~~0001521951fbiz:AssetDerivativesMemberus-gaap:DesignatedAsHedgingInstrumentMemberfbiz:InterestRateSwapRelatedToFHLBBorrowingsMember2022-01-012022-06-30~~0001521951us-gaap:FairValueInputsLevel1Memberus-gaap:InterestRateSwapMember2021-12-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☑						Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended ~~June~~September 30, 2022


☐						Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 001-34095

FIRST BUSINESS FINANCIAL SERVICES, INC.

(Exact name of registrant as specified in its charter)


Wisconsin						39-1576570

(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)


401 Charmany Drive		53719
Madison	Wisconsin
(Address of Principal Executive Offices)		(Zip Code)

(608) 238-8008

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

FBIZ

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

☑

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ

The number of shares outstanding of the registrant’s sole class of common stock, par value $0.01 per share, on ~~July 24,~~October 26, 2022 was ~~8,475,953~~8,431,235 shares.

Table of Contents

FIRST BUSINESS FINANCIAL SERVICES, INC.

INDEX — FORM 10-Q


PART I. Financial Information			1
Item 1. Financial Statements			1
Consolidated Balance Sheets (Unaudited)			1
Consolidated Statements of Income (Unaudited)			2
Consolidated Statements of Comprehensive Income (Unaudited)			34
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)			45
Consolidated Statements of Cash Flows (Unaudited)			67
Notes to Unaudited Consolidated Financial Statements			89
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			4243
Item 3. Quantitative and Qualitative Disclosures about Market Risk			6566
Item 4. Controls and Procedures			6566
PART II. Other Information			6566
Item 1. Legal Proceedings			6566
Item 1A. Risk Factors			6567
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			6667
Item 3. Defaults Upon Senior Securities			1
Item 4. Mine Safety Disclosures			1
Item 5. Other Information			1
Item 6. Exhibits			6667
Signatures			6768

Table of Contents

PART I. Financial Information

Item 1. Financial Statements

First Business Financial Services, Inc.

Consolidated Balance Sheets


			June 30, 2022		December 31, 2021				September 30, 2022		December 31, 2021
			(Unaudited)						(Unaudited)
		(In Thousands, Except Share Data)						(In Thousands, Except Share Data)
Assets	Assets						Assets
Cash and due from banks	Cash and due from banks		$	39,251	$	9,697	Cash and due from banks		$	24,258	$	9,697
Short-term investments	Short-term investments		56,233		47,413		Short-term investments		86,707		47,413
Cash and cash equivalents	Cash and cash equivalents		95,484		57,110		Cash and cash equivalents		110,965		57,110
Securities available-for-sale, at fair value	Securities available-for-sale, at fair value		208,643		205,702		Securities available-for-sale, at fair value		196,566		205,702
Securities held-to-maturity, at amortized cost	Securities held-to-maturity, at amortized cost		13,968		19,746		Securities held-to-maturity, at amortized cost		13,531		19,746
Loans held for sale	Loans held for sale		2,256		3,570		Loans held for sale		773		3,570
Loans and leases receivable, net of allowance for loan and lease losses of $24,104 and $24,336, respectively			2,265,996		2,215,072
Loans and leases receivable, net of allowance for loan and lease losses of $24,143 and $24,336, respectively							Loans and leases receivable, net of allowance for loan and lease losses of $24,143 and $24,336, respectively		2,306,557		2,215,072
Premises and equipment, net	Premises and equipment, net		1,899		1,694		Premises and equipment, net		3,143		1,694
Foreclosed properties	Foreclosed properties		124		164		Foreclosed properties		151		164
Right-of-use assets, net	Right-of-use assets, net		5,772		4,910		Right-of-use assets, net		5,424		4,910
Bank-owned life insurance	Bank-owned life insurance		54,324		53,600		Bank-owned life insurance		54,683		53,600
Federal Home Loan Bank stock, at cost	Federal Home Loan Bank stock, at cost		22,959		13,336		Federal Home Loan Bank stock, at cost		15,701		13,336
Goodwill and other intangible assets	Goodwill and other intangible assets		12,262		12,268		Goodwill and other intangible assets		12,218		12,268
Derivatives	Derivatives		44,461		26,343		Derivatives		73,718		26,343
Accrued interest receivable and other assets	Accrued interest receivable and other assets		48,868		39,390		Accrued interest receivable and other assets		57,372		39,390
Total assets	Total assets		$	2,777,016	$	2,652,905	Total assets		$	2,850,802	$	2,652,905
Liabilities and Stockholders’ Equity	Liabilities and Stockholders’ Equity						Liabilities and Stockholders’ Equity
Deposits	Deposits		$	1,869,331	$	1,957,923	Deposits		$	2,087,545	$	1,957,923
Federal Home Loan Bank advances and other borrowings	Federal Home Loan Bank advances and other borrowings		596,642		403,451		Federal Home Loan Bank advances and other borrowings		420,297		403,451
Junior subordinated notes	Junior subordinated notes		—		10,076		Junior subordinated notes		—		10,076
Lease liabilities	Lease liabilities		7,207		5,406		Lease liabilities		6,827		5,406
Derivatives	Derivatives		40,357		28,283		Derivatives		66,162		28,283
Accrued interest payable and other liabilities	Accrued interest payable and other liabilities		13,556		15,344		Accrued interest payable and other liabilities		16,967		15,344
Total liabilities	Total liabilities		2,527,093		2,420,483		Total liabilities		2,597,798		2,420,483

Stockholders’ equity:	Stockholders’ equity:						Stockholders’ equity:
Preferred stock, Series A; $0.01 par value, 7% non-cumulative perpetual preferred stock liquidation preference $1,000 per share, 2,500,000 shares authorized, 12,500 and no shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively			11,992		—
Common stock, $0.01 par value, 25,000,000 shares authorized, 9,367,337 and 9,326,361 shares issued, 8,474,699 and 8,457,564 shares outstanding at June 30, 2022 and December 31, 2021, respectively			94		93
Preferred stock, Series A; $0.01 par value, 7% non-cumulative perpetual preferred stock liquidation preference $1,000 per share, 2,500,000 shares authorized, 12,500 and no shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively							Preferred stock, Series A; $0.01 par value, 7% non-cumulative perpetual preferred stock liquidation preference $1,000 per share, 2,500,000 shares authorized, 12,500 and no shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively		11,992		—
Common stock, $0.01 par value, 25,000,000 shares authorized, 9,370,888 and 9,326,361 shares issued, 8,432,048 and 8,457,564 shares outstanding at September 30, 2022 and December 31, 2021, respectively							Common stock, $0.01 par value, 25,000,000 shares authorized, 9,370,888 and 9,326,361 shares issued, 8,432,048 and 8,457,564 shares outstanding at September 30, 2022 and December 31, 2021, respectively		94		93
Additional paid-in capital	Additional paid-in capital		86,123		85,797		Additional paid-in capital		86,803		85,797
Retained earnings	Retained earnings		186,302		170,020		Retained earnings		195,235		170,020
Accumulated other comprehensive loss	Accumulated other comprehensive loss		(11,588)		(1,457)		Accumulated other comprehensive loss		(16,588)		(1,457)
Treasury stock, 892,638 and 868,797 shares at June 30, 2022 and December 31, 2021, respectively, at cost			(23,000)		(22,031)
Treasury stock, 938,840 and 868,797 shares at September 30, 2022 and December 31, 2021, respectively, at cost							Treasury stock, 938,840 and 868,797 shares at September 30, 2022 and December 31, 2021, respectively, at cost		(24,532)		(22,031)
Total stockholders’ equity	Total stockholders’ equity		249,923		232,422		Total stockholders’ equity		253,004		232,422
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity		$	2,777,016	$	2,652,905	Total liabilities and stockholders’ equity		$	2,850,802	$	2,652,905

Table of Contents

See accompanying Notes to Unaudited Consolidated Financial Statements.

~~Table of Contents~~

First Business Financial Services, Inc.

Consolidated Statements of Income (Unaudited)
For the Three Months Ended June 30, For the Six Months Ended June 30,
2022 2021 2022 2021
(In Thousands, Except Per Share Data)
Interest income
Loans and leases $ 25,687 $ 23,591 $ 48,759 $ 46,386
Securities 1,064 816 2,039 1,669
Short-term investments 280 192 468 351
Total interest income 27,031 24,599 51,266 48,406
Interest expense
Deposits 1,058 943 1,824 1,962
Federal Home Loan Bank advances and other borrowings 2,313 1,727 3,851 3,377
Junior subordinated notes — 277 504 552
Total interest expense 3,371 2,947 6,179 5,891
Net interest income 23,660 21,652 45,087 42,515
Provision for loan and lease losses (3,727) (958) (4,582) (3,026)
Net interest income after provision for loan and lease losses 27,387 22,610 49,669 45,541
Non-interest income
Private wealth management service fees 2,852 2,744 5,693 5,151
Gain on sale of Small Business Administration loans 951 1,203 1,537 2,281
Service charges on deposits 1,041 941 2,040 1,859
Loan fees 697 569 1,349 1,114
Increase in cash surrender value of bank-owned life insurance 350 350 698 699
Net gain on sale of securities — 29 — 29
Swap fees 471 — 697 684
Other non-interest income 510 485 2,244 1,699
Total non-interest income 6,872 6,321 14,258 13,516
Non-interest expense
Compensation 14,020 13,255 27,658 25,912
Occupancy 568 533 1,123 1,085
Professional fees 1,298 913 2,468 1,778
Data processing 892 798 1,673 1,569
Marketing 670 511 1,170 902
Equipment 235 261 479 506
Computer software 1,117 1,129 2,199 2,244
FDIC insurance 296 280 610 642
Other non-interest expense 360 504 900 876
Total non-interest expense 19,456 18,184 38,280 35,514
Income before income tax expense 14,803 10,747 25,647 23,543
Income tax expense 3,599 2,512 5,771 5,577
Net income 11,204 8,235 19,876 17,966
Preferred stock dividend 246 — 246 —
Net income available to common shareholders $ 10,958 $ 8,235 $ 19,630 $ 17,966
Earnings per common share
Basic $ 1.29 $ 0.95 $ 2.31 $ 2.08
Diluted 1.29 0.95 2.31 2.08
Dividends declared per share 0.1975 0.18 0.395 0.36

~~See accompanying Notes to Unaudited Consolidated Financial Statements.~~


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
	(In Thousands, Except Per Share Data)
Interest income
Loans and leases	$	30,174	$	22,947	$	78,934	$	69,333
Securities	1,165		855		3,204		2,524
Short-term investments	447		212		915		563
Total interest income	31,786		24,014		83,053		72,420
Interest expense
Deposits	3,181		834		5,005		2,796
Federal Home Loan Bank advances and other borrowings	2,721		1,677		6,573		5,054
Junior subordinated notes	—		280		504		832
Total interest expense	5,902		2,791		12,082		8,682
Net interest income	25,884		21,223		70,971		63,738
Provision for loan and lease losses	12		(2,269)		(4,569)		(5,295)
Net interest income after provision for loan and lease losses	25,872		23,492		75,540		69,033
Non-interest income
Private wealth management service fees	2,618		2,759		8,311		7,910
Gain on sale of Small Business Administration loans	732		721		2,269		3,002

Service charges on deposits	1,018		956		3,058		2,814
Loan fees	814		713		2,163		1,828
Increase in cash surrender value of bank-owned life insurance	359		357		1,057		1,056
Net gain on sale of securities	—		—		—		29
Swap fees	341		—		1,038		684
Other non-interest income	2,315		1,509		4,559		3,208
Total non-interest income	8,197		7,015		22,455		20,531
Non-interest expense
Compensation	14,817		13,351		42,475		39,263
Occupancy	566		544		1,689		1,628
Professional fees	1,203		1,024		3,671		2,803
Data processing	719		746		2,391		2,315
Marketing	543		572		1,713		1,474
Equipment	253		260		732		767
Computer software	1,128		999		3,327		3,244
FDIC insurance	230		291		840		933





Other non-interest expense	569		703		1,469		1,576
Total non-interest expense	20,028		18,490		58,307		54,003
Income before income tax expense	14,041		12,017		39,688		35,561
Income tax expense	3,215		2,819		8,986		8,396
Net income	10,826		9,198		30,702		27,165
Preferred stock dividend	218		—		464		—
Net income available to common shareholders	$	10,608	$	9,198	$	30,238	$	27,165
Earnings per common share
Basic	$	1.25	$	1.07	$	3.57	$	3.15
Diluted	1.25		1.07		3.57		3.15
Dividends declared per share	0.1975		0.18		0.5925		0.54

Table of Contents

~~First Business Financial Services, Inc.~~

~~Consolidated Statements of Comprehensive Income (Unaudited)~~

For the Three Months Ended June 30, For the Six Months Ended June 30,
2022 2021 2022 2021
(In Thousands)
Net income $ 11,204 $ 8,235 $ 19,876 $ 17,966
Other comprehensive (loss) income
Securities available-for-sale:
Unrealized securities (losses) gains arising during the period (7,184) 662 (19,665) (1,576)
Reclassification adjustment for net gain realized in net income — (29) — (29)
Securities held-to-maturity:
Amortization of net unrealized losses transferred from available-for-sale 3 7 8 15
Interest rate swaps:
Unrealized gains (losses) on interest rate swaps arising during the period 2,175 (271) 6,044 1,818
Income tax benefit (expense) 1,281 (94) 3,482 (58)
Total other comprehensive (loss) income (3,725) 275 (10,131) 170
Comprehensive income $ 7,479 $ 8,510 $ 9,745 $ 18,136

See accompanying Notes to Unaudited Consolidated Financial Statements.

Table of Contents

First Business Financial Services, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
	(In Thousands)
Net income	$	10,826	$	9,198	$	30,702	$	27,165
Other comprehensive loss
Securities available-for-sale:
Unrealized securities losses arising during the period	(10,174)		(1,457)		(29,839)		(3,033)
Reclassification adjustment for net gain realized in net income	—		—		—		(29)
Securities held-to-maturity:
Amortization of net unrealized losses transferred from available-for-sale	3		7		11		22
Interest rate swaps:
Unrealized gains on interest rate swaps arising during the period	3,452		520		9,496		2,338
Income tax benefit	1,719		238		5,201		180
Total other comprehensive loss	(5,000)		(692)		(15,131)		(522)
Comprehensive income	$	5,826	$	8,506	$	15,571	$	26,643

See accompanying Notes to Unaudited Consolidated Financial Statements.

Table of Contents

First Business Financial Services, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)


		Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total			Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total
		(In Thousands, Except Share Data)																(In Thousands, Except Share Data)
Balance at January 1, 2021	Balance at January 1, 2021	8,566,960	$	—	$	92	$	83,125	$	140,431	$	(933)	$	(16,553)	$	206,162	Balance at January 1, 2021	8,566,960	$	—	$	92	$	83,125	$	140,431	$	(933)	$	(16,553)	$	206,162
Net income	Net income	—	—		—		—		9,731		—		—		9,731		Net income	—	—		—		—		9,731		—		—		9,731
Other comprehensive loss	Other comprehensive loss	—	—		—		—		—		(105)		—		(105)		Other comprehensive loss	—	—		—		—		—		(105)		—		(105)

Share-based compensation - restricted shares and employee stock purchase plan	Share-based compensation - restricted shares and employee stock purchase plan	84,255	—		1		530		—		—		—		531		Share-based compensation - restricted shares and employee stock purchase plan	84,255	—		1		530		—		—		—		531
Issuance of common stock under the employee stock purchase plan	Issuance of common stock under the employee stock purchase plan	1,775	—		—		39		—		—		—		39		Issuance of common stock under the employee stock purchase plan	1,775	—		—		39		—		—		—		39

Cash dividends ($0.18 per share)	Cash dividends ($0.18 per share)	—	—		—		—		(1,541)		—		—		(1,541)		Cash dividends ($0.18 per share)	—	—		—		—		(1,541)		—		—		(1,541)
Treasury stock purchased	Treasury stock purchased	(14,795)	—		—		—		—		—		(326)		(326)		Treasury stock purchased	(14,795)	—		—		—		—		—		(326)		(326)
Balance at March 31, 2021	Balance at March 31, 2021	8,638,195	$	—	$	93	$	83,694	$	148,621	$	(1,038)	$	(16,879)	$	214,491	Balance at March 31, 2021	8,638,195	$	—	$	93	$	83,694	$	148,621	$	(1,038)	$	(16,879)	$	214,491
Net income	Net income	—	—		—		—		8,235		—		—		8,235		Net income	—	—		—		—		8,235		—		—		8,235
Other comprehensive loss	Other comprehensive loss	—	—		—		—		—		275		—		275		Other comprehensive loss	—	—		—		—		—		275		—		275

Share-based compensation - restricted shares and employee stock purchase plan	Share-based compensation - restricted shares and employee stock purchase plan	1,421	—		—		607		—		—		—		607		Share-based compensation - restricted shares and employee stock purchase plan	1,421	—		—		607		—		—		—		607
Issuance of common stock under the employee stock purchase plan	Issuance of common stock under the employee stock purchase plan	1,694	—		—		42		—		—		—		42		Issuance of common stock under the employee stock purchase plan	1,694	—		—		42		—		—		—		42

Cash dividends ($0.18 per share)	Cash dividends ($0.18 per share)	—	—		—		—		(1,556)		—		—		(1,556)		Cash dividends ($0.18 per share)	—	—		—		—		(1,556)		—		—		(1,556)
Treasury stock purchased	Treasury stock purchased	(23,549)	—		—		—		—		—		(642)		(642)		Treasury stock purchased	(23,549)	—		—		—		—		—		(642)		(642)
Balance at June 30, 2021	Balance at June 30, 2021	8,617,761	$	—	$	93	$	84,343	$	155,300	$	(763)	$	(17,521)	$	221,452	Balance at June 30, 2021	8,617,761	$	—	$	93	$	84,343	$	155,300	$	(763)	$	(17,521)	$	221,452
Net income																	Net income	—	—		—		—		9,198		—		—		9,198
Other comprehensive loss																	Other comprehensive loss	—	—		—		—		—		(692)		—		(692)

Share-based compensation - restricted shares and employee stock purchase plan																	Share-based compensation - restricted shares and employee stock purchase plan	651	—		—		578		—		—		—		578
Issuance of common stock under the employee stock purchase plan																	Issuance of common stock under the employee stock purchase plan	1,490	—		—		38		—		—		—		38

Cash dividends ($0.18 per share)																	Cash dividends ($0.18 per share)	—	—		—		—		(1,546)		—		—		(1,546)
Treasury stock purchased																	Treasury stock purchased	(136,803)	—		—		—		—		—		(3,748)		(3,748)
Balance at September 30, 2021																	Balance at September 30, 2021	8,483,099	$	—	$	93	$	84,959	$	162,952	$	(1,455)	$	(21,269)	$	225,280

Table of Contents


		Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total			Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total
		(In Thousands, Except Share Data)																(In Thousands, Except Share Data)
Balance at January 1, 2022	Balance at January 1, 2022	8,457,564	$	—	$	93	$	85,797	$	170,020	$	(1,457)	$	(22,031)	$	232,422	Balance at January 1, 2022	8,457,564	$	—	$	93	$	85,797	$	170,020	$	(1,457)	$	(22,031)	$	232,422
Net income	Net income	—	—		—		—		8,672		—		—		8,672		Net income	—	—		—		—		8,672		—		—		8,672
Other comprehensive loss	Other comprehensive loss	—	—		—		—		—		(6,406)		—		(6,406)		Other comprehensive loss	—	—		—		—		—		(6,406)		—		(6,406)
Issuance of preferred stock, net of issuance costs	Issuance of preferred stock, net of issuance costs	—	11,992		—		—		—		—		—		11,992		Issuance of preferred stock, net of issuance costs	—	11,992		—		—		—		—		—		11,992

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

Issuance of common stock under the employee stock purchase plan	Issuance of common stock under the employee stock purchase plan	1,380	—		—		40		—		—		—		40		Issuance of common stock under the employee stock purchase plan	1,380	—		—		40		—		—		—		40
Treasury stock re-issued	Treasury stock re-issued	—	—		—		(1,002)		—		—		1,002		—		Treasury stock re-issued	—	—		—		(1,002)		—		—		1,002		—
Cash dividends ($0.1975 per share)	Cash dividends ($0.1975 per share)	—	—		—		—		(1,670)		—		—		(1,670)		Cash dividends ($0.1975 per share)	—	—		—		—		(1,670)		—		—		(1,670)
Treasury stock purchased	Treasury stock purchased	(18,223)	—		—		—		—		—		(608)		(608)		Treasury stock purchased	(18,223)	—		—		—		—		—		(608)		(608)
Balance at March 31, 2022	Balance at March 31, 2022	8,488,585	$	11,992	$	94	$	85,443	$	177,022	$	(7,863)	$	(21,637)	$	245,051	Balance at March 31, 2022	8,488,585	$	11,992	$	94	$	85,443	$	177,022	$	(7,863)	$	(21,637)	$	245,051
Net income	Net income	—	—		—		—		11,204		—		—		11,204		Net income	—	—		—		—		11,204		—		—		11,204
Other comprehensive income	Other comprehensive income	—	—		—		—		—		(3,725)		—		(3,725)		Other comprehensive income	—	—		—		—		—		(3,725)		—		(3,725)

Share-based compensation - restricted shares and employee stock purchase plan	Share-based compensation - restricted shares and employee stock purchase plan	25,860	—		—		645		—		—		—		645		Share-based compensation - restricted shares and employee stock purchase plan	27,114	—		—		645		—		—		—		645

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

Preferred stock dividends	Preferred stock dividends	—	—		—		—		(246)		—		—		(246)		Preferred stock dividends	—	—		—		—		(246)		—		—		(246)
Cash dividends ($0.1975 per share)	Cash dividends ($0.1975 per share)	—	—		—		—		(1,678)		—		—		(1,678)		Cash dividends ($0.1975 per share)	—	—		—		—		(1,678)		—		—		(1,678)
Treasury stock purchased	Treasury stock purchased	(41,000)	—		—		—		—		—		(1,363)		(1,363)		Treasury stock purchased	(41,000)	—		—		—		—		—		(1,363)		(1,363)
Balance at June 30, 2022	Balance at June 30, 2022	8,474,699	$	11,992	$	94	$	86,123	$	186,302	$	(11,588)	$	(23,000)	$	249,923	Balance at June 30, 2022	8,475,953	$	11,992	$	94	$	86,123	$	186,302	$	(11,588)	$	(23,000)	$	249,923
Net income																	Net income	—	—		—		—		10,826		—		—		10,826
Other comprehensive loss																	Other comprehensive loss	—	—		—		—		—		(5,000)		—		(5,000)

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

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

Preferred stock dividends																	Preferred stock dividends	—	—		—		—		(218)		—		—		(218)
Cash dividends ($0.1975 per share)																	Cash dividends ($0.1975 per share)	—	—		—		—		(1,675)		—		—		(1,675)
Treasury stock purchased																	Treasury stock purchased	(46,202)	—		—		—		—		—		(1,532)		(1,532)
Balance at September 30, 2022																	Balance at September 30, 2022	8,432,048	$	11,992	$	94	$	86,803	$	195,235	$	(16,588)	$	(24,532)	$	253,004

See accompanying Notes to Unaudited Consolidated Financial Statements.

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First Business Financial Services, Inc.

Consolidated Statements of Cash Flows (Unaudited)


		For the Six Months Ended June 30,					For the Nine Months Ended September 30,
		2022		2021			2022		2021
		(In Thousands)					(In Thousands)
Operating activities	Operating activities					Operating activities
Net income	Net income	$	19,876	$	17,966	Net income	$	30,702	$	27,165
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes, net	Deferred income taxes, net	(1,695)		(1,359)		Deferred income taxes, net	(2,258)		1,218
Impairment of tax credit investments	Impairment of tax credit investments	(351)		—		Impairment of tax credit investments	(351)		—
Provision for loan and lease losses	Provision for loan and lease losses	(4,582)		(3,026)		Provision for loan and lease losses	(4,569)		(5,295)
Derivative credit valuation adjustment	Derivative credit valuation adjustment	—		(376)		Derivative credit valuation adjustment	—		(376)
Depreciation, amortization and accretion, net	Depreciation, amortization and accretion, net	2,025		1,845		Depreciation, amortization and accretion, net	3,088		2,696
Gain on disposal of lease equipment						Gain on disposal of lease equipment	(478)		—
Loss on disposal of equipment	Loss on disposal of equipment	—		56		Loss on disposal of equipment	—		68

Amortization of low income housing tax credits						Amortization of low income housing tax credits	552		—
Share-based compensation	Share-based compensation	1,254		1,138		Share-based compensation	1,905		1,716
Net gain on sale of securities	Net gain on sale of securities	—		(29)		Net gain on sale of securities	—		(29)

Increase in bank-owned life insurance policies	Increase in bank-owned life insurance policies	(698)		(699)		Increase in bank-owned life insurance policies	(1,057)		(1,056)
Origination of loans for sale	Origination of loans for sale	(61,278)		(48,137)		Origination of loans for sale	(94,433)		(57,710)
Sale of SBA loans originated for sale	Sale of SBA loans originated for sale	64,129		53,054		Sale of SBA loans originated for sale	99,499		63,805
Gain on sale of loans originated for sale	Gain on sale of loans originated for sale	(1,537)		(2,281)		Gain on sale of loans originated for sale	(2,269)		(3,002)
Net loss on foreclosed properties, including impairment valuation	Net loss on foreclosed properties, including impairment valuation	20		1		Net loss on foreclosed properties, including impairment valuation	27		7
Loan servicing right impairment valuation		—		(78)

Excess tax benefit (expense) from share-based compensation		183		(16)
Loan servicing right impairment (recovery) valuation						Loan servicing right impairment (recovery) valuation	15		(78)

Excess tax benefit expense from share-based compensation						Excess tax benefit expense from share-based compensation	183		27
Returns on investments in limited partnerships	Returns on investments in limited partnerships	314		—		Returns on investments in limited partnerships	314		—
Payments on operating lease liabilities	Payments on operating lease liabilities	(817)		(788)		Payments on operating lease liabilities	(1,230)		(1,187)
Payments received on operating leases	Payments received on operating leases	90		82		Payments received on operating leases	134		126
Net increase in accrued interest receivable and other assets	Net increase in accrued interest receivable and other assets	(13,814)		(1,152)		Net increase in accrued interest receivable and other assets	(4)		(4,789)
Net increase (decrease) in accrued interest payable and other liabilities		13,658		(1,230)
Net increase in accrued interest payable and other liabilities						Net increase in accrued interest payable and other liabilities	1,620		1,455
Net cash provided by operating activities	Net cash provided by operating activities	16,777		14,971		Net cash provided by operating activities	31,390		24,761
Investing activities	Investing activities					Investing activities
Proceeds from maturities, redemptions, and paydowns of available-for-sale securities	Proceeds from maturities, redemptions, and paydowns of available-for-sale securities	20,185		31,315		Proceeds from maturities, redemptions, and paydowns of available-for-sale securities	32,699		40,789
Proceeds from maturities, redemptions, and paydowns of held-to-maturity securities	Proceeds from maturities, redemptions, and paydowns of held-to-maturity securities	5,761		3,969		Proceeds from maturities, redemptions, and paydowns of held-to-maturity securities	6,190		5,146
Proceeds from sale of available-for-sale securities	Proceeds from sale of available-for-sale securities	—		14,955		Proceeds from sale of available-for-sale securities	—		14,955
Purchases of available-for-sale securities	Purchases of available-for-sale securities	(43,231)		(35,559)		Purchases of available-for-sale securities	(54,098)		(69,503)

Proceeds from sale of foreclosed properties	Proceeds from sale of foreclosed properties	37		—		Proceeds from sale of foreclosed properties	37		—

Net (increase) decrease in loans and leases	Net (increase) decrease in loans and leases	(46,359)		2,444		Net (increase) decrease in loans and leases	(86,487)		23,969

Investments in limited partnerships	Investments in limited partnerships	(363)		—		Investments in limited partnerships	(797)		(672)
Returns of investments in limited partnerships	Returns of investments in limited partnerships	—		60		Returns of investments in limited partnerships	17		60

Distribution from historic development entities	Distribution from historic development entities	282		57		Distribution from historic development entities	474		57
Investment in low-income housing entities	Investment in low-income housing entities	(5,937)		(1,307)		Investment in low-income housing entities	(11,146)		(1,307)

Investment in Federal Home Loan Bank stock	Investment in Federal Home Loan Bank stock	(23,370)		(6,314)		Investment in Federal Home Loan Bank stock	(35,650)		(6,314)
Proceeds from the sale of Federal Home Loan Bank stock	Proceeds from the sale of Federal Home Loan Bank stock	13,746		6,440		Proceeds from the sale of Federal Home Loan Bank stock	33,285		7,540
Purchases of leasehold improvements and equipment, net	Purchases of leasehold improvements and equipment, net	(469)		(135)		Purchases of leasehold improvements and equipment, net	(1,847)		(224)
Proceeds from sale of leasehold improvements and equipment		—		12

Premium payment on bank owned life insurance policies	Premium payment on bank owned life insurance policies	(25)		—		Premium payment on bank owned life insurance policies	(25)		—

Proceeds from redemption of Trust II stock	Proceeds from redemption of Trust II stock	315		—		Proceeds from redemption of Trust II stock	315		—
Net cash used in investing activities	Net cash used in investing activities	(79,428)		15,937		Net cash used in investing activities	(117,033)		14,496
Financing activities	Financing activities					Financing activities
Net (decrease) increase in deposits		(88,592)		305,191
Proceeds from Federal Home Loan Bank advances		1,413,844		510,300
Net increase in deposits						Net increase in deposits	129,622		48,766

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Proceeds from Federal Home Loan Bank advances						Proceeds from Federal Home Loan Bank advances	2,002,844		624,300
Repayment of Federal Home Loan Bank advances	Repayment of Federal Home Loan Bank advances	(1,228,543)		(517,000)		Repayment of Federal Home Loan Bank advances	(1,993,844)		(661,000)

Repayment of subordinated notes payable	Repayment of subordinated notes payable	(9,090)		—		Repayment of subordinated notes payable	(9,090)		—
Proceeds from issuance of subordinated notes payable	Proceeds from issuance of subordinated notes payable	20,000		—		Proceeds from issuance of subordinated notes payable	20,000		—
Repayment of junior subordinated notes payable	Repayment of junior subordinated notes payable	(10,076)		—		Repayment of junior subordinated notes payable	(10,076)		—

Net (decrease) increase in long-term borrowed funds	Net (decrease) increase in long-term borrowed funds	(3,020)		7,653		Net (decrease) increase in long-term borrowed funds	(3,064)		11,633

Cash dividends paid	Cash dividends paid	(3,348)		(3,097)		Cash dividends paid	(5,023)		(4,644)
Preferred stock dividends paid	Preferred stock dividends paid	(246)		—		Preferred stock dividends paid	(464)		—
Proceeds from issuance of common stock under ESPP	Proceeds from issuance of common stock under ESPP	75		81		Proceeds from issuance of common stock under ESPP	104		119

Proceeds from issuance of preferred stock	Proceeds from issuance of preferred stock	11,992		—		Proceeds from issuance of preferred stock	11,992		—
Purchase of treasury stock	Purchase of treasury stock	(1,971)		(968)		Purchase of treasury stock	(3,503)		(4,716)
Net cash provided by financing activities	Net cash provided by financing activities	101,025		302,160		Net cash provided by financing activities	139,498		14,458
Net increase in cash and cash equivalents	Net increase in cash and cash equivalents	38,374		333,068		Net increase in cash and cash equivalents	53,855		53,715
Cash and cash equivalents at the beginning of the period	Cash and cash equivalents at the beginning of the period	57,110		56,909		Cash and cash equivalents at the beginning of the period	57,110		56,909
Cash and cash equivalents at the end of the period	Cash and cash equivalents at the end of the period	$	95,484	$	389,977	Cash and cash equivalents at the end of the period	$	110,965	$	110,624
Supplementary cash flow information	Supplementary cash flow information					Supplementary cash flow information
Cash paid during the period for:	Cash paid during the period for:					Cash paid during the period for:
Interest paid on deposits and borrowings	Interest paid on deposits and borrowings	$	5,707	$	7,469	Interest paid on deposits and borrowings	$	11,083	$	10,876
Income taxes paid	Income taxes paid	(31)		7,658		Income taxes paid	3,263		9,958
Non-cash investing and financing activities:	Non-cash investing and financing activities:					Non-cash investing and financing activities:

Right-of-use assets obtained in exchange for operating lease liabilities	Right-of-use assets obtained in exchange for operating lease liabilities	—		316		Right-of-use assets obtained in exchange for operating lease liabilities	—		316
Transfer from loans and leases to foreclosed properties	Transfer from loans and leases to foreclosed properties	17		149		Transfer from loans and leases to foreclosed properties	50		145

See accompany Notes to Unaudited Consolidated Financial Statements

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Notes to Unaudited Consolidated Financial Statements

Note 1 — Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

The accounting and reporting practices of First Business Financial Services, Inc. (“FBFS” or the “Corporation”), through our wholly-owned subsidiary, First Business Bank (“FBB” or the “Bank”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). FBB operates as a commercial banking institution primarily in Wisconsin and the greater Kansas City metropolitan area. The Bank provides a full range of financial services to businesses, business owners, executives, professionals, and high net worth individuals. FBB also offers bank consulting services to community banks. The Bank is subject to competition from other financial institutions and service providers, and is also subject to state and federal regulations. As of ~~June~~September 30, 2022, FBB had the following wholly-owned subsidiaries: First Business Specialty Finance, LLC (“FBSF”), First Madison Investment Corp. (“FMIC”), ABKC Real Estate, LLC (“ABKC”), FBB Real Estate 2, LLC (“FBB RE 2”), BOC Investment, LLC (“BOC”), Mitchell Street Apartments Investment, LLC (“Mitchell Street”), and FBB Tax Credit Investment, LLC (“FBB Tax Credit”).

Basis of Presentation

The accompanying unaudited Consolidated Financial Statements were prepared in accordance with GAAP and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Corporation’s Consolidated Financial Statements and footnotes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021. The unaudited Consolidated Financial Statements include the accounts of the Corporation and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. In accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 810, the Corporation’s ownership interest in FBFS Statutory Trust II (“Trust II”) was not consolidated into the financial statements. As of March 30, 2022, the Bank’s trust preferred securities were redeemed and Trust II was subsequently dissolved.

Management of the Corporation is required to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that could significantly change in the near-term include the value of securities and interest rate swaps, level of the allowance for loan and lease losses, lease residuals, property under operating leases, goodwill, and income taxes. The results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2022, are not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, 2022. Certain amounts in prior periods may have been reclassified to conform to the current presentation. Subsequent events have been evaluated through the date of the issuance of the unaudited Consolidated Financial Statements. No significant subsequent events have occurred through this date requiring adjustment to the financial statements or disclosures.

The Corporation has not changed its significant accounting and reporting policies from those disclosed in the Corporation’s Form 10-K for the year ended December 31, 2021.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-13, “Financial Instruments- Credit Losses (Topic 326),” which is often referred to as Current Expected Credit Losses (“CECL”). The ASU replaces the incurred loss impairment methodology for recognizing credit losses with a methodology that reflects all expected credit losses. The ASU also requires consideration of a broader range of information to inform credit loss estimates, including such factors as past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, and any other financial asset not excluded from the scope under which the Corporation has the contractual right to receive cash. Entities will apply the amendments in the ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In November 2019, the FASB issued ASU No. 2019-10, “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842).” The ASU delays the effective date for the credit losses standard from January 1, 2020 to January 1, 2023 for certain entities, including certain Securities and Exchange Commission filers, public business entities, and private companies. As a smaller reporting company, the Corporation is eligible for the delay and has deferred adoption. The Corporation has established a cross-functional committee and has implemented a third-party software solution to assist with the adoption of the standard. ~~Management has gathered all necessary data and reviewed potential methods to calculate~~During the ~~expected~~fourth quarter of 2022, management will have the model validated by a third party,

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~~credit losses. Management is currently calculating sample expected loss computations~~perform a full parallel run, and ~~developing~~continue to refine the ~~allowance~~ methodology, processes and ~~assumptions that~~internal controls. Management’s model utilizes national GDP and unemployment as inputs to the reasonable and supportable forecast. The impact of adopting this ASU cannot be reasonably estimated until model validation and confirmation of qualitative components are complete. The estimated impact at adoption will ~~be used under~~depend on the ~~new standard.~~composition, characteristics and quality of the loan portfolio as well as the economic environment and forecasts as of the adoption date. Management will continue to ~~progress~~refine the model based on ~~its implementation project plan~~on-going reviews and ~~improve the Corporation’s approach throughout the deferral period.~~parallel calculations up to adoption on January 1, 2023.

In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. In January 2021, the FASB issued ASU 2021-01 which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Corporation continues to implement its transition plan toward cessation of LIBOR and the modification of its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. ~~The~~In the fourth quarter 2022, the Corporation expects to utilize the LIBOR transition relief allowed under ASU 2020-04 and ASU 2020-01, and does not expect such adoption to have a material impact on its accounting and ~~disclosures.~~

In August 2021, the FASB issued ASU No. 2021-06 “Presentation of Financial Statements (Topic 205), Financial Services-Depository and Lending (Topic 942), and Financial Services-Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants.” This ASU amends the SEC sections of the Codification related to Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update to Statistical Disclosures for Bank and Savings and Loan Registrants. The guidance is effective upon its addition to the FASB codification. The Corporation is assessing the impact of ASU 2021-06 and its impact on its disclosures.

In March 2022, the FASB issued ASU 2022-02 "Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." The amendments in this update eliminate the accounting guidance for troubled debt restructurings (“TDRs”) by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance in paragraphs 310-20-35-9 through 35-11 to determine whether a modification results in a new loan or a continuation of an existing loan. Additionally, for public business entities, the amendments in this ~~Update~~update require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost in the vintage disclosures required by paragraph 326-20-50-6. The guidance is effective for the Corporation upon the adoption of ASU 2016-13, January 1, 2023. The Corporation is currently assessing the impact of ASU 2022-02 on its disclosures and control structure; however, the Corporation does not expect the adoption of this standard to have a material impact on the consolidated financial statements.

910

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Note 2 — Earnings per Common Share

Earnings per common share are computed using the two-class method. Basic earnings per common share are computed by dividing net income allocated to common shares by the weighted-average number of shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include unvested restricted shares. Unvested restricted shares are considered participating securities because holders of these securities receive non-forfeitable dividends, or dividend equivalents, at the same rate as holders of the Corporation’s common stock. Diluted earnings per share are computed by dividing net income allocated to common shares adjusted for reallocation of undistributed earnings of unvested restricted shares by the weighted average number of shares determined for the basic earnings per common share computation plus the dilutive effect of common stock equivalents using the treasury stock method.


		For the Three Months Ended June 30,				For the Six Months Ended June 30,					For the Three Months Ended September 30,				For the Nine Months Ended September 30,
		2022		2021		2022		2021			2022		2021		2022		2021
		(Dollars in Thousands, Except Share Data)									(Dollars in Thousands, Except Share Data)
Basic earnings per common share	Basic earnings per common share									Basic earnings per common share
Net income	Net income	$	11,204	$	8,235	$	19,876	$	17,966	Net income	$	10,826	$	9,198	$	30,702	$	27,165
Less: preferred stock dividends	Less: preferred stock dividends	246		—		246		—		Less: preferred stock dividends	218		—		464		—
Less: earnings allocated to participating securities	Less: earnings allocated to participating securities	310		238		547		493		Less: earnings allocated to participating securities	281		252		834		744
Basic earnings allocated to common shareholders	Basic earnings allocated to common shareholders	$	10,648	$	7,997	$	19,083	$	17,473	Basic earnings allocated to common shareholders	$	10,327	$	8,946	$	29,404	$	26,421
Weighted-average common shares outstanding, excluding participating securities	Weighted-average common shares outstanding, excluding participating securities	8,225,838		8,385,069		8,245,317		8,381,868		Weighted-average common shares outstanding, excluding participating securities	8,230,902		8,340,042		8,237,879		8,380,591
Basic earnings per common share	Basic earnings per common share	$	1.29	$	0.95	$	2.31	$	2.08	Basic earnings per common share	$	1.25	$	1.07	$	3.57	$	3.15

Diluted earnings per common share	Diluted earnings per common share									Diluted earnings per common share
Earnings allocated to common shareholders, diluted	Earnings allocated to common shareholders, diluted	$	10,648	$	7,997	$	19,083	$	17,473	Earnings allocated to common shareholders, diluted	$	10,327	$	8,946	$	29,404	$	26,421

Weighted-average diluted common shares outstanding, excluding participating securities	Weighted-average diluted common shares outstanding, excluding participating securities	8,225,838		8,385,069		8,245,317		8,381,868		Weighted-average diluted common shares outstanding, excluding participating securities	8,230,902		8,340,042		8,237,879		8,380,591
Diluted earnings per common share	Diluted earnings per common share	$	1.29	$	0.95	$	2.31	$	2.08	Diluted earnings per common share	$	1.25	$	1.07	$	3.57	$	3.15

Note 3 — Share-Based Compensation

The Corporation adopted the 2019 Equity Incentive Plan (the “Plan”) during the quarter ended June 30, 2019. The Plan is administered by the Compensation Committee of the Board of Directors (the “Board”) of the Corporation and provides for the grant of equity ownership opportunities through incentive stock options and nonqualified stock options (“(��Stock Options”), restricted stock, restricted stock units, dividend equivalent units, and any other type of award permitted by the Plan. As of ~~June~~September 30, 2022, ~~154,002~~149,931 shares were available for future grants under the Plan. Shares covered by awards that expire, terminate, or lapse will again be available for the grant of awards under the Plan.

Restricted Stock

Under the Plan, the Corporation may grant restricted stock awards (“RSA”), restricted stock units (“RSU”), and other stock-based awards to plan participants, subject to forfeiture upon the occurrence of certain events until the dates specified in the participant’s award agreement. While restricted stock is subject to forfeiture, restricted stock award participants may exercise full voting rights and will receive all dividends and other distributions paid with respect to the restricted shares. Restricted stock units do not have voting rights and are provided dividend equivalents. The restricted stock granted under the Plan is typically subject to a vesting period. Compensation expense for restricted stock is recognized over the requisite service period of generally three or four years for the entire award on a straight-line basis. Upon vesting of restricted stock, the benefit of tax deductions in excess of recognized compensation expense is reflected as an income tax benefit in the unaudited Consolidated Statements of Income.

The Corporation may issue a combination of performance-based restricted stock units (“PRSU”) and time-based restricted stock awards to its plan participants. Vesting of the performance-based restricted stock units will be measured on the relative Total Shareholder Return (“TSR”) and relative Return on Equity (“ROE”) and will cliff-vest after a three-year measurement period based on the Corporation’s TSR performance and ROE performance compared to a broad peer group of over 100 banks. At the end of the performance period, the number of actual shares to be awarded varies between 0% and 200% of target amounts. The

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restricted stock awards issued to executive officers will vest ratably over a three-year period. Compensation expense is recognized for PRSU over the requisite service and performance period of generally three years for the entire expected award on a straight-line basis. The compensation expense for the awards expected to vest for the percentage of performance-based restricted stock units subject to the ROE metric will be adjusted if there is a change in the expectation of ROE. The compensation expense for the awards expected to vest for the percentage of performance based restricted stock units subject to the TSR metric are never adjusted, and are amortized utilizing the accounting fair value provided using a Monte Carlo pricing model.

Restricted stock activity for the year ended December 31, 2021 and the ~~six~~nine months ended ~~June~~September 30, 2022 was as follows:


		RSA		Weighted Average Grant Price		PRSU		Weighted Average Grant Price		RSU		Weighted Average Grant Price		Total		Weighted Average Grant Price			RSA		Weighted Average Grant Price		PRSU		Weighted Average Grant Price		RSU		Weighted Average Grant Price		Total		Weighted Average Grant Price
Nonvested balance as of January 1, 2021	Nonvested balance as of January 1, 2021	143,246		$	23.04	39,570		$	28.85	4,988		$	24.08	187,804		$	24.29	Nonvested balance as of January 1, 2021	143,246		$	23.04	39,570		$	28.85	4,988		$	24.08	187,804		$	24.29
Granted (1)	Granted (1)	67,515		22.39		23,550		27.12		2,065		21.68		93,130		23.57		Granted (1)	67,515		22.39		23,550		27.12		2,065		21.68		93,130		23.57
Vested	Vested	(61,384)		22.26		—		—		(2,001)		22.91		(63,385)		22.28		Vested	(61,384)		22.26		—		—		(2,001)		22.91		(63,385)		22.28
Forfeited	Forfeited	(7,760)		23.24		—		—		—		—		(7,760)		23.24		Forfeited	(7,760)		23.24		—		—		—		—		(7,760)		23.24
Nonvested balance as of December 31, 2021	Nonvested balance as of December 31, 2021	141,617		23.06		63,120		28.20		5,052		23.56		209,789		24.62		Nonvested balance as of December 31, 2021	141,617		23.06		63,120		28.20		5,052		23.56		209,789		24.62
Granted (1)	Granted (1)	55,275		33.59		37,335		24.71		335		33.60		92,945		30.02		Granted (1)	59,460		33.79		37,335		24.71		3,115		27.95		99,910		30.21
Vested	Vested	(46,367)		23.38		(43,020)		18.91		(1,552)		24.17		(90,939)		21.28		Vested	(57,934)		23.29		(43,020)		18.91		(2,062)		23.20		(103,016)		21.46
Forfeited	Forfeited	(1,807)		25.60		—		—		—		—		(1,807)		25.60		Forfeited	(4,701)		26.50		—		—		—		—		(4,701)		26.50
Nonvested balance as of June 30, 2022		148,718		$	26.84	57,435		$	32.89	3,835		$	24.19	209,988		$	28.45
Nonvested balance as of September 30, 2022																		Nonvested balance as of September 30, 2022	138,442		$	27.46	57,435		$	32.89	6,105		$	25.92	201,982		$	28.95
Unrecognized compensation cost (in thousands)	Unrecognized compensation cost (in thousands)	$	3,222			$	1,239			$	70			$	4,531			Unrecognized compensation cost (in thousands)	$	2,880			$	1,046			$	105			$	4,031
Weighted average remaining recognition period (in years)	Weighted average remaining recognition period (in years)	2.67				2.00				1.97				2.47				Weighted average remaining recognition period (in years)	2.48				1.81				1.91				2.29

(1)The number of restricted shares/units shown includes the shares that would be granted if the target level of performance is achieved ~~plus~~ related to the performance based restricted stock units. The number of shares actually issued may vary. During the ~~six~~nine months ended ~~June~~September 30, 2022, an additional 21,510 were issued related to actual performance results of previously granted awards.

Employee Stock Purchase Plan

During 2020, an employee stock purchase plan ("ESPP") was approved by the Corporation’s shareholders and is offered to all qualifying employees. The Corporation is authorized to issue up to 250,000 shares of common stock under the ESPP. The plan qualifies as an employee stock purchase plan under section 423 of the Internal Revenue Code of 1986. Under the ESPP, eligible employees may enroll in a three month offer period that begins January, April, July, and October of each year. Employees may elect to purchase a limited number of shares on the Corporation's common stock at 90% of the fair market value on the last day of the offering period. The ESPP is treated as a compensatory item for purposes of share-based compensation expense.

During the ~~six~~nine months ended ~~June~~September 30, 2022, the Corporation issued ~~2,634~~3,640 shares of common stock under the ESPP. As of ~~June~~September 30, 2022, ~~238,122~~235,862 shares remained available for issuance under the ESPP.

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

For the Three Months Ended June 30, For the Six Months Ended June 30,
2022 2021 2022 2021
(In Thousands)
Share-based compensation expense $ 645 $ 607 $ 1,254 $ 1,138


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
	(In Thousands)
Share-based compensation expense	$	651	$	578	$	1,905	$	1,716

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Note 4 — Securities

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


		As of June 30, 2022									As of September 30, 2022
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
		(In Thousands)									(In Thousands)
Available-for-sale:	Available-for-sale:									Available-for-sale:
U.S. treasuries	U.S. treasuries	$	4,974	$	—	$	(401)	4,573		U.S. treasuries	$	4,975	$	—	$	(575)	4,400
U.S. government agency securities - government-sponsored enterprises	U.S. government agency securities - government-sponsored enterprises	17,059		248		(393)		16,914		U.S. government agency securities - government-sponsored enterprises	15,711		104		(563)		15,252
Municipal securities	Municipal securities	43,995		7		(5,228)		38,774		Municipal securities	44,379		—		(7,580)		36,799

Residential mortgage-backed securities - government issued	Residential mortgage-backed securities - government issued	17,148		2		(1,284)		15,866		Residential mortgage-backed securities - government issued	18,373		—		(2,314)		16,059
Residential mortgage-backed securities - government-sponsored enterprises	Residential mortgage-backed securities - government-sponsored enterprises	104,040		3		(8,085)		95,958		Residential mortgage-backed securities - government-sponsored enterprises	106,445		—		(13,071)		93,374
Commercial mortgage-backed securities - government issued	Commercial mortgage-backed securities - government issued	3,834		—		(337)		3,497		Commercial mortgage-backed securities - government issued	3,585		—		(505)		3,080
Commercial mortgage-backed securities - government-sponsored enterprises	Commercial mortgage-backed securities - government-sponsored enterprises	36,275		—		(4,195)		32,080		Commercial mortgage-backed securities - government-sponsored enterprises	32,934		—		(5,332)		27,602
Other securities		980		1		—		981
		$	228,305	$	261	$	(19,923)	$	208,643
											$	226,402	$	104	$	(29,940)	$	196,566


	As of December 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In Thousands)
Available-for-sale:
U.S. treasuries	$	4,971	$	—	$	(57)	$	4,914
U.S. government agency securities - government-sponsored enterprises	19,797		248		(110)		19,935
Municipal securities	30,828		473		(344)		30,957

Residential mortgage-backed securities - government issued	19,563		238		(140)		19,661
Residential mortgage-backed securities - government-sponsored enterprises	85,748		741		(784)		85,705
Commercial mortgage-backed securities - government issued	5,801		36		(66)		5,771
Commercial mortgage-backed securities - government-sponsored enterprises	36,786		313		(568)		36,531
Other securities	2,205		23		—		2,228
	$	205,699	$	2,072	$	(2,069)	$	205,702

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


		As of June 30, 2022									As of September 30, 2022
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value			Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
		(In Thousands)									(In Thousands)
Held-to-maturity:	Held-to-maturity:									Held-to-maturity:

Municipal securities	Municipal securities	$	8,291	$	23	$	(26)	$	8,288	Municipal securities	$	8,134	$	—	$	(147)	$	7,987

Residential mortgage-backed securities - government issued	Residential mortgage-backed securities - government issued	1,878		—		(57)		1,821		Residential mortgage-backed securities - government issued	1,744		—		(94)		1,650
Residential mortgage-backed securities - government-sponsored enterprises	Residential mortgage-backed securities - government-sponsored enterprises	1,792		—		(48)		1,744		Residential mortgage-backed securities - government-sponsored enterprises	1,646		—		(101)		1,545
Commercial mortgage-backed securities - government-sponsored enterprises	Commercial mortgage-backed securities - government-sponsored enterprises	2,007		—		(11)		1,996		Commercial mortgage-backed securities - government-sponsored enterprises	2,007		—		(111)		1,896
		$	13,968	$	23	$	(142)	$	13,849		$	13,531	$	—	$	(453)	$	13,078


		As of December 31, 2021									As of December 31, 2021
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value			Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
		(In Thousands)									(In Thousands)
Held-to-maturity:	Held-to-maturity:									Held-to-maturity:

Municipal securities	Municipal securities	$	13,009	$	222	$	(3)	$	13,228	Municipal securities	$	13,009	$	222	$	(3)	$	13,228

Residential mortgage-backed securities - government issued	Residential mortgage-backed securities - government issued	2,226		40		—		2,266		Residential mortgage-backed securities - government issued	2,226		40		—		2,266
Residential mortgage-backed securities - government-sponsored enterprises	Residential mortgage-backed securities - government-sponsored enterprises	2,502		76		—		2,578		Residential mortgage-backed securities - government-sponsored enterprises	2,502		76		—		2,578
Commercial mortgage-backed securities - government-sponsored enterprises	Commercial mortgage-backed securities - government-sponsored enterprises	2,009		195		—		2,204		Commercial mortgage-backed securities - government-sponsored enterprises	2,009		195		—		2,204
		$	19,746	$	533	$	(3)	$	20,276		$	19,746	$	533	$	(3)	$	20,276

U.S. Treasuries contains treasury bonds issued by the United States Treasury. U.S. government agency securities - government-sponsored enterprises represent securities issued by Federal National Mortgage Association (“FNMA”) and the SBA. Municipal securities include securities issued by various municipalities located primarily within Wisconsin and are primarily general obligation bonds that are tax-exempt in nature. Residential and commercial mortgage-backed securities - government issued represent securities guaranteed by the Government National Mortgage Association. Residential and commercial mortgage-backed securities - government-sponsored enterprises include securities guaranteed by the Federal Home Loan Mortgage Corporation, FNMA, and the FHLB. Other securities represent certificates of deposit of insured banks and savings institutions with an original maturity greater than three months. There were no sales of available-for-sale securities that occurred during the three and ~~six~~nine months ended ~~June~~September 30, ~~2022 and there~~2022. There were 7no sales of available-for-sale securities that occurred during the three ~~and six~~ months ended ~~June~~September 30, 2021 and seven sales of available-for-sale securities that occurred during the nine months ended September 30, 2021.

At ~~June~~September 30, 2022 and December 31, 2021, securities with a fair value of ~~$39.7~~$36.4 million and $70.3 million, respectively, were pledged to secure various obligations, including interest rate swap contracts and municipal deposits.

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The amortized cost and fair value of securities by contractual maturity at ~~June~~September 30, 2022 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations with or without call or prepayment penalties.


		Available-for-Sale				Held-to-Maturity					Available-for-Sale				Held-to-Maturity
		Amortized Cost		Fair Value		Amortized Cost		Fair Value			Amortized Cost		Fair Value		Amortized Cost		Fair Value
		(In Thousands)									(In Thousands)
Due in one year or less	Due in one year or less	$	2,757	$	2,755	$	3,962	$	3,973	Due in one year or less	$	1,947	$	1,928	$	2,557	$	2,539
Due in one year through five years	Due in one year through five years	12,882		12,115		4,130		4,109		Due in one year through five years	13,389		12,025		4,660		4,544
Due in five through ten years	Due in five through ten years	58,532		53,524		4,940		4,862		Due in five through ten years	57,109		49,658		5,419		5,167
Due in over ten years	Due in over ten years	154,134		140,249		936		905		Due in over ten years	153,957		132,955		895		828
		$	228,305	$	208,643	$	13,968	$	13,849		$	226,402	$	196,566	$	13,531	$	13,078

The tables below show the Corporation’s gross unrealized losses and fair value of available-for-sale investments aggregated by investment category and length of time that individual investments were in a continuous loss position at ~~June~~September 30, 2022 and December 31, 2021. At ~~June~~September 30, 2022, the Corporation held ~~164~~176 available-for-sale securities that were in an unrealized loss position. Such securities have not experienced credit rating downgrades; however, they have primarily declined in value due to the current interest rate environment. At ~~June~~September 30, 2022, the Corporation held 1140 available-for-sale securities that have been in a continuous unrealized loss position for twelve months or greater.

The Corporation also has not specifically identified available-for-sale securities in a loss position that it intends to sell in the near term and does not believe that it will be required to sell any such securities. The Corporation reviews its securities on a quarterly basis to monitor its exposure to other-than-temporary impairment. Consideration is given to such factors as the length of time and extent to which the security has been in an unrealized loss position, changes in security ratings, and an evaluation of the present value of expected future cash flows, if necessary. Based on the Corporation’s evaluation, it is expected that the Corporation will recover the entire amortized cost basis of each security. Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the three and ~~six~~nine months ended ~~June~~September 30, 2022 and 2021.

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


		As of June 30, 2022													As of September 30, 2022
		Less than 12 Months				12 Months or Longer				Total					Less than 12 Months				12 Months or Longer				Total
		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
		(In Thousands)													(In Thousands)
Available-for-sale:	Available-for-sale:													Available-for-sale:
U.S. treasuries	U.S. treasuries	$	4,573	$	401	$	—	$	—	$	4,573	$	401	U.S. treasuries	$	—	$	—	$	4,400	$	575	$	4,400	$	575
U.S. government agency securities - government-sponsored enterprises	U.S. government agency securities - government-sponsored enterprises	926		73		2,181		320		3,107		393		U.S. government agency securities - government-sponsored enterprises	—		—		2,937		563		2,937		563
Municipal securities	Municipal securities	33,074		3,895		3,517		1,333		36,591		5,228		Municipal securities	27,780		4,733		9,019		2,847		36,799		7,580

Residential mortgage-backed securities - government issued	Residential mortgage-backed securities - government issued	14,826		1,284		—		—		14,826		1,284		Residential mortgage-backed securities - government issued	9,936		1,060		6,123		1,254		16,059		2,314
Residential mortgage-backed securities - government-sponsored enterprises	Residential mortgage-backed securities - government-sponsored enterprises	83,381		6,556		11,394		1,529		94,775		8,085		Residential mortgage-backed securities - government-sponsored enterprises	59,449		6,384		33,925		6,687		93,374		13,071
Commercial mortgage-backed securities - government issued	Commercial mortgage-backed securities - government issued	3,497		337		—		—		3,497		337		Commercial mortgage-backed securities - government issued	1,348		95		1,732		410		3,080		505
Commercial mortgage-backed securities - government-sponsored enterprises	Commercial mortgage-backed securities - government-sponsored enterprises	26,080		3,048		6,000		1,147		32,080		4,195		Commercial mortgage-backed securities - government-sponsored enterprises	11,668		1,669		15,934		3,663		27,602		5,332

		$	166,357	$	15,594	$	23,092	$	4,329	$	189,449	$	19,923		$	110,181	$	13,941	$	74,070	$	15,999	$	184,251	$	29,940


	As of December 31, 2021
	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In Thousands)
Available-for-sale:
U.S. treasuries	$	4,914	$	57	$	—	$	—	$	4,914	$	57
U.S. government agency securities - government-sponsored enterprises	978		22		2,412		88		3,390		110
Municipal securities	12,568		344		—		—		12,568		344

Residential mortgage-backed securities - government issued	12,745		140		—		—		12,745		140
Residential mortgage-backed securities - government-sponsored enterprises	41,276		629		4,250		155		45,526		784
Commercial mortgage-backed securities - government issued	2,193		66		—		—		2,193		66
Commercial mortgage-backed securities - government-sponsored enterprises	25,906		568		—		—		25,906		568

	$	100,580	$	1,826	$	6,662	$	243	$	107,242	$	2,069

The tables below show the Corporation’s gross unrealized losses and fair value of held-to-maturity investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at ~~June~~September 30, 2022 and December 31, 2021. At ~~June~~September 30, 2022, the Corporation held 2344 held-to-maturity securities that were in an unrealized loss position. Such securities have not experienced credit rating downgrades; however, they have primarily declined in value due to the current interest rate environment. At ~~June~~September 30, 2022, the Corporation held 1one held-to-maturity security that had ~~been in a~~

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been in a continuous unrealized loss position for twelve months or greater. It is expected that the Corporation will recover the entire amortized cost basis of each held-to-maturity security based upon an evaluation of aforementioned factors. Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the three and ~~six~~nine months ended ~~June~~September 30, 2022 and 2021.

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


		As of June 30, 2022													As of September 30, 2022
		Less than 12 Months				12 Months or Longer				Total					Less than 12 Months				12 Months or Longer				Total
		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
		(In Thousands)													(In Thousands)
Held-to-maturity:	Held-to-maturity:													Held-to-maturity:

Municipal securities	Municipal securities	$	1,742	$	8	$	268	$	18	$	2,010	$	26	Municipal securities	$	7,501	$	122	$	261	$	25	$	7,762	$	147
Residential mortgage-backed securities - government issued	Residential mortgage-backed securities - government issued	1,821		57		—		—		1,821		57		Residential mortgage-backed securities - government issued	1,650		94		—		—		1,650		94
Residential mortgage-backed securities - government-sponsored enterprises	Residential mortgage-backed securities - government-sponsored enterprises	3,364		48		—		—		3,364		48		Residential mortgage-backed securities - government-sponsored enterprises	1,545		101		—		—		1,545		101
Commercial mortgage-backed securities - government-sponsored enterprises	Commercial mortgage-backed securities - government-sponsored enterprises	376		11		—		—		376		11		Commercial mortgage-backed securities - government-sponsored enterprises	1,896		111		—		—		1,896		111
		$	7,303	$	124	$	268	$	18	$	7,571	$	142		$	12,592	$	428	$	261	$	25	$	12,853	$	453


	As of December 31, 2021
	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In Thousands)
Held-to-maturity:

Municipal securities	$	—	$	—	$	284	$	3	$	284	$	3

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Note 5 — Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses

Loan and lease receivables consist of the following:


		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
		(In Thousands)					(In Thousands)
Commercial real estate:	Commercial real estate:					Commercial real estate:
Commercial real estate — owner occupied	Commercial real estate — owner occupied	$	258,375	$	235,589	Commercial real estate — owner occupied	$	265,989	$	235,589
Commercial real estate — non-owner occupied	Commercial real estate — non-owner occupied	651,920		661,423		Commercial real estate — non-owner occupied	657,975		661,423
Land development	Land development	42,545		42,792		Land development	49,458		42,792
Construction	Construction	203,913		179,841		Construction	162,051		179,841
Multi-family	Multi-family	314,392		320,072		Multi-family	332,782		320,072
1-4 family	1-4 family	17,335		14,911		1-4 family	16,678		14,911
Total commercial real estate	Total commercial real estate	1,488,480		1,454,628		Total commercial real estate	1,484,933		1,454,628
Commercial and industrial	Commercial and industrial	741,363		730,819		Commercial and industrial	788,983		730,819
Direct financing leases, net	Direct financing leases, net	13,718		15,743		Direct financing leases, net	11,109		15,743
Consumer and other:	Consumer and other:					Consumer and other:
Home equity and second mortgages	Home equity and second mortgages	5,132		4,223		Home equity and second mortgages	5,413		4,223
Other	Other	42,387		35,518		Other	40,710		35,518
Total consumer and other	Total consumer and other	47,519		39,741		Total consumer and other	46,123		39,741
Total gross loans and leases receivable	Total gross loans and leases receivable	2,291,080		2,240,931		Total gross loans and leases receivable	2,331,148		2,240,931
Less:	Less:					Less:
Allowance for loan and lease losses	Allowance for loan and lease losses	24,104		24,336		Allowance for loan and lease losses	24,143		24,336
Deferred loan fees	Deferred loan fees	980		1,523		Deferred loan fees	448		1,523
Loans and leases receivable, net	Loans and leases receivable, net	$	2,265,996	$	2,215,072	Loans and leases receivable, net	$	2,306,557	$	2,215,072

As of ~~June~~September 30, 2022 and December 31, 2021, the Corporation had ~~$8.3~~$2.4 million and $27.9 million, respectively, in gross PPP loans outstanding included in the commercial and industrial loan category and deferred processing fees outstanding of ~~$113,000~~$52,000 and $557,000, respectively, included in deferred loan fees. The processing fees are deferred and recognized over the contractual life of the loan, or accelerated at forgiveness, as an adjustment of yield using the interest method. The SBA provides a guaranty to the lender of 100% of principal and interest, unless the lender violated an obligation under the agreement. As loan losses are expected to be immaterial, if any at all, due to the guaranty, management excluded the PPP loans from the allowance for loan and lease losses calculation. Management funded these short-term loans primarily through a combination of excess cash held at the Federal Reserve and from an increase in in-market deposits.

The total amount of the Corporation’s ownership of SBA loans on-balance sheet is comprised of the following:


		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
		(In Thousands)					(In Thousands)
SBA 7(a) loans	SBA 7(a) loans	$	32,927	$	33,223	SBA 7(a) loans	$	34,723	$	33,223
SBA 504 loans	SBA 504 loans	38,569		41,394		SBA 504 loans	26,279		41,394
SBA Express loans and lines of credit	SBA Express loans and lines of credit	233		387		SBA Express loans and lines of credit	231		387
SBA PPP loans	SBA PPP loans	8,285		27,854		SBA PPP loans	2,376		27,854
Total SBA loans	Total SBA loans	$	80,014	$	102,858	Total SBA loans	$	63,609	$	102,858

As of ~~June~~September 30, 2022 and December 31, 2021, ~~$944,000~~$1.2 million and $1.7 million of SBA loans were considered impaired, respectively.

Loans transferred to third parties consist of the guaranteed portions of SBA loans which the Corporation sold in the secondary market and participation interests in other, non-SBA originated loans. The total principal amount of the guaranteed portions of SBA loans sold during the three months ended ~~June~~September 30, 2022, and 2021, was ~~$11.9~~$9.2 million and ~~$9.0~~$5.3 million, respectively.

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The total principal amount of the guaranteed portions of SBA loans sold during the ~~six~~nine months ended ~~June~~September 30, 2022, and 2021, was

~~Table of Contents~~

~~$17.4~~ $26.6 million and ~~$19.6~~$25.0 million, respectively. Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the three months ended ~~June~~September 30, 2022, and 2021, have been derecognized in the unaudited Consolidated Financial Statements. The guaranteed portions of SBA loans were transferred at their fair value and the related gain was recognized upon the transfer as non-interest income in the unaudited Consolidated Financial Statements. The total outstanding balance of sold SBA loans at ~~June~~September 30, 2022, and December 31, 2021, was ~~$95.9~~$96.1 million and $93.0 million, respectively.

The total principal amount of transferred participation interests in other, non-SBA originated loans during the three months ended ~~June~~September 30, 2022, and 2021, was ~~$23.0~~$25.4 million and ~~$11.8~~$18.9 million, respectively. The total principal amount of transferred participation interests in other, non-SBA originated loans during the ~~six~~nine months ended ~~June~~September 30, 2022, and 2021, was ~~$45.2~~$70.6 million and ~~$16.9~~$35.8 million, respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer. No gain or loss was recognized on participation interests in other, non-SBA originated loans as they were transferred at or near the date of loan origination and the payments received for servicing the portion of the loans participated represents adequate compensation. The total outstanding balance of these transferred loans at ~~June~~September 30, 2022, and December 31, 2021, was ~~$199.0~~$210.7 million and $195.2 million, respectively. As of ~~June~~September 30, 2022, and December 31, 2021, the total amount of the Corporation’s partial ownership of these transferred loans on the unaudited Consolidated Balance Sheets was ~~$320.2~~$327.3 million and $314.5 million, respectively. As of ~~June~~September 30, 2022 and December 31, 2021, the non-SBA originated participation portfolio contained no impaired loans. The Corporation does not share in the participant’s portion of any potential charge-offs. There were no loan participations purchased on the unaudited Consolidated Balance Sheets as of ~~June~~September 30, 2022 and December 31, 2021.

The following tables illustrate ending balances of the Corporation’s loan and lease portfolio, including impaired loans by class of receivable, and considering certain credit quality indicators:


		June 30, 2022																September 30, 2022
		Category																Category
		I			II			III			IV			Total				I			II			III			IV			Total
		(Dollars in Thousands)																(Dollars in Thousands)
Commercial real estate:	Commercial real estate:																Commercial real estate:
Commercial real estate — owner occupied	Commercial real estate — owner occupied	$	203,127		$	36,688		$	18,447		$	113		$	258,375		Commercial real estate — owner occupied	$	248,115		$	4,830		$	13,044		$	—		$	265,989
Commercial real estate — non-owner occupied	Commercial real estate — non-owner occupied	540,971			92,025			18,924			—			651,920			Commercial real estate — non-owner occupied	602,701			28,347			26,927			—			657,975
Land development	Land development	42,221			324			—			—			42,545			Land development	49,341			117			—			—			49,458
Construction	Construction	162,066			17,475			24,372			—			203,913			Construction	151,169			—			10,882			—			162,051
Multi-family	Multi-family	280,188			23,018			11,186			—			314,392			Multi-family	324,731			8,051			—			—			332,782
1-4 family	1-4 family	13,470			3,832			—			33			17,335			1-4 family	15,336			1,310			—			32			16,678
Total commercial real estate	Total commercial real estate	1,242,043			173,362			72,929			146			1,488,480			Total commercial real estate	1,391,393			42,655			50,853			32			1,484,933
Commercial and industrial	Commercial and industrial	576,320			119,543			39,922			5,578			741,363			Commercial and industrial	744,625			8,737			31,897			3,724			788,983
Direct financing leases, net	Direct financing leases, net	9,136			320			4,213			49			13,718			Direct financing leases, net	9,167			415			1,466			61			11,109
Consumer and other:	Consumer and other:																Consumer and other:
Home equity and second mortgages	Home equity and second mortgages	3,047			1,822			263			—			5,132			Home equity and second mortgages	4,173			1,198			42			—			5,413
Other	Other	42,153			234			—			—			42,387			Other	40,710			—			—			—			40,710
Total consumer and other	Total consumer and other	45,200			2,056			263			—			47,519			Total consumer and other	44,883			1,198			42			—			46,123
Total gross loans and leases receivable	Total gross loans and leases receivable	$	1,872,699		$	295,281		$	117,327		$	5,773		$	2,291,080		Total gross loans and leases receivable	$	2,190,068		$	53,005		$	84,258		$	3,817		$	2,331,148
Category as a % of total portfolio	Category as a % of total portfolio	81.74		%	12.89		%	5.12		%	0.25		%	100.00		%	Category as a % of total portfolio	93.96		%	2.27		%	3.61		%	0.16		%	100.00		%

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		December 31, 2021																December 31, 2021
		Category																Category
		I			II			III			IV			Total				I			II			III			IV			Total
		(Dollars in Thousands)																(Dollars in Thousands)
Commercial real estate:	Commercial real estate:																Commercial real estate:
Commercial real estate — owner occupied	Commercial real estate — owner occupied	$	192,849		$	31,611		$	10,781		$	348		$	235,589		Commercial real estate — owner occupied	$	218,965		$	5,495		$	10,781		$	348		$	235,589
Commercial real estate — non-owner occupied	Commercial real estate — non-owner occupied	540,572			88,880			31,971			—			661,423			Commercial real estate — non-owner occupied	599,089			30,363			31,971			—			661,423
Land development	Land development	41,745			1,047			—			—			42,792			Land development	42,291			501			—			—			42,792
Construction	Construction	130,285			18,973			30,583			—			179,841			Construction	140,181			9,077			30,583			—			179,841
Multi-family	Multi-family	280,183			28,623			11,266			—			320,072			Multi-family	300,589			8,217			11,266			—			320,072
1-4 family	1-4 family	12,057			2,113			402			339			14,911			1-4 family	14,012			158			402			339			14,911
Total commercial real estate	Total commercial real estate	1,197,691			171,247			85,003			687			1,454,628			Total commercial real estate	1,315,127			53,811			85,003			687			1,454,628
Commercial and industrial	Commercial and industrial	594,388			97,678			32,964			5,789			730,819			Commercial and industrial	686,123			5,943			32,964			5,789			730,819
Direct financing leases, net	Direct financing leases, net	10,829			168			4,647			99			15,743			Direct financing leases, net	10,892			105			4,647			99			15,743
Consumer and other:	Consumer and other:																Consumer and other:
Home equity and second mortgages	Home equity and second mortgages	2,473			1,683			67			—			4,223			Home equity and second mortgages	3,925			231			67			—			4,223
Other	Other	35,249			269			—			—			35,518			Other	35,385			133			—			—			35,518
Total consumer and other	Total consumer and other	37,722			1,952			67			—			39,741			Total consumer and other	39,310			364			67			—			39,741
Total gross loans and leases receivable	Total gross loans and leases receivable	$	1,840,630		$	271,045		$	122,681		$	6,575		$	2,240,931		Total gross loans and leases receivable	$	2,051,452		$	60,223		$	122,681		$	6,575		$	2,240,931
Category as a % of total portfolio	Category as a % of total portfolio	82.14		%	12.10		%	5.47		%	0.29		%	100.00		%	Category as a % of total portfolio	91.55		%	2.69		%	5.47		%	0.29		%	100.00		%

Each credit is evaluated for proper risk rating upon origination, at the time of each subsequent renewal, upon receipt and evaluation of updated financial information from the Corporation’s borrowers, or as other circumstances dictate. The Corporation primarily uses a nine grade risk rating system to monitor the ongoing credit quality of its loans and leases. The risk rating grades follow a consistent definition and are then applied to specific loan types based on the nature of the loan. Each risk rating is subjective and, depending on the size and nature of the credit, subject to various levels of review and concurrence on the stated risk rating. In addition to its nine grade risk rating system, the Corporation groups loans into four loan and related risk categories which determine the level and nature of review by management.

Category I — Loans and leases in this category are performing in accordance with the terms of the contract and generally exhibit no immediate concerns regarding the security and viability of the underlying collateral, financial stability of the borrower, integrity or strength of the borrowers’ management team, or the industry in which the borrower operates. The Corporation monitors Category I loans and leases through payment performance, continued maintenance of its personal relationships with such borrowers, and continued review of such borrowers’ compliance with the terms of their respective agreements.

Category II — Loans and leases in this category are beginning to show signs of deterioration in one or more of the Corporation’s core underwriting criteria such as financial stability, management strength, industry trends, or collateral values. Management will place credits in this category to allow for proactive monitoring and resolution with the borrower to possibly mitigate the area of concern and prevent further deterioration or risk of loss to the Corporation. Category II loans are considered performing but are monitored frequently by the assigned business development officer and by asset quality review committees.

Category III — Loans and leases in this category are identified by management as warranting special attention. However, the balance in this category is not intended to represent the amount of adversely classified assets held by the Bank. Category III loans and leases generally exhibit undesirable characteristics, such as evidence of adverse financial trends and conditions, managerial problems, deteriorating economic conditions within the related industry, or evidence of adverse public filings and may exhibit collateral shortfall positions. Management continues to believe that it will collect all contractual principal and interest in accordance with the original terms of the contracts relating to the loans and leases in this category, and therefore Category III loans are considered performing with no specific reserves established for this category. Category III loans are monitored by management and asset quality review committees on a monthly basis.

Category IV — Loans and leases in this category are considered to be impaired. Impaired loans and leases, with the exception of performing TDRs, have been placed on non-accrual as management has determined that it is unlikely that the Bank will receive the contractual principal and interest in accordance with the original terms of the agreement. Impaired loans are

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individually evaluated to assess the need for the establishment of specific reserves or charge-offs. When analyzing the adequacy of collateral, the Corporation obtains external appraisals at least annually for impaired loans and leases. External appraisals are obtained from the Corporation’s approved appraiser listing and are independently reviewed to monitor the quality of such appraisals. To the extent a collateral shortfall position is present, a specific reserve or charge-off will be recorded to reflect the magnitude of the impairment. Loans and leases in this category are monitored by management and asset quality review committees on a monthly basis.

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

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		June 30, 2022																			September 30, 2022
		30-59 Days Past Due			60-89 Days Past Due			Greater Than 90 Days Past Due			Total Past Due			Current			Total Loans and Leases				30-59 Days Past Due			60-89 Days Past Due			Greater Than 90 Days Past Due			Total Past Due			Current			Total Loans and Leases
		(Dollars in Thousands)																			(Dollars in Thousands)
Accruing loans and leases	Accruing loans and leases																			Accruing loans and leases
Commercial real estate:	Commercial real estate:																			Commercial real estate:
Owner occupied	Owner occupied	$	—		$	—		$	—		$	—		$	258,262		$	258,262		Owner occupied	$	—		$	—		$	—		$	—		$	265,989		$	265,989
Non-owner occupied	Non-owner occupied	—			—			—			—			651,920			651,920			Non-owner occupied	—			—			—			—			657,975			657,975
Land development	Land development	—			—			—			—			42,545			42,545			Land development	—			—			—			—			49,458			49,458
Construction	Construction	13,400			—			—			13,400			190,513			203,913			Construction	—			—			—			—			162,051			162,051
Multi-family	Multi-family	—			—			—			—			314,392			314,392			Multi-family	—			—			—			—			332,782			332,782
1-4 family	1-4 family	—			—			—			—			17,302			17,302			1-4 family	—			—			—			—			16,646			16,646
Commercial and industrial	Commercial and industrial	3,685			437			—			4,122			731,851			735,973			Commercial and industrial	1,031			597			—			1,628			783,803			785,431
Direct financing leases, net	Direct financing leases, net	2,827			59			—			2,886			10,783			13,669			Direct financing leases, net	27			—			—			27			11,021			11,048
Consumer and other:	Consumer and other:																			Consumer and other:
Home equity and second mortgages	Home equity and second mortgages	—			—			—			—			5,132			5,132			Home equity and second mortgages	—			—			—			—			5,413			5,413
Other	Other	—			—			—			—			42,387			42,387			Other	—			—			—			—			40,710			40,710
Total	Total	19,912			496			—			20,408			2,265,087			2,285,495			Total	1,058			597			—			1,655			2,325,848			2,327,503
Non-accruing loans and leases	Non-accruing loans and leases																			Non-accruing loans and leases
Commercial real estate:	Commercial real estate:																			Commercial real estate:
Owner occupied	Owner occupied	—			—			113			113			—			113			Owner occupied	—			—			—			—			—			—
Non-owner occupied	Non-owner occupied	—			—			—			—			—			—			Non-owner occupied	—			—			—			—			—			—
Land development	Land development	—			—			—			—			—			—			Land development	—			—			—			—			—			—
Construction	Construction	—			—			—			—			—			—			Construction	—			—			—			—			—			—
Multi-family	Multi-family	—			—			—			—			—			—			Multi-family	—			—			—			—			—			—
1-4 family	1-4 family	—			—			—			—			33			33			1-4 family	—			—			—			—			32			32
Commercial and industrial	Commercial and industrial	77			79			1,377			1,533			3,857			5,390			Commercial and industrial	663			398			1,820			2,881			671			3,552
Direct financing leases, net	Direct financing leases, net	—			—			49			49			—			49			Direct financing leases, net	—			—			61			61			—			61
Consumer and other:	Consumer and other:																			Consumer and other:
Home equity and second mortgages	Home equity and second mortgages	—			—			—			—			—			—			Home equity and second mortgages	—			—			—			—			—			—
Other	Other	—			—			—			—			—			—			Other	—			—			—			—			—			—
Total	Total	77			79			1,539			1,695			3,890			5,585			Total	663			398			1,881			2,942			703			3,645
Total loans and leases	Total loans and leases																			Total loans and leases
Commercial real estate:	Commercial real estate:																			Commercial real estate:
Owner occupied	Owner occupied	—			—			113			113			258,262			258,375			Owner occupied	—			—			—			—			265,989			265,989
Non-owner occupied	Non-owner occupied	—			—			—			—			651,920			651,920			Non-owner occupied	—			—			—			—			657,975			657,975
Land development	Land development	—			—			—			—			42,545			42,545			Land development	—			—			—			—			49,458			49,458
Construction	Construction	13,400			—			—			13,400			190,513			203,913			Construction	—			—			—			—			162,051			162,051
Multi-family	Multi-family	—			—			—			—			314,392			314,392			Multi-family	—			—			—			—			332,782			332,782
1-4 family	1-4 family	—			—			—			—			17,335			17,335			1-4 family	—			—			—			—			16,678			16,678
Commercial and industrial	Commercial and industrial	3,762			516			1,377			5,655			735,708			741,363			Commercial and industrial	1,694			995			1,820			4,509			784,474			788,983
Direct financing leases, net	Direct financing leases, net	2,827			59			49			2,935			10,783			13,718			Direct financing leases, net	27			—			61			88			11,021			11,109
Consumer and other:	Consumer and other:																			Consumer and other:
Home equity and second mortgages	Home equity and second mortgages	—			—			—			—			5,132			5,132			Home equity and second mortgages	—			—			—			—			5,413			5,413
Other	Other	—			—			—			—			42,387			42,387			Other	—			—			—			—			40,710			40,710
Total	Total	$	19,989		$	575		$	1,539		$	22,103		$	2,268,977		$	2,291,080		Total	$	1,721		$	995		$	1,881		$	4,597		$	2,326,551		$	2,331,148
Percent of portfolio	Percent of portfolio	0.87		%	0.03		%	0.07		%	0.97		%	99.03		%	100.00		%	Percent of portfolio	0.07		%	0.04		%	0.08		%	0.19		%	99.81		%	100.00		%

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	December 31, 2021
	30-59 Days Past Due			60-89 Days Past Due			Greater Than 90 Days Past Due			Total Past Due			Current			Total Loans and Leases
	(Dollars in Thousands)
Accruing loans and leases
Commercial real estate:
Owner occupied	$	420		$	—		$	—		$	420		$	234,821		$	235,241
Non-owner occupied	—			—			—			—			661,423			661,423
Land development	—			—			—			—			42,792			42,792
Construction	394			—			—			394			179,447			179,841
Multi-family	—			—			—			—			320,072			320,072
1-4 family	100			—			—			100			14,472			14,572
Commercial and industrial	907			536			—			1,443			723,804			725,247
Direct financing leases, net	281			14			—			295			15,349			15,644
Consumer and other:
Home equity and second mortgages	—			—			—			—			4,223			4,223
Other	—			—			—			—			35,518			35,518
Total	2,102			550			—			2,652			2,231,921			2,234,573
Non-accruing loans and leases
Commercial real estate:
Owner occupied	—			—			113			113			235			348
Non-owner occupied	—			—			—			—			—			—
Land development	—			—			—			—			—			—
Construction	—			—			—			—			—			—
Multi-family	—			—			—			—			—			—
1-4 family	—			—			—			—			339			339
Commercial and industrial	23			36			1,445			1,504			4,068			5,572
Direct financing leases, net	—			—			84			84			15			99
Consumer and other:
Home equity and second mortgages	—			—			—			—			—			—
Other	—			—			—			—			—			—
Total	23			36			1,642			1,701			4,657			6,358
Total loans and leases
Commercial real estate:
Owner occupied	420			—			113			533			235,056			235,589
Non-owner occupied	—			—			—			—			661,423			661,423
Land development	—			—			—			—			42,792			42,792
Construction	394			—			—			394			179,447			179,841
Multi-family	—			—			—			—			320,072			320,072
1-4 family	100			—			—			100			14,811			14,911
Commercial and industrial	930			572			1,445			2,947			727,872			730,819
Direct financing leases, net	281			14			84			379			15,364			15,743
Consumer and other:
Home equity and second mortgages	—			—			—			—			4,223			4,223
Other	—			—			—			—			35,518			35,518
Total	$	2,125		$	586		$	1,642		$	4,353		$	2,236,578		$	2,240,931
Percent of portfolio	0.09		%	0.03		%	0.07		%	0.19		%	99.81		%	100.00		%

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The Corporation’s total impaired assets consisted of the following:


		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
		(In Thousands)					(In Thousands)
Non-accrual loans and leases	Non-accrual loans and leases					Non-accrual loans and leases
Commercial real estate:	Commercial real estate:					Commercial real estate:
Commercial real estate — owner occupied	Commercial real estate — owner occupied	$	113	$	348	Commercial real estate — owner occupied	$	—	$	348
Commercial real estate — non-owner occupied	Commercial real estate — non-owner occupied	—		—		Commercial real estate — non-owner occupied	—		—
Land development	Land development	—		—		Land development	—		—
Construction	Construction	—		—		Construction	—		—
Multi-family	Multi-family	—		—		Multi-family	—		—
1-4 family	1-4 family	33		339		1-4 family	32		339
Total non-accrual commercial real estate	Total non-accrual commercial real estate	146		687		Total non-accrual commercial real estate	32		687
Commercial and industrial	Commercial and industrial	5,390		5,572		Commercial and industrial	3,552		5,572
Direct financing leases, net	Direct financing leases, net	49		99		Direct financing leases, net	61		99
Consumer and other:	Consumer and other:					Consumer and other:
Home equity and second mortgages	Home equity and second mortgages	—		—		Home equity and second mortgages	—		—
Other	Other	—		—		Other	—		—
Total non-accrual consumer and other loans	Total non-accrual consumer and other loans	—		—		Total non-accrual consumer and other loans	—		—
Total non-accrual loans and leases	Total non-accrual loans and leases	5,585		6,358		Total non-accrual loans and leases	3,645		6,358
Foreclosed properties, net	Foreclosed properties, net	124		164		Foreclosed properties, net	151		164
Total non-performing assets	Total non-performing assets	5,709		6,522		Total non-performing assets	3,796		6,522
Performing troubled debt restructurings	Performing troubled debt restructurings	188		217		Performing troubled debt restructurings	172		217
Total impaired assets	Total impaired assets	$	5,897	$	6,739	Total impaired assets	$	3,968	$	6,739


		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
Total non-accrual loans and leases to gross loans and leases	Total non-accrual loans and leases to gross loans and leases	0.24	%	0.28	%	Total non-accrual loans and leases to gross loans and leases	0.16	%	0.28	%
Total non-performing assets to total gross loans and leases plus foreclosed properties, net	Total non-performing assets to total gross loans and leases plus foreclosed properties, net	0.25		0.29		Total non-performing assets to total gross loans and leases plus foreclosed properties, net	0.16		0.29
Total non-performing assets to total assets	Total non-performing assets to total assets	0.21		0.25		Total non-performing assets to total assets	0.13		0.25
Allowance for loan and lease losses to gross loans and leases	Allowance for loan and lease losses to gross loans and leases	1.05		1.09		Allowance for loan and lease losses to gross loans and leases	1.04		1.09
Allowance for loan and lease losses to non-accrual loans and leases	Allowance for loan and lease losses to non-accrual loans and leases	431.58		382.76		Allowance for loan and lease losses to non-accrual loans and leases	662.36		382.76

As of ~~June~~September 30, 2022 and December 31, 2021, ~~$615,000~~$499,000 and $627,000 of the non-accrual loans and leases were considered TDRs, respectively. The Corporation has allocated ~~$138,000~~$143,000 and $134,000 of specific reserves to TDRs as of ~~June~~September 30, 2022 and December 31, 2021, respectively. There were no unfunded commitments associated with TDR loans and leases as of ~~June~~September 30, 2022.

All loans and leases modified as TDRs are measured for impairment. The nature and extent of the impairment of restructured loans, including those which have experienced a default, is considered in the determination of an appropriate level of the allowance for loan and lease losses.

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The following table provides the number of loans modified as a TDR and the pre- and post-modification recorded investment by class of receivable for the three and ~~six~~nine months ended ~~June~~September 30, 2021:
For the Three Months Ended June 30, For the Six Months Ended June 30,
2021 2021
Number of Loans Pre-Modification
Recorded
Investment Post-Modification
Recorded
Investment Number of Loans Pre-Modification
Recorded
Investment Post-Modification
Recorded
Investment
(Dollars in Thousands)
Commercial and industrial — — — 1 $ 56 $ 43


	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2021
	Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment
	(Dollars in Thousands)







Commercial and industrial	1	$	73	$	70	2	$	129	$	121

During the three and ~~six~~nine months ended ~~June~~September 30, 2022, no loans were modified as a TDR.

Restructured loan modifications may include payment schedule modifications, interest rate concessions, maturity date extensions, principal reduction, or some combination of these concessions. During the ~~six~~nine months ended ~~June~~September 30, 2021, the modification of terms primarily consisted of payment schedule modifications.

There were no loans modified as a TDR during the 12 months ended ~~June~~September 30, 2022 which subsequently defaulted during the three and ~~six~~nine months ended ~~June~~September 30, 2022 and 1one with a recorded investment of ~~$269,000~~$281,000 that defaulted during the three and ~~six~~nine months ended ~~June~~September 30, 2021.

Additionally, the Corporation worked with borrowers impacted by COVID-19 and provided modifications to include interest only deferrals and principal and interest deferrals. These modifications were excluded from TDR classification under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators. As of ~~June~~September 30, 2022, the Corporation had no deferrals outstanding. As of December 31, 2021, the Corporation had 3three deferrals outstanding, representing $293,000 in total loans.

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The following represents additional information regarding the Corporation’s impaired loans and leases, including performing TDRs, by class:


		As of and for the Six Months Ended June 30, 2022															As of and for the Nine Months Ended September 30, 2022
		Recorded Investment(1)		Unpaid Principal Balance		Impairment Reserve		Average Recorded Investment(2)		Foregone Interest Income		Interest Income Recognized		Net Foregone Interest Income			Recorded Investment(1)		Unpaid Principal Balance		Impairment Reserve		Average Recorded Investment(2)		Foregone Interest Income		Interest Income Recognized		Net Foregone Interest Income
		(In Thousands)															(In Thousands)
With no impairment reserve recorded:	With no impairment reserve recorded:															With no impairment reserve recorded:
Commercial real estate:	Commercial real estate:															Commercial real estate:
Owner occupied	Owner occupied	$	113	$	151	$	—	$	343	$	13	$	735	$	(722)	Owner occupied	$	—	$	—	$	—	$	241	$	14	$	756	$	(742)
Non-owner occupied	Non-owner occupied	—		—		—		—		—		1		(1)		Non-owner occupied	—		—		—		—		—		1		(1)
Land development	Land development	—		—		—		—		—		—		—		Land development	—		—		—		—		—		—		—
Construction	Construction	—		—		—		—		—		—		—		Construction	—		—		—		—		—		47		(47)
Multi-family	Multi-family	—		—		—		—		—		—		—		Multi-family	—		—		—		—		—		—		—
1-4 family	1-4 family	33		38		—		193		6		29		(23)		1-4 family	32		37		—		139		7		35		(28)
Commercial and industrial	Commercial and industrial	3,998		4,099		—		4,256		135		45		90		Commercial and industrial	996		1,097		—		3,460		192		214		(22)
Direct financing leases, net	Direct financing leases, net	—		—		—		26		—		2		(2)		Direct financing leases, net	—		—		—		13		—		2		(2)
Consumer and other:	Consumer and other:															Consumer and other:
Home equity and second mortgages	Home equity and second mortgages	—		—		—		—		—		—		—		Home equity and second mortgages	—		—		—		—		—		—		—
Other	Other	—		—		—		—		—		—		—		Other	—		—		—		—		—		—		—
Total	Total	4,144		4,288		—		4,818		154		812		(658)		Total	1,028		1,134		—		3,853		213		1,055		(842)
With impairment reserve recorded:	With impairment reserve recorded:															With impairment reserve recorded:
Commercial real estate:	Commercial real estate:															Commercial real estate:
Owner occupied	Owner occupied	—		—		—		—		—		—		—		Owner occupied	—		—		—		—		—		—		—
Non-owner occupied	Non-owner occupied	—		—		—		—		—		—		—		Non-owner occupied	—		—		—		—		—		—		—
Land development	Land development	—		—		—		—		—		—		—		Land development	—		—		—		—		—		—		—
Construction	Construction	—		—		—		—		—		—		—		Construction	—		—		—		—		—		—		—
Multi-family	Multi-family	—		—		—		—		—		—		—		Multi-family	—		—		—		—		—		—		—
1-4 family	1-4 family	—		—		—		—		—		—		—		1-4 family	—		—		—		—		—		—		—
Commercial and industrial	Commercial and industrial	1,580		1,580		1,205		1,142		51		1		50		Commercial and industrial	2,728		2,729		1,647		1,625		97		2		95
Direct financing leases, net	Direct financing leases, net	49		49		49		49		1		—		1		Direct financing leases, net	61		61		54		54		2		—		2
Consumer and other:	Consumer and other:															Consumer and other:
Home equity and second mortgages	Home equity and second mortgages	—		—		—		—		—		—		—		Home equity and second mortgages	—		—		—		—		—		—		—
Other	Other	—		—		—		—		—		—		—		Other	—		—		—		—		—		—		—
Total	Total	1,629		1,629		1,254		1,191		52		1		51		Total	2,789		2,790		1,701		1,679		99		2		97
Total:	Total:															Total:
Commercial real estate:	Commercial real estate:															Commercial real estate:
Owner occupied	Owner occupied	113		151		—		343		13		735		(722)		Owner occupied	—		—		—		241		14		756		(742)
Non-owner occupied	Non-owner occupied	—		—		—		—		—		1		(1)		Non-owner occupied	—		—		—		—		—		1		(1)
Land development	Land development	—		—		—		—		—		—		—		Land development	—		—		—		—		—		—		—
Construction	Construction	—		—		—		—		—		—		—		Construction	—		—		—		—		—		47		(47)
Multi-family	Multi-family	—		—		—		—		—		—		—		Multi-family	—		—		—		—		—		—		—
1-4 family	1-4 family	33		38		—		193		6		29		(23)		1-4 family	32		37		—		139		7		35		(28)
Commercial and industrial	Commercial and industrial	5,578		5,679		1,205		5,398		186		46		140		Commercial and industrial	3,724		3,826		1,647		5,085		289		216		73
Direct financing leases, net	Direct financing leases, net	49		49		49		75		1		2		(1)		Direct financing leases, net	61		61		54		67		2		2		—
Consumer and other:	Consumer and other:															Consumer and other:
Home equity and second mortgages	Home equity and second mortgages	—		—		—		—		—		—		—		Home equity and second mortgages	—		—		—		—		—		—		—
Other	Other	—		—		—		—		—		—		—		Other	—		—		—		—		—		—		—
Grand total	Grand total	$	5,773	$	5,917	$	1,254	$	6,009	$	206	$	813	$	(607)	Grand total	$	3,817	$	3,924	$	1,701	$	5,532	$	312	$	1,057	$	(745)

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

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

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	As of and for the Year Ended December 31, 2021
	Recorded Investment(1)		Unpaid Principal Balance		Impairment Reserve		Average Recorded Investment(2)		Foregone Interest Income		Interest Income Recognized		Net Foregone Interest Income
	(In Thousands)
With no impairment reserve recorded:
Commercial real estate:
Owner occupied	$	348	$	386	$	—	$	2,217	$	145	$	218	$	(73)
Non-owner occupied	—		—		—		2,281		233		16		217
Land development	—		—		—		7		—		—		—
Construction	—		—		—		—		—		—		—
Multi-family	—		—		—		—		—		—		—
1-4 family	339		344		—		285		60		24		36
Commercial and industrial	3,717		3,819		—		7,914		522		179		343
Direct financing leases, net	15		15		—		2		1		—		1
Consumer and other:
Home equity and second mortgages	—		—		—		40		7		9		(2)
Other	—		—		—		8		23		—		23
Total	4,419		4,564		—		12,754		991		446		545
With impairment reserve recorded:
Commercial real estate:
Owner occupied	—		—		—		—		—		—		—
Non-owner occupied	—		—		—		—		—		—		—
Land development	—		—		—		—		—		—		—
Construction	—		—		—		—		—		—		—
Multi-family	—		—		—		—		—		—		—
1-4 family	—		—		—		—		—		—		—
Commercial and industrial	2,072		2,072		1,439		1,456		109		8		101
Direct financing leases, net	84		84		66		50		4		—		4
Consumer and other:
Home equity and second mortgages	—		—		—		—		—		—		—
Other	—		—		—		—		—		—		—
Total	2,156		2,156		1,505		1,506		113		8		105
Total:
Commercial real estate:
Owner occupied	348		386		—		2,217		145		218		(73)
Non-owner occupied	—		—		—		2,281		233		16		217
Land development	—		—		—		7		—		—		—
Construction	—		—		—		—		—		—		—
Multi-family	—		—		—		—		—		—		—
1-4 family	339		344		—		285		60		24		36
Commercial and industrial	5,789		5,891		1,439		9,370		631		187		444
Direct financing leases, net	99		99		66		52		5		—		5
Consumer and other:
Home equity and second mortgages	—		—		—		40		7		9		(2)
Other	—		—		—		8		23		—		23
Grand total	$	6,575	$	6,720	$	1,505	$	14,260	$	1,104	$	454	$	650

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

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

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The difference between the recorded investment of loans and leases and the unpaid principal balance of ~~$144,000~~$107,000 and $145,000 as of ~~June~~September 30, 2022, and December 31, 2021, respectively, represents partial charge-offs of loans and leases resulting from losses due to the appraised value of the collateral securing the loans and leases being below the carrying values of the loans and leases. Impaired loans and leases also included ~~$188,000~~$172,000 and $217,000 of loans as of ~~June~~September 30, 2022, and December 31, 2021, respectively, that were performing TDRs, and although not on non-accrual, were reported as impaired due to the concession in terms. When a loan is placed on non-accrual, interest accrual is discontinued and previously accrued but uncollected interest is deducted from interest income. Cash payments collected on non-accrual loans are first applied to such loan’s principal. Foregone interest represents the interest that was contractually due on the loan but not received or recorded. To the extent the amount of principal on a non-accrual loan is fully collected and additional cash is received, the Corporation will recognize interest income.

To determine the level and composition of the allowance for loan and lease losses, the Corporation categorizes the portfolio into segments with similar risk characteristics. First, the Corporation evaluates loans and leases for potential impairment classification. The Corporation analyzes each loan and lease determined to be impaired 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. The Corporation applies historical trends from established risk factors to each category of loans and leases that has not been individually evaluated for the purpose of establishing the general portion of the allowance.

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


		As of and for the Three Months Ended June 30, 2022									As of and for the Three Months Ended September 30, 2022
		Commercial Real Estate		Commercial and Industrial		Consumer and Other		Total			Commercial Real Estate		Commercial and Industrial		Consumer and Other		Total
		(In Thousands)									(In Thousands)
Beginning balance	Beginning balance	$	13,765	$	8,912	$	992	$	23,669	Beginning balance	$	13,410	$	9,866	$	828	$	24,104
Charge-offs	Charge-offs	—		(85)		—		(85)		Charge-offs	—		(33)		(21)		(54)
Recoveries	Recoveries	4,121		117		9		4,247		Recoveries	23		50		8		81
Net recoveries (charge-offs)	Net recoveries (charge-offs)	4,121		32		9		4,162		Net recoveries (charge-offs)	23		17		(13)		27
Provision for loan and lease losses	Provision for loan and lease losses	(4,476)		922		(173)		(3,727)		Provision for loan and lease losses	(492)		629		(125)		12

Ending balance	Ending balance	$	13,410	$	9,866	$	828	$	24,104	Ending balance	$	12,941	$	10,512	$	690	$	24,143


		As of and for the Three Months Ended June 30, 2021									As of and for the Three Months Ended September 30, 2021
		Commercial Real Estate		Commercial and Industrial		Consumer and Other		Total			Commercial Real Estate		Commercial and Industrial		Consumer and Other		Total
		(In Thousands)									(In Thousands)
Beginning balance	Beginning balance	$	18,445	$	9,544	$	993	$	28,982	Beginning balance	$	16,876	$	7,881	$	918	$	25,675
Charge-offs	Charge-offs	(249)		(2,621)		(24)		(2,894)		Charge-offs	(7)		(356)		(1)		(364)
Recoveries	Recoveries	84		460		1		545		Recoveries	1,501		128		5		1,634
Net (charge-offs) recoveries		(165)		(2,161)		(23)		(2,349)
Net recoveries (charge-offs)										Net recoveries (charge-offs)	1,494		(228)		4		1,270
Provision for loan and lease losses	Provision for loan and lease losses	(1,404)		498		(52)		(958)		Provision for loan and lease losses	(2,736)		563		(96)		(2,269)

Ending balance	Ending balance	$	16,876	$	7,881	$	918	$	25,675	Ending balance	$	15,634	$	8,216	$	826	$	24,676

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		As of and for the Six Months Ended June 30, 2022									As of and for the Nine Months Ended September 30, 2022
		Commercial Real Estate		Commercial and Industrial		Consumer and Other		Total			Commercial Real Estate		Commercial and Industrial		Consumer and Other		Total
		(In Thousands)									(In Thousands)
Beginning balance	Beginning balance	$	15,110	$	8,413	$	813	$	24,336	Beginning balance	$	15,110	$	8,413	$	813	$	24,336
Charge-offs	Charge-offs	—		(107)		—		(107)		Charge-offs	—		(140)		(21)		(161)
Recoveries	Recoveries	4,237		201		19		4,457		Recoveries	4,259		251		27		4,537
Net recoveries (charge-offs)		4,237		94		19		4,350
Net recoveries										Net recoveries	4,259		111		6		4,376
Provision for loan and lease losses	Provision for loan and lease losses	(5,937)		1,359		(4)		(4,582)		Provision for loan and lease losses	(6,428)		1,988		(129)		(4,569)

Ending balance	Ending balance	$	13,410	$	9,866	$	828	$	24,104	Ending balance	$	12,941	$	10,512	$	690	$	24,143


		As of and for the Six Months Ended June 30, 2021									As of and for the Nine Months Ended September 30, 2021
		Commercial Real Estate		Commercial and Industrial		Consumer and Other		Total			Commercial Real Estate		Commercial and Industrial		Consumer and Other		Total
		(In Thousands)									(In Thousands)
Beginning balance	Beginning balance	$	17,157	$	10,593	$	771	$	28,521	Beginning balance	$	17,157	$	10,593	$	771	$	28,521
Charge-offs	Charge-offs	(249)		(2,765)		(24)		(3,038)		Charge-offs	(256)		(3,121)		(25)		(3,402)
Recoveries	Recoveries	2,303		913		2		3,218		Recoveries	3,804		1,041		7		4,852
Net (charge-offs) recoveries		2,054		(1,852)		(22)		180
Net recoveries (charge-offs)										Net recoveries (charge-offs)	3,548		(2,080)		(18)		1,450
Provision for loan and lease losses	Provision for loan and lease losses	(2,335)		(860)		169		(3,026)		Provision for loan and lease losses	(5,071)		(297)		73		(5,295)

Ending balance	Ending balance	$	16,876	$	7,881	$	918	$	25,675	Ending balance	$	15,634	$	8,216	$	826	$	24,676

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


		As of June 30, 2022									As of September 30, 2022
		Commercial Real Estate		Commercial and Industrial		Consumer and Other		Total			Commercial Real Estate		Commercial and Industrial		Consumer and Other		Total
		(In Thousands)									(In Thousands)
Allowance for loan and lease losses:	Allowance for loan and lease losses:									Allowance for loan and lease losses:
Collectively evaluated for impairment	Collectively evaluated for impairment	$	13,410	$	8,612	$	828	$	22,850	Collectively evaluated for impairment	$	12,941	$	8,811	$	690	$	22,442
Individually evaluated for impairment	Individually evaluated for impairment	—		1,254		—		1,254		Individually evaluated for impairment	—		1,701		—		1,701

Total	Total	$	13,410	$	9,866	$	828	$	24,104	Total	$	12,941	$	10,512	$	690	$	24,143
Loans and lease receivables:	Loans and lease receivables:									Loans and lease receivables:
Collectively evaluated for impairment	Collectively evaluated for impairment	$	1,488,334	$	749,454	$	47,519	$	2,285,307	Collectively evaluated for impairment	$	1,484,901	$	796,307	$	46,123	$	2,327,331
Individually evaluated for impairment	Individually evaluated for impairment	146		5,627		—		5,773		Individually evaluated for impairment	32		3,785		—		3,817

Total	Total	$	1,488,480	$	755,081	$	47,519	$	2,291,080	Total	$	1,484,933	$	800,092	$	46,123	$	2,331,148


	As of December 31, 2021
	Commercial Real Estate		Commercial and Industrial		Consumer and Other		Total
	(In Thousands)
Allowance for loan and lease losses:
Collectively evaluated for impairment	$	15,110	$	6,908	$	813	$	22,831
Individually evaluated for impairment	—		1,505		—		1,505

Total	$	15,110	$	8,413	$	813	$	24,336
Loans and lease receivables:
Collectively evaluated for impairment	$	1,453,941	$	740,674	$	39,741	$	2,234,356
Individually evaluated for impairment	687		5,888		—		6,575

Total	$	1,454,628	$	746,562	$	39,741	$	2,240,931

Note 6 — Leases

The Corporation leases various office spaces and specialized lending production offices under non-cancellable operating leases which expire on various dates through 2033. The Corporation also leases office equipment. The Corporation recognizes a right-of-use asset and an operating lease liability for all leases, with the exception of short-term leases. Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term. During 2022, the Corporation entered into a new lease in the Southeast Wisconsin market resulting in a $1.6 million right-of-use asset. In addition, the Corporation received a $991,000 tenant improvement allowance which is recognized as a lease incentive and deducted from the right-of-use asset.

In 2019, the Corporation entered into a sublease for office space it vacated in its Kansas City metropolitan area which expires in 2023. During the first quarter 2022, the Corporation amended the sublease agreement and the amendment did not result in any impairment.

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The components of total lease expense were as follows:


		For the Three Months Ended June 30,				For the Six Months Ended June 30,					For the Three Months Ended September 30,				For the Nine Months Ended September 30,
		2022		2021		2022		2021			2022		2021		2022		2021
		(In Thousands)									(In Thousands)
Operating lease cost	Operating lease cost	$	382	$	374	$	765	$	749	Operating lease cost	$	382	$	381	$	1,147	$	1,131
Short-term lease cost	Short-term lease cost	37		49		74		88		Short-term lease cost	38		31		112		119
Variable lease cost	Variable lease cost	140		111		266		239		Variable lease cost	142		126		408		365
Less: sublease income	Less: sublease income	(45)		(43)		(90)		(82)		Less: sublease income	(45)		(43)		(134)		(126)
Total lease cost, net	Total lease cost, net	$	514	$	491	$	1,015	$	994	Total lease cost, net	$	517	$	495	$	1,533	$	1,489

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


		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
Weighted-average remaining lease term (in years)	Weighted-average remaining lease term (in years)	6.84		5.05		Weighted-average remaining lease term (in years)	6.68		5.05
Weighted-average discount rate	Weighted-average discount rate	2.72	%	2.51	%	Weighted-average discount rate	2.76	%	2.51	%

The following maturity analysis shows the undiscounted cash flows due on the Corporation’s operating lease liabilities:


(In Thousands)	(In Thousands)			(In Thousands)
2022	2022	$	832	2022	$	419
2023	2023	1,248		2023	1,248
2024	2024	1,073		2024	1,073
2025	2025	949		2025	949
2026	2026	935		2026	935
Thereafter	Thereafter	3,003		Thereafter	3,003
Total undiscounted cash flows	Total undiscounted cash flows	8,040		Total undiscounted cash flows	7,627
Discount on cash flows	Discount on cash flows	(833)		Discount on cash flows	(800)
Total lease liability	Total lease liability	$	7,207	Total lease liability	$	6,827

Note 7 — Other Assets

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


		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
		(In Thousands)					(In Thousands)
Accrued interest receivable	Accrued interest receivable	$	6,433	$	5,497	Accrued interest receivable	$	7,348	$	5,497
Net deferred tax asset	Net deferred tax asset	7,870		6,175		Net deferred tax asset	10,110		6,175
Investment in historic development entities	Investment in historic development entities	2,369		2,299		Investment in historic development entities	2,176		2,299
Investment in low-income housing development entity	Investment in low-income housing development entity	8,901		2,964		Investment in low-income housing development entity	13,689		2,964

Investment in limited partnerships	Investment in limited partnerships	11,435		9,874		Investment in limited partnerships	13,230		9,874
Investment in Trust II	Investment in Trust II	—		315		Investment in Trust II	—		315
Prepaid expenses	Prepaid expenses	3,760		2,689		Prepaid expenses	3,372		2,689
Other assets	Other assets	8,100		9,577		Other assets	7,447		9,577
Total accrued interest receivable and other assets	Total accrued interest receivable and other assets	$	48,868	$	39,390	Total accrued interest receivable and other assets	$	57,372	$	39,390

As of March 30, 2022, the Corporation surrendered its common shares for no gain or loss and exited the Trust II entity, which was subsequently dissolved. Previously, the Corporation was the sole owner of $315,000 of common securities issued by Trust II. The purpose of Trust II was to complete the sale of $10.0 million of 10.50% fixed rate preferred securities. Trust II, a wholly

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owned subsidiary of the Corporation, is not consolidated into the financial statements of the Corporation. The investment in Trust II of $315,000 as of December 31, 2021 is included in accrued interest receivable and other assets.

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Note 8 — Deposits

The composition of deposits is shown below. Average balances represent year to date averages.


		June 30, 2022						December 31, 2021							September 30, 2022						December 31, 2021
		Balance		Average Balance		Average Rate		Balance		Average Balance		Average Rate			Balance		Average Balance		Average Rate		Balance		Average Balance		Average Rate
		(Dollars in Thousands)													(Dollars in Thousands)
Non-interest-bearing transaction accounts	Non-interest-bearing transaction accounts	$	544,507	$	559,793	—	%	$	589,559	$	536,981	—	%	Non-interest-bearing transaction accounts	$	564,141	$	568,131	—	%	$	589,559	$	536,981	—	%
Interest-bearing transaction accounts	Interest-bearing transaction accounts	466,785		517,923		0.23		530,225		506,693		0.19		Interest-bearing transaction accounts	461,883		507,402		0.42		530,225		506,693		0.19
Money market accounts	Money market accounts	731,718		775,808		0.22		754,410		693,608		0.17		Money market accounts	742,545		765,839		0.43		754,410		693,608		0.17
Certificates of deposit	Certificates of deposit	114,000		63,098		0.54		54,091		47,020		0.84		Certificates of deposit	160,655		80,093		0.85		54,091		47,020		0.84
Wholesale deposits	Wholesale deposits	12,321		14,282		2.94		29,638		119,831		0.82		Wholesale deposits	158,321		21,838		2.66		29,638		119,831		0.82
Total deposits	Total deposits	$	1,869,331	$	1,930,904	0.19		$	1,957,923	$	1,904,133	0.19		Total deposits	$	2,087,545	$	1,943,303	0.34		$	1,957,923	$	1,904,133	0.19

A summary of annual maturities of in-market and wholesale certificates of deposit at ~~June~~September 30, 2022 is as follows:


(In Thousands)	(In Thousands)			(In Thousands)
Maturities during the year ended December 31,	Maturities during the year ended December 31,			Maturities during the year ended December 31,
2022	2022	$	90,092	2022	$	208,837
2023	2023	16,724		2023	49,268
2024	2024	16,541		2024	26,424
2025	2025	402		2025	1,452
2026	2026	490		2026	492
Thereafter	Thereafter	2,072		Thereafter	2,503
		$	126,321		$	288,976

Wholesale deposits include ~~$12.3~~$128.3 million of wholesale certificates of deposit and no$30.0 million of non-reciprocal interest-bearing transaction accounts at ~~June~~September 30, 2022, compared to $19.6 million and $10.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at December 31, 2021.

Deposits include ~~$25.3~~$50.3 million and $7.9 million of certificates of deposit and wholesale deposits which are denominated in amounts greater than $250,000 at ~~June~~September 30, 2022 and December 31, 2021, respectively.

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

The composition of borrowed funds is shown below. Average balances represent year to date averages.

June 30, 2022 December 31, 2021
Balance Weighted Average
Balance Weighted
Average Rate Balance Weighted Average
Balance Weighted
Average Rate
(Dollars in Thousands)
Federal funds purchased $ — $ 22 2.01 % $ — $ — — %
FHLB advances 554,100 417,518 1.29 % 368,800 376,781 1.30 %
Line of credit — 171 2.76 500 78 2.90
Other borrowings 8,267 9,600 4.05 10,363 8,090 4.11
Subordinated notes payable 34,275 35,901 5.27 23,788 23,766 5.94
Junior subordinated notes(1)
— 4,898 20.58 10,076 10,068 11.05
$ 596,642 $ 468,110 1.86 $ 413,527 $ 418,783 1.86

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	September 30, 2022						December 31, 2021
	Balance		Weighted Average Balance		Weighted Average Rate		Balance		Weighted Average Balance		Weighted Average Rate
	(Dollars in Thousands)
Federal funds purchased	$	—	$	15	2.02	%	$	—	$	—	—	%

FHLB advances	377,800		422,576		1.54	%	368,800		376,781		1.30	%
Line of credit	—		114		2.77		500		78		2.90
Other borrowings	8,190		9,234		4.68		10,363		8,090		4.11
Subordinated notes payable	34,307		35,356		5.13		23,788		23,766		5.94
Junior subordinated notes(1)	—		3,247		20.69		10,076		10,068		11.05
	$	420,297	$	470,542	2.01		$	413,527	$	418,783	1.86

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

A summary of annual maturities of borrowings at ~~June~~September 30, 2022 is as follows:


(In Thousands)	(In Thousands)			(In Thousands)
Maturities during the year ended December 31,	Maturities during the year ended December 31,			Maturities during the year ended December 31,
2022	2022	$	338,300	2022	$	136,000
2023	2023	42,300		2023	42,300
2024	2024	35,500		2024	35,500
2025	2025	48,000		2025	56,000
2026	2026	60,000		2026	60,000
Thereafter	Thereafter	72,542		Thereafter	90,497
		$	596,642		$	420,297

In September 2008, Trust II completed the sale of $10.0 million of 10.50% fixed rate trust preferred securities (“Trust Preferred

Securities”). Trust II also issued common securities of $315,000. Trust II used the proceeds from the offering to purchase $10.3 million of 10.50% junior subordinated notes of the Corporation. The Trust Preferred Securities ~~are~~were mandatorily redeemable upon the maturity of the junior subordinated notes on September 26, 2038. As of March 30, 2022 the junior subordinated notes were redeemed and the remaining unamortized debt issuance cost was accelerated due to the early redemption. As of December 31, 2021 the unamortized debt issuance cost included in junior subordinated notes on the Consolidated Balance Sheets was $239,000.

The Corporation issued a new subordinated note payable as of March 4, 2022. The principal amount of the newly issued subordinated note ~~payable~~ was $20.0 million which qualified as Tier 2 capital. The subordinated note bears a fixed interest rate of 3.50% with a maturity date of March 15, 2032. The subordinated note payable has certain financial performance ~~debt~~ covenants, ofwith which the Corporation was in ~~compliance.~~compliance as of September 30, 2022. The Corporation may, at its option, redeem the note, in whole or part, at any time after the fifth anniversary of issuance. As of June 16, 2022, the $9.1 million subordinated notes payable that bore a fixed interest rate of 6.00% were redeemed, and the remaining unamortized debt issuance cost was accelerated due to the early redemption. As of ~~June~~September 30, 2022, ~~$725,000~~$693,000 of debt issuance costs remain in the subordinated note payable balance, of which ~~$456,000~~$433,000 is related to the recently issued subordinated note.

As of ~~June~~September 30, 2022 and December 31, 2021, the Corporation had other borrowings of $8.2 million and $10.4 million, respectively, which consisted of sold loans accounted for as secured borrowings because they did not qualify for true sale accounting.

As of ~~June~~September 30, 2022 and December 31, 2021, the Corporation was in compliance with its debt covenants under its third-party secured senior line of credit. Per the promissory note dated February 19, 2022, the Corporation pays a fee on this line of credit. During both the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, the Corporation incurred interest expense of ~~$6,600~~$10,000 due to this fee.

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Note 10 — Preferred Stock

On March 4, 2022, the Corporation issued 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”) in a private placement to institutional investors. The net proceeds received from the issuance of the Series A Preferred Stock were $12.0 million.

The Corporation expects to pay dividends on the Series A Preferred Stock when and if declared by the 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 Secured Overnight Financing Rate (“SOFR”) plus a spread of 539 basis points per annum. During the three and ~~six~~nine months ended ~~June~~September 30, 2022, the Board of Directors declared a cash preferred stock dividend of ~~$246,000.~~$218,000 and $464,000 respectively. The Series A Preferred Stock is perpetual and has no stated maturity. The Corporation may redeem the Series A Preferred Stock at its option at a redemption price equal to $1,000 per share, plus any declared and unpaid dividends (without regard to any undeclared dividends), subject to regulatory approval, on or after March 15, 2027 or within 90 days following a regulatory capital treatment event, in accordance with the terms of the Series A Preferred Stock.

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Note 11 — Commitments and Contingencies

In the normal course of business, various legal proceedings involving the Corporation are pending. Management, based upon advice from legal counsel, does not anticipate any significant losses as a result of these actions. Management believes that any liability arising from any such proceedings currently existing or threatened will not have a material adverse effect on the Corporation’s financial position, results of operations, and cash flows.

The Corporation sells the guaranteed portions of SBA 7(a) and 504 loans, as well as participation interests in other, non-SBA originated, loans to third parties. The Corporation has a continuing involvement in each of the transferred lending arrangements by way of relationship management and servicing the loans, as well as being subject to normal and customary requirements of the SBA loan program and standard representations and warranties related to sold amounts. In the event of a loss resulting from default and a determination by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Corporation, the SBA may require the Corporation to repurchase the loan, deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of the principal loss related to the deficiency from the Corporation. The Corporation must comply with applicable SBA regulations in order to maintain the guaranty. In addition, the Corporation retains the option to repurchase the sold guaranteed portion of an SBA loan if the loan defaults.

Management has assessed estimated losses inherent in the outstanding guaranteed portions of SBA loans sold in accordance with ASC 450, Contingencies, and determined a recourse reserve based on the probability of future losses for these loans to be ~~$673,000~~$763,000 at ~~June~~September 30, 2022, which is reported in accrued interest payable and other liabilities on the unaudited Consolidated Balance Sheets.

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


		As of and for the Three Months Ended June 30,				As of and for the Six Months Ended June 30,					As of and for the Three Months Ended September 30,				As of and for the Nine Months Ended September 30,
		2022		2021		2022		2021			2022		2021		2022		2021
		(In Thousands)									(In Thousands)
Balance at the beginning of the period	Balance at the beginning of the period	$	559	$	593	$	635	$	723	Balance at the beginning of the period	$	673	$	829	$	635	$	723
SBA recourse provision	SBA recourse provision	114		245		38		115		SBA recourse provision	96		(69)		134		45
Charge-offs, net	Charge-offs, net	—		(8)		—		(8)		Charge-offs, net	(6)		—		(6)		(8)
Balance at the end of the period	Balance at the end of the period	$	673	$	830	$	673	$	830	Balance at the end of the period	$	763	$	760	$	763	$	760

Note 12 — Fair Value Disclosures

The Corporation determines the fair values of its financial instruments based on the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is defined as the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date and is based on exit prices. Fair value includes assumptions about risk,

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such as nonperformance risk in liability fair values, and is a market-based measurement, not an entity-specific measurement. The standard describes three levels of inputs that may be used to measure fair value.

Level 1 — Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.

Level 2 — Level 2 inputs are inputs, other than quoted prices included with Level 1, that are observable for the asset or liability either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

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

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

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particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

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


		June 30, 2022									September 30, 2022
		Fair Value Measurements Using									Fair Value Measurements Using
		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
		(In Thousands)									(In Thousands)
Assets:	Assets:									Assets:
Securities available-for-sale:	Securities available-for-sale:									Securities available-for-sale:
U.S. treasuries	U.S. treasuries	$	—	$	4,573	$	—	$	4,573	U.S. treasuries	$	—	$	4,400	$	—	$	4,400
U.S. government agency securities - government-sponsored enterprises	U.S. government agency securities - government-sponsored enterprises	—		16,914		—		16,914		U.S. government agency securities - government-sponsored enterprises	—		15,252		—		15,252
Municipal securities	Municipal securities	—		38,774		—		38,774		Municipal securities	—		36,799		—		36,799
Residential mortgage-backed securities - government issued	Residential mortgage-backed securities - government issued	—		15,866		—		15,866		Residential mortgage-backed securities - government issued	—		16,059		—		16,059
Residential mortgage-backed securities - government-sponsored enterprises	Residential mortgage-backed securities - government-sponsored enterprises	—		95,958		—		95,958		Residential mortgage-backed securities - government-sponsored enterprises	—		93,374		—		93,374
Commercial mortgage-backed securities - government issued	Commercial mortgage-backed securities - government issued	—		3,497		—		3,497		Commercial mortgage-backed securities - government issued	—		3,080		—		3,080
Commercial mortgage-backed securities - government-sponsored enterprises	Commercial mortgage-backed securities - government-sponsored enterprises	—		32,080		—		32,080		Commercial mortgage-backed securities - government-sponsored enterprises	—		27,602		—		27,602
Other securities	Other securities	—		981		—		981		Other securities	—		—		—		—
Interest rate swaps	Interest rate swaps	—		44,461		—		44,461		Interest rate swaps	—		73,718		—		73,718
Liabilities:	Liabilities:									Liabilities:
Interest rate swaps	Interest rate swaps	—		40,357		—		40,357		Interest rate swaps	—		66,162		—		66,162

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	December 31, 2021
	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
	(In Thousands)
Assets:
Securities available-for-sale:
U.S. treasuries	$	—	$	4,914	$	—	$	4,914
U.S. government agency securities - government-sponsored enterprises	—		19,935		—		19,935
Municipal securities	—		30,957		—		30,957
Residential mortgage-backed securities - government issued	—		19,661		—		19,661
Residential mortgage-backed securities - government-sponsored enterprises	—		85,705		—		85,705
Commercial mortgage-backed securities - government issued	—		5,771		—		5,771
Commercial mortgage-backed securities - government-sponsored enterprises	—		36,531		—		36,531
Other securities	—		2,228		—		2,228
Interest rate swaps	—		26,343		—		26,343
Liabilities:
Interest rate swaps	—		28,283		—		28,283

For assets and liabilities measured at fair value on a recurring basis, there were no transfers between the levels during the three and ~~six~~nine months ended ~~June~~September 30, 2022 or the year ended December 31, 2021 related to the above measurements.

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


		June 30, 2022									September 30, 2022
		Fair Value Measurements Using									Fair Value Measurements Using
		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
		(In Thousands)									(In Thousands)
Impaired loans	Impaired loans	$	—	$	—	$	720	$	720	Impaired loans	$	—	$	—	$	1,321	$	1,321
Foreclosed properties	Foreclosed properties	—		—		124		124		Foreclosed properties	—		—		151		151
Loan servicing rights	Loan servicing rights	—		—		1,594		1,594		Loan servicing rights	—		—		1,551		1,551


	December 31, 2021
	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
	(In Thousands)
Impaired loans	$	—	$	—	$	1,000	$	1,000
Foreclosed properties	—		—		164		164
Loan servicing rights	—		—		1,601		1,601

Impaired loans were written down to the fair value of their underlying collateral less costs to sell of ~~$720,000~~$1.3 million and $1.0 million at ~~June~~September 30, 2022 and December 31, 2021, respectively, through the establishment of specific reserves or by recording charge-offs when the carrying value exceeded the fair value of the underlying collateral of impaired loans. Valuation techniques consistent with the market approach, income approach, or cost approach were used to measure fair value. These techniques included observable inputs for the individual impaired loans being evaluated, such as current appraisals, recent sales of similar assets, or other observable market data, and unobservable inputs, typically when discounts are applied to appraisal values to adjust such values to current market conditions or to reflect net realizable values. The quantification of unobservable inputs for Level 3 impaired loan values range from 8% - 100% as of the measurement date of ~~June~~September 30, 2022. The weighted average of those unobservable inputs was ~~32%~~34%. The majority of the impaired loans are considered collateral dependent loans or are supported by an SBA guaranty.

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Foreclosed properties, upon initial recognition, are remeasured and reported at fair value through a charge-off to the allowance for loan and lease losses, if deemed necessary, based upon the fair value of the foreclosed property. The fair value of a foreclosed property, upon initial recognition, is estimated using a market approach or based on observable market data, typically a current appraisal, or based upon assumptions specific to the individual property or equipment, such as management applied discounts used to further reduce values to a net realizable value when observable inputs become stale.

Loan servicing rights represent the asset retained upon sale of the guaranteed portion of certain SBA loans. When SBA loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. The servicing rights are subsequently measured using the amortization method, which requires amortization into interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.

The Corporation periodically reviews this portfolio for impairment and engages a third-party valuation firm to assess the fair value of the overall servicing rights portfolio. Loan servicing rights do not trade in an active, open market with readily observable prices. While sales of loan servicing rights do occur, the precise terms and conditions typically are not readily available to allow for a “quoted price for similar assets” comparison. Accordingly, the Corporation utilizes an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of its loan servicing rights. The valuation model incorporates prepayment assumptions to project loan servicing rights cash flows based on the current interest rate scenario, which is then discounted to estimate an expected fair value of the loan servicing rights. The valuation model considers portfolio characteristics of the underlying serviced portion of the SBA loans and uses the following significant unobservable inputs: (1) constant prepayment rate (“CPR”) assumptions based on the SBA sold pools historical CPR as quoted in Bloomberg and (2) a discount rate. Due to the nature of the valuation inputs, loan servicing rights are classified in Level 3 of the fair value hierarchy.

Fair Value of Financial Instruments

The Corporation is required to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions, consistent with exit price concepts for fair value measurements, are set forth below:

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June 30, 2022
Carrying
Amount Fair Value
Total Level 1 Level 2 Level 3
(In Thousands)
Financial assets:
Cash and cash equivalents $ 95,484 $ 95,484 $ 95,484 $ — $ —
Securities available-for-sale 208,643 208,643 — 208,643 —
Securities held-to-maturity 13,968 13,849 — 13,849 —
Loans held for sale 2,256 2,437 — 2,437 —
Loans and lease receivables, net 2,265,996 2,258,728 — — 2,258,728
Federal Home Loan Bank stock 22,959 N/A N/A N/A N/A
Accrued interest receivable 6,433 6,433 6,433 — —
Interest rate swaps 44,461 44,461 — 44,461 —
Financial liabilities:
Deposits 1,869,331 1,869,191 1,743,010 126,181 —
Federal Home Loan Bank advances and other borrowings 596,642 587,308 — 587,308 —
Accrued interest payable 1,708 1,708 1,708 — —
Interest rate swaps 40,357 40,357 — 40,357 —
Off-balance sheet items:
Standby letters of credit 116 116 — — 116

~~N/A = The fair value is not applicable due to restrictions placed on transferability~~


		December 31, 2021											September 30, 2022
		Carrying Amount		Fair Value									Carrying Amount		Fair Value
				Total		Level 1		Level 2		Level 3					Total		Level 1		Level 2		Level 3
		(In Thousands)											(In Thousands)
Financial assets:	Financial assets:											Financial assets:
Cash and cash equivalents	Cash and cash equivalents	$	57,110	$	57,110	$	57,110	$	—	$	—	Cash and cash equivalents	$	110,965	$	110,965	$	110,965	$	—	$	—
Securities available-for-sale	Securities available-for-sale	205,702		205,702		—		205,702		—		Securities available-for-sale	196,566		196,566		—		196,566		—
Securities held-to-maturity	Securities held-to-maturity	19,746		20,276		—		20,276		—		Securities held-to-maturity	13,531		13,078		—		13,078		—
Loans held for sale	Loans held for sale	3,570		3,927		—		3,927		—		Loans held for sale	773		834		—		834		—
Loans and lease receivables, net	Loans and lease receivables, net	2,215,072		2,241,093		—		—		2,241,093		Loans and lease receivables, net	2,306,557		2,299,299		—		—		2,299,299
Federal Home Loan Bank stock	Federal Home Loan Bank stock	13,336		N/A		N/A		N/A		N/A		Federal Home Loan Bank stock	15,701		N/A		N/A		N/A		N/A
Accrued interest receivable	Accrued interest receivable	5,497		5,497		5,497		—		—		Accrued interest receivable	7,348		7,348		7,348		—		—
Interest rate swaps	Interest rate swaps	26,343		26,343		—		26,343		—		Interest rate swaps	73,718		73,718		—		73,718		—
Financial liabilities:	Financial liabilities:											Financial liabilities:
Deposits	Deposits	1,957,923		1,968,195		1,894,273		73,922		—		Deposits	2,087,545		2,085,419		1,798,569		286,850		—
Federal Home Loan Bank advances and other borrowings	Federal Home Loan Bank advances and other borrowings	403,451		409,894		—		409,894		—		Federal Home Loan Bank advances and other borrowings	420,297		411,193		—		411,193		—
Junior subordinated notes		10,076		8,844		—		—		8,844

Accrued interest payable	Accrued interest payable	1,008		1,008		1,008		—		—		Accrued interest payable	2,038		2,038		2,038		—		—
Interest rate swaps	Interest rate swaps	28,283		28,283		—		28,283		—		Interest rate swaps	66,162		66,162		—		66,162		—
Off-balance sheet items:	Off-balance sheet items:											Off-balance sheet items:
Standby letters of credit	Standby letters of credit	203		203		—		—		203		Standby letters of credit	170		170		—		—		170

N/A = The fair value is not applicable due to restrictions placed on transferability

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	December 31, 2021
	Carrying Amount		Fair Value
			Total		Level 1		Level 2		Level 3
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	57,110	$	57,110	$	57,110	$	—	$	—
Securities available-for-sale	205,702		205,702		—		205,702		—
Securities held-to-maturity	19,746		20,276		—		20,276		—
Loans held for sale	3,570		3,927		—		3,927		—
Loans and lease receivables, net	2,215,072		2,241,093		—		—		2,241,093
Federal Home Loan Bank stock	13,336		N/A		N/A		N/A		N/A
Accrued interest receivable	5,497		5,497		5,497		—		—
Interest rate swaps	26,343		26,343		—		26,343		—
Financial liabilities:
Deposits	1,957,923		1,968,195		1,894,273		73,922		—
Federal Home Loan Bank advances and other borrowings	403,451		409,894		—		409,894		—
Junior subordinated notes	10,076		8,844		—		—		8,844
Accrued interest payable	1,008		1,008		1,008		—		—
Interest rate swaps	28,283		28,283		—		28,283		—
Off-balance sheet items:
Standby letters of credit	203		203		—		—		203

N/A = The fair value is not applicable due to restrictions placed on transferability

Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the unaudited Consolidated Balance Sheets. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Corporation.

Securities: The fair value measurements of investment securities are determined by a third-party pricing service which considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, credit information, and the securities’ terms and conditions, among other things. The fair value measurements are subject to independent verification by another pricing source on a quarterly basis to review for reasonableness. Any significant differences in pricing are reviewed with appropriate members of management who have the relevant technical expertise to assess the results. The Corporation has determined that these valuations are classified in Level 2 of the fair value hierarchy. When the independent pricing service does not provide a fair value measurement for a particular security, the Corporation will estimate the fair value based on specific information about each security. Fair values derived in this manner are classified in Level 3 of the fair value hierarchy.

Loans Held for Sale: Loans held for sale, which consist of the guaranteed portions of SBA 7(a) loans, are carried at the lower of cost or estimated fair value. The estimated fair value is based on what secondary markets are currently offering for portfolios with similar characteristics.

Interest Rate Swaps: The carrying amount and fair value of existing derivative financial instruments are based upon independent valuation models, which use widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative contract. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The Corporation incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative

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

Limitations: Fair value estimates are made at a discrete point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holding of a particular financial instrument. Because no market exists for a significant portion of the Corporation’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and are not considered in the estimates.

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Note 13 — Derivative Financial Instruments

The Corporation offers interest rate swap products directly to qualified commercial borrowers. The Corporation economically hedges client derivative transactions by entering into offsetting interest rate swap contracts executed with a third party. Derivative transactions executed as part of this program are not considered hedging instruments and are marked-to-market through earnings each period. The derivative contracts have mirror-image terms, which results in the positions’ changes in fair value offsetting through earnings each period. The credit risk and risk of non-performance embedded in the fair value calculations is different between the dealer counterparties and the commercial borrowers which may result in a difference in the changes in the fair value of the mirror-image swaps. The Corporation incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the counterparty’s risk in the fair value measurements. When evaluating the fair value of its derivative contracts for the effects of non-performance and credit risk, the Corporation considered the impact of netting and any applicable credit enhancements such as collateral postings, thresholds, and guarantees. As of ~~June~~September 30, 2022 and December 31, 2021, the credit valuation allowance was $191,000.

The Corporation receives fixed rates and pays floating rates based upon designated benchmark interest rates used on the swaps with commercial borrowers. Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements. The Corporation pays fixed rates and receives floating rates based upon designated benchmark interest rates used on the swaps with dealer counterparties. Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and are reported on the unaudited Consolidated Balance Sheet. The gross amount of dealer counterparty swaps, without regard to the enforceable master netting agreement, was a gross derivative liability of ~~$3.2~~$66.2 million and ~~$40.3 million~~no gross derivative ~~asset.~~assets. No right of offset existed with the dealer counterparty swaps as of ~~June~~September 30, 2022.

All changes in the fair value of these instruments are recorded in other non-interest income. Given the mirror-image terms of the outstanding derivative portfolio, the change in fair value for the three and ~~six~~nine months ended ~~June~~September 30, 2022 and 2021 had an insignificant impact on the unaudited Consolidated Statements of Income.

The Corporation also enters into interest rate swaps to manage interest rate risk and reduce the cost of match-funding certain long-term fixed rate loans. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. The instruments are designated as cash flow hedges as the receipt of floating rate interest from the counterparty is used to manage interest rate risk associated with forecasted issuances of short-term FHLB advances. The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affects earnings. A pre-tax unrealized gain of ~~$1.7~~$3.2 million and ~~$5.7~~$8.9 million was recognized in other comprehensive income for the three and ~~six~~nine months ended ~~June~~September 30, 2022, and there were no ineffective portions of these hedges.

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reclassified into earnings in the period that the hedged transactions affects earnings. A pre-tax unrealized gain of ~~$426,000~~$215,000 and ~~$376,000~~$592,000 was recognized in other comprehensive income for the three and ~~six~~nine months ended ~~June~~September 30, 2022 and there was no ineffective portion of these hedges.

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		As of June 30, 2022							As of September 30, 2022
		Number of Instruments	Notional Amount		Weighted Average Maturity (In Years)	Fair Value			Number of Instruments	Notional Amount		Weighted Average Maturity (In Years)	Fair Value
		(Dollars in Thousands)							(Dollars in Thousands)
Included in Derivative assets	Included in Derivative assets							Included in Derivative assets
Derivatives not designated as hedging instruments	Derivatives not designated as hedging instruments							Derivatives not designated as hedging instruments
Interest rate swap agreements on loans with commercial loan customers		12	$	131,393	8.91	$	3,215

Interest rate swap agreements on loans with third-party counter parties	Interest rate swap agreements on loans with third-party counter parties	81	646,078		8.12	37,142		Interest rate swap agreements on loans with third-party counter parties	81	$	666,218	7.81	$	66,162
Derivatives designated as hedging instruments	Derivatives designated as hedging instruments							Derivatives designated as hedging instruments
Interest rate swap related to AFS securities	Interest rate swap related to AFS securities	11	$	12,500	9.78	$	377	Interest rate swap related to AFS securities	11	$	12,500	9.53	$	592
Interest rate swap related to FHLB borrowings	Interest rate swap related to FHLB borrowings	12	$	124,400	3.19	$	3,727	Interest rate swap related to FHLB borrowings	12	124,400		2.94	6,964
Included in Derivative liabilities	Included in Derivative liabilities							Included in Derivative liabilities
Derivatives not designated as hedging instruments	Derivatives not designated as hedging instruments							Derivatives not designated as hedging instruments
Interest rate swap agreements on loans with commercial loan customers	Interest rate swap agreements on loans with commercial loan customers	69	$	514,685	7.92	$	40,357	Interest rate swap agreements on loans with commercial loan customers	81	$	666,218	7.81	$	66,162


	As of December 31, 2021
	Number of Instruments	Notional Amount		Weighted Average Maturity (In Years)	Fair Value
	(Dollars in Thousands)
Included in Derivative assets
Derivatives not designated as hedging instruments
Interest rate swap agreements on loans with commercial loan customers	41	$	411,913	8.18	$	26,343




Included in Derivative liabilities
Derivatives not designated as hedging instruments
Interest rate swap agreements on loans with commercial loan customers	39	$	228,676	8.70	$	6,595
Interest rate swap agreements on loans with third-party counter parties	80	640,589		8.37	19,748
Derivatives designated as hedging instruments

Interest rate swap related to FHLB borrowings	10	$	106,000	3.17	$	1,940

Note 14 — Regulatory Capital

The Corporation and the Bank are subject to various regulatory capital requirements administered by Federal and Wisconsin banking agencies. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions on the part of regulators, that if undertaken, could have a direct material effect on the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory practices. The Corporation’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The Corporation regularly reviews and updates, when appropriate, its Capital and Liquidity Action Plan, which is designed to help ensure appropriate capital adequacy, to plan for future capital needs, and to ensure that the Corporation serves as a source of financial strength to the Bank. The Corporation’s and the Bank’s Board and management teams adhere to the appropriate regulatory guidelines on decisions which affect their respective capital positions, including but not limited to, decisions relating to the payment of dividends and increasing indebtedness.

As a bank holding company, the Corporation’s ability to pay dividends is affected by the policies and enforcement powers of the Board of Governors of the Federal Reserve system (the “Federal Reserve”). Federal Reserve guidance urges financial

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institutions to strongly consider eliminating, deferring, or significantly reducing dividends if: (i) net income available to common shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully

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fund the dividend; (ii) the prospective rate of earnings retention is not consistent with the bank holding company’s capital needs and overall current and prospective financial condition; or (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital ratios. Management intends, when appropriate under regulatory guidelines, to consult with the Federal Reserve Bank of Chicago and provide it with information on the Corporation’s then-current and prospective earnings and capital position in advance of declaring any cash dividends. As a Wisconsin corporation, the Corporation is subject to the limitations of the Wisconsin Business Corporation Law, which prohibit the Corporation from paying dividends if such payment would: (i) render the Corporation unable to pay its debts as they become due in the usual course of business, or (ii) result in the Corporation’s assets being less than the sum of its total liabilities plus the amount needed to satisfy the preferential rights upon dissolution of any shareholders with preferential rights superior to those shareholders receiving the dividend.

The Bank is also subject to certain legal, regulatory, and other restrictions on their ability to pay dividends to the Corporation. As a bank holding company, the payment of dividends by the Bank to the Corporation is one of the sources of funds the Corporation could use to pay dividends, if any, in the future and to make other payments. Future dividend decisions by the Bank and the Corporation will continue to be subject to compliance with various legal, regulatory, and other restrictions as defined from time to time.

Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of Total Common Equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to adjusted total assets. These risk-based capital requirements presently address credit risk related to both recorded and off-balance sheet commitments and obligations.

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As of ~~June~~September 30, 2022, the Corporation’s capital levels exceeded the regulatory minimums and the Bank’s capital levels remained characterized as well capitalized under the regulatory framework. The following tables summarize both the Corporation’s and the Bank’s capital ratios and the ratios required by their federal regulators:


		As of June 30, 2022																	As of September 30, 2022
		Actual				Minimum Required for Capital Adequacy Purposes				For Capital Adequacy Purposes Plus Capital Conservation Buffer				Minimum Required to Be Well Capitalized Under Prompt Corrective Action Requirements					Actual				Minimum Required for Capital Adequacy Purposes				For Capital Adequacy Purposes Plus Capital Conservation Buffer				Minimum Required to Be Well Capitalized Under Prompt Corrective Action Requirements
		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio			Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
		(Dollars in Thousands)																	(Dollars in Thousands)
Total capital (to risk-weighted assets)	Total capital (to risk-weighted assets)																	Total capital (to risk-weighted assets)
Consolidated	Consolidated	$	309,573	11.56	%	$	214,312	8.00	%	$	281,285	10.50	%	N/A		N/A		Consolidated	$	317,840	11.66	%	$	218,100	8.00	%	$	286,257	10.50	%	N/A		N/A
First Business Bank	First Business Bank	301,151		11.25		214,190		8.00		281,125		10.50		$	267,738	10.00	%	First Business Bank	313,112		11.49		217,954		8.00		286,065		10.50		$	272,443	10.00	%
Tier 1 capital (to risk-weighted assets)	Tier 1 capital (to risk-weighted assets)																	Tier 1 capital (to risk-weighted assets)
Consolidated	Consolidated	$	250,331	9.34	%	$	160,734	6.00	%	$	227,707	8.50	%	N/A		N/A		Consolidated	$	258,435	9.48	%	$	163,575	6.00	%	$	231,732	8.50	%	N/A		N/A
First Business Bank	First Business Bank	276,184		10.32		160,643		6.00		227,577		8.50		$	214,190	8.00	%	First Business Bank	288,014		10.57		163,466		6.00		231,576		8.50		$	217,954	8.00	%
Common equity tier 1 capital (to risk-weighted assets)	Common equity tier 1 capital (to risk-weighted assets)																	Common equity tier 1 capital (to risk-weighted assets)
Consolidated	Consolidated	$	238,339	8.90	%	$	120,551	4.50	%	$	187,523	7.00	%	N/A		N/A		Consolidated	$	246,443	9.04	%	$	122,682	4.50	%	$	190,838	7.00	%	N/A		N/A
First Business Bank	First Business Bank	276,184		10.32		120,482		4.50		187,417		7.00		$	174,030	6.50	%	First Business Bank	288,014		10.57		122,599		4.50		190,710		7.00		$	177,088	6.50	%
Tier 1 leverage capital (to adjusted assets)	Tier 1 leverage capital (to adjusted assets)																	Tier 1 leverage capital (to adjusted assets)
Consolidated	Consolidated	$	250,331	9.19	%	$	108,923	4.00	%	$	108,923	4.00	%	N/A		N/A		Consolidated	$	258,435	9.34	%	$	110,684	4.00	%	$	110,684	4.00	%	N/A		N/A
First Business Bank	First Business Bank	276,184		10.15		108,823		4.00		108,823		4.00		$	136,029	5.00	%	First Business Bank	288,014		10.42		110,602		4.00		110,602		4.00		$	138,253	5.00	%


	As of December 31, 2021
	Actual				Minimum Required for Capital Adequacy Purposes				For Capital Adequacy Purposes Plus Capital Conservation Buffer				Minimum Required to Be Well Capitalized Under Prompt Corrective Action Requirements
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in Thousands)
Total capital (to risk-weighted assets)
Consolidated	$	281,745	10.82	%	$	208,337	8.00	%	$	273,443	10.50	%	N/A		N/A
First Business Bank	280,448		10.78		208,142		8.00		273,187		10.50		$	260,178	10.00	%
Tier 1 capital (to risk-weighted assets)
Consolidated	$	232,795	8.94	%	$	156,253	6.00	%	$	221,358	8.50	%	N/A		N/A
First Business Bank	255,286		9.81		156,107		6.00		221,151		8.50		$	208,142	8.00	%
Common equity tier 1 capital (to risk-weighted assets)
Consolidated	$	222,719	8.55	%	$	117,190	4.50	%	$	182,295	7.00	%	N/A		N/A
First Business Bank	255,286		9.81		117,080		4.50		182,124		7.00		$	169,116	6.50	%
Tier 1 leverage capital (to adjusted assets)
Consolidated	$	232,795	8.94	%	$	104,145	4.00	%	$	104,145	4.00	%	N/A		N/A
First Business Bank	255,286		9.81		104,045		4.00		104,045		4.00		$	130,056	5.00	%

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

Unless otherwise indicated or unless the context requires otherwise, all references in this Report to the “Corporation,” “we,” “us,” “our,” or similar references mean First Business Financial Services, Inc. together with our subsidiary. “FBB” or the “Bank” refers to our subsidiary, First Business Bank.

Forward-Looking Statements

This report may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which reflect our current views with respect to future events and financial performance. Forward-looking statements are not based on historical information, but rather are related to future operations, strategies, financial results, or other developments. Forward-looking statements are based on management’s expectations as well as certain assumptions and estimates made by, and information available to, management at the time the statements are made. Such statements are subject to risks and uncertainties, including among other things:

•Adverse changes in the economy or business conditions, either nationally or in our markets, including, without limitation, inflation, supply chain issues, labor shortages, wage pressures, and the adverse effects of the COVID-19 pandemic on the global, national, and local economy.

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

•Increases in defaults by borrowers and other delinquencies.

•Our ability to manage growth effectively, including the successful expansion of our client support, administrative infrastructure, and internal management systems.

•Fluctuations in interest rates and market prices.

•Changes in legislative or regulatory requirements applicable to us and our subsidiaries.

•Changes in tax requirements, including tax rate changes, new tax laws, and revised tax law interpretations.

•Fraud, including client and system failure or breaches of our network security, including our internet banking activities.

•Failure to comply with the applicable SBA regulations in order to maintain the eligibility of the guaranteed portions of SBA loans.

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 stockholders and potential investors. See Part I, Item 1A — Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2021 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. The factors described within this Form 10-Q could affect our financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods.

Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, we caution that, while our management believes such assumptions or bases are reasonable and are made in good faith, assumed facts or bases can vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. Where, in any forward-looking statement, an expectation or belief is expressed as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be achieved or accomplished.

We do not intend to, and specifically disclaim any obligation to, update any forward-looking statements.

The following discussion and analysis is intended as a review of significant events and factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with the unaudited Consolidated Financial Statements and the Notes thereto presented in this Form 10-Q.

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Overview

We are a registered bank holding company incorporated under the laws of the State of Wisconsin and are engaged in the commercial banking business through our wholly-owned banking subsidiary, FBB. All of our operations are conducted through FBB and First Business Specialty Finance, LLC (“FBSF”), a wholly-owned subsidiary of FBB. We operate as a business bank focusing on delivering a full line of commercial banking products and services tailored to meet the specific needs of small and medium-sized businesses, business owners, executives, professionals, and high net worth individuals. Our products and services include those for business banking, private wealth, and bank consulting. Within business banking, we offer commercial lending, asset-based lending, accounts receivable financing, equipment financing, floorplan financing, vendor financing, SBA lending and servicing, treasury management services, and company retirement plans. Our private wealth services for executives and individuals include trust and estate administration, financial planning, investment management, consumer lending, and private banking. ~~For other financial institutions, our~~Our bank consulting experts provide investment portfolio administrative services, asset liability management services, and asset liability management process ~~validation.~~validation for other financial institutions. We do not utilize a branch network to attract retail clients. Our operating philosophy is predicated on deep client relationships within our commercial bank markets and extensive expertise within our nationwide specialized lending business lines, combined with the efficiency of centralized administrative functions, such as information technology, loan and deposit operations, finance and accounting, credit administration, compliance, marketing, and human resources. Our focused model allows experienced staff to provide the level of financial expertise needed to develop and maintain long-term relationships with our clients.

Financial Performance Summary

Results as of and for the three and ~~six~~nine months ended ~~June~~September 30, 2022 include:

•Net income available to common shareholders totaled ~~$11.0~~$10.6 million, or diluted earnings per share of ~~$1.29,~~$1.25, for the three months ended ~~June~~September 30, 2022, compared to ~~$8.2~~$9.2 million, or diluted earnings per share of ~~$0.95,~~$1.07, for the same period in 2021. Net income available to common shareholders totaled ~~$19.6~~$30.2 million, or diluted earnings per share of ~~$2.31,~~$3.57, for the ~~six~~nine months ended ~~June~~September 30, 2022, compared to ~~$18.0~~$27.2 million, or diluted earnings per share of ~~$2.08,~~$3.15, for the same period in 2021.

•Annualized return on average assets (“ROA”) and annualized return on average ~~common~~ equity (“~~ROCE”~~ROAE”) for the three months ended ~~June~~September 30, 2022 measured ~~1.61%~~1.57% and ~~18.79%~~16.97%, respectively, compared to ~~1.26%~~1.41% and ~~15.09%~~16.39% for the same period in 2021. Annualized ROA and annualized ~~ROCE~~ROAE for the ~~six~~nine months ended ~~June~~September 30, 2022 measured ~~1.46%~~1.49% and ~~16.74%~~16.59%, respectively, compared to ~~1.38%~~1.39% and ~~16.75%~~16.63% for the same period in 2021.

•Return on average tangible common equity (“ROATCE”), which is defined as net income less earnings allocated to participating shares and preferred stock dividends, if any, divided by average equity reduced by intangible assets and average preferred stock, if any. ROATCE was 17.88% and 17.40% for the three and nine months ended September 30, 2022, respectively, compared to 16.85% and 17.12% for the same periods in 2021.

•Pre-tax, pre-provision (“PTPP”) adjusted earnings, which excludes certain one-time and discrete items, ~~totaled $10.8~~and PTPP ROA were $14.2 million and 2.05%, respectively, for the three months ended ~~June~~September 30, 2022, increasing ~~$835,000, or 8.3%~~$4.5 million and 56 basis points (“bps”), from ~~the same period in 2021. Pre-tax, pre-provision adjusted ROA was 1.60% for the three months ended June 30, 2022, compared to 1.53% for~~ the same period in 2021. Excluding PPP interest and fee income, ~~pre-tax, pre-provision~~PTPP adjusted earnings ~~totaled $10.6~~and ROA were $14.1 million and 2.05%, respectively, for the three months ended ~~June~~September 30, 2022, up ~~$3.7~~$6.3 million ~~or 53.8%,~~and 81 bps from ~~the same period in 2021. Pre-tax, pre-provision adjusted ROA, excluding the impact of PPP, was 1.57% for the three months ended June 30, 2022, compared to 1.15% for~~ the same period in 2021.

•~~Pre-tax, pre-provision~~PTPP adjusted earnings and ROA totaled ~~$20.8~~$34.9 million and 1.72%, respectively, for the ~~six~~nine months ended ~~June~~September 30, 2022, up ~~$153,000, or 0.7%,~~$4.6 million and 17 bps from ~~the same period in 2021. Pre-tax, pre-provision adjusted ROA was 1.54% for the six months ended June 30, 2022, compared to 1.59% for~~ the same period in 2021. Excluding PPP interest and fee income, ~~pre-tax, pre-provision~~PTPP adjusted earnings ~~totaled $20.2~~and ROA were $34.3 million and 1.69%, respectively, for the ~~six~~nine months ended ~~June~~September 30, 2022, ~~up $5.6~~increasing $11.8 million ~~or 37.8%,~~and 45 bps from ~~the same period in 2021. Pre-tax, pre-provision adjusted ROA, excluding the impact of PPP, was 1.51% for the six months ended June 30, 2022, compared to 1.24% for~~ the same period in 2021.

•Fees in lieu of interest, defined as prepayment fees, asset-based loan fees, non-accrual interest, and loan fee amortization, totaled ~~$1.9~~$807,000 and $4.0 million for the three and nine months ended ~~June~~September 30, 2022, respectively, compared to ~~$3.5~~$2.8 million and $9.5 million for the ~~three months ended June 30,~~same periods in 2021. PPP fee income, included in loan fee amortization, was ~~$196,000 for~~$61,000 and $506,000for the three and nine months ended ~~June~~September 30, 2022, respectively, compared to ~~$2.5~~$1.7 million and $6.4 million for the same ~~period in 2021.~~

•Fees in lieu of interest totaled $3.2 million for the six months ended June 30, 2022, compared to $6.6 million for the six months ended June 30, 2021. PPP fee income, included in loan fee amortization, was $445,000 for the six months ended June 30, 2022 compared to $4.8 million for the same periodperiods in 2021.

•Net interest margin was ~~3.71%~~4.01% for the three months ended ~~June~~September 30, 2022 compared to ~~3.49%~~3.45% for the same period in 2021. Adjusted net interest margin, which excludes certain one-time and volatile items, was ~~3.45%~~3.89% for the three months ended ~~June~~September 30, 2022 up from ~~3.20%~~3.22% for the same period in 2021. Net interest margin ~~was 3.55%~~and adjusted net interest margin were 3.71% and 3.53%, respectively, for the ~~six~~nine months ended ~~June~~September 30, 2022 compared to 3.46% ~~for the same period in 2021. Adjusted net interest margin, which excludes certain one-time~~ and ~~volatile items, was 3.35% for the six months ended June 30, 2022 up from 3.20%~~3.21%, respectively, for the same period in 2021.

~~Table of Contents~~

•Top line revenue, defined as net interest income plus non-interest income, totaled ~~$30.5~~$34.1 million and $93.4 million for the three and nine months ended ~~June~~September 30, 2022, up ~~$2.6~~$5.8 million and $9.2 million, or ~~9.1%~~20.7% and 10.9% from the same period in ~~2021.~~2021, respectively. Excluding PPP interest income and fees, top line revenue for the three and nine

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months ended September 30, 2022 increased ~~$5.4~~$7.7 million and $16.4 million, up ~~21.9%~~29.1% and 21.4% from the same period in ~~2021. Top line revenue totaled $59.3 million~~2021, respectively.

•Effective tax rate was 22.64% for the ~~six~~nine months ended ~~June~~September 30, 2022 ~~up $3.3 million, or 5.9% from~~compared to 23.61% for the same period in 2021. ~~Excluding PPP interest~~The nine months ended September 30, 2022 included a $155,000 benefit from a low income ~~and fees, top line revenue increased $8.7 million, up 17.4% from~~housing tax credit investment, while the same period in ~~2021.~~2021 did not include any tax credit benefit.

•Provision for loan and lease losses was ~~a benefit~~an expense of ~~$3.7 million~~$12,000 for the three months ended ~~June~~September 30, 2022 compared to a benefit of ~~$958,000~~$2.3 million for the same period in 2021. Provision for loan and lease losses was a benefit of $4.6 million for the ~~six~~nine months ended ~~June~~September 30, 2022 compared to a benefit of ~~$3.0~~$5.3 million for the same period in 2021.

•Total assets at ~~June~~September 30, 2022 increased ~~$124.1~~$197.9 million, or ~~9.4%~~9.9% annualized, to ~~$2.777~~$2.851 billion from $2.653 billion at December 31, 2021.

•Period-end gross loans and leases receivable increased ~~$50.1~~$90.2 million, or ~~4.5%~~5.4% annualized, to ~~$2.291~~$2.331 billion as of ~~June~~September 30, 2022 compared to $2.241 billion as of December 31, 2021. Average gross loans and leases of ~~$2.259~~$2.278 billion increased ~~$55.6~~$99.4 million, or ~~2.5%,~~6.1% annualized, for the ~~six~~nine months ended ~~June~~September 30, 2022, compared to ~~$2.203~~$2.179 billion for the same period in 2021.

•Period-end gross loans and leases receivable, excluding PPP loans, at ~~June~~September 30, 2022 increased ~~$69.7~~$115.7 million, or ~~6.3%~~7.0% annualized, to ~~$2.283~~$2.329 billion from $2.213 billion as of December 31, 2021. Average gross loans and leases, excluding net PPP loans, of ~~$2.243~~$2.266 billion increased ~~$275.0~~$272.8 million, or ~~14.0%~~13.7%, for the ~~six~~nine months ended ~~June~~September 30, 2022, compared to ~~$1.968~~$1.993 billion for the same period in 2021.

•Period-end gross PPP loans and PPP deferred processing fees were ~~$8.3~~$2.4 million and ~~$113,000,~~$52,000, respectively, at ~~June~~September 30, 2022 compared to $27.9 million and $557,000 at December 31, 2021. Average PPP loans, net of deferred processing fees, were ~~$16.3~~$12.3 million for the ~~six~~nine months ended ~~June~~September 30, 2022 compared to ~~$235.7~~$185.7 million for the same period in 2021.

•Non-performing assets were ~~$5.7~~$3.8 million and ~~0.21%~~0.13% of total assets as of ~~June~~September 30, 2022, compared to $6.5 million and 0.25% of total assets as of December 31, 2021.

•The allowance for loan and lease losses decreased ~~$232,000,~~$193,000, or ~~1.0%,~~1.1% annualized, compared to December 31, 2021. The allowance for loan and lease losses decreased to ~~1.05%~~1.04% of total loans, compared to 1.09% at December 31, 2021. ~~Excluding net PPP loans, the allowance for loan and lease losses decreased to 1.06% of total loans as of June 30, 2022, compared to 1.10% as of December 31, 2021.~~

•Period-end in-market deposits at ~~June~~September 30, 2022 ~~decreased $71.3 million, or 3.7%,~~increased $939,000 to ~~$1.857~~$1.929 billion from $1.928 billion as of December 31, 2021. Average in-market deposits of ~~$1.917~~$1.921 billion increased ~~$187.8~~$165.0 million, or ~~10.9%~~9.4%, for the ~~six~~nine months ended ~~June~~September 30, 2022, compared to ~~$1.729~~$1.756 billion for the same period in 2021.

•Private wealth and trust assets under management and administration decreased by ~~$280.3~~$428.1 million, or ~~9.9%,~~19.5% annualized, to ~~$2.554~~$2.493 billion at ~~June~~September 30, 2022, compared to $2.921 billion at December 31, 2021. Private wealth management service fees decreased $141,000, or 5.1%, but increased ~~$108,000,~~$401,000, or ~~3.9%, and $542,000, or 10.5%~~5.1%, for the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively, compared to the three and ~~six~~nine months ended ~~June~~September 30, ~~2021.~~2021, respectively.

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Results of Operations

Top Line Revenue

Top line revenue, comprised of net interest income and non-interest income, increased ~~$2.6~~$5.8 million, or ~~9.1%~~20.7%, for the three months ended ~~June~~September 30, 2022, compared to the same period in 2021, due to a 9%22.0% and 16.8% increase in net interest income and non-interest ~~income.~~income, respectively. The increase in net interest income, driven by an increase in net interest margin and average loans and leases outstanding, was partially offset by a decrease in PPP interest and fees of ~~$2.9~~$1.8 million. Excluding PPP interest and fees, top line revenue grew ~~21.9%~~29.1%. The increase in non-interest income was due to an increase in commercial loan swap fee income, private wealth fee income, loan fee income, and services charges on deposits, partially offset by a reduction in gains on the sale of SBA loans. Top line revenue increased ~~$3.3~~$9.2 million, or ~~5.9%~~10.9%, for the ~~six~~nine months ended ~~June~~September 30, 2022, compared to the same period in 2021, primarily due to a 6%11.3% increase in net interest ~~income and non-interest~~ income combined with a benefit from above-average returns from the Corporation’s investments in mezzanine funds. Excluding PPP interest and fees, top line revenue grew ~~17.4%~~21.4%.

The components of top line revenue were as follows:


		For the Three Months Ended June 30,							For the Six Months Ended June 30,								For the Three Months Ended September 30,							For the Nine Months Ended September 30,
		2022		2021		$ Change		% Change	2022		2021		$ Change		% Change		2022		2021		$ Change		% Change	2022		2021		$ Change		% Change
		(Dollars in Thousands)															(Dollars in Thousands)
Net interest income	Net interest income	$	23,660	$	21,652	$	2,008	9.3%	$	45,087	$	42,515	$	2,572	6.0%	Net interest income	$	25,884	$	21,223	$	4,661	22.0%	$	70,971	$	63,738	$	7,233	11.3%
Non-interest income	Non-interest income	6,872		6,321		551		8.7	14,258		13,516		742		5.5	Non-interest income	8,197		7,015		1,182		16.8	22,455		20,531		1,924		9.4
Top line revenue	Top line revenue	$	30,532	$	27,973	$	2,559	9.1	$	59,345	$	56,031	$	3,314	5.9	Top line revenue	$	34,081	$	28,238	$	5,843	20.7	$	93,426	$	84,269	$	9,157	10.9

Annualized Return on Average Assets and Annualized Return on Average Common Equity

ROA for the three and ~~six~~nine months ended ~~June~~September 30, 2022 increased to ~~1.61%~~1.57% and ~~1.46%~~1.49%, respectively, compared to ~~1.26%~~1.41% and ~~1.38%~~1.39% for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively. The increase in ROA was due to an increase in top line revenue, ~~and~~partially offset by an increase in loan loss provision ~~benefit, partially offset by an increase in~~and operating expenses. Please refer to the operating results analysis below for further discussion on the reasons driving the increase in profitability. We consider ROA a critical metric to measure the profitability of our organization and how efficiently our assets are deployed. ROA 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.

~~ROCE~~ROAE for the three and ~~six~~nine months ended ~~June~~September 30, 2022 was ~~18.79%~~16.97% and ~~16.74%~~16.59%, respectively, compared to ~~15.09%~~16.39% and ~~16.75%~~16.63% for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively. The primary reason for the change in ~~ROCE~~ROAE is consistent with the net income variance explanation as discussed under Return on Average Assets above. We view ~~ROCE~~ROAE 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 58.46% and 62.61% for the three and nine months ended September 30, 2022, respectively, compared to 65.68% and 64.02% for the three and nine ended September 30, 2021, respectively. 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 foreclosed properties, 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. ~~Pre-tax, pre-provision~~

PTPP adjusted earnings for three and nine months ended September 30, 2022 was $14.2 million and $34.9 million, respectively, compared to $9.7 million and $30.3 million for the three and nine ended September 30, 2021, respectively. PTPP adjusted earnings is defined as operating revenue less operating expense. 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. The ~~pre-tax, pre-provision~~PTPP adjusted earnings allows management to benchmark performance of our model to our peers without the influence of the loan loss provision and tax considerations, which will ultimately influence other traditional financial measurements, including ROA and ~~ROCE.~~ROAE. The information provided below reconciles the efficiency ratio to its most comparable GAAP measure.

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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 ~~pre-tax, pre-provision~~PTPP adjusted earnings.


		For the Three Months Ended June 30,									For the Six Months Ended June 30,										For the Three Months Ended September 30,									For the Nine Months Ended September 30,
		2022			2021			$ Change		% Change	2022			2021			$ Change		% Change		2022			2021			$ Change		% Change	2022			2021			$ Change		% Change
		(Dollars in Thousands)																			(Dollars in Thousands)
Total non-interest expense	Total non-interest expense	$	19,456		$	18,184		$	1,272	7.0%	$	38,280		$	35,514		$	2,766	7.8%	Total non-interest expense	$	20,028		$	18,490		$	1,538	8.3%	$	58,307		$	54,003		$	4,304	8.0%
Less:	Less:																			Less:
Net loss (gain) on foreclosed properties		8			(1)			9		NM	20			1			19		NM
Net loss on foreclosed properties																				Net loss on foreclosed properties	7			6			1		NM	27			7			20		NM
Amortization of other intangible assets	Amortization of other intangible assets	—			8			(8)		NM	—			15			(15)		NM	Amortization of other intangible assets	—			7			(7)		NM	—			23			(23)		NM
SBA recourse provision		114			245			(131)		(53.5)	38			115			(77)		(67.0)
SBA recourse provision (benefit)																				SBA recourse provision (benefit)	96			(69)			165		(239.1)	134			45			89		197.8
Tax credit investment impairment recovery	Tax credit investment impairment recovery	(351)			—			(351)		NM	(351)			—			(351)		NM	Tax credit investment impairment recovery	—			—			—		NM	(351)			—			(351)		NM

Total operating expense	Total operating expense	$	19,685		$	17,932		$	1,753	9.8	$	38,573		$	35,383		$	3,190	9.0	Total operating expense	$	19,925		$	18,546		$	1,379	7.4	$	58,497		$	53,928		$	4,569	8.5
Net interest income	Net interest income	$	23,660		$	21,652		$	2,008	9.3	$	45,087		$	42,515		$	2,572	6.0	Net interest income	$	25,884		$	21,223		$	4,661	22.0	$	70,971		$	63,738		$	7,233	11.3
Total non-interest income	Total non-interest income	6,872			6,321			551		8.7	14,258			13,516			742		5.5	Total non-interest income	8,197			7,015			1,182		16.8	22,455			20,531			1,924		9.4
Less:	Less:																			Less:
Net gain on sale of securities	Net gain on sale of securities	—			29			(29)		NM	—			29			(29)		NM	Net gain on sale of securities	—			—			—		NM	—			29			(29)		NM
Adjusted non-interest income	Adjusted non-interest income	6,872			6,292			580		9.2	$	14,258		$	13,487		$	771	5.7	Adjusted non-interest income	8,197			7,015			1,182		16.8	$	22,455		$	20,502		$	1,953	9.5
Total operating revenue	Total operating revenue	$	30,532		$	27,944		$	2,588	9.3	$	59,345		$	56,002		$	3,343	6.0	Total operating revenue	$	34,081		$	28,238		$	5,843	20.7	$	93,426		$	84,240		$	9,186	10.9
Efficiency ratio	Efficiency ratio	64.47		%	64.17		%				65.00		%	63.18		%				Efficiency ratio	58.46		%	65.68		%				62.61		%	64.02		%

Pre-tax, pre-provision adjusted earnings	Pre-tax, pre-provision adjusted earnings	$	10,847		$	10,012		$	835	8.3	$	20,772		$	20,619		$	153	0.7	Pre-tax, pre-provision adjusted earnings	$	14,156		$	9,692		$	4,464	46.1	$	34,929		$	30,312		$	4,617	15.2
Average total assets	Average total assets	$	2,716,707		$	2,621,340		$	95,367	3.6	2,691,613			2,599,373			92,240		3.5	Average total assets	$	2,758,961		$	2,608,198		$	150,763	5.8	2,714,309			2,602,347			111,962		4.3
Pre-tax, pre-provision adjusted return on average assets	Pre-tax, pre-provision adjusted return on average assets	1.60		%	1.53		%				1.54		%	1.59		%				Pre-tax, pre-provision adjusted return on average assets	2.05		%	1.49		%				1.72		%	1.55		%

NM = Not Meaningful

PPP loans, related fees, and interest income had a material impact on the prior period comparisons in the table above. As this economic stimulus was non-recurring, we believe these key performance indicators are a better indicator of current operating performance of the Corporation, excluding PPP loans and related fee and interest income. The table below includes the efficiency ratio, and ~~pre-tax, pre-provision~~PTPP adjusted earnings and return on average assets, excluding average net PPP loans, fee income, and interest income.

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The improvement in efficiency and ~~pre-tax, pre-provision~~PTPP profitability, excluding the impact of PPP loans, was primarily due to the aforementioned increase in net interest income driven by an increase in average loans and leases receivable.


		For the Three Months Ended June 30,									For the Six Months Ended June 30,										For the Three Months Ended September 30,									For the Nine Months Ended September 30,
		2022			2021			$ Change		% Change	2022			2021			$ Change		% Change		2022			2021			$ Change		% Change	2022			2021			$ Change		% Change
		(Dollars in Thousands)																			(Dollars in Thousands)
Total non-interest expense	Total non-interest expense	$	19,456		$	18,184		$	1,272	7.0%	$	38,280		$	35,514		$	2,766	7.8%	Total non-interest expense	$	20,028		$	18,490		$	1,538	8.3%	$	58,307		$	54,003		$	4,304	8.0%
Less:	Less:																			Less:
Net loss on foreclosed properties	Net loss on foreclosed properties	8			(1)			9		NM	20			1			19		NM	Net loss on foreclosed properties	7			6			1		16.7	27			7			20		NM
Amortization of other intangible assets	Amortization of other intangible assets	—			8			(8)		NM	—			15			(15)		NM	Amortization of other intangible assets	—			7			(7)		NM	—			23			(23)		NM
SBA recourse provision	SBA recourse provision	114			245			(131)		(53.5)	38			115			(77)		(67.0)	SBA recourse provision	96			(69)			165		(239.1)	134			45			89		NM
Tax credit investment impairment recovery	Tax credit investment impairment recovery	(351)			—			(351)		NM	(351)			—			(351)		NM	Tax credit investment impairment recovery	—			—			—		NM	(351)			—			(351)		NM
Total operating expense	Total operating expense	$	19,685		$	17,932		$	1,753	9.8	$	38,573		$	35,383		$	3,190	9.0	Total operating expense	$	19,925		$	18,546		$	1,379	7.4	$	58,497		$	53,928		$	4,569	8.5
Net interest income	Net interest income	$	23,660		$	21,652		$	2,008	9.3	$	45,087		$	42,515		$	2,572	6.0	Net interest income	$	25,884		$	21,223		$	4,661	22.0	$	70,971		$	63,738		$	7,233	11.3
Less:	Less:																			Less:
PPP interest income	PPP interest income	29			566			(537)		(94.9)	81			1,169			(1,088)		(93.1)	PPP interest income	11			221			(210)		(95.0)	92			1,391			(1,299)		(93.4)
PPP loan fee amortization	PPP loan fee amortization	196			2,541			(2,345)		(92.3)	445			4,754			(4,309)		(90.6)	PPP loan fee amortization	61			1,666			(1,605)		(96.3)	506			6,419			(5,913)		(92.1)
Adjusted net interest income	Adjusted net interest income	23,435			18,545			4,890		26.4	44,561			36,592			7,969		21.8	Adjusted net interest income	25,812			19,336			6,476		33.5	70,373			55,928			14,445		25.8
Total non-interest income	Total non-interest income	6,872			6,321			551		8.7	14,258			13,516			742		5.5	Total non-interest income	8,197			7,015			1,182		16.8	22,455			20,531			1,924		9.4
Less:	Less:																			Less:
Net gain on sale of securities	Net gain on sale of securities	—			29			(29)		NM	—			29			(29)		NM	Net gain on sale of securities	—			—			—		NM	—			29			(29)		NM
Adjusted non-interest income	Adjusted non-interest income	6,872			6,292			580		9.2	14,258			13,487			771		5.7	Adjusted non-interest income	8,197			7,015			1,182		16.8	22,455			20,502			1,953		9.5
Adjusted operating revenue	Adjusted operating revenue	$	30,307		$	24,837		$	5,470	22.0	$	58,819		$	50,079		$	8,740	17.5	Adjusted operating revenue	$	34,009		$	26,351		$	7,658	29.1	$	92,828		$	76,430		$	16,398	21.5
Efficiency ratio	Efficiency ratio	64.95		%	72.20		%				65.58		%	70.65		%				Efficiency ratio	58.59		%	70.38		%				63.02		%	70.56		%

Pre-tax, pre-provision adjusted earnings	Pre-tax, pre-provision adjusted earnings	$	10,622		$	6,905		$	3,717	53.8	$	20,246		$	14,696		$	5,550	37.8	Pre-tax, pre-provision adjusted earnings	$	14,084		$	7,805		$	6,279	80.4	$	34,331		$	22,502		$	11,829	52.6
Average total assets	Average total assets	$	2,716,707		$	2,621,340		$	95,367	3.6	$	2,691,613		$	2,599,373		$	92,240	3.5	Average total assets	$	2,758,961		$	2,608,198		$	150,763	5.8	$	2,714,309		$	2,602,347		$	111,962	4.3
Average PPP loans, net	Average PPP loans, net	11,650			229,165			(217,515)		(94.9)	16,266			235,668			(219,402)		(93.1)	Average PPP loans, net	4,505			87,517			(83,012)		(94.9)	12,303			185,741			(173,438)		(93.4)
Adjusted average total assets	Adjusted average total assets	$	2,705,057		$	2,392,175		$	312,882	13.1	$	2,675,347		$	2,363,705		$	311,642	13.2	Adjusted average total assets	$	2,754,456		$	2,520,681		$	233,775	9.3	$	2,702,006		$	2,416,606		$	285,400	11.8
Pre-tax, pre-provision adjusted return on average assets	Pre-tax, pre-provision adjusted return on average assets	1.57		%	1.15		%				1.51		%	1.24		%				Pre-tax, pre-provision adjusted return on average assets	2.05		%	1.24		%				1.69		%	1.24		%

NM = Not Meaningful

Excluding the impact of PPP in periods of comparison, 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. These initiatives include efforts to grow our existing specialized lending revenues, increase our commercial banking market share, and scale our private wealth management business.

The Corporation’s recent improvement in operating efficiency is principally due to the rising interest rate environment and related expansion of net interest margin.

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Net Interest Income

Net interest income levels depend on the amount of and yield on interest-earning assets as compared to the amount of and rate paid on interest-bearing liabilities. Net interest income is sensitive to changes in market rates of interest and the asset/liability management processes to prepare for and respond to such changes.

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 ~~six~~nine months ended ~~June~~September 30, 2022 compared to the same period in 2021. 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 June 30,				Increase (Decrease) for the Six Months Ended June 30,						Increase (Decrease) for the Three Months Ended September 30,						Increase (Decrease) for the Nine Months Ended September 30,
		2022 Compared to 2021				2022 Compared to 2021						2022 Compared to 2021						2022 Compared to 2021
		Rate		Volume		Net		Rate		Volume			Net			Rate		Volume		Net		Rate		Volume		Net
		(In Thousands)										(In Thousands)
Interest-earning assets	Interest-earning assets														Interest-earning assets
Commercial real estate and other mortgage loans(1)	Commercial real estate and other mortgage loans(1)	$	1,414	$	842	$	2,256	$	1,264	$	1,810		$	3,074	Commercial real estate and other mortgage loans(1)	$	3,213	$	977	$	4,190	$	4,463	$	2,802	$	7,265
Commercial and industrial loans(1)	Commercial and industrial loans(1)	330		(495)		(165)		310		(999)			(689)		Commercial and industrial loans(1)	1,767		1,240		3,007		2,204		114		2,318
Direct financing leases(1)	Direct financing leases(1)	3		(49)		(46)		14		(115)			(101)		Direct financing leases(1)	(10)		(37)		(47)		5		(152)		(147)
Consumer and other loans(1)	Consumer and other loans(1)	(3)		54		51		(2)		91			89		Consumer and other loans(1)	23		54		77		19		146		165
Total loans and leases receivable	Total loans and leases receivable	1,744		352		2,096		1,586		787			2,373		Total loans and leases receivable	4,993		2,234		7,227		6,691		2,910		9,601
Mortgage-related securities	Mortgage-related securities	51		122		173		56		211			267		Mortgage-related securities	192		64		256		243		281		524
Other investment securities	Other investment securities	14		61		75		6		97			103		Other investment securities	23		31		54		28		128		156
FHLB and FRB Stock	FHLB and FRB Stock	9		41		50		9		60			69		FHLB and FRB Stock	51		71		122		63		129		192
Short-term investments	Short-term investments	48		(10)		38		54		(6)			48		Short-term investments	172		(59)		113		216		(56)		160
Total net change in income on interest-earning assets	Total net change in income on interest-earning assets	1,866		566		2,432		1,711		1,149			2,860		Total net change in income on interest-earning assets	5,431		2,341		7,772		7,241		3,392		10,633
Interest-bearing liabilities	Interest-bearing liabilities														Interest-bearing liabilities
Transaction accounts	Transaction accounts	93		2		95		91		8			99		Transaction accounts	765		(11)		754		856		(3)		853
Money market accounts	Money market accounts	178		49		227		183		108			291		Money market accounts	1,284		20		1,304		1,466		130		1,596
Certificates of deposit	Certificates of deposit	(50)		52		2		(173)		54			(119)		Certificates of deposit	86		183		269		(58)		207		149
Wholesale deposits	Wholesale deposits	266		(475)		(209)		549		(958)			(409)		Wholesale deposits	194		(174)		20		740		(1,129)		(389)
Total deposits	Total deposits	487		(372)		115		650		(788)			(138)		Total deposits	2,329		18		2,347		3,004		(795)		2,209
FHLB advances	FHLB advances	231		151		382		(33)		202			169		FHLB advances	761		184		945		719		395		1,114

Other borrowings(2)	Other borrowings(2)	(34)		238		204		(101)		406			305		Other borrowings(2)	(33)		132		99		(133)		538		405
Junior subordinated notes~~(2)~~(3)	Junior subordinated notes~~(2)~~(3)	—		(277)		(277)		327		(375)			(48)		Junior subordinated notes~~(2)~~(3)	—		(280)		(280)		451		(779)		(328)
Total net change in expense on interest-bearing liabilities	Total net change in expense on interest-bearing liabilities	684		(260)		424		843		(555)			288		Total net change in expense on interest-bearing liabilities	3,057		54		3,111		4,041		(641)		3,400
Net change in net interest income	Net change in net interest income	$	1,182	$	826	$	2,008	$	868	$	1,704		$	2,572	Net change in net interest income	$	2,374	$	2,287	$	4,661	$	3,200	$	4,033	$	7,233

(1)The average balances of loans and leases include non-accrual loans and leases and loans held for sale.

(2)The rate column for the ~~three and six~~nine months ended ~~June~~September 30, 2022 ~~includes $12,000 and $248,000~~included $236,000 in accelerated amortization of debt issuance costs ~~respectively.~~

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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 ~~six~~nine months ended ~~June~~September 30, 2022 and 2021. The average balances are derived from average daily balances.


		For the Three Months Ended June 30,															For the Three Months Ended September 30,
		2022							2021								2022							2021
		Average Balance			Interest		Average Yield/Rate(4)		Average Balance			Interest		Average Yield/Rate(4)			Average Balance			Interest		Average Yield/Rate(4)		Average Balance			Interest		Average Yield/Rate(4)
		(Dollars in Thousands)															(Dollars in Thousands)
Interest-earning assets	Interest-earning assets															Interest-earning assets
Commercial real estate and other mortgage loans(1)	Commercial real estate and other mortgage loans(1)	$	1,472,075		$	15,343	4.17	%	$	1,386,187		$	13,087	3.78	%	Commercial real estate and other mortgage loans(1)	$	1,486,530		$	17,280	4.65	%	$	1,388,236		$	13,090	3.77	%
Commercial and industrial loans(1)	Commercial and industrial loans(1)	734,299			9,710		5.29		772,257			9,875		5.11		Commercial and industrial loans(1)	765,440			12,266		6.41		680,563			9,259		5.44
Direct financing leases(1)	Direct financing leases(1)	15,527			176		4.53		19,883			222		4.47		Direct financing leases(1)	15,093			160		4.24		18,611			207		4.45
Consumer and other loans(1)	Consumer and other loans(1)	51,045			458		3.59		45,026			407		3.62		Consumer and other loans(1)	49,558			468		3.78		43,689			391		3.58
Total loans and leases receivable(1)	Total loans and leases receivable(1)	2,272,946			25,687		4.52		2,223,353			23,591		4.24		Total loans and leases receivable(1)	2,316,621			30,174		5.21		2,131,099			22,947		4.31
Mortgage-related securities(2)	Mortgage-related securities(2)	176,747			804		1.82		149,253			631		1.69		Mortgage-related securities(2)	168,433			915		2.17		154,372			659		1.71
Other investment securities(3)	Other investment securities(3)	54,591			260		1.91		41,569			185		1.78		Other investment securities(3)	51,812			250		1.93		45,196			196		1.73
FHLB and FRB stock	FHLB and FRB stock	17,355			226		5.21		14,172			176		4.97		FHLB and FRB stock	18,167			289		6.36		13,279			167		5.03
Short-term investments	Short-term investments	29,541			54		0.73		55,100			16		0.12		Short-term investments	27,912			158		2.26		116,621			45		0.15
Total interest-earning assets	Total interest-earning assets	2,551,180			27,031		4.24		2,483,447			24,599		3.96		Total interest-earning assets	2,582,945			31,786		4.92		2,460,567			24,014		3.90
Non-interest-earning assets	Non-interest-earning assets	165,527							137,893							Non-interest-earning assets	176,016							147,631
Total assets	Total assets	$	2,716,707						$	2,621,340						Total assets	$	2,758,961						$	2,608,198
Interest-bearing liabilities	Interest-bearing liabilities															Interest-bearing liabilities
Transaction accounts	Transaction accounts	$	502,763		343		0.27		$	499,040		248		0.20		Transaction accounts	$	486,704		1,005		0.83		$	509,089		251		0.20
Money market accounts	Money market accounts	767,433			509		0.27		662,919			282		0.17		Money market accounts	746,227			1,610		0.86		703,460			306		0.17
Certificates of deposit	Certificates of deposit	73,560			114		0.62		45,993			112		0.97		Certificates of deposit	113,529			340		1.20		42,370			71		0.67
Wholesale deposits	Wholesale deposits	12,350			92		2.98		162,580			301		0.74		Wholesale deposits	36,702			226		2.46		89,135			206		0.92
Total interest-bearing deposits	Total interest-bearing deposits	1,356,106			1,058		0.31		1,370,532			943		0.28		Total interest-bearing deposits	1,383,162			3,181		0.92		1,344,054			834		0.25
FHLB advances	FHLB advances	449,599			1,666		1.48		405,855			1,284		1.27		FHLB advances	432,528			2,173		2.01		381,061			1,228		1.29

Other borrowings	Other borrowings	51,018			647		5.07		32,447			443		5.46		Other borrowings	42,800			548		5.12		32,630			449		5.50
Junior subordinated notes~~(5)~~	Junior subordinated notes~~(5)~~	—			—		—		10,066			277		11.01		Junior subordinated notes~~(5)~~	—			—		—		10,070			280		11.12
Total interest-bearing liabilities	Total interest-bearing liabilities	1,856,723			3,371		0.73		1,818,900			2,947		0.65		Total interest-bearing liabilities	1,858,490			5,902		1.27		1,767,815			2,791		0.63
Non-interest-bearing demand deposit accounts	Non-interest-bearing demand deposit accounts	557,086							527,441							Non-interest-bearing demand deposit accounts	584,535							556,029
Other non-interest-bearing liabilities	Other non-interest-bearing liabilities	57,615							56,691							Other non-interest-bearing liabilities	60,705							59,865
Total liabilities	Total liabilities	2,471,424							2,403,032							Total liabilities	2,503,730							2,383,709
Stockholders’ equity	Stockholders’ equity	245,283							218,308							Stockholders’ equity	255,231							224,489
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	2,716,707						$	2,621,340						Total liabilities and stockholders’ equity	$	2,758,961						$	2,608,198
Net interest income	Net interest income				$	23,660						$	21,652			Net interest income				$	25,884						$	21,223
Interest rate spread	Interest rate spread						3.51	%						3.31	%	Interest rate spread						3.65	%						3.27	%
Net interest-earning assets	Net interest-earning assets	$	694,457						$	664,547						Net interest-earning assets	$	724,455						$	692,752
Net interest margin	Net interest margin						3.71	%						3.49	%	Net interest margin						4.01	%						3.45	%
Average interest-earning assets to average interest-bearing liabilities	Average interest-earning assets to average interest-bearing liabilities	137.40		%					136.54		%					Average interest-earning assets to average interest-bearing liabilities	138.98		%					139.19		%
Return on average assets(4)	Return on average assets(4)	1.61							1.26							Return on average assets(4)	1.57							1.41
Return on average common equity(4)		18.79							15.09
Return on average equity(4)																Return on average equity(4)	16.97							16.39
Average equity to average assets	Average equity to average assets	9.03							8.33							Average equity to average assets	9.25							8.61
Non-interest expense to average assets(4)	Non-interest expense to average assets(4)	2.86							2.77							Non-interest expense to average assets(4)	2.90							2.84

(1)The average balances of loans and leases include non-accrual loans and leases and loans held for sale. Interest income related to non-accrual 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.

Table of Contents


	For the Nine Months Ended September 30,
	2022							2021
	Average Balance			Interest		Average Yield/Rate(4)		Average Balance			Interest		Average Yield/Rate(4)
	(Dollars in Thousands)
Interest-earning assets
Commercial real estate and other mortgage loans(1)	$	1,472,930		$	45,969	4.16	%	$	1,377,302		$	38,704	3.75	%
Commercial and industrial loans(1)	739,540			31,077		5.60		736,623			28,759		5.21
Direct financing leases(1)	15,714			526		4.46		20,242			673		4.43
Consumer and other loans(1)	50,149			1,362		3.62		44,780			1,197		3.56
Total loans and leases receivable(1)	2,278,333			78,934		4.62		2,178,947			69,333		4.24
Mortgage-related securities(2)	176,654			2,479		1.87		155,617			1,955		1.67
Other investment securities(3)	52,324			725		1.85		42,992			569		1.76
FHLB and FRB stock	16,523			688		5.55		13,308			496		4.97
Short-term investments	29,509			227		1.03		65,769			67		0.14
Total interest-earning assets	2,553,343			83,053		4.34		2,456,633			72,420		3.93
Non-interest-earning assets	160,966							145,714
Total assets	$	2,714,309						$	2,602,347
Interest-bearing liabilities
Transaction accounts	$	507,402		1,602		0.42		$	509,709		749		0.20
Money market accounts	765,839			2,458		0.43		674,858			862		0.17
Certificates of deposit	80,093			509		0.85		48,540			360		0.99
Wholesale deposits	21,838			436		2.66		139,205			825		0.79
Total interest-bearing deposits	1,375,172			5,005		0.49		1,372,312			2,796		0.27
FHLB advances	422,576			4,875		1.54		384,581			3,761		1.30
Other borrowings	44,719			1,698		5.06		30,811			1,293		5.60
Junior subordinated notes(5)	3,247			504		20.69		10,066			832		11.02
Total interest-bearing liabilities	1,845,714			12,082		0.87		1,797,770			8,682		0.64
Non-interest-bearing demand deposit accounts	568,131							523,368
Other non-interest-bearing liabilities	53,685							63,366
Total liabilities	2,467,530							2,384,504
Stockholders’ equity	246,779							217,843
Total liabilities and stockholders’ equity	$	2,714,309						$	2,602,347
Net interest income				$	70,971						$	63,738
Interest rate spread						3.46	%						3.29	%
Net interest-earning assets	$	707,629						$	658,863
Net interest margin						3.71	%						3.46	%
Average interest-earning assets to average interest-bearing liabilities	138.34		%					136.65		%
Return on average assets(4)	1.49							1.39
Return on average equity(4)	16.59							16.63
Average equity to average assets	9.09							8.37
Non-interest expense to average assets(4)	2.86							2.77

(2)Includes amortized cost basis of assets available-for-sale and held-to-maturity.

(3)Yields on tax-exempt municipal securities are not presented on a tax-equivalent basis in this table.

(4)Represents annualized yields/rates.

(5)The calculation for the ~~three~~nine months ended ~~June~~September 30, 2022 includes ~~$12,000~~$236,000 in accelerated amortization of debt issuance costs.

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For the Six Months Ended June 30,
2022 2021
Average
Balance Interest
Average
Yield/Rate(4)
Average
Balance Interest
Average
Yield/Rate(4)
(Dollars in Thousands)
Interest-earning assets
Commercial real estate and other mortgage loans(1)
$ 1,466,017 $ 28,689 3.91 % $ 1,371,744 $ 25,615 3.73 %
Commercial and industrial loans(1)
726,376 18,811 5.18 765,117 19,500 5.10
Direct financing leases(1)
16,030 365 4.55 21,071 466 4.42
Consumer and other loans(1)
50,449 894 3.54 45,335 805 3.55
Total loans and leases receivable(1)
2,258,872 48,759 4.32 2,203,267 46,386 4.21
Mortgage-related securities(2)
180,832 1,564 1.73 156,249 1,297 1.66
Other investment securities(3)
52,584 475 1.81 41,871 372 1.78
FHLB and FRB stock 15,688 398 5.07 13,323 329 4.94
Short-term investments 30,321 70 0.46 39,922 22 0.11
Total interest-earning assets 2,538,297 51,266 4.04 2,454,632 48,406 3.94
Non-interest-earning assets 153,316 144,741
Total assets $ 2,691,613 $ 2,599,373
Interest-bearing liabilities
Transaction accounts $ 517,923 597 0.23 $ 510,024 498 0.20
Money market accounts 775,808 848 0.22 660,319 557 0.17
Certificates of deposit 63,098 169 0.54 51,677 288 1.11
Wholesale deposits 14,282 210 2.94 164,654 619 0.75
Total interest-bearing deposits 1,371,111 1,824 0.27 1,386,674 1,962 0.28
FHLB advances 417,518 2,702 1.29 386,371 2,533 1.31
Other borrowings 45,694 1,149 5.03 29,886 844 5.65
Junior subordinated notes(5)
4,898 504 20.58 10,064 552 10.97
Total interest-bearing liabilities 1,839,221 6,179 0.67 1,812,995 5,891 0.65
Non-interest-bearing demand deposit accounts 559,793 506,767
Other non-interest-bearing liabilities 50,117 65,146
Total liabilities 2,449,131 2,384,908
Stockholders’ equity 242,482 214,465
Total liabilities and stockholders’ equity $ 2,691,613 $ 2,599,373
Net interest income $ 45,087 $ 42,515
Interest rate spread 3.37 % 3.29 %
Net interest-earning assets $ 699,076 $ 641,637
Net interest margin 3.55 % 3.46 %
Average interest-earning assets to average interest-bearing liabilities 138.01 % 135.39 %
Return on average assets(4)
1.46 1.38
Return on average common equity(4)
16.74 16.75
Average equity to average assets 9.01 8.25
Non-interest expense to average assets(4)
2.84 2.73

~~(1)~~The ~~average balances~~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, ~~include non-accrual~~total interest earning assets, in-market deposits, interest-bearing deposits and total interest-bearing liabilities for the three and nine months ended September 30, 2022 and 2021. 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,
	2022		2021				2022		2021
	Average Yield/Rate (3)		Average Yield/Rate (3)		Increase (Decrease)		Average Yield/Rate (3)		Average Yield/Rate (3)		Increase (Decrease)
Total loans and leases receivable (a)	5.21	%	4.31	%	0.90	%	4.62	%	4.24	%	0.38	%
Total interest-earning assets(b)	4.92	%	3.90	%	1.02	%	4.34	%	3.93	%	0.41	%
Adjusted total loans and leases receivable (1)(c)	5.08	%	3.89	%	1.19	%	4.40	%	3.91	%	0.49	%
Adjusted total interest-earning assets (1)(d)	4.80	%	3.53	%	1.27	%	4.14	%	3.61	%	0.53	%
Interest-bearing in-market deposits(e)	0.88	%	0.20	%	0.68	%	0.45	%	0.21	%	0.24	%
Interest-bearing deposits(f)	0.92	%	0.25	%	0.67	%	0.49	%	0.27	%	0.22	%
Interest-bearing liabilities(g)	1.27	%	0.63	%	0.64	%	0.87	%	0.64	%	0.23	%

Effective fed funds rate (2)(h)	2.18	%	0.09	%	2.09	%	1.03	%	0.08	%	0.95	%

Beta Calculations:
Total loans and leases receivable(a)/(h)					43.20	%					39.66	%
Total interest-earning assets(b)/(h)					48.74	%					42.77	%
Adjusted total loans and leases receivable (1)(c)/(h)					56.75	%					51.96	%
Adjusted total interest-earning assets (1)(d)/(h)					60.87	%					55.80	%
Interest-bearing in-market deposits(e)/(h)					32.43	%					24.94	%
Interest-bearing deposits(f)/(h)					32.14	%					22.48	%
Interest-bearing liabilities(g)/(h)					30.56	%					24.09	%

(1)Excluding average net PPP loans, ~~held for sale. Interest~~PPP loan interest income, ~~related to non-accrual loans~~ and ~~leases is recognized when collected. Interest income includes net loan~~ fees in lieu of interest.

(2)~~Includes amortized cost basis~~Board of ~~assets available-for-sale and held-to-maturity.~~Governors of the Federal Reserve System (US), Effective Federal Funds Rates [DFF]. retrieved from FRED, Federal Reserve Bank of St. Louis.

(3)~~Yields on tax-exempt municipal securities are not presented on a tax-equivalent basis in this table.~~

~~(4)~~Represents annualized yields/rates.

~~(5)The calculation for the six months ended June 30, 2022 includes $248,000 in accelerated amortization of debt issuance costs.~~

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Comparison of Net Interest Income for the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2022 and 2021

Net interest income increased ~~$2.0~~$4.7 million, or ~~9.3%~~22.0%, and ~~$2.6~~$7.2 million, or ~~6.0%~~11.3%, during the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively, compared to the three and ~~six~~nine months ended ~~June~~September 30, 2021. The increase in net interest income reflected an increase in net interest margin and increase in average gross loans and leases, ~~and an increase in net interest margin,~~ partially offset by a reduction in fees in lieu of interest. Fees in lieu of interest, which can vary from quarter to quarter, totaled ~~$1.9 million~~$807,000 and ~~$3.2~~$4.0 million for the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively, compared to ~~$3.5~~$2.8 million and ~~$6.6~~$9.5 million for the same periods in 2021. PPP loan fees decreased $1.6 million and $5.9 million for the three and nine months ended September 30, 2022, respectively, and drove the decrease of fees in lieu of interest. Excluding fees in lieu of interest and interest income from PPP loans, net interest income for the three and ~~six~~nine months ended ~~June~~September 30, 2022 increased ~~$4.2~~$6.9 million, or ~~24.0%~~38.0%, and ~~$7.1~~$14.0 million, or ~~20.5%~~26.5%, respectively. Average gross loans and leases for the three and ~~six~~nine months ended ~~June~~September 30, 2022 increased ~~$49.6~~$185.5 million, or ~~2.2%~~8.7%, and ~~$55.6~~$99.4 million, or ~~2.5%~~4.6%, respectively, compared to the three and ~~six~~nine months ended ~~June~~September 30, 2021. Excluding net PPP loans, average gross loans and leases for the three and ~~six~~nine months ended ~~June~~September 30, 2022 increased ~~$267.1~~$268.5 million, or ~~13.4%~~13.1%, and ~~$275.0~~$272.8 million, or ~~14.0%~~13.7%, respectively, compared to the three and ~~six~~nine months ended ~~June~~September 30, 2021.

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Net interest margin increased to ~~3.71%~~4.01% and ~~3.55%~~3.71% for the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively, compared to ~~3.49%~~3.45% and 3.46% for the three and ~~six~~nine months ended ~~June~~September 30, 2021. The primary driver of improved net interest margin was a low deposit beta and higher earning asset yields in the current rising rate environment. The change in the rate paid on interest-bearing liabilities compared to the change in short-term market rates is commonly referred to as a beta. The Corporation uses the daily average effective federal funds rate for purposes of estimating interest-bearing liability betas. Adjusted net interest margin measured ~~3.45%~~3.89% and ~~3.35%~~3.53% for the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively, compared to ~~3.20%~~3.22% and 3.21% for ~~both~~ the three and ~~six~~nine months ended ~~June~~September 30, ~~2021.~~2021, respectively. Adjusted net interest margin is a non-GAAP measure representing net interest income excluding the impact of PPP loans, fees in lieu of interest, and other recurring, but volatile, components of net interest margin divided by average interest-earning assets less average net PPP loans, if any, and other recurring, but volatile, components of average interest-earning assets.

The yield on average loans and leases for the three and ~~six~~nine months ended ~~June~~September 30, 2022 was ~~4.52%~~5.21% and ~~4.32%~~4.62%, respectively, compared to ~~4.24%~~4.31% and ~~4.21%~~4.24% for the three and ~~six~~nine months ended ~~June~~September 30, 2021. Excluding the impact of loan fees in lieu of interest and PPP loan interest income, the yield on average loans and leases excluding net PPP loans for the three and ~~six~~nine months ended ~~June~~September 30, 2022 was ~~4.21%~~5.08% and ~~4.06%~~4.40%, respectively, compared to ~~3.91%~~3.89% and ~~3.92%~~3.91% for the three and ~~six~~nine months ended ~~June~~September 30, 2021. Similarly, the yield on average interest-earning assets for the three and ~~six~~nine months ended ~~June~~September 30, 2022 measured ~~4.24%~~4.92% and ~~4.04%~~4.34%, respectively, compared to ~~3.96%~~3.90% and ~~3.94%~~3.93% for the three and ~~six~~nine months ended ~~June~~September 30, 2021. Excluding loan fees in lieu of interest and the impact of PPP loans, the yield on average interest-earning assets for the three and ~~six~~nine months ended ~~June~~September 30, 2022 was ~~3.96%~~4.80% and ~~3.81%~~4.14%, respectively, compared to ~~3.64%~~3.53% and ~~3.66%~~3.61% for the three and ~~six~~nine months ended ~~June~~September 30, 2021. 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 ~~150~~300 basis points during the first ~~half~~three quarters of 2022, as well as the reinvestment of cash flows from the securities and fixed-rate loan portfolios in a rising rate environment.

The rate paid on average interest-bearing in-market deposits for the three and ~~six~~nine months ended ~~June~~September 30, 2022 increased to ~~0.29%~~0.88% and ~~0.24%~~0.45%, respectively, from ~~0.21%~~0.20% and ~~0.22%~~0.21% for the three and ~~six~~nine months ended ~~June~~September 30, 2021. The average rate paid on total interest-bearing liabilities for the three and ~~six~~nine months ended ~~June~~September 30, 2022 increased to ~~0.73%~~1.27% and ~~0.67%~~0.87%, respectively, from ~~0.65%~~0.63% and 0.64% for ~~both~~ the three and ~~six~~nine months ended ~~June~~September 30, ~~2021.~~2021, respectively. Total interest-bearing liabilities include interest-bearing deposits, federal funds purchased, FHLB advances, subordinated and junior subordinated notes payable, and other borrowings. The average rates paid increased commensurate with the increase in short-term market rates and the ~~renewal~~replacement of maturing FHLB advances at higher fixed rates. The daily average effective federal funds rate for the three and ~~six~~nine months ended ~~June~~September 30, 2022 increased 70209 and 3895 basis points, respectively, compared to the same periods in 2021. This equates to a beta of ~~11%~~30.6% and 5%24.1% for the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively, on total interest-bearing ~~in-market deposits.~~liabilities. The Bank ended the quarter positioned to benefit from rising rates, but the Bank anticipates net interest margin expansion to slow due to deposit betas rising with future federal fund rate increases.

Management believes its success in growing in-market deposit relationships, disciplined loan pricing, and increased production in existing higher-yielding specialized lending lines of business will allow the Corporation to maintain a net interest margin of at least 3.50%, on average, over the long-term; 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. Net interest margin may also experience volatility due to events such as a rapidly changing rate environment, the collection of interest on loans previously in non-accrual status or the accumulation of significant short-term deposit inflows. The Corporation continues to maintain an asset-sensitive balance sheet and ended the quarter appropriately positioned for net interest income to benefit from rising short-term interest rates.

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Provision for Loan and Lease Losses

We determine our provision for loan and lease losses pursuant to our allowance for loan and lease loss methodology, which is based on the magnitude of current and historical net charge-offs recorded throughout the established look-back period, the evaluation of several qualitative factors for each portfolio category, and the amount of specific reserves established for impaired loans that present collateral shortfall positions. Refer to Allowance for Loan and Lease Losses, below, for further information regarding our allowance for loan and lease loss methodology.

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The Corporation recognized a ~~$3.7 million~~$12,000 provision expense and $4.6 million provision benefit for the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively, compared to a benefit of ~~$1.0~~$2.3 million and ~~$3.0~~$5.3 million for the three and ~~six~~nine months ended ~~June~~September 30, 2021. The provision ~~benefit~~expense for the three months ended ~~June~~September 30, 2022 was primarily due to ~~a net recovery of $4.2 million and a $185,000 reduction due to qualitative risk factor improvements, partially offset by a $527,000~~an increase in the general reserve ~~due~~of $400,000 related to loan ~~growth.~~growth and a $447,000 net increase in specific reserves, partially offset by a $940,000 reduction in the general reserve from change in loss factors derived from historical look-back. The provision benefit for the ~~six~~nine months ended ~~June~~September 30, 2022 was primarily due to a net recovery of $4.4 million, a ~~$601,000 reduction due to~~$1.1 million historical loss factor improvement, and a $469,000 qualitative risk factor ~~improvements, and a $251,000 net decrease in specific reserves,~~improvement, partially offset by a ~~$762,000~~$196,000 increase in ~~the general reserve due to loan growth.~~specific reserves. The net recovery for the ~~three and six~~nine months ended ~~June~~September 30, 2022 included a $4.1 million principal recovery relating to a legacy SBA relationship originated in May 2016 and fully charged-off in December 2020.

The following table shows the components of the provision for loan and lease losses for the three and ~~six~~nine months ended ~~June~~September 30, 2022 compared to the ~~three months ended June 30,~~same periods in 2021.

For the Three Months Ended June 30, For the Six Months Ended June 30,
2022 2021 2022 2021
(In Thousands)
Change in general reserve due to subjective factor changes $ (185) $ (652) $ (601) $ 430
Change in general reserve due to historical loss factor changes 64 (1,687) (142) (2,671)
Charge-offs 85 2,894 107 3,038
Recoveries (4,247) (545) (4,457) (3,218)
Change in specific reserves on impaired loans, net 29 (1,466) (251) (1,660)
Change due to loan growth, net 527 498 762 1,055
Total provision for loan and lease losses $ (3,727) $ (958) $ (4,582) $ (3,026)

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	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
	(In Thousands)
Change in general reserve due to qualitative factor changes	$	132	$	(51)	$	(469)	$	379
Change in general reserve due to historical loss factor changes	(940)		(923)		(1,082)		(3,594)
Charge-offs	54		364		161		3,402
Recoveries	(81)		(1,634)		(4,537)		(4,852)
Change in specific reserves on impaired loans, net	447		(451)		196		(2,111)
Change due to loan growth, net	400		426		1,162		1,481
Total provision for loan and lease losses	$	12	$	(2,269)	$	(4,569)	$	(5,295)

The addition of specific reserves on impaired loans represents new specific reserves established when collateral shortfalls or government guaranty deficiencies are present, while the release of specific reserves represents the reduction of previously established reserves that are no longer required. Changes in the allowance for loan and lease losses due to ~~subjective~~qualitative factor changes reflect management’s evaluation of the level of risk within the portfolio based upon several factors for each portfolio segment. Charge-offs in excess of previously established specific reserves require an additional provision for loan and lease losses to maintain the allowance for loan and lease losses at a level deemed appropriate by management. This amount is net of the release of any specific reserve that may have already been provided. Change in the inherent risk of the portfolio is primarily influenced by the overall growth in gross loans and leases and an analysis of loans previously charged off, as well as movement of existing loans and leases in and out of an impaired loan classification where a specific evaluation of a particular credit may be required rather than the application of a general reserve loss rate. 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 ~~Six~~Nine Months Ended ~~June~~September 30, 2022 and 2021

Non-Interest Income

Non-interest income increased ~~$551,000,~~$1.2 million, or ~~8.7%~~16.8%, to ~~$6.9~~$8.2 million for the three months ended ~~June~~September 30, 2022 compared to ~~$6.3~~$7.0 million for the same period in 2021. The increase in total non-interest income for the three months ended ~~June~~September 30, 2022 was due to increases in ~~private wealth management services fee~~other non-interest income, driven by mezzanine fund investment income, loan fee income, service charges on deposits, and commercial loan swap fee income. These favorable variances were partially offset by a decrease in ~~gains on the sale of SBA loans.~~private wealth management services fee income. Non-interest income for the ~~six~~nine months ended ~~June~~September 30, 2022 increased ~~$742,000,~~$1.9 million, or ~~5.5%~~9.4%, to ~~$14.3~~$22.5 million compared to ~~$13.5~~$20.5 million for the same period in 2021. The increase in total non-interest income for the ~~six~~nine months ended ~~June~~September 30, 2022 reflected strong private wealth management services fee income, an increase in other non-interest income, led by mezzanine fund investment income, and an increase in commercial loan swap fee income, loan fee income, and service charges on deposits. These favorable variances were partially offset by a decrease in gains on the sale of SBA loans.

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 ~~22.5%~~24.1% and 24.0% of total revenues for the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively, compared to ~~22.6%~~24.8% and ~~24.1%~~24.4% for the three and ~~six~~nine months ended ~~June~~September 30, 2021.

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The components of non-interest income were as follows:


		For the Three Months Ended June 30,									For the Six Months Ended June 30,										For the Three Months Ended September 30,									For the Nine Months Ended September 30,
		2022			2021			$ Change		% Change	2022			2021			$ Change		% Change		2022			2021			$ Change		% Change	2022			2021			$ Change		% Change
		(Dollars in Thousands)																			(Dollars in Thousands)
Private wealth management services fee income	Private wealth management services fee income	$	2,852		$	2,744		$	108	3.9%	$	5,693		$	5,151		$	542	10.5%	Private wealth management services fee income	$	2,618		$	2,759		$	(141)	(5.1)%	$	8,311		$	7,910		$	401	5.1%
Gain on sale of SBA loans	Gain on sale of SBA loans	951			1,203			(252)		(20.9)	1,537			2,281			(744)		(32.6)	Gain on sale of SBA loans	732			721			11		1.5	2,269			3,002			(733)		(24.4)
Service charges on deposits	Service charges on deposits	1,041			941			100		10.6	2,040			1,859			181		9.7	Service charges on deposits	1,018			956			62		6.5	3,058			2,814			244		8.7
Loan fees	Loan fees	697			569			128		22.5	1,349			1,114			235		21.1	Loan fees	814			713			101		14.2	2,163			1,828			335		18.3
Increase in cash surrender value of bank-owned life insurance	Increase in cash surrender value of bank-owned life insurance	350			350			—		NM	698			699			(1)		(0.1)	Increase in cash surrender value of bank-owned life insurance	359			357			2		0.6	1,057			1,056			1		0.1
Net gain (loss) on sale of securities	Net gain (loss) on sale of securities	—			29			(29)		NM	—			29			(29)		NM	Net gain (loss) on sale of securities	—			—			—		NM	—			29			(29)		NM
Swap fees	Swap fees	471			—			471		NM	697			684			13		1.9	Swap fees	341			—			341		NM	1,038			684			354		51.8
Other non-interest income	Other non-interest income	510			485			25		5.2	2,244			1,699			545		32.1	Other non-interest income	2,315			1,509			806		53.4	4,559			3,208			1,351		42.1
Total non-interest income	Total non-interest income	$	6,872		$	6,321		$	551	8.7	$	14,258		$	13,516		$	742	5.5	Total non-interest income	$	8,197		$	7,015		$	1,182	16.8	$	22,455		$	20,531		$	1,924	9.4
Fee income ratio(1)	Fee income ratio(1)	22.5		%	22.6		%				24.0		%	24.1		%				Fee income ratio(1)	24.1		%	24.8		%				24.0		%	24.4		%

(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 decreased $141,000, or 5.1%, but increased ~~$108,000,~~$401,000, or ~~3.9%, and $542,000, or 10.5%~~5.1%, for the three and ~~six~~nine months ended ~~June~~September 30, 2022, compared to the ~~three and six months ended June 30,~~same periods in 2021. 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 ~~June~~September 30, 2022, private wealth and trust assets under management and administration totaled ~~$2.554 billion,~~$2,492.6 million, decreasing ~~$10.6~~$255.1 million, or ~~0.4%~~9.3%, compared to ~~$2.564~~$2.748 billion as of ~~June~~September 30, 2021, as new client relationships and new money from existing clients was more than offset by the decline in market values.

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Other non-interest income increased $806,000, or 53.4%, and $1.4 million, or 42.1% for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The increase for the three and nine months ended September 30, 2022 was primarily due to strong returns from the Corporation’s investments in mezzanine funds and gains recognized on end-of-term buyout agreements related to the Company’s equipment financing business line.

Commercial loan interest rate swap fee income ~~was $471,000~~increased $341,000 and ~~$697,000~~$1.0 million, or 51.8%, for the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively, compared to ~~no activity for~~ the ~~three months ended June 30, 2021 and $684,000 for the six months ended June 30,~~same periods in 2021. We originate commercial real estate loans in which we offer clients a floating rate and an interest rate swap. The client’s swap is then offset with a counter-party dealer. The execution of these transactions generates swap fee income. The aggregate amortizing notional value of interest rate swaps with various borrowers was ~~$646.1~~$666.2 million as of ~~June~~September 30, 2022, compared to ~~$637.0~~$634.0 million as of ~~June~~September 30, 2021. 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.

Loan fees increased ~~$128,000,~~$101,000, or ~~22.5%~~14.2%, and ~~$235,000,~~$335,000, or ~~21.1%~~18.3%, for the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively, compared to the same periods in 2021. The increase was due to an increase in ~~conventional, SBA,~~equipment financing, floorplan financing, and ~~floorplan financing~~conventional activity generating additional service fee income.

Service charges on deposits increased ~~$100,000,~~$62,000, or ~~10.6%~~6.5%, and ~~$181,000,~~$244,000, or ~~9.7%~~8.7%, for the three and ~~six~~nine months ended ~~June 30, 2022, respectively, compared to same periods in 2021. The increase was due to an increase in new client relationships and the addition of new services to existing client relationships.~~

~~Other non-interest income increased $25,000, or 5.2%, and $545,000, or 32.1% for the three and six months ended June~~September 30, 2022, respectively, compared to the same periods in 2021. The increase for the ~~six~~three and nine months ended ~~June~~September 30, 2022 was primarily due to ~~above~~an increase in average ~~returns~~balances compared to the same periods from ~~the Corporation’s investments in mezzanine funds.~~2021.

Gain on sale of SBA loans for the three ~~and six~~ months ended ~~June~~September 30, 2022 remained relatively flat. The gain on sale of SBA loans for the nine months ended September 30, 2022 decreased ~~$252,000,~~$733,000, or ~~20.9%~~24.4%, ~~and $744,000, or 32.6%, respectively,~~ compared to the same periods in 2021. Premiums on the sale of SBA loans decreased and was the primary factor for lower income for the nine months ended September 30, 2022.

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Comparison of Non-Interest Expense for the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2022 and 2021

Non-Interest Expense

Non-interest expense for the three and ~~six~~nine months ended ~~June~~September 30, 2022 increased by ~~$1.3~~$1.5 million, or ~~7.0%~~8.3%, and ~~$2.8~~$4.3 million, or ~~7.8%~~8.0%, respectively, compared to the same periods in 2021. Operating expense, which excludes certain one-time and discrete items as defined in the Efficiency Ratio table above, increased ~~$1.8~~$1.4 million, or ~~9.8%~~7.4%, and ~~$3.2~~$4.6 million, or ~~9.0%~~8.5%, for the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively, compared to the same periods in 2021. The increase in operating expense was primarily due to an increase in compensation, and professional ~~fees, and marketing expenses.~~fees.

The components of non-interest expense were as follows:


		For the Three Months Ended June 30,								For the Six Months Ended June 30,									For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2022		2021		$ Change		% Change		2022		2021		$ Change		% Change			2022		2021		$ Change		% Change		2022		2021		$ Change		% Change
		(Dollars in Thousands)																	(Dollars in Thousands)
Compensation	Compensation	$	14,020	$	13,255	$	765	5.8	%	$	27,658	$	25,912	$	1,746	6.7	%	Compensation	$	14,817	$	13,351	$	1,466	11.0	%	$	42,475	$	39,263	$	3,212	8.2	%
Occupancy	Occupancy	568		533		35		6.6		1,123		1,085		38		3.5		Occupancy	566		544		22		4.0		1,689		1,628		61		3.7
Professional fees	Professional fees	1,298		913		385		42.2		2,468		1,778		690		38.8		Professional fees	1,203		1,024		179		17.5		3,671		2,803		868		31.0
Data processing	Data processing	892		798		94		11.8		1,673		1,569		104		6.6		Data processing	719		746		(27)		(3.6)		2,391		2,315		76		3.3
Marketing	Marketing	670		511		159		31.1		1,170		902		268		29.7		Marketing	543		572		(29)		(5.1)		1,713		1,474		239		16.2
Equipment	Equipment	235		261		(26)		(10.0)		479		506		(27)		(5.3)		Equipment	253		260		(7)		(2.7)		732		767		(35)		(4.6)
Computer software	Computer software	1,117		1,129		(12)		(1.1)		2,199		2,244		(45)		(2.0)		Computer software	1,128		999		129		12.9		3,327		3,244		83		2.6
FDIC insurance	FDIC insurance	296		280		16		5.7		610		642		(32)		(5.0)		FDIC insurance	230		291		(61)		(21.0)		840		933		(93)		(10.0)

Other non-interest expense	Other non-interest expense	360		504		(144)		(28.6)		900		876		24		2.7		Other non-interest expense	569		703		(134)		(19.1)		1,469		1,576		(107)		(6.8)
Total non-interest expense	Total non-interest expense	$	19,456	$	18,184	$	1,272	7.0		$	38,280	$	35,514	$	2,766	7.8		Total non-interest expense	$	20,028	$	18,490	$	1,538	8.3		$	58,307	$	54,003	$	4,304	8.0
Total operating expense(1)	Total operating expense(1)	$	19,685	$	17,932	$	1,753	9.8		$	38,573	$	35,383	$	3,190	9.0		Total operating expense(1)	$	19,925	$	18,546	$	1,379	7.4		$	58,497	$	53,928	$	4,569	8.5

Full-time equivalent employees	Full-time equivalent employees	333		319						333		319						Full-time equivalent employees	335		307						335		307

(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 ~~six~~nine months ended ~~June~~September 30, 2022 increased ~~$765,000,~~$1.5 million, or ~~5.8%~~11.0%, and ~~$1.7~~$3.2 million, or ~~6.7%~~8.2%, respectively, compared to the three and ~~six~~nine months ended ~~June~~September 30, 2021. The increase reflects above average

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annual merit and market increases, reflecting the competitive job market, as well as an increase in the annual cash incentive compensation bonus accrual related to performance, and ~~hiring~~increase in head count to support the Bank’s growth plans. Management believes there will be upward pressure on compensation throughout the remainder of the year as the Bank continues to opportunistically invest in new talent and retain existing talent in the competitive market. Employee-related benefit expenses, such as health insurance and payroll taxes, also contributed to the increase as a result of successful hiring efforts to secure talent. Average full-time equivalent employees for the three months ended ~~June~~September 30, 2022 increased to ~~321,~~333, up ~~2.89%~~7.07%, compared to ~~312~~311 for the three months ended ~~June~~September 30, 2021.

Professional fees increased ~~$385,000,~~$179,000, or ~~42.2%~~17.5%, and ~~$690,000,~~$868,000, or ~~38.8%~~31.0%, for the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively, compared to the three and ~~six~~nine months ended ~~June~~September 30, 2021. 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.

Marketing expense decreased $29,000, or 5.1%, but increased ~~$159,000,~~$239,000, or ~~31.1%, and $268,000, or 29.7%~~16.2%, for the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively, compared to the three and ~~six~~nine months ended ~~June~~September 30, 2021. The increase during the nine months ended September 30, 2022 was primarily due to an increase in business development efforts as the Corporation returns to pre-pandemic spending levels.

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Income Taxes

Income tax expense totaled ~~$5.8~~$9.0 million for the ~~six~~nine months ended ~~June~~September 30, 2022 compared to an$8.4 million for the nine months ended September 30, 2021. The income tax expense ~~of $5.6 million for~~included a $155,000 net benefit from a low income housing tax credit investment, no tax credits were recognized in the ~~six months ended June 30, 2021.~~prior year. The effective tax rate for the ~~six~~nine months ended ~~June~~September 30, 2022 was ~~23.7%~~22.6% compared to ~~23.6%~~23.5% for the ~~six months ended June 30,~~same period in 2021. For 2022, the Corporation expects to report an effective tax rate ~~of approximately 23%~~less than 22.5%, as ~~management intends~~the Bank continues to ~~continue actively pursuing~~receive the benefit from its tax credit ~~opportunities.~~investments.

Generally, the provision for income taxes is determined by applying an estimated annual effective income tax rate to income before taxes and adjusting for discrete items. The rate is based on the most recent annualized forecast of pre-tax income, book versus tax differences and tax credits, if any. If we conclude that a reliable estimated annual effective tax rate cannot be determined, the actual effective tax rate for the year-to-date period may be used. We re-evaluate the income tax rates each quarter. Therefore, the current projected effective tax rate for the entire year may change.

Financial Condition

General

Total assets increased by ~~$124.1~~$197.9 million, or ~~4.7%~~7.5%, to ~~$2.777~~$2.851 billion as of ~~June~~September 30, 2022 compared to $2.653 billion at December 31, 2021. The increase in total assets was primarily driven by an increase in cash, ~~and~~ loans and leases ~~receivable.~~receivable, and an increase in other assets. Total liabilities increased by ~~$106.6~~$177.3 million, or ~~4.4%~~7.3%, to ~~$2.527~~$2.598 billion at ~~June~~September 30, 2022 compared to $2.420 billion at December 31, 2021. The increase in total liabilities was principally due to an increase in ~~FHLB advances and subordinated debentures, partially offset by a decrease in~~ deposits and ~~payoff of junior subordinated debentures.~~other liabilities. Total stockholders’ equity increased by ~~$17.5~~$20.6 million, or ~~7.5%~~8.9%, to ~~$249.9~~$253.0 million at ~~June~~September 30, 2022 compared to $232.4 million at December 31, 2021. The increase in total stockholders’ equity was due to retention of earnings and issuance of preferred stock, partially offset by unrealized losses on available-for-sale securities, ~~and~~ dividends paid to common ~~stockholders.~~stockholders, and stock repurchased.

Cash and Cash Equivalents

Cash and cash equivalents include short-term investments and cash and due from banks. Cash and due from banks increased ~~$29.6~~$14.6 million to ~~$39.3~~$24.3 million at ~~June~~September 30, 2022 principally due to a routine temporary increase in cash related to client funds in-transit. Short-term investments increased by ~~$8.8~~$39.3 million to ~~$56.2~~$86.7 million at ~~June~~September 30, 2022 from $47.4 million at December 31, 2021. 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 ~~on-balance sheet~~readily accessible liquidity program. As of ~~June~~September 30, 2022 and December 31, 2021, interest-bearing deposits held at the FRB were ~~$55.5~~$85.3 million and $47.0 million, respectively. In general, the level of our cash and short-term investments will be influenced by the timing of deposit gathering, scheduled maturities of wholesale deposits, funding of loan and lease growth, and the level of our securities portfolio. Please refer to the section entitled Liquidity and Capital Resources for further discussion.

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Securities

Total securities, including available-for-sale and held-to-maturity, decreased by ~~$2.8~~$15.4 million, or ~~1.3%~~6.8%, to ~~$222.6~~$210.1 million, or ~~8.0%~~7.4% of total assets at ~~June~~September 30, 2022 compared to $225.4 million, or 8.5% of total assets at December 31, 2021. During the ~~six~~nine months ended ~~June~~September 30, 2022 the Corporation recognized unrealized losses of ~~$19.7~~$29.8 million before income taxes through other comprehensive income, compared to unrealized losses of ~~$1.6~~$3.0 million for the same period in 2021. These unrealized losses are solely driven by the recent ~~shift~~increase in interest rates. As of ~~June~~September 30, 2022 and December 31, 2021, our overall securities portfolio, including available-for-sale securities and held-to-maturity securities, had an estimated weighted-average expected maturity of 6.3 years and 5.7 years, respectively. Our investment philosophy remains as stated in our most recent Annual Report on Form 10-K.

We use a third-party pricing service as our primary source of market prices for our securities portfolio. On a quarterly basis, we validate the reasonableness of prices received from this source through independent verification, data integrity validation primarily through comparison of current price to an expectation-based analysis of movement in prices based upon the changes in the related yield curves, and other market factors. No securities within our portfolio were deemed to be other-than-temporarily impaired as of ~~June~~September 30, 2022.

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Loans and Leases Receivable

Loans and leases receivable, net of allowance for loan and lease losses, increased by ~~$50.9~~$91.5 million, or to ~~$2.266~~$2.307 billion at ~~June~~September 30, 2022 from $2.215 billion at December 31, 2021 which was driven by commercial loan growth, partially offset by PPP loan forgiveness. Loans and leases receivable, net of allowance for loan and lease losses and excluding net PPP loans, increased by ~~$70.0~~$110.6 million to ~~$2.258~~$2.304 billion at ~~June~~September 30, 2022 from $2.188 billion at December 31, 2021.

Total commercial real estate (“CRE”) loans increased ~~$33.9~~$30.3 million to ~~$1.488~~$1.485 billion, up from $1.455 billion at December 31, 2021. Owner occupied CRE and ~~construction financing~~multi-family drove CRE loan growth as of ~~June~~September 30, 2022, increasing ~~$22.8~~$30.4 million, and ~~$24.1~~$12.7 million, respectively, from December 31, 2021, partially offset by a ~~$5.7 million and $9.5~~$17.8 million decline in ~~multi-family and non-owner occupied CRE loans, respectively.~~construction loans.

There continues to be a concentration in CRE loans which represented ~~65.2%~~63.8% and 65.8% of our total loans, excluding net PPP loans, as of ~~June~~September 30, 2022 and December 31, 2021, respectively. As of ~~June~~September 30, 2022, ~~17.4%~~17.9% of the CRE loans were owner-occupied CRE, compared to 16.2% as of December 31, 2021. 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.

Excluding PPP loans, C&I loans increased ~~$30.1~~$83.6 million, to ~~$733.1~~$786.6 million from $703.0 million at December 31, 2021. Despite elevated payoffs during the first quarter of 2022, management believes timely prior-period investments in conventional and specialized commercial lending has positioned C&I lending for strong and sustainable growth in 2022 and beyond. Including PPP loans, our C&I portfolio increased ~~$10.5~~$58.2 million to ~~$741.4~~$789.0 million from $730.8 million at December 31, 2021.

We will 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.

Underwriting of new credit is primarily through approval from a serial sign-off or committee process and is a key component of our operating philosophy. Business development officers have no individual lending authority limits. We make every reasonable effort to ensure that there is appropriate collateral or a government guarantee at the time of origination to protect our interest in the related loan or lease. To monitor the ongoing credit quality of our loans and leases, each credit is evaluated for proper risk rating using a nine grade risk rating system at the time of origination, subsequent renewal, evaluation of updated financial information from our borrowers, or as other circumstances dictate.

While we continue to experience significant competition from banks operating in our primary geographic areas, we remain committed to our underwriting standards and will not deviate from those standards for the sole purpose of growing our loan and lease portfolio. We continue to expect our new loan and lease activity to be adequate to replace normal amortization, allowing us to continue growing in future years. The types of loans and leases we originate and the various risks associated with these originations remain consistent with information previously outlined in our most recent Annual Report on Form 10-K.

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Deposits

As of ~~June~~September 30, 2022, deposits ~~decreased~~increased by ~~$88.6~~$129.6 million to ~~$1.869~~$2.088 billion from $1.958 billion at December 31, 2021, primarily due to a ~~$108.5~~$128.7 million and ~~$22.7~~$106.6 million ~~decrease~~increase in ~~transaction accounts~~wholesale deposits and ~~money market~~certificate of deposit accounts, respectively, partially offset by a ~~$59.9~~$93.8 million ~~increase~~decrease in ~~certificates of deposit.~~transaction accounts. The ~~decline~~increase in balances was due to movement of client deposits to ~~investment alternatives, seasonality within~~term deposits earning a higher yield, and utilizing wholesale deposits, consistent with Management’s funding philosophy to manage interest rate risk with the ~~Bank’s municipality clients, tax payments,~~most efficient and cost effective source of wholesale funds. The decrease in transactional account was due to client deposit movement to alternative investments, and normal course of business for continuing client relationships. Management believes the Bank’s deposit-centric sales strategy, led by treasury management sales, will contribute to a net increase in deposits annually; 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 volatility 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, were ~~$1.917~~$1.921 billion for the ~~six~~nine months ended ~~June~~September 30, 2022 compared to ~~$1.729~~$1.756 billion for the ~~six~~nine months ended ~~June~~September 30, 2021.

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FHLB Advances and Other Borrowings

As of ~~June~~September 30, 2022, FHLB advances and other borrowings increased by ~~$193.2~~$16.8 million, or ~~47.9%~~4.2%, to ~~$596.6~~$420.3 million from $403.5 million at December 31, 2021. ~~The~~As in-market deposit balances have increased, we have been able to reduce our reliance on wholesale funding. As previously mentioned, we will continue to utilize FHLB advances ~~were used~~and wholesale deposits to ~~fund the seasonal decline of in-market deposits~~manage interest rate risk, liquidity, and ~~to match-fund existing and new fixed-rate loan growth to mitigate interest risk.~~contingency funding.

As of ~~June~~September 30, 2022 and December 31, 2021, the Corporation had other borrowings of ~~$8.3~~$8.2 million and $10.4 million respectively, which consisted of sold loans which were accounted for as a secured borrowing, because they did not qualify for true sale ~~accounting, and borrowings associated with our investment in a community development entity.~~accounting.

On March 4, 2022, the Corporation completed a private placement of $20.0 million in new subordinated debt to one institutional investor. Management used a portion of the proceeds during the second quarter of 2022 to redeem $9.1 million of subordinated notes bearing a fixed interest rate of 6.00%. The remainder of the proceeds will be used for general corporate purposes, including to support the Bank’s growth strategy, and to fund the Corporation’s previously announced $5 million share repurchase plan. The subordinated note bears a fixed interest rate of 3.50% with a maturity date of March 15, 2032 and has certain financial performance ~~debt~~ covenants ofwith which the Corporation was in compliance as of ~~June~~September 30, 2022. The Corporation may, at its option, redeem the note, in whole or part, ~~at any time~~ after the fifth anniversary of issuance.

Consistent with our funding philosophy to manage interest rate risk, we will use the most efficient and cost effective source of wholesale funds. We will utilize FHLB advances to the extent we maintain an adequate level of excess borrowing capacity for liquidity and contingency funding purposes and pricing remains favorable in comparison to the wholesale deposit alternative. We will use FHLB advances and/or brokered certificates of deposit in specific maturity periods needed, typically three to five years, to match-fund fixed rate loans and effectively mitigate the interest rate risk measured through our asset/liability management process and to support asset growth initiatives while taking into consideration our operating goals and desired level of usage of wholesale funds. Please refer to the section entitled Liquidity and Capital Resources, below, for further information regarding our use and monitoring of wholesale funds.

Preferred Stock

On March 4, 2022, the Corporation issued 12,500 shares, or $12.5 million in aggregate liquidation preference, of ~~its~~ 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”) in a private placement to institutional investors. The net proceeds received from the issuance of the Series A Preferred Stock were $12.0 million. The proceeds were used to redeem $10.1 million of junior subordinated notes in the first quarter of 2022.

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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 ~~June~~September 30, 2022, the Corporation paid ~~$246,000~~$218,000 and $464,000 in preferred cash ~~dividends.~~dividends, respectively. The Series A Preferred Stock is perpetual and has no stated maturity. The Corporation may redeem the Series A Preferred Stock at its option at a redemption price equal to $1,000 per share, plus any declared and unpaid dividends (without regard to any undeclared dividends), subject to regulatory approval, on or after March 15, 2027 or within 90 days following a regulatory capital treatment event, in accordance with the terms of the Series A Preferred Stock.

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Derivatives

The Board approved Bank policies allow the Bank to participate in hedging strategies or to use financial futures, options, forward commitments, or interest rate swaps. The Bank utilizes, from time to time, derivative instruments in the course of its asset/liability management. The Corporation’s derivative financial instruments, under which the Corporation is required to either receive cash from or pay cash to counterparties depending on changes in interest rates applied to notional amounts, are carried at fair value on the consolidated balance sheets.

As of ~~June~~September 30, 2022, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was approximately ~~$646.1~~$666.2 million, compared to $640.6 million as of December 31, 2021. 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 2038.~~June 2039. Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements. As of ~~June~~September 30, 2022, the commercial borrower swaps were reported on the Consolidated Balance Sheet as a derivative ~~asset of $3.2 million and as a derivative~~ liability of ~~$40.4~~$66.2 million compared to a derivative asset and liability of $26.3 million and $6.6 million, respectively, as of December 31, 2021. 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 2038.~~June 2039. 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 ~~$37.1~~$66.2 million as of ~~June~~September 30, 2022, compared to a net derivative liability of $19.7 million as of December 31, 2021. The gross amount of dealer counterparty swaps as of ~~June~~September 30, 2022, without regard to the enforceable master netting agreement, was a gross derivative ~~liability of $3.2 million and a gross derivative~~ asset of ~~$40.4~~$66.2 million, compared to a gross derivative liability of $26.3 million and gross derivative asset of $6.6 million as of December 31, 2021.

The Corporation also enters into interest rate swaps to manage interest rate risk and reduce the cost of match-funding certain long-term fixed rate loans. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. The instruments are designated as cash flow hedges as the receipt of floating rate interest from the counterparty is used to manage interest rate risk associated with forecasted issuances of short-term FHLB advances. The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affects earnings. As of ~~June~~September 30, 2022, the aggregate notional value of interest rate swaps designated as cash flow hedges was $124.4 million. These interest rate swaps mature between December 2022 and March 2034. A pre-tax unrealized gain of ~~$1.7~~$3.2 million and ~~$5.7~~$8.9 million was recognized in other comprehensive income for the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively, and there was no ineffective portion of these hedges.

The Corporation also enters into interest rate swaps to mitigate market value volatility on certain long-term fixed securities. The objective of the hedge is to protect the Corporation against changes in fair value due to changes in benchmark interest rates. The instruments are designated as fair value hedges as the changes in the fair value of the interest rate swap are expected to offset changes in the fair value of the hedged item attributable to changes in the SOFR swap rate, the designated benchmark interest rate. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affects earnings. As of ~~June~~September 30, 2022, 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 ~~loss~~gain of ~~$376,000~~$215,000 and $592,000 was recognized in other comprehensive income for the ~~six~~three and nine months ended ~~June~~September 30, 2022, respectively, and there was no ineffective portion of these hedges.

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

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Asset Quality

Impaired Assets

Total impaired assets consisted of the following at ~~June~~September 30, 2022 and December 31, 2021, respectively:


		June 30, 2022			December 31, 2021				September 30, 2022			December 31, 2021
		(Dollars in Thousands)							(Dollars in Thousands)
Non-accrual loans and leases	Non-accrual loans and leases							Non-accrual loans and leases
Commercial real estate:	Commercial real estate:							Commercial real estate:
Commercial real estate - owner occupied	Commercial real estate - owner occupied	$	113		$	348		Commercial real estate - owner occupied	$	—		$	348
Commercial real estate - non-owner occupied	Commercial real estate - non-owner occupied	—			—			Commercial real estate - non-owner occupied	—			—
Land development	Land development	—			—			Land development	—			—
Construction	Construction	—			—			Construction	—			—
Multi-family	Multi-family	—			—			Multi-family	—			—
1-4 family	1-4 family	33			339			1-4 family	32			339
Total non-accrual commercial real estate	Total non-accrual commercial real estate	146			687			Total non-accrual commercial real estate	32			687
Commercial and industrial	Commercial and industrial	5,390			5,572			Commercial and industrial	3,552			5,572
Direct financing leases, net	Direct financing leases, net	49			99			Direct financing leases, net	61			99
Consumer and other:	Consumer and other:							Consumer and other:
Home equity and second mortgages	Home equity and second mortgages	—			—			Home equity and second mortgages	—			—
Other	Other	—			—			Other	—			—
Total non-accrual consumer and other loans	Total non-accrual consumer and other loans	—			—			Total non-accrual consumer and other loans	—			—
Total non-accrual loans and leases	Total non-accrual loans and leases	5,585			6,358			Total non-accrual loans and leases	3,645			6,358
Foreclosed properties, net	Foreclosed properties, net	124			164			Foreclosed properties, net	151			164
Total non-performing assets	Total non-performing assets	5,709			6,522			Total non-performing assets	3,796			6,522
Performing troubled debt restructurings	Performing troubled debt restructurings	188			217			Performing troubled debt restructurings	172			217
Total impaired assets	Total impaired assets	$	5,897		$	6,739		Total impaired assets	$	3,968		$	6,739

Total non-accrual loans and leases to gross loans and leases	Total non-accrual loans and leases to gross loans and leases	0.24		%	0.28		%	Total non-accrual loans and leases to gross loans and leases	0.16		%	0.28		%
Total non-performing assets to gross loans and leases plus foreclosed properties, net	Total non-performing assets to gross loans and leases plus foreclosed properties, net	0.25			0.29			Total non-performing assets to gross loans and leases plus foreclosed properties, net	0.16			0.29
Total non-performing assets to total assets	Total non-performing assets to total assets	0.21			0.25			Total non-performing assets to total assets	0.13			0.25
Allowance for loan and lease losses to gross loans and leases	Allowance for loan and lease losses to gross loans and leases	1.05			1.09			Allowance for loan and lease losses to gross loans and leases	1.04			1.09
Allowance for loan and lease losses to non-accrual loans and leases	Allowance for loan and lease losses to non-accrual loans and leases	431.58			382.76			Allowance for loan and lease losses to non-accrual loans and leases	662.36			382.76

Net PPP loans outstanding as of ~~June~~September 30, 2022 and December 31, 2021, were ~~$8.2~~$2.3 million and $27.3 million, respectively. The following asset quality ratios exclude net PPP loans as they are fully guaranteed by the SBA:


		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
Total non-accrual loans and leases to gross loans and leases	Total non-accrual loans and leases to gross loans and leases	0.24	%	0.29	%	Total non-accrual loans and leases to gross loans and leases	0.16	%	0.29	%
Total non-performing assets to gross loans and leases plus foreclosed properties, net	Total non-performing assets to gross loans and leases plus foreclosed properties, net	0.25		0.29		Total non-performing assets to gross loans and leases plus foreclosed properties, net	0.16		0.29
Total non-performing assets to total assets	Total non-performing assets to total assets	0.21		0.25		Total non-performing assets to total assets	0.13		0.25
Allowance for loan and lease losses to gross loans and leases	Allowance for loan and lease losses to gross loans and leases	1.06		1.10		Allowance for loan and lease losses to gross loans and leases	1.04		1.10

Non-accrual loans decreased ~~$773,000,~~$2.7 million, or ~~12.2%~~42.7%, to ~~$5.6~~$3.6 million at ~~June~~September 30, 2022, compared to $6.4 million at December 31, 2021. The decrease in non-accrual loans was principally due to loan payoffs, loans returning to accrual status, and ~~$85,000~~$161,000 of charge-offs. The Corporation’s non-accrual loans as a percentage of total gross loans and leases measured ~~0.24%~~0.16% and 0.28% at ~~June~~September 30, 2022 and December 31, 2021, respectively. Non-accrual loans as a percentage of total gross loans and leases, excluding net PPP loans, was ~~0.24%~~0.16% and 0.29% at ~~June~~September 30, 2022 and December 31, 2021, respectively. ~~As of~~

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~~June~~As of September 30, 2022 and December 31, 2021, ~~$615,000~~$499,000 and $627,000 of non-accrual loans and leases were considered TDRs, respectively.

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 ~~0.21%~~0.13% and 0.25% at ~~June~~September 30, 2022 and December 31, 2021, respectively. As of ~~June~~September 30, 2022 and December 31, 2021, the payment performance of our loans and leases did not point to any new areas of concern, as approximately ~~99.0%~~99.8% of the total portfolio at the end of each period was in a current payment ~~status, compared to 99.8% as of December 31, 2021.~~status. We also monitor asset quality through our established categories as defined in Note 5 – Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses of the Consolidated Financial Statements. As we continue to actively monitor the credit quality of our loan and lease portfolios, we may identify additional loans and leases for which the borrowers or lessees are having difficulties making the required principal and interest payments based upon factors including, but not limited to, the inability to sell the underlying collateral, inadequate cash flow from the operations of the underlying businesses, liquidation events, or bankruptcy filings. We are proactively working with our impaired loan borrowers to find meaningful solutions to difficult situations that are in the best interests of the Bank.

As of ~~June~~September 30, 2022, 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 considered impaired and are placed on non-accrual status. 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 impaired loans and leases:


		As of and for the Six Months Ended June 30,				As of and for the Year Ended December 31,			As of and for the Nine Months Ended September 30,				As of and for the Year Ended December 31,
		2022		2021		2021			2022		2021		2021
		(In Thousands)							(In Thousands)
Impaired loans and leases with no impairment reserves required	Impaired loans and leases with no impairment reserves required	$	4,144	$	7,948	$	4,419	Impaired loans and leases with no impairment reserves required	$	1,028	$	4,985	$	4,419
Impaired loans and leases with impairment reserves required	Impaired loans and leases with impairment reserves required	1,629		3,530		2,156		Impaired loans and leases with impairment reserves required	2,789		2,501		2,156
Total impaired loans and leases	Total impaired loans and leases	5,773		11,478		6,575		Total impaired loans and leases	3,817		7,486		6,575
Less: Impairment reserve (included in allowance for loan and lease losses)	Less: Impairment reserve (included in allowance for loan and lease losses)	1,254		2,021		1,505		Less: Impairment reserve (included in allowance for loan and lease losses)	1,701		1,570		1,505
Net impaired loans and leases	Net impaired loans and leases	$	4,519	$	9,457	$	5,070	Net impaired loans and leases	$	2,116	$	5,916	$	5,070
Average impaired loans and leases	Average impaired loans and leases	$	6,009	$	19,420	$	14,260	Average impaired loans and leases	$	5,532	$	16,700	$	14,260
Foregone interest income attributable to impaired loans and leases	Foregone interest income attributable to impaired loans and leases	$	206	$	1,081	$	1,104	Foregone interest income attributable to impaired loans and leases	$	312	$	1,002	$	1,104
Less: Interest income recognized on impaired loans and leases	Less: Interest income recognized on impaired loans and leases	813		153		454		Less: Interest income recognized on impaired loans and leases	1,057		164		454
Net foregone interest income on impaired loans and leases	Net foregone interest income on impaired loans and leases	$	(607)	$	928	$	650	Net foregone interest income on impaired loans and leases	$	(745)	$	838	$	650

Allowance for Loan and Lease Losses

The allowance for loan and lease losses decreased ~~$232,000,~~$193,000, or ~~1.0%~~0.8%, to $24.1 million as of ~~June~~September 30, 2022 from $24.3 million as of December 31, 2021. The allowance for loan and lease losses as a percentage of gross loans and leases ~~decreased~~improved to ~~1.05%~~1.04% as of ~~June~~September 30, 2022 from 1.09% as of December 31, 2021. The allowance for loan and lease losses as a percentage of gross loans and leases, excluding net PPP loans, was ~~1.06%~~1.04% as of ~~June~~September 30, 2022 compared to 1.10% as of December 31, 2021. The decrease in allowance for loan and lease losses as a percent of gross loans and leases was principally due to ~~the net decrease~~improvements in ~~specific reserves~~historical loss and qualitative risk ~~factor improvements. These general and specific reserve releases were partially offset by an increase in general reserve commensurate with loan growth.~~factors. The majority of loan segments experienced a reduction in historical loss factors as the look-back period continued to roll off the Corporation’s higher loss rates from the Great Recession. These general reserve releases were partially offset by an increase in general reserve commensurate with loan growth and a net increase in specific reserves.

There have been no substantive changes to our methodology for estimating the appropriate level of allowance for loan and lease loss reserves from what was previously outlined in our most recent Annual Report on Form 10-K.

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During the ~~six~~nine months ended ~~June~~September 30, 2022, we recorded net recoveries on impaired loans and leases of $4.4 million, comprised of ~~$107,000~~$161,000 of charge-offs and $4.5 million of recoveries. While we likely will continue to experience some level of periodic charge-offs in the future as exit strategies are considered and executed, based on current economic conditions, management believes net charge-offs will remain at low levels in the near term. Loans and leases with previously established specific reserves, however, may ultimately result in a charge-off under a variety of scenarios.

As of ~~June~~September 30, 2022 and December 31, 2021, our ratio of allowance for loan and lease losses to total non-accrual loans and leases was ~~431.58%~~662.36% and 382.76%, respectively. This ratio increased primarily due to the substantial decrease in non-accrual loans and leases discussed above, in comparison to the modest decrease in the allowance for loan and leases losses. Impaired loans and leases exhibit weaknesses that inhibit repayment in compliance with the original terms of the note or lease; however, the measurement of impairment on loans and leases may not always result in a specific reserve included in the allowance for loan and lease losses. As part of the underwriting process, as well as our ongoing monitoring efforts, we try to ensure that we have sufficient collateral to protect our interest in the related loan or lease. As a result of this practice, a significant portion of our outstanding balance of non-performing loans or leases may not require additional specific reserves or require only a minimal amount of required specific reserve. Management is proactive in recording charge-offs to bring loans to their net realizable value in situations where it is determined with certainty that we will not recover the entire amount of our principal. This practice may lead to a lower allowance for loan and lease loss to non-accrual loans and leases ratio as compared to our peers or industry expectations. As asset quality strengthens, our allowance for loan and lease losses is measured more through general characteristics, including historical loss experience, 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 ~~June~~September 30, 2022.

To determine the level and composition of the allowance for loan and lease losses, we break out the portfolio by segments with similar risk characteristics. First, we evaluate loans and leases for potential impairment classification. We analyze each loan and lease identified as impaired 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 each segment of loans and leases that has not been individually evaluated, management segregates the Bank’s loss factors into a quantitative general reserve component based on historical loss rates throughout the defined look back period. The quantitative general reserve component also considers an estimate of the historical loss emergence period, which is the period of time between the event that triggers the loss to the charge-off of that loss. The methodology also focuses on evaluation of several qualitative factors for each portfolio category, including but not limited to: 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, existing economic conditions, level of loans and leases subject to more frequent review by management, changes in underlying collateral, concentrations of loans to 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 loan and lease loss reserve to bring the loan or lease to its net realizable value. Many of the impaired loans as of ~~June~~September 30, 2022 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 or equipment at least annually, or more frequently as circumstances warrant. As we have completed new appraisals and/or market evaluations, in specific situations current fair values collateralizing certain impaired loans were inadequate to support the entire amount of the outstanding debt. Foreclosure actions may have been initiated on certain of these commercial real estate and other mortgage loans.

As a result of our review process, we have concluded an appropriate allowance for loan and lease losses for the existing loan and lease portfolio was $24.1 million, or ~~1.05%~~1.04% of gross loans and leases, at ~~June~~September 30, 2022. However, given ongoing complexities with current workout situations and the uncertainty surrounding future economic conditions, further charge-offs, and increased provisions for loan and lease losses may be recorded if additional facts and circumstances lead us to a different conclusion. In addition, various federal and state regulatory agencies review the allowance for loan and lease losses. These agencies could require certain loan and lease balances to be classified differently or charged off when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination.

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A summary of the activity in the allowance for loan and lease losses follows:


		As of and for the Three Months Ended June 30,						As of and for the Six Months Ended June 30,							As of and for the Three Months Ended September 30,						As of and for the Nine Months Ended September 30,
		2022			2021			2022			2021				2022			2021			2022			2021
		(Dollars in Thousands)													(Dollars in Thousands)
Allowance at beginning of period	Allowance at beginning of period	$	23,669		$	28,982		$	24,336		$	28,521		Allowance at beginning of period	$	24,104		$	25,675		$	24,336		$	28,521
Charge-offs:	Charge-offs:													Charge-offs:
Commercial real estate:	Commercial real estate:													Commercial real estate:
Commercial real estate — owner occupied	Commercial real estate — owner occupied	—			(4)			—			(4)			Commercial real estate — owner occupied	—			(7)			—			(11)
Commercial real estate — non-owner occupied	Commercial real estate — non-owner occupied	—			—			—			—			Commercial real estate — non-owner occupied	—			—			—			—
Construction and land development	Construction and land development	—			—			—			—			Construction and land development	—			—			—			—
Multi-family	Multi-family	—			—			—			—			Multi-family	—			—			—			—
1-4 family	1-4 family	—			(245)			—			(245)			1-4 family	—			—			—			(245)
Commercial and industrial	Commercial and industrial	(85)			(2,621)			(107)			(2,765)			Commercial and industrial	(33)			(356)			(140)			(3,121)
Direct financing leases	Direct financing leases	—			—			—			—			Direct financing leases	—			—			—			—
Consumer and other:	Consumer and other:													Consumer and other:
Home equity and second mortgages	Home equity and second mortgages	—			—			—			—			Home equity and second mortgages	—			—			—			—
Other	Other	—			(24)			—			(24)			Other	(21)			(1)			(21)			(25)
Total charge-offs	Total charge-offs	(85)			(2,894)			(107)			(3,038)			Total charge-offs	(54)			(364)			(161)			(3,402)
Recoveries:	Recoveries:													Recoveries:
Commercial real estate:	Commercial real estate:													Commercial real estate:
Commercial real estate — owner occupied	Commercial real estate — owner occupied	4,121			84			4,236			225			Commercial real estate — owner occupied	23			70			4,258			295
Commercial real estate — non-owner occupied	Commercial real estate — non-owner occupied	—			—			1			—			Commercial real estate — non-owner occupied	—			1,431			1			1,431
Construction and land development	Construction and land development	—			—			—			2,078			Construction and land development	—			—			—			2,078
Multi-family	Multi-family	—			—			—			—			Multi-family	—			—			—			—
1-4 family	1-4 family	—			—			—			—			1-4 family	—			—			—			—
Commercial and industrial	Commercial and industrial	117			460			201			913			Commercial and industrial	50			128			251			1,041
Direct financing leases	Direct financing leases	—			—			—			—			Direct financing leases	—			—			—			—
Consumer and other:	Consumer and other:													Consumer and other:
Home equity and second mortgages	Home equity and second mortgages	—			—			—			1			Home equity and second mortgages	—			—			—			1
Other	Other	9			1			19			1			Other	8			5			27			6
Total recoveries	Total recoveries	4,247			545			4,457			3,218			Total recoveries	81			1,634			4,537			4,852
Net recoveries	Net recoveries	4,162			(2,349)			4,350			180			Net recoveries	27			1,270			4,376			1,450
Provision for loan and lease losses	Provision for loan and lease losses	(3,727)			(958)			(4,582)			(3,026)			Provision for loan and lease losses	12			(2,269)			(4,569)			(5,295)
Allowance at end of period	Allowance at end of period	$	24,104		$	25,675		$	24,104		$	25,675		Allowance at end of period	$	24,143		$	24,676		$	24,143		$	24,676
Annualized net (recoveries) charge-offs as a percent of average gross loans and leases		(0.73)		%	0.42		%	(0.39)		%	(0.02)		%
Annualized net (recoveries) charge-offs as a percent of average gross loans and leases, excluding average net PPP loans		(0.74)		%	0.47		%	(0.39)		%	(0.02)		%
Annualized net recoveries as a percent of average gross loans and leases														Annualized net recoveries as a percent of average gross loans and leases	—		%	(0.24)		%	(0.26)		%	(0.09)		%

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Liquidity and Capital Resources

The Corporation expects to meet its liquidity needs through existing cash on hand, established cash flow sources, its third party senior line of credit, and dividends received from the Bank. While the Bank is subject to certain generally applicable regulatory limitations regarding its ability to pay dividends to the Corporation, we do not believe that the Corporation will be adversely affected by these dividend limitations. The Corporation’s principal liquidity requirements at ~~June~~September 30, 2022 were the interest payments due on subordinated notes 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 ~~June~~September 30, 2022, and continue to meet the heightened requirements imposed by Basel III, including the capital conservation buffer. The Corporation’s Board and management teams adhere to the appropriate regulatory guidelines on decisions which affect their capital positions, including but not limited to, decisions relating to the payment of dividends and increasing indebtedness.

The Bank maintains liquidity by obtaining funds from several sources. The Bank’s primary source of funds are principal and interest payments on loans receivable and mortgage-related securities, deposits, and other borrowings, such as federal funds, and FHLB advances. The scheduled payments of loans and mortgage-related securities are generally a predictable source of funds. Deposit flows and loan prepayments, however, are greatly influenced by general interest rates, economic conditions, and competition.

We view ~~on-balance sheet~~readily accessible liquidity as a critical element ~~to maintaining adequate liquidity~~ to meet our cash and collateral obligations. We define our ~~on-balance sheet~~readily accessible liquidity as the total of our short-term investments, our unencumbered securities available-for-sale, and our unencumbered pledged loans. As of ~~June~~September 30, 2022 and December 31, 2021, our ~~immediate on-balance sheet~~readily accessible liquidity was ~~$413.0~~$549.2 million and $529.5 million, respectively. At ~~June~~September 30, 2022 and December 31, 2021, the Bank had ~~$55.5~~$85.3 million and $47.0 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 ~~on-balance sheet~~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 ~~$566.4~~$536.1 million of outstanding wholesale funds at ~~June~~September 30, 2022, compared to $398.4 million of wholesale funds as of December 31, 2021, which represented ~~23.4%~~21.8% and 17.1%, respectively, of ending balance total bank funding. Wholesale funds include FHLB advances, brokered certificates of deposit, and deposits gathered from internet listing services. Total bank funding is defined as total deposits plus FHLB advances. We are committed to raising in-market deposits while utilizing wholesale funds to mitigate interest rate risk. Wholesale funds continue to be an efficient and cost effective source of funding for the Bank and allows it to gather funds across a larger geographic base at price levels and maturities that are more attractive than local time deposits when required to raise a similar level of in-market deposits within a short time period. Access to such deposits and borrowings allows us the flexibility to refrain from pursuing single service deposit relationships in markets that have experienced unfavorable pricing levels. In addition, the administrative costs associated with wholesale funds are considerably lower than those that would be incurred to administer a similar level of local deposits with a similar maturity structure. During the time frames necessary to accumulate wholesale funds in an orderly manner, we will use short-term FHLB advances to meet our temporary funding needs. The short-term FHLB advances will typically have terms of one week to one month to cover the overall expected funding demands.

Period-end in-market deposits ~~decreased $71.3 million, or 3.7%, to $1.857~~remained relatively flat at $1.929 billion ~~at June~~as of September 30, 2022, ~~from $1.928 billion at~~compared to December 31, 2021. ~~The decline~~There was ~~due~~a shift of in-market deposit mix to term deposits at higher interest rates, which was partially offset by deposit movement ~~of deposits~~from transaction accounts to alternative investment ~~alternatives~~options and ~~to pay taxes, seasonality within the Bank’s municipality~~ clients ~~and~~funding their normal course of ~~business for continuing client relationships.~~business. The decline in ~~in-market deposits~~transaction accounts was not the result of the loss of any significant client relationships, and we expect to continue to establish new client relationships and increase ~~deposit~~transaction account balances with existing clients’ accounts. Nonetheless, we will continue to use wholesale funds in specific maturity periods, typically three to five years, needed to effectively mitigate the interest rate risk measured through our asset/liability management process or in shorter time periods if in-market deposit balances decline. In order to provide for ongoing liquidity and funding, none of our wholesale certificates of deposit allow for withdrawal at the option of the depositor before the stated maturity (with the exception of deposits accumulated through the internet listing service which have the same early withdrawal privileges and fees as do our other in-market deposits) and FHLB advances with contractual maturity terms. The Bank limits the percentage of wholesale funds to total bank funds in accordance with liquidity policies approved by its Board. The Bank was in compliance with its policy limits as of ~~June~~September 30, 2022.

The Bank was able to access the wholesale funding market as needed at rates and terms comparable to market standards during the year ended ~~June~~September 30, 2022. 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 ~~on-balance sheet~~readily accessible liquidity. These potential funding sources include deposits maintained

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at the FRB or Federal Reserve Discount Window utilizing currently unencumbered securities and acceptable loans as collateral.

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As of ~~June~~September 30, 2022, the available liquidity was in excess of the stated policy minimum. We believe the Bank will also have access to the unused federal funds lines, cash flows from borrower repayments, and cash flows from security maturities. The Bank also has the ability to raise local market deposits by offering attractive rates to generate the level required to fulfill its liquidity needs.

The Corporation has filed a shelf registration 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.

The Bank is required by federal regulation to maintain sufficient liquidity to ensure safe and sound operations. We believe that the Bank has sufficient liquidity to match the balance of net withdrawable deposits and short-term borrowings in light of present economic conditions and deposit flows.

During the ~~six~~nine months ended ~~June~~September 30, 2022, operating activities resulted in a net cash inflow of ~~$16.8~~$31.4 million, which included net income of ~~$19.9~~$30.7 million, partially offset by a $4.6 million provision for loan and lease loss benefit. Net cash used by investing activities for the ~~six~~nine months ended ~~June~~September 30, 2022 was ~~$79.4~~$117.0 million primarily due to net loan disbursements, investments made in securities available for sale, ~~net loan disbursements,~~ and ~~a net increase in FHLB stock.~~low-income housing tax credit investments. Net cash provided by financing activities was ~~$101.0~~$139.5 million for the ~~six~~nine months ended ~~June~~September 30, 2022 primarily due to a net increase in deposits, net increase in FHLB advances, ~~partially offset by a net decrease in deposits.~~and the issuance of preferred stock. 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 ~~June~~September 30, 2022, 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, 2021. We continue to believe that we have adequate capital and liquidity available from various sources to fund projected contractual obligations and commitments.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Corporation’s management, with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, has evaluated the Corporation’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer have concluded that the Corporation’s disclosure controls and procedures were effective as of ~~June~~September 30, 2022.

Changes in Internal Control over Financial Reporting

There was no change in the Corporation’s internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that occurred during the quarter ended ~~June~~September 30, 2022 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II. Other Information

Item 1. Legal Proceedings

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From time to time, the Corporation and its subsidiaries are engaged in legal proceedings in the ordinary course of their respective businesses. Management believes that any liability arising from any such proceedings currently existing or threatened will not have a material adverse effect on the Corporation’s financial position, results of operations, or cash flows.

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Item 1A. Risk Factors

There were no material changes to the risk factors previously disclosed in Item 1A. to Part I of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Securities

On March 4, 2022, the Corporation’s Board approved a new share repurchase program. The program authorized the repurchase by the Corporation of up to $5 million of its total outstanding shares of common stock over a period of approximately twelve months, ending March 4, 2023. As of ~~June~~September 30, 2022, the Corporation had repurchased a total of ~~30,600~~73,055 shares for approximately ~~$1.0~~$2.4 million at an average cost of ~~$33.28~~$33.04 per share.

Under the share repurchase program, the Corporation is authorized to repurchase shares from time to time in the open market or negotiated transactions at prevailing market rates, or by other means in accordance with federal securities laws. In connection with the share repurchase program, the Corporation implemented a 10b5-1 trading plan. The trading plan allows the Corporation to repurchase shares of its common stock at times when it otherwise might be prevented from doing so under insider trading laws by requiring that an agent selected by the Corporation repurchase shares of common stock on the Corporation’s behalf on pre-determined terms.

The following table sets forth information about the Corporation's purchases of its common stock during the three months ended ~~June~~September 30, 2022.

Period
Total Number of Shares Purchased(1)
Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Total Number of Shares that May Yet Be Purchased Under the Plans or Programs
April 1, 2022 - April 30, 2022 22,797 $ 33.15 7,809 —
May 1, 2022 - May 31, 2022 10,557 33.74 9,743 —
June 1, 2022 - June 30, 2022 7,646 32.78 8,546 —
Total 41,000 33.24 26,098 124,075


Period	Total Number of Shares Purchased(1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Total Number of Shares that May Yet Be Purchased Under the Plans or Programs(2)
July 1, 2022 - July 31, 2022	14,365	$	31.33	14,365	—
August 1, 2022 - August 31, 2022	15,505	34.55		11,758	—
September 1, 2022 - September 30, 2022	16,332	33.44		16,332	—
Total	46,202	—		42,455	80,041

(1)During the ~~second~~third quarter of 2022, the Corporation repurchased an aggregate ~~41,000~~46,202 shares of the Corporation’s common stock in open-market transactions, of which ~~26,098~~42,455 shares were purchased pursuant to the repurchase program publicly announced on March 4, 2022, and of which ~~14,902~~3,747 shares were surrendered to us to satisfy income tax withholding obligations in connection with the vesting of restricted awards.

(2)Number of shares available to be purchased under the March 4, 2022 share repurchase program was calculated by taking $2.6 million remaining capacity and dividing by closing stock price on September 30, 2022.

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Item 6. Exhibits


10.1						Form of Performance-Based Restricted Stock Unit Award Agreement - Executive Officer (filed herewith)

10.2						Form of Restricted Stock Unit Award Agreement - Executive Officer (filed herewith)

10.3						Form of Restricted Stock Unit Award Agreement - Board of Directors (filed herewith)

31.1						Certification of the Chief Executive Officer

31.2						Certification of the Chief Financial Officer

32						Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

101						The following financial information from First Business Financial Services, Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~June~~September 30, 2022, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of ~~June~~September 30, 2022 and December 31, 2021, (ii) Consolidated Statements of Income for the three and ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, (iii) Consolidated Statements of Comprehensive Income for the three and ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three and ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, (v) Consolidated Statements of Cash Flows for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, and (vi) the Notes to Unaudited Consolidated Financial Statements

104						The cover page from First Business Financial Services, Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~June~~September 30, 2022 has been formatted in Inline XBRL and contained in Exhibit 101.

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


			FIRST BUSINESS FINANCIAL SERVICES, INC.
~~July 29,~~October 28, 2022			/s/ Corey A. Chambas
			Corey A. Chambas
			Chief Executive Officer

~~July 29,~~October 28, 2022			/s/ Edward G. Sloane, Jr.
			Edward G. Sloane, Jr.
			Chief Financial Officer
			(principal financial officer)

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