of March 31, 2024.

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.

Period-end loans and leases receivable, net of allowance for credit losses, increased by $59.1 million, or 8.4% annualized to $2.878 billion at March 31, 2024 from $2.819 billion at December 31, 2023 primarily driven by commercial loan growth.

Management expects to manage loan growth towards our long term target of 10%.

C&I loans increased $14.9 million, or 5.6% annualized, to $1.121 billion.

The increase was due to growth in traditional commercial lending, Equipment Finance, and Floorplan Financing products.

Total commercial real estate (“CRE”) loans increased $39.9 million, or 9.4% annualized, to $1.740 billion.

The increase was primarily due to an increase in non-owner occupied CRE and owner occupied CRE in our Wisconsin markets.

CRE loans represented 59.8% and 59.6% of our total loans as of March 31, 2024 and December 31, 2023, respectively.

As of March 31, 2024, 15.2% of the CRE loans were owner-occupied CRE, compared to 15.1% as of December 31, 2023.

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.

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 core deposit, treasury management, and private wealth management relationships which generate additional fee revenue.

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.

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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.

Deposit composition

(in thousands) September 30,

2023 June 30,

2023 March 31,

The following table presents information concerning the composition of the Bank’s consolidated loans and leases receivable.

As of March 31, As of December 31,

Amount Outstanding % of Total Loans and Leases Amount Outstanding % of Total Loans and Leases

(Dollars in Thousands)

Commercial real estate:

Commercial real estate — owner occupied $ 263,748 9.1 % $ 256,479 9.0 %

Commercial real estate — non-owner occupied 792,858 27.2 773,494 27.1

Construction 202,382 7.0 193,080 6.8

Multi-family 453,321 15.6 450,529 15.8

1-4 family 27,482 0.9 26,289 0.9

Total commercial real estate 1,739,791 59.8 1,699,871 59.6

Commercial and industrial 1,120,779 38.5 1,105,835 38.8

Consumer and other 50,020 1.7 44,312 1.6

Total gross loans and leases receivable 2,910,590 100.0 % 2,850,018 100.0 %

Allowance for credit losses 32,799 31,275

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

Loans and leases receivable, net $ 2,878,065 $ 2,818,986

Below is a view of selected loan portfolios disaggregated by North American Industry Classification (“NAICs”) code as of March 31, 2024:

Real Estate Wholesale and Manufacturing Retail and Hospitality Transportation and Warehousing Other Total

Commercial real estate — owner occupied 5% 28% 18% 10% 39% 100%

Commercial real estate — non-owner occupied 71% (1)

1% 11% —% 17% 100%

Commercial and industrial 3% 34% 16% 12% 35% 100%

( 1) Includes approximately $285 million of office real estate, or 9.8% of gross loans.

See Asset Quality for further discussion of industry-specific risks.

De posit composition

(in thousands) March 31,

2024 December 31,

2023 September 30,

2023 June 30,

2023 March 31,

Non-interest-bearing transaction accounts

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% of total deposits 35.5 % 35.0 % 33.4 % 32.8 % 38.0 %

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.

As of March 31, 2024, total period-end deposits decreased by $41.4 million to $2.755 billion from $2.797 billion at December 31, 2023, primarily due to decreases of $77.2 million, $45.1 million, and $21.1 million in interest bearing transaction accounts, non-interest bearing transaction accounts, and certificate of deposit accounts, respectively.

These decreases were partially offset by a $102.2 million increase in money market accounts.

As of March 31, 2024, total period-end core deposits decreased $41.2 million, or 7.0% annualized, to $2.298 billion, compared to $2.339 billion at December 31, 2023.

The decline in period-end balances is due to the delayed receipt of a significant core deposit which typically occurs near the end of the month.

Including this recurring deposit inflow received by the Bank on April 1, period-end core deposits increased $24.2 million, or 4.1% annualized.

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.

however, period-end deposit balances associated with core 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.

Therefore, we believe average balances are a better indicator of our deposit growth.

Our strategic efforts remain focused on adding core deposit relationships.

We measure the success of core 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 core deposits, consisting of all transaction accounts, money market accounts, and certificates of deposit, increased $345.9 million, or 17.3%, to $2.346 billion for the three months ended March 31, 2024 compared to $2.001 billion for the three months ended March 31, 2023.

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.

As of March 31, 2024, FHLB advances and other borrowings increased by $50.8 million, or 15.4%, to $381.7 million from $330.9 million at December 31, 2023.

The increase reflects the temporary funding need due to the delayed recurring core deposit inflow the Bank did not receive until April 1.

As average 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 accessible 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.

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

Consistent with our funding philosophy to manage interest rate risk, we will use the most efficient and cost effective source of wholesale funds.

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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.

During the three months ended March 31, 2024, the Corporation paid $219,000, in preferred cash dividends with respect to the Series A Preferred Stock.

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

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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.

As of March 31, 2024, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was approximately $938.7 million, compared to $939.2 million as of December 31, 2023.

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.

These swaps mature between May 2024 and July 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.

As of March 31, 2024, the commercial borrower swaps were reported on the Consolidated Balance Sheet as a derivative asset of $2.8 million and liability of $61.1 million compared to a derivative asset of $7.9 million and liability of $51.1 million as of December 31, 2023.

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.

These interest rate swaps also have maturity dates between May 2024 and July 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 $58.4 million as of March 31, 2024, compared to a net derivative asset of $43.2 million as of December 31, 2023.

The gross amount of dealer counterparty swaps as of March 31, 2024, without regard to the enforceable master netting agreement, was a gross derivative asset of $61.1 million, compared to a gross derivative liability of $7.9 million and gross derivative asset of $51.1 million as of December 31, 2023.

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.

As of March 31, 2024, the aggregate notional value of interest rate swaps designated as cash flow hedges was $394.7 million.

These interest rate swaps mature between July 2024 and October 2034.

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 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.

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As of September 30, 2023, the aggregate notional value of interest rate swaps designated as fair value hedges was $12.5 million.

As of March 31, 2024, 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.

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.

For further information and discussion of our derivatives, see Note 13 — Derivative Financial Instruments of the Consolidated Financial Statements.

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Non-performing Assets

Total non-performing assets consisted of the following at September 30, 2023 and December 31, 2022, respectively:

September 30,

Total non-performing assets consisted of the following at March 31, 2024 and December 31, 2023, respectively:

2024 December 31,

(Dollars in Thousands)

Non-performing loans and leases

Non-accrual loans and leases

Commercial real estate:

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Consumer and other — —

Total non-performing loans and leases 17,628 3,659

Total non-accrual loans and leases

19,829 20,597

Repossessed assets, net 317 247

Total non-performing assets $ 20,146 $ 20,844

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

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

0.68 % 0.72 %

Total non-performing assets to gross loans and leases plus repossessed assets, net 0.69 0.73

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Allowance for credit losses to gross loans and leases 1.19 1.16

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.

Allowance for credit losses to non-accrual loans and leases

174.64 160.21

Non-performing loans decreased $768,000, to $19.8 million at March 31, 2024, compared to $20.6 million at December 31, 2023.

The Corporation’s non-accrual loans as a percentage of total gross loans and leases measured 0.68% and 0.72% at March 31, 2024 and December 31, 2023, respectively.

The change in non-performing assets was driven by charge-offs in the Equipment Finance pool and a paydown in the Asset-Based Lending (ABL) pool within the C&I portfolio segment.

We continue to expect full repayment related to the $7.5 million ABL loan that defaulted in 2023.

Excluding this credit, non-performing assets totaled $12.7 million, or 0.36% of total assets in the current quarter and $12.0 million, or 0.34% 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.

The recent 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.

Non-performing assets as a percentage of total assets was 0.57% and 0.59% at March 31, 2024 and December 31, 2023, respectively.

As of March 31, 2024 and December 31, 2023, the payment performance of our loans and leases did not point to any new areas of concern, as approximately 99.3% and 99.2%, respectively, of the total portfolio at the end of each period was in a current payment status.

We reviewed loans and leases with exposure to certain industries:

• Transportation and Logistics, Equipment Finance - 2% of total loans - Management considered the following:

9% of Equipment Finance Transportation loans are rated Category IV and defaults from these borrowers are driving an increase in charge-offs and new reserves.

Based on our reserve methodology for individually and collectively evaluated loans, we believe our reserves related to this industry to be appropriate

• Transportation and Logistics, other than Equipment Finance - 3% of total loans - Management considered the following:

Less than 1% of the Transportation loans outside of Equipment Finance are rated Category IV.

Collateral on these loans includes commercial real estate, business assets, and equipment.

Based on these and other borrower-specific considerations, no additional reserve requirements were identified.

• Office, Commercial Real Estate - 10% of total loans - Management considered the following:

office exposure is concentrated in the Wisconsin markets where local market vacancy rates are below national rates, a majority of the loan maturity dates are beyond 2031 with the borrower paying a fixed rate, either directly or through an interest rate swap, and there are no non-performing loans in the portfolio.

Based on these and other borrower-specific considerations, no additional reserve requirements were identified.

• Multifamily, Commercial Real Estate - 16% of total loans - Management considered the following:

multifamily exposure is concentrated in the Wisconsin markets where local market vacancy rates are below national rates, a majority of the loan maturity dates are beyond 2029 with the borrower paying a fixed rate, either directly or through an interest rate swap, and there are no non-performing loans in the portfolio.

Based on these and other borrower-specific considerations, no additional reserve requirements were identified.

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.

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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.

As of March 31, 2024, 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

against the outstanding principal.

Cash received while a loan or a lease is on non-accrual status is generally applied solely 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

The following represents additional information regarding our non-accrual loans and leases:

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

Year Ended December 31,

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Specific reserves (included in allowance for credit losses) 6,618 1,622 5,990

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

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)

Net non-accrual loans and leases

$ 13,211 $ 1,790 $ 14,607

Average non-accrual loans and leases

$ 20,541 $ 3,536 $ 10,450

Foregone interest income attributable to non-accrual loans and leases

$ 591 $ 78 $ 1,431

Interest income recognized on non-accrual loans and leases

Net foregone interest income on non-accrual loans and leases

$ 420 $ 38 $ 1,165

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.

The allowance for credit losses, including unfunded commitment reserves, increased $1.6 million, or 5.2%, to $34.6 million as of March 31, 2024 from $33.0 million as of December 31, 2023.

The allowance for credit losses as a percentage of gross loans and leases increased to 1.19% as of March 31, 2024 from 1.16% as of December 31, 2023.

During the three months ended March 31, 2024, we recorded net charge-offs on individually evaluated loans and leases of $694,000, comprised of $921,000 of charge-offs and $227,000 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 of March 31, 2024 and December 31, 2023, our ratio of allowance for credit losses to total non-accrual loans and leases was 174.64% and 160.21% , respectively.

This ratio increased because of paydowns on non-accrual loans and an increase in general reserves .

Non-accrual loans and leases exhibit weaknesses that inhibit repayment in compliance with the original terms of the note or lease;

however, the evaluation of non-accrual 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.

As a result of this practice, a significant portion of our outstanding balance of non-accrual 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.

This practice may lead to a lower allowance for credit loss to non-accrual 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.

Conversely, if we identify further non-accrual loans, this ratio could fall if the non-accrual loans are adequately collateralized and therefore require no specific or general reserve.

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.

First, we evaluate loans and leases for non-accrual classification.

We analyze each loan and lease identified as non-accrual 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.

Accruing loans may be evaluated individually.

All loans not evaluated individually are evaluated collectively as part of a portfolio segment or portfolio segment and class.

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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:

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.

It is typically part of our process to obtain appraisals on individually evaluated 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 collateral-dependent 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 loan and lease portfolio was $34.6 million, or 1.19% of gross loans and leases, at March 31, 2024.

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.

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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

As of and for the Three Months Ended March 31,

(Dollars in Thousands)

22 unchanged sentences

Allowance at end of period $ 34,629 $ 27,550

Allowance for loan losses $ 29,331 $ 24,143 $ 29,331 $ 24,143

Allowance for unfunded credit commitments 1,705 — 1,705 —

Allowance for credit losses on loans

$ 32,799 $ 26,140

Allowance for credit losses on unfunded credit commitments

Total ACL $ 34,629 $ 27,550

3 unchanged sentences

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 principal liquidity requirements at March 31, 2024 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 March 31, 2024, 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.

4 unchanged sentences

Sources of liquidity

(in thousands) September 30,

2023 June 30,

2023 March 31,

(in thousands) March 31,

2024 December 31,

2023 September 30,

2023 June 30,

2023 March 31,

Short-term investments $ 46,984 $ 107,162 $ 109,612 $ 80,510 $ 159,859

1 unchanged sentence

Market value of unencumbered securities 288,965 259,791 236,618 217,074 200,332

Readily available liquidity 661,297 563,468 656,584 449,639 549,233

Readily accessible liquidity

676,588 734,424 661,297 563,468 656,584

Fed fund lines 45,000 45,000 45,000 45,000 45,000

6 unchanged sentences

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.

Our readily accessible liquidity decreased quarter over quarter.

At March 31, 2024 and December 31, 2023, the Bank had $46.6 million and $106.8 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.

We had $789.8 million of outstanding wholesale funds at March 31, 2024, compared to $739.2 million of wholesale funds as of December 31, 2023, which represented 25.6% and 24.0%, 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.

We are committed to raising core deposits while utilizing wholesale funds to mitigate interest rate risk.

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.

3 unchanged sentences

The short-term FHLB advances will typically have terms of one week to one month to cover the overall expected funding demands.

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.

Period-end core deposits decreased $41.2 million as of March 31, 2024, compared to December 31, 2023.

The decrease was primarily due to decreases of $77.2 million, $45.1 million, and $21.1 million in interest bearing transaction accounts, non-interest bearing transaction accounts, and certificate of deposit accounts, respectively.

These decreases were partially offset by a $102.2 million increase in money market accounts.

The decline in period-end balances is due to the delayed receipt of a significant core deposit which typically occurs near the end of the month.

Including this recurring deposit inflow received by the Bank on April 1, period-end core deposits increased $24.2 million .

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 core 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 core 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.

The Bank was in compliance with its policy limits as of March 31, 2024.

The Bank was able to access the wholesale funding market as needed at rates and terms comparable to market standards during the quarter ended March 31, 2024.

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.

As of March 31, 2024, the accessible 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.

1 unchanged sentence

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.

During the three months ended March 31, 2024, operating activities resulted in a net cash inflow of $8.7 million, which included net income of $8.8 million.

Net cash used by investing activities for the three months ended March 31, 2024 was $82.7 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 $6.6 million for the three months ended March 31, 2024 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.

As of March 31, 2024, 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, 2023.

We continue to believe that we have adequate capital and liquidity accessible from various sources to fund projected contractual obligations and commitments.

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 2. Management’s Discussion and Analysis