0001521951fbiz:AssetDerivativesMemberus-gaap:DesignatedAsHedgingInstrumentMemberfbiz:InterestRateSwapRelatedToFHLBBorrowingsMember2022-01-012022-06-30

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ☑Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended SeptemberJune 30, 20172022
OR
¨☐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)
Wisconsin39-1576570
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
401 Charmany Drive Madison, WI53719
MadisonWisconsin
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par valueFBIZThe 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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or 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. (Check one):
Large accelerated filer¨
¨
Accelerated filerþ
þ
Non-accelerated filer¨
¨
Smaller reporting company¨
☑
Emerging growth company¨
(Do not check if a smaller reporting 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 October 20, 2017July 24, 2022 was 8,759,6738,475,953 shares.


Table of Contents
FIRST BUSINESS FINANCIAL SERVICES, INC.
INDEX — FORM 10-Q





1
Item 1. Financial Statements
1
Consolidated Balance Sheets (Unaudited)
1
Consolidated Statements of Income (Unaudited)
2
Consolidated Statements of Comprehensive Income (Unaudited)
3
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
4
Consolidated Statements of Cash Flows (Unaudited)
56
Notes to Unaudited Consolidated Financial Statements
78
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
3842
Item 3. Quantitative and Qualitative Disclosures about Market Risk
5865
Item 4. Controls and Procedures
5965
5965
Item 1. Legal Proceedings
5965
Item 1A. Risk Factors
5965
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
5966
Item 3. Defaults Upon Senior Securities
591
Item 4. Mine Safety Disclosures
591
Item 5. Other Information
601
Item 6. Exhibits
6066
6067




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
(Unaudited)
 (In Thousands, Except Share Data)
Assets  
Cash and due from banks$39,251 $9,697 
Short-term investments56,233 47,413 
Cash and cash equivalents95,484 57,110 
Securities available-for-sale, at fair value208,643 205,702 
Securities held-to-maturity, at amortized cost13,968 19,746 
Loans held for sale2,256 3,570 
Loans and leases receivable, net of allowance for loan and lease losses of $24,104 and $24,336, respectively2,265,996 2,215,072 
Premises and equipment, net1,899 1,694 
Foreclosed properties124 164 
Right-of-use assets, net5,772 4,910 
Bank-owned life insurance54,324 53,600 
Federal Home Loan Bank stock, at cost22,959 13,336 
Goodwill and other intangible assets12,262 12,268 
Derivatives44,461 26,343 
Accrued interest receivable and other assets48,868 39,390 
Total assets$2,777,016 $2,652,905 
Liabilities and Stockholders’ Equity  
Deposits$1,869,331 $1,957,923 
Federal Home Loan Bank advances and other borrowings596,642 403,451 
Junior subordinated notes— 10,076 
Lease liabilities7,207 5,406 
Derivatives40,357 28,283 
Accrued interest payable and other liabilities13,556 15,344 
Total liabilities2,527,093 2,420,483 
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, respectively11,992 — 
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, respectively94 93 
Additional paid-in capital86,123 85,797 
Retained earnings186,302 170,020 
Accumulated other comprehensive loss(11,588)(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)
Total stockholders’ equity249,923 232,422 
Total liabilities and stockholders’ equity$2,777,016 $2,652,905 
  September 30,
2017		 December 31,
2016
  (unaudited)  
 (In Thousands, Except Share Data)
Assets    
Cash and due from banks $20,685
 $14,596
Short-term investments 52,511
 62,921
Cash and cash equivalents 73,196
 77,517
Securities available-for-sale, at fair value 131,130
 145,893
Securities held-to-maturity, at amortized cost 38,873
 38,612
Loans held for sale —
 1,111
Loans and leases receivable, net of allowance for loan and lease losses of $19,923 and $20,912, respectively 1,446,790
 1,429,763
Premises and equipment, net 3,048
 3,772
Foreclosed properties 2,585
 1,472
Bank-owned life insurance 39,988
 39,048
Federal Home Loan Bank and Federal Reserve Bank stock, at cost 5,083
 2,131
Goodwill and other intangible assets 12,735
 12,773
Accrued interest receivable and other assets 32,228
 28,607
Total assets $1,785,656
 $1,780,699
Liabilities and Stockholders’ Equity    
Deposits $1,423,724
 $1,538,855
Federal Home Loan Bank advances and other borrowings 167,884
 59,676
Junior subordinated notes 10,015
 10,004
Accrued interest payable and other liabilities 17,252
 10,514
Total liabilities 1,618,875
 1,619,049
Stockholders’ equity:    
Preferred stock, $0.01 par value, 2,500,000 shares authorized, none issued or outstanding —
 —
Common stock, $0.01 par value, 25,000,000 shares authorized, 9,016,345 and 8,959,239 shares issued, 8,758,923 and 8,715,856 shares outstanding at September 30, 2017 and December 31, 2016, respectively 90
 90
Additional paid-in capital 78,353
 77,542
Retained earnings 95,785
 91,317
Accumulated other comprehensive loss (370) (522)
Treasury stock, 257,422 and 243,383 shares at September 30, 2017 and December 31, 2016, respectively, at cost (7,077) (6,777)
Total stockholders’ equity 166,781
 161,650
Total liabilities and stockholders’ equity $1,785,656
 $1,780,699


See accompanying Notes to Unaudited Consolidated Financial Statements.

1

Table of Contents
First Business Financial Services, Inc.
Consolidated Statements of Income (Unaudited)
  For the Three Months Ended September 30, For the Nine Months Ended September 30,
  2017 2016 2017 2016
  (In Thousands, Except Per Share Data)
Interest income        
Loans and leases $17,686
 $18,016
 $53,492
 $55,161
Securities 771
 698
 2,326
 2,102
Short-term investments 177
 184
 488
 533
Total interest income 18,634
 18,898
 56,306
 57,796
Interest expense        
Deposits 2,708
 2,870
 8,039
 8,961
Federal Home Loan Bank advances and other borrowings 763
 453
 2,185
 1,425
Junior subordinated notes 280
 280
 832
 835
Total interest expense 3,751
 3,603
 11,056
 11,221
Net interest income 14,883
 15,295
 45,250
 46,575
Provision for loan and lease losses 1,471
 3,537
 5,699
 6,824
Net interest income after provision for loan and lease losses 13,412
 11,758
 39,551
 39,751
Non-interest income        
Trust and investment services fee income 1,653
 1,364
 4,930
 3,981
Gain on sale of Small Business Administration loans 606
 347
 1,501
 3,854
Gain on sale of residential mortgage loans —
 198
 26
 540
Service charges on deposits 756
 772
 2,287
 2,247
Loan fees 391
 506
 1,525
 1,791
Increase in cash surrender value of bank-owned life insurance 314
 244
 940
 730
Other non-interest income 619
 209
 1,931
 914
Total non-interest income 4,339
 3,640
 13,140
 14,057
Non-interest expense        
Compensation 7,645
 7,637
 24,710
 24,454
Occupancy 527
 530
 1,521
 1,538
Professional fees 995
 1,065
 3,046
 2,888
Data processing 592
 623
 1,810
 1,971
Marketing 594
 528
 1,546
 1,710
Equipment 285
 292
 868
 913
Computer software 715
 539
 2,037
 1,607
FDIC insurance 320
 444
 1,081
 989
Collateral liquidation costs 371
 89
 556
 204
Net loss on foreclosed properties —
 —
 —
 93
Impairment of tax credit investments 112
 3,314
 338
 3,520
Small Business Administration recourse provision 1,315
 375
 2,095
 449
Other non-interest expense 760
 317
 2,404
 1,574
Total non-interest expense 14,231
 15,753
 42,012
 41,910
Income (loss) before income tax expense 3,520
 (355) 10,679
 11,898
Income tax expense (benefit) 936
 (3,020) 2,812
 957
Net income $2,584
 $2,665
 $7,867
 $10,941
Earnings per common share        
Basic $0.30
 $0.31
 $0.90
 $1.26
Diluted 0.30
 0.31
 0.90
 1.26
Dividends declared per share 0.13
 0.12
 0.39
 0.36
For the Three Months Ended June 30,For the Six Months Ended June 30,
 2022202120222021
 (In Thousands, Except Per Share Data)
Interest income    
Loans and leases$25,687 $23,591 $48,759 $46,386 
Securities1,064 816 2,039 1,669 
Short-term investments280 192 468 351 
Total interest income27,031 24,599 51,266 48,406 
Interest expense    
Deposits1,058 943 1,824 1,962 
Federal Home Loan Bank advances and other borrowings2,313 1,727 3,851 3,377 
Junior subordinated notes— 277 504 552 
Total interest expense3,371 2,947 6,179 5,891 
Net interest income23,660 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 losses27,387 22,610 49,669 45,541 
Non-interest income    
Private wealth management service fees2,852 2,744 5,693 5,151 
Gain on sale of Small Business Administration loans951 1,203 1,537 2,281 
Service charges on deposits1,041 941 2,040 1,859 
Loan fees697 569 1,349 1,114 
Increase in cash surrender value of bank-owned life insurance350 350 698 699 
Net gain on sale of securities— 29 — 29 
Swap fees471 — 697 684 
Other non-interest income510 485 2,244 1,699 
Total non-interest income6,872 6,321 14,258 13,516 
Non-interest expense    
Compensation14,020 13,255 27,658 25,912 
Occupancy568 533 1,123 1,085 
Professional fees1,298 913 2,468 1,778 
Data processing892 798 1,673 1,569 
Marketing670 511 1,170 902 
Equipment235 261 479 506 
Computer software1,117 1,129 2,199 2,244 
FDIC insurance296 280 610 642 
Other non-interest expense360 504 900 876 
Total non-interest expense19,456 18,184 38,280 35,514 
Income before income tax expense14,803 10,747 25,647 23,543 
Income tax expense3,599 2,512 5,771 5,577 
Net income11,204 8,235 19,876 17,966 
Preferred stock dividend246 — 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 
Diluted1.29 0.95 2.31 2.08 
Dividends declared per share0.1975 0.18 0.395 0.36 
See accompanying Notes to Unaudited Consolidated Financial Statements.

2
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,
2022202120222021
(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-sale3 7 8 15 
Interest rate swaps:
Unrealized gains (losses) on interest rate swaps arising during the period2,175 (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 
  For the Three Months Ended September 30, For the Nine Months Ended September 30,
  2017 2016 2017 2016
  (In Thousands)
Net income $2,584
 $2,665
 $7,867
 $10,941
Other comprehensive income, before tax        
Securities available-for-sale:        
Net unrealized securities gains arising during the period 172
 81
 199
 1,317
Securities held-to-maturity:        
Amortization of net unrealized losses transferred from available-for-sale 25
 41
 79
 124
Income tax expense (76) (47) (126) (555)
     Total other comprehensive income 121
 75
 152
 886
Comprehensive income $2,705
 $2,740
 $8,019
 $11,827


See accompanying Notes to Unaudited Consolidated Financial Statements.

3
Table of Contents
First Business Financial Services, Inc.
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)


Common Shares OutstandingPreferred StockCommon
Stock		Additional
Paid-in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Loss		Treasury
Stock		Total
 (In Thousands, Except Share Data)
Balance at January 1, 20218,566,960 $— $92 $83,125 $140,431 $(933)$(16,553)$206,162 
Net income— — — — 9,731 — — 9,731 
Other comprehensive loss— — — — — (105)— (105)
Share-based compensation - restricted shares and employee stock purchase plan84,255 — 1 530 — — — 531 
Issuance of common stock under the employee stock purchase plan1,775 — — 39 — — — 39 
Cash dividends ($0.18 per share)— — — — (1,541)— — (1,541)
Treasury stock purchased(14,795)— — — — — (326)(326)
Balance at March 31, 20218,638,195 $— $93 $83,694 $148,621 $(1,038)$(16,879)$214,491 
Net income— — — — 8,235 — — 8,235 
Other comprehensive loss— — — — — 275 — 275 
Share-based compensation - restricted shares and employee stock purchase plan1,421 — — 607 — — — 607 
Issuance of common stock under the employee stock purchase plan1,694 — — 42 — — — 42 
Cash dividends ($0.18 per share)
— — — — (1,556)— — (1,556)
Treasury stock purchased(23,549)— — — — — (642)(642)
Balance at June 30, 20218,617,761 $— $93 $84,343 $155,300 $(763)$(17,521)$221,452 
4
Table of Contents
  Common Shares Outstanding 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Treasury
Stock
 Total
  (In Thousands, Except Share Data)
Balance at December 31, 2015 8,699,410
 $89
 $76,549
 $80,584
 $(80) $(6,310) $150,832
Net income —
 —
 —
 10,941
 —
 —
 10,941
Other comprehensive income —
 —
 —
 —
 886
 —
 886
Share-based compensation - restricted shares, net 37,708
 1
 857
 —
 —
 —
 858
Cash dividends ($0.36 per share) —
 —
 —
 (3,132) —
 —
 (3,132)
Treasury stock purchased (19,819) —
 —
 —
 —
 (454) (454)
Balance at September 30, 2016 8,717,299
 $90
 $77,406
 $88,393
 $806
 $(6,764) $159,931
Common Shares OutstandingPreferred StockCommon
Stock		Additional
Paid-in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Loss		Treasury
Stock		Total
 (In Thousands, Except Share Data)
Balance at January 1, 20228,457,564 $— $93 $85,797 $170,020 $(1,457)$(22,031)$232,422 
Net income— — — — 8,672 — — 8,672 
Other comprehensive loss— — — — — (6,406)— (6,406)
Issuance of preferred stock, net of issuance costs— 11,992 — — — — — 11,992 
Share-based compensation - restricted shares and employee stock purchase plan47,864 — 1 608 — — — 609 
Issuance of common stock under the employee stock purchase plan1,380 — — 40 — — — 40 
Treasury stock re-issued— — — (1,002)— — 1,002 — 
Cash dividends ($0.1975 per share)— — — — (1,670)— — (1,670)
Treasury stock purchased(18,223)— — — — — (608)(608)
Balance at March 31, 20228,488,585 $11,992 $94 $85,443 $177,022 $(7,863)$(21,637)$245,051 
Net income— — — — 11,204 — — 11,204 
Other comprehensive income— — — — — (3,725)— (3,725)
Share-based compensation - restricted shares and employee stock purchase plan25,860 — — 645 — — — 645 
Issuance of common stock under the employee stock purchase plan1,254 — — 35 — — — 35 
Preferred stock dividends— — — — (246)— — (246)
Cash dividends ($0.1975 per share)— — — — (1,678)— — (1,678)
Treasury stock purchased(41,000)— — — — — (1,363)(1,363)
Balance at June 30, 20228,474,699 $11,992 $94 $86,123 $186,302 $(11,588)$(23,000)$249,923 

  Common Shares Outstanding 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Treasury
Stock
 Total
  (In Thousands, Except Share Data)
Balance at December 31, 2016 8,715,856
 $90
 $77,542
 $91,317
 $(522) $(6,777) $161,650
Net income —
 —
 —
 7,867
 —
 —
 7,867
Other comprehensive income —
 —
 —
 —
 152
 —
 152
Share-based compensation - restricted shares, net 57,106
 —
 811
 —
 —
 —
 811
Cash dividends ($0.39 per share) —
 —
 —
 (3,399) —
 —
 (3,399)
Treasury stock purchased (14,039) —
 —
 —
 —
 (300) (300)
Balance at September 30, 2017 8,758,923
 $90
 $78,353
 $95,785
 $(370) $(7,077) $166,781


See accompanying Notes to Unaudited Consolidated Financial Statements.



5
Table of Contents
First Business Financial Services, Inc.
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30,
 20222021
(In Thousands)
Operating activities  
Net income$19,876 $17,966 
Adjustments to reconcile net income to net cash provided by operating activities:  
Deferred income taxes, net(1,695)(1,359)
Impairment of tax credit investments(351)— 
Provision for loan and lease losses(4,582)(3,026)
Derivative credit valuation adjustment— (376)
Depreciation, amortization and accretion, net2,025 1,845 
Loss on disposal of equipment— 56 
Share-based compensation1,254 1,138 
Net gain on sale of securities— (29)
Increase in bank-owned life insurance policies(698)(699)
Origination of loans for sale(61,278)(48,137)
Sale of SBA loans originated for sale64,129 53,054 
Gain on sale of loans originated for sale(1,537)(2,281)
Net loss on foreclosed properties, including impairment valuation20 1 
Loan servicing right impairment valuation— (78)
Excess tax benefit (expense) from share-based compensation183 (16)
Returns on investments in limited partnerships314 — 
Payments on operating lease liabilities(817)(788)
Payments received on operating leases90 82 
Net increase in accrued interest receivable and other assets(13,814)(1,152)
Net increase (decrease) in accrued interest payable and other liabilities13,658 (1,230)
Net cash provided by operating activities16,777 14,971 
Investing activities  
Proceeds from maturities, redemptions, and paydowns of available-for-sale securities20,185 31,315 
Proceeds from maturities, redemptions, and paydowns of held-to-maturity securities5,761 3,969 
Proceeds from sale of available-for-sale securities— 14,955 
Purchases of available-for-sale securities(43,231)(35,559)
Proceeds from sale of foreclosed properties37 — 
Net (increase) decrease in loans and leases(46,359)2,444 
Investments in limited partnerships(363)— 
Returns of investments in limited partnerships— 60 
Distribution from historic development entities282 57 
Investment in low-income housing entities(5,937)(1,307)
Investment in Federal Home Loan Bank stock(23,370)(6,314)
Proceeds from the sale of Federal Home Loan Bank stock13,746 6,440 
Purchases of leasehold improvements and equipment, net(469)(135)
Proceeds from sale of leasehold improvements and equipment— 12 
Premium payment on bank owned life insurance policies(25)— 
Proceeds from redemption of Trust II stock315 — 
Net cash used in investing activities(79,428)15,937 
Financing activities  
Net (decrease) increase in deposits(88,592)305,191 
Proceeds from Federal Home Loan Bank advances1,413,844 510,300 
6
Table of Contents
  For the Nine Months Ended September 30,
  2017 2016
  (In Thousands)
Operating activities    
Net income $7,867
 $10,941
Adjustments to reconcile net income to net cash provided by operating activities:    
Deferred income taxes, net (1,603) (9)
Impairment of tax credit investments 338
 3,520
Provision for loan and lease losses 5,699
 6,824
Depreciation, amortization and accretion, net 1,148
 1,103
Share-based compensation 811
 858
Increase in value of bank-owned life insurance policies (940) (730)
Origination of loans for sale (24,606) (54,794)
Sale of loans originated for sale 27,244
 59,263
Gain on sale of loans originated for sale (1,527) (4,394)
Net loss on foreclosed properties, including impairment valuation —
 93
Excess tax benefit from share-based compensation (59) (138)
Returns on investments in limited partnerships 92
 250
Net increase in accrued interest receivable and other assets (1,759) (2,813)
Net (decrease) increase in accrued interest payable and other liabilities 6,739
 (2,789)
Net cash provided by operating activities 19,444
 17,185
Investing activities    
Proceeds from maturities, redemptions and paydowns of available-for-sale securities 29,802
 32,555
Proceeds from maturities, redemptions and paydowns of held-to-maturity securities 2,723
 2,906
Proceeds from sale of available-for-sale securities 11,702
 2,190
Purchases of available-for-sale securities (27,125) (48,229)
Purchases of held-to-maturity securities

 (3,016) (714)
Proceeds from sale of foreclosed properties —
 57
Net increase in loans and leases (22,530) (29,962)
Investments in limited partnerships (500) (750)
Returns of investments in limited partnerships —
 541
Investment in historic development entities (417) (1,488)
Investment in Federal Home Loan Bank and Federal Reserve Bank Stock (12,223) (388)
Proceeds from the sale of Federal Home Loan Bank Stock 9,271
 1,066
Purchases of leasehold improvements and equipment, net (942) (519)
Net cash used in investing activities (13,255) (42,735)
Financing activities    
Net decrease in deposits (115,107) (10,924)
Repayment of Federal Home Loan Bank advances (470,416) (63,100)
Proceeds from Federal Home Loan Bank advances 580,415
 59,600
Proceeds from issuance of subordinated notes payable 9,090
 —
Repayment of subordinated notes payable (7,889) —
Net decrease in other borrowed funds (2,904) (1,240)
Cash dividends paid (3,399) (3,132)
Purchase of treasury stock (300) (454)
Net cash used in financing activities (10,510) (19,250)
Net decrease in cash and cash equivalents (4,321) (44,800)
Cash and cash equivalents at the beginning of the period 77,517
 113,564
Cash and cash equivalents at the end of the period $73,196
 $68,764
Supplementary cash flow information    
Cash paid during the period for:    
Interest paid on deposits and borrowings $10,504
 $11,058
Income taxes paid 490
 5,122
Non-cash investing and financing activities:    
Transfer of loans from held-to-maturity to held-for-sale 8,366
 11,504
Transfer from premises and equipment to foreclosed properties 1,113
 —

Repayment of Federal Home Loan Bank advances(1,228,543)(517,000)
Repayment of subordinated notes payable(9,090)— 
Proceeds from issuance of subordinated notes payable20,000 — 
Repayment of junior subordinated notes payable(10,076)— 
Net (decrease) increase in long-term borrowed funds(3,020)7,653 
Cash dividends paid(3,348)(3,097)
Preferred stock dividends paid(246)— 
Proceeds from issuance of common stock under ESPP75 81 
Proceeds from issuance of preferred stock11,992 — 
Purchase of treasury stock(1,971)(968)
Net cash provided by financing activities101,025 302,160 
Net increase in cash and cash equivalents38,374 333,068 
Cash and cash equivalents at the beginning of the period57,110 56,909 
Cash and cash equivalents at the end of the period$95,484 $389,977 
Supplementary cash flow information  
Cash paid during the period for:
Interest paid on deposits and borrowings$5,707 $7,469 
Income taxes paid(31)7,658 
Non-cash investing and financing activities:
Right-of-use assets obtained in exchange for operating lease liabilities— 316 
Transfer from loans and leases to foreclosed properties17 149 
See accompanyingaccompany Notes to Unaudited Consolidated Financial Statements.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.Operations
The accounting and reporting practices of First Business Financial Services, Inc. (the(“FBFS” or the “Corporation”), through our wholly-owned subsidiary, First Business Bank (“FBB” or the “Bank”), hashave been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). FBB operates as a commercial banking institution primarily in the Wisconsin and the greater Kansas City markets. FBB also offers trust and investment services through First Business Trust & Investments (“FBTI”), a division of FBB.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 30, 2022, FBB hashad the following wholly ownedwholly-owned subsidiaries: First Business Capital Corp.Specialty Finance, LLC (“FBCC”FBSF”), First Madison Investment Corp. (“FMIC”), First Business Equipment Finance, LLC (“FBEF”), ABKC Real Estate, LLC (“ABKC”), Rimrock Road Investment Fund,FBB Real Estate 2, LLC (“Rimrock Road”FBB RE 2”), BOC Investment, LLC (“BOC”), Mitchell Street Apartments Investment, LLC (“Mitchell Street”), and FBB Tax Credit Investment, LLC (“FBB Tax Credit”). FMIC is located in and was formed under the laws of the state of Nevada.
Basis of Presentation.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, 2016.2021. The unaudited Consolidated Financial Statements include the accounts of the Corporation and its wholly ownedwholly-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”) haswas not been 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 thatwhich 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, level of the Small Business Administration (“SBA”) recourse reserve and income taxes. The results of operations for the nine month periodthree and six months ended SeptemberJune 30, 20172022, are not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, 2017.2022. 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, 2016.2021.
Recent Accounting Pronouncements
In May 2014,June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” with an original effective date for annual reporting periods beginning after December 15, 2016. The ASU is a converged standard between the FASB and the IASB that provides a single comprehensive revenue recognition model for all contracts with customers across transactions and industries. The primary objective of the ASU is revenue recognition that represents the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU 2014-09 to annual and interim reporting periods in fiscal years beginning after December 15, 2017. Earlier application is permitted only as of annual and interim reporting periods in fiscal years beginning after December 15, 2016. In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net.” The ASU intends to improve the operability and understandability of the implementation guidance of ASU 2014-09 on principal versus agent considerations. In April, May and December 2016, the FASB also issued ASU No. 2016-10, No. 2016-12 and No. 2016-20, respectively, related to Topic 606. The amendments do not change the core principles of the previously issued guidance, but instead further clarify and provide implementation guidance for certain aspects of the original ASU. The Corporation intends to adopt the accounting standards during the first quarter of 2018, as required. The Corporation has conducted its initial assessment and evaluated contracts to assess and quantify accounting methodology changes resulting from the adoption of this standard. The adoption of this accounting standard is not expected to have a material impact on the Corporation's consolidated financial statements. The

FASB continues to release new accounting guidance related to the adoption of this standard, which could impact the Corporation's initial assessment and may change the conclusions reached as to the application of this new guidance.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The ASU intends to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities and disclosing key information about leasing arrangements. The ASU will require lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessees’ obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. The ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Corporation intends to adopt the accounting standard during the first quarter of 2019, as required, and is currently evaluating the impact on its results of operations, financial position and liquidity.
In June 2016, the FASB issued ASUAccounting 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-sheetoff-balance sheet credit exposures, and any other financial asset not excluded from the scope that haveunder 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. The ASU is effective for public companies for fiscal years beginning after December 15,In November 2019, including interim periods within those fiscal years. Early adoption is permitted as of the fiscal years beginning after December 15, 2018. The Corporation intends to adopt the accounting standard during the first quarter of 2020, as required, and is currently evaluating the impact on its results of operations, financial position and liquidity.
In May 2017, the FASB issued ASU No. 2017-09, 2019-10, “Compensation- Stock CompensationFinancial Instruments—Credit Losses (Topic 718)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 the expected
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credit losses. Management is currently calculating sample expected loss computations and developing the allowance methodology and assumptions that will be used under the new standard. Management will continue to progress on its implementation project plan and improve the Corporation’s approach throughout the deferral period.
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 clarity aboutoptional 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 changesclarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the terms or conditions of a share-based payment award require an entity to apply modification accounting.discounting transition. The ASUguidance 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 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 fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoptionBank 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 permitted.effective upon its addition to the FASB codification. The Corporation is in the process of evaluatingassessing 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 standard butupdate 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 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 its resultsthe consolidated financial statements.

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Table of operations, financial position and liquidity.Contents

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815).” The ASU intends to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. It also expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item. The ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Corporation is in the process of evaluating the impact of this standard but does not expect this standard to have a material impact on its results of operations, financial position and liquidity.



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 averageweighted-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.
There were no anti-dilutive employee share-based awards for the three and nine month periods ended September 30, 2017 and 2016.
For the Three Months Ended June 30,For the Six Months Ended June 30,
 2022202120222021
(Dollars in Thousands, Except Share Data)
Basic earnings per common share  
Net income$11,204 $8,235 $19,876 $17,966 
Less: preferred stock dividends246 — 246 — 
Less: earnings allocated to participating securities310 238 547 493 
Basic earnings allocated to common shareholders$10,648 $7,997 $19,083 $17,473 
Weighted-average common shares outstanding, excluding participating securities8,225,838 8,385,069 8,245,317 8,381,868 
Basic earnings per common share$1.29 $0.95 $2.31 $2.08 
Diluted earnings per common share  
Earnings allocated to common shareholders, diluted$10,648 $7,997 $19,083 $17,473 
Weighted-average diluted common shares outstanding, excluding participating securities8,225,838 8,385,069 8,245,317 8,381,868 
Diluted earnings per common share$1.29 $0.95 $2.31 $2.08 

  For the Three Months Ended September 30, For the Nine Months Ended September 30,
  2017 2016 2017 2016
  (Dollars in Thousands, Except Share Data)
Basic earnings per common share        
Net income $2,584
 $2,665
 $7,867
 $10,941
Less: earnings allocated to participating securities 35
 38
 105
 165
Basic earnings allocated to common shareholders $2,549
 $2,627
 $7,762
 $10,776
Weighted-average common shares outstanding, excluding participating securities 8,621,311
 8,582,836
 8,606,080
 8,569,613
Basic earnings per common share $0.30
 $0.31
 $0.90
 $1.26
         
Diluted earnings per common share        
Earnings allocated to common shareholders, diluted $2,549
 $2,627
 $7,762
 $10,776
Weighted-average diluted common shares outstanding, excluding participating securities 8,621,311
 8,582,836
 8,606,080
 8,569,613
Diluted earnings per common share $0.30
 $0.31
 $0.90
 $1.26

Note 3 — Share-Based Compensation
The Corporation adopted the 20122019 Equity Incentive Plan (the “Plan”) during the quarter ended June 30, 2012.2019. 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 SeptemberJune 30, 2017, 217,4752022, 154,002 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. The Corporation may issue new shares and shares from its treasury stock for shares delivered 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, with the exception of restricted stock units, which do not have voting rights and are provided dividend equivalents, restricted stockaward 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, 20162021 and the ninesix months ended SeptemberJune 30, 20172022 was as follows:
RSAWeighted Average Grant PricePRSUWeighted Average Grant PriceRSUWeighted Average Grant PriceTotalWeighted Average Grant Price
Nonvested balance as of January 1, 2021143,246 $23.04 39,570 $28.85 4,988 $24.08 187,804 $24.29 
Granted (1)
67,515 22.39 23,550 27.12 2,065 21.68 93,130 23.57 
Vested(61,384)22.26 — — (2,001)22.91 (63,385)22.28 
Forfeited(7,760)23.24 — — — — (7,760)23.24 
Nonvested balance as of December 31, 2021141,617 23.06 63,120 28.20 5,052 23.56 209,789 24.62 
Granted (1)
55,275 33.59 37,335 24.71 335 33.60 92,945 30.02 
Vested(46,367)23.38 (43,020)18.91 (1,552)24.17 (90,939)21.28 
Forfeited(1,807)25.60 — — — — (1,807)25.60 
Nonvested balance as of June 30, 2022148,718 $26.84 57,435 $32.89 3,835 $24.19 209,988 $28.45 
Unrecognized compensation cost (in thousands)$3,222 $1,239 $70 $4,531 
Weighted average remaining recognition period (in years)2.672.001.972.47
(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 months ended June 30, 2022, an additional 21,510 were issued related to actual performance results of previously granted awards.
Employee Stock Purchase Plan
  
Number of
Restricted Shares/Units
 
Weighted Average
Grant-Date
Fair Value
Nonvested balance as of December 31, 2015 135,471
 $20.13
Granted 60,415
 22.74
Vested (56,090) 18.71
Forfeited (23,551) 20.90
Nonvested balance as of December 31, 2016 116,245
 21.13
Granted 64,725
 21.62
Vested (45,695) 21.49
Forfeited (7,619) 21.57
Nonvested balance as of September 30, 2017 127,656
 $21.39
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 months ended June 30, 2022, the Corporation issued 2,634 shares of common stock under the ESPP. As of SeptemberJune 30, 2017,2022, 238,122 shares remained available for issuance under the Corporation had $2.6 million of deferred unvested compensation expense, which the Corporation expects to recognize over a weighted-average period of approximately 3.03 years.ESPP.

For the three and nine months ended September 30, 2017 and 2016, share-basedShare-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,
2022202120222021
(In Thousands)
Share-based compensation expense$645 $607 $1,254 $1,138 

11
 For the Three Months Ended September 30, For the Nine Months Ended September 30,
 2017 2016 2017 2016
 (In Thousands)
Share-based compensation expense$268
 $292
 $811
 $858
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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
Amortized CostGross
Unrealized Gains		Gross
Unrealized Losses		Fair Value
 (In Thousands)
Available-for-sale:
U.S. treasuries$4,974 $— $(401)4,573 
U.S. government agency securities - government-sponsored enterprises17,059 248 (393)16,914 
Municipal securities43,995 7 (5,228)38,774 
Residential mortgage-backed securities - government issued17,148 2 (1,284)15,866 
Residential mortgage-backed securities - government-sponsored enterprises104,040 3 (8,085)95,958 
Commercial mortgage-backed securities - government issued3,834 — (337)3,497 
Commercial mortgage-backed securities - government-sponsored enterprises36,275 — (4,195)32,080 
Other securities980 1 — 981 
 $228,305 $261 $(19,923)$208,643 
 As of December 31, 2021
Amortized CostGross
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 enterprises19,797 248 (110)19,935 
Municipal securities30,828 473 (344)30,957 
Residential mortgage-backed securities - government issued19,563 238 (140)19,661 
Residential mortgage-backed securities - government-sponsored enterprises85,748 741 (784)85,705 
Commercial mortgage-backed securities - government issued5,801 36 (66)5,771 
Commercial mortgage-backed securities - government-sponsored enterprises36,786 313 (568)36,531 
Other securities2,205 23 — 2,228 
 $205,699 $2,072 $(2,069)$205,702 

12
  As of September 30, 2017
  Amortized Cost 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 Fair Value
  (In Thousands)
Available-for-sale:        
U.S. Government agency obligations - government-sponsored enterprises $3,799
 $11
 $(3) $3,807
Municipal obligations 9,342
 13
 (23) 9,332
Collateralized mortgage obligations - government issued 22,750
 301
 (149) 22,902
Collateralized mortgage obligations - government-sponsored enterprises 95,608
 165
 (684) 95,089
  $131,499
 $490
 $(859) $131,130


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  As of December 31, 2016
  Amortized Cost 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 Fair Value
  (In Thousands)
Available-for-sale:        
U.S. Government agency obligations - government-sponsored enterprises $6,298
 $7
 $(10) $6,295
Municipal obligations 8,246
 2
 (92) 8,156
Asset-backed securities 1,116
 —
 (35) 1,081
Collateralized mortgage obligations - government issued 30,936
 423
 (146) 31,213
Collateralized mortgage obligations - government-sponsored enterprises 99,865
 252
 (969) 99,148
  $146,461
 $684
 $(1,252) $145,893

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
Amortized CostGross
Unrealized Gains		Gross
Unrealized Losses		Fair Value
 (In Thousands)
Held-to-maturity:
Municipal securities$8,291 $23 $(26)$8,288 
Residential mortgage-backed securities - government issued1,878 — (57)1,821 
Residential mortgage-backed securities - government-sponsored enterprises1,792 — (48)1,744 
Commercial mortgage-backed securities - government-sponsored enterprises2,007 — (11)1,996 
 $13,968 $23 $(142)$13,849 
 As of December 31, 2021
Amortized CostGross
Unrealized Gains		Gross
Unrealized Losses		Fair Value
 (In Thousands)
Held-to-maturity:
Municipal securities$13,009 $222 $(3)$13,228 
Residential mortgage-backed securities - government issued2,226 40 — 2,266 
Residential mortgage-backed securities - government-sponsored enterprises2,502 76 — 2,578 
Commercial mortgage-backed securities - government-sponsored enterprises2,009 195 — 2,204 
 $19,746 $533 $(3)$20,276 
  As of September 30, 2017
  Amortized Cost 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 Fair Value
  (In Thousands)
Held-to-maturity:        
U.S. Government agency obligations - government-sponsored enterprises $1,498
 $—
 $(5) $1,493
Municipal obligations 21,928
 443
 (14) 22,357
Collateralized mortgage obligations - government issued 9,601
 16
 (33) 9,584
Collateralized mortgage obligations - government-sponsored enterprises 5,846
 12
 (18) 5,840
  $38,873
 $471
 $(70) $39,274

  As of December 31, 2016
  Amortized Cost 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 Fair Value
  (In Thousands)
Held-to-maturity:        
U.S. Government agency obligations - government-sponsored enterprises $1,497
 $2
 $(5) $1,494
Municipal obligations 21,173
 62
 (78) 21,157
Collateralized mortgage obligations - government issued 9,148
 17
 (38) 9,127
Collateralized mortgage obligations - government-sponsored enterprises 6,794
 6
 (58) 6,742
  $38,612
 $87
 $(179) $38,520


U.S. GovernmentTreasuries contains treasury bonds issued by the United States Treasury. U.S. government agency obligationssecurities - government-sponsored enterprises represent securities issued by the Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”). and the SBA. Municipal obligationssecurities include securities issued by various municipalities located primarily within the State of Wisconsin and are primarily general obligation bonds that are tax-exempt in nature. Asset-backedResidential and commercial mortgage-backed securities represent securities issued by the Student Loan Marketing Association (“SLMA”) which are 97% guaranteed by the U.S. Government. Collateralized mortgage obligations - government issued represent securities guaranteed by the Government National Mortgage Association. Collateralized mortgage obligations

Residential and commercial mortgage-backed securities - government-sponsored enterprises include securities guaranteed by the FHLMCFederal Home Loan Mortgage Corporation, FNMA, and the FNMA.FHLB. Other securities represent certificates of deposit of insured banks and savings institutions with an original maturity greater than three months. There were 14no sales of available-for-sale securities that occurred during the ninethree and six months ended SeptemberJune 30, 20172022 and threethere were 7 sales of available-for-sale securities that occurred during the ninethree and six months ended SeptemberJune 30, 2016.2021.


At SeptemberJune 30, 20172022 and December 31, 2016,2021, securities with a fair value of $1.9$39.7 million and $22.4$70.3 million,, respectively, were pledged to secure various obligations, including interest rate swap contracts outstanding Federal Home Loan Bank (“FHLB”) advances and additional FHLB availability.municipal deposits.
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The amortized cost and fair value of securities by contractual maturity at SeptemberJune 30, 20172022 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-SaleHeld-to-Maturity
 Amortized CostFair ValueAmortized CostFair Value
(In Thousands)
Due in one year or less$2,757 $2,755 $3,962 $3,973 
Due in one year through five years12,882 12,115 4,130 4,109 
Due in five through ten years58,532 53,524 4,940 4,862 
Due in over ten years154,134 140,249 936 905 
 $228,305 $208,643 $13,968 $13,849 
  Available-for-Sale Held-to-Maturity
  Amortized Cost Fair Value Amortized Cost Fair Value
  (In Thousands)
Due in one year or less $6,785
 $6,783
 $—
 $—
Due in one year through five years 13,156
 13,194
 11,177
 11,326
Due in five through ten years 48,051
 48,168
 13,258
 13,495
Due in over ten years 63,507
 62,985
 14,438
 14,453
  $131,499
 $131,130
 $38,873
 $39,274


The tables below show the Corporation’s gross unrealized losses and fair value of available-for-sale investments with unrealized losses, aggregated by investment category and length of time that individual investments were in a continuous loss position at SeptemberJune 30, 20172022 and December 31, 2016.2021. At SeptemberJune 30, 2017,2022, the Corporation held 106164 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 SeptemberJune 30, 2017,2022, the Corporation held 5611 available-for-sale securities that hadhave 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 ninethree and six months ended SeptemberJune 30, 20172022 and 2016.2021.

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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
 Less than 12 Months12 Months or LongerTotal
Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses
 (In Thousands)
Available-for-sale:
U.S. treasuries$4,573 $401 $— $— $4,573 $401 
U.S. government agency securities - government-sponsored enterprises926 73 2,181 320 3,107 393 
Municipal securities33,074 3,895 3,517 1,333 36,591 5,228 
Residential mortgage-backed securities - government issued14,826 1,284 — — 14,826 1,284 
Residential mortgage-backed securities - government-sponsored enterprises83,381 6,556 11,394 1,529 94,775 8,085 
Commercial mortgage-backed securities - government issued3,497 337 — — 3,497 337 
Commercial mortgage-backed securities - government-sponsored enterprises26,080 3,048 6,000 1,147 32,080 4,195 
 $166,357 $15,594 $23,092 $4,329 $189,449 $19,923 
 As of December 31, 2021
 Less than 12 Months12 Months or LongerTotal
Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses
 (In Thousands)
Available-for-sale:
U.S. treasuries$4,914 $57 $— $— $4,914 $57 
U.S. government agency securities - government-sponsored enterprises978 22 2,412 88 3,390 110 
Municipal securities12,568 344 — — 12,568 344 
Residential mortgage-backed securities - government issued12,745 140 — — 12,745 140 
Residential mortgage-backed securities - government-sponsored enterprises41,276 629 4,250 155 45,526 784 
Commercial mortgage-backed securities - government issued2,193 66 — — 2,193 66 
Commercial mortgage-backed securities - government-sponsored enterprises25,906 568 — — 25,906 568 
 $100,580 $1,826 $6,662 $243 $107,242 $2,069 
  As of September 30, 2017
  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. Government agency obligations - government-sponsored enterprises $800
 $—
 $1,997
 $3
 $2,797
 $3
Municipal obligations 1,916
 9
 3,011
 14
 4,927
 23
Collateralized mortgage obligations - government issued 3,679
 14
 6,185
 135
 9,864
 149
Collateralized mortgage obligations - government-sponsored enterprises 32,752
 121
 31,883
 563
 64,635
 684
  $39,147
 $144
 $43,076
 $715
 $82,223
 $859

  As of December 31, 2016
  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. Government agency obligations - government-sponsored enterprises $1,991
 $10
 $—
 $—
 $1,991
 $10
Municipal obligations 7,207
 89
 406
 3
 7,613
 92
Asset-backed securities —
 $—
 1,081
 35
 1,081
 35
Collateralized mortgage obligations - government issued 10,552
 130
 493
 16
 11,045
 146
Collateralized mortgage obligations - government-sponsored enterprises 54,843
 931
 1,819
 38
 56,662
 969
  $74,593
 $1,160
 $3,799
 $92
 $78,392
 $1,252


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 SeptemberJune 30, 20172022 and December 31, 2016.2021. At SeptemberJune 30, 2017,2022, the Corporation held 1423 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. There were sevenAt June 30, 2022, the Corporation held 1 held-to-maturity securitiessecurity that had been in a
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continuous unrealized loss position for twelve months or greater as of September 30, 2017.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 ninethree and six months ended SeptemberJune 30, 20172022 and 2016.2021.


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
 Less than 12 Months12 Months or LongerTotal
Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses
 (In Thousands)
Held-to-maturity:
Municipal securities$1,742 $8 $268 $18 $2,010 $26 
Residential mortgage-backed securities - government issued1,821 57 — — 1,821 57 
Residential mortgage-backed securities - government-sponsored enterprises3,364 48 — — 3,364 48 
Commercial mortgage-backed securities - government-sponsored enterprises376 11 — — 376 11 
 $7,303 $124 $268 $18 $7,571 $142 

 As of December 31, 2021
 Less than 12 Months12 Months or LongerTotal
Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses
 (In Thousands)
Held-to-maturity:
Municipal securities$— $— $284 $3 $284 $3 

16
  As of September 30, 2017
  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:            
U.S. Government agency obligations - government-sponsored enterprises $1,000
 $5
 $—
 $—
 $1,000
 $5
Municipal obligations 853
 11
 260
 3
 1,113
 14
Collateralized mortgage obligations - government issued 2,806
 8
 3,804
 25
 6,610
 33
Collateralized mortgage obligations - government-sponsored enterprises —
 —
 1,927
 18
 1,927
 18
  $4,659
 $24
 $5,991
 $46
 $10,650
 $70

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  As of December 31, 2016
  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:            
U.S. Government agency obligations - government-sponsored enterprises $1,000
 $5
 $—
 $—
 $1,000
 $5
Municipal obligations 9,472
 78
 —
 —
 9,472
 78
Collateralized mortgage obligations - government issued 6,980
 38
 —
 —
 6,980
 38
Collateralized mortgage obligations - government-sponsored enterprises 4,682
 58
 —
 —
 4,682
 58
  $22,134
 $179
 $—
 $—
 $22,134
 $179


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:
 September 30,
2017		 December 31,
2016		June 30,
2022		December 31,
2021
 (In Thousands) (In Thousands)
Commercial real estate:    Commercial real estate:  
Commercial real estate — owner occupied $182,755
 $176,459
Commercial real estate — owner occupied$258,375 $235,589 
Commercial real estate — non-owner occupied 461,586
 473,158
Commercial real estate — non-owner occupied651,920 661,423 
Land development 41,499
 56,638
Land development42,545 42,792 
Construction 115,660
 101,206
Construction203,913 179,841 
Multi-family 125,080
 92,762
Multi-family314,392 320,072 
1-4 family 40,173
 45,651
1-4 family17,335 14,911 
Total commercial real estate 966,753
 945,874
Total commercial real estate1,488,480 1,454,628 
Commercial and industrial 447,223
 450,298
Commercial and industrial741,363 730,819 
Direct financing leases, net 28,868
 30,951
Direct financing leases, net13,718 15,743 
Consumer and other:    Consumer and other:  
Home equity and second mortgages 7,776
 8,412
Home equity and second mortgages5,132 4,223 
Other 17,447
 16,329
Other42,387 35,518 
Total consumer and other 25,223
 24,741
Total consumer and other47,519 39,741 
Total gross loans and leases receivable 1,468,067
 1,451,864
Total gross loans and leases receivable2,291,080 2,240,931 
Less:    Less:  
Allowance for loan and lease losses 19,923
 20,912
 Allowance for loan and lease losses24,104 24,336 
Deferred loan fees 1,354
 1,189
 Deferred loan fees980 1,523 
Loans and leases receivable, net $1,446,790
 $1,429,763
Loans and leases receivable, net$2,265,996 $2,215,072 
As of SeptemberJune 30, 20172022 and December 31, 2016,2021, the Corporation had $8.3 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 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 the unaudited Consolidated Balance Sheetson-balance sheet is comprised of the following:
June 30,
2022		December 31,
2021
(In Thousands)
SBA 7(a) loans$32,927 $33,223 
SBA 504 loans38,569 41,394 
SBA Express loans and lines of credit233 387 
SBA PPP loans8,285 27,854 
Total SBA loans$80,014 $102,858 
  September 30,
2017		 December 31,
2016
  (In Thousands)
Retained, unguaranteed portion of sold SBA loans $30,632
 $30,418
Other SBA loans(1)
 25,684
 31,728
Total SBA loans $56,316
 $62,146
(1)Primarily consisted of SBA Express loans, partially funded 7(a) program loans, and impaired SBA loans that were repurchased from the secondary market, all of which were not saleable as of September 30, 2017 and December 31, 2016, respectively.
As of SeptemberJune 30, 20172022 and December 31, 2016, $11.9 million2021, $944,000 and $5.5$1.7 million of SBA loans in this portfolio were considered impaired, respectively.
Loans transferred to third parties consist of the guaranteed portionportions of SBA loans which the Corporation sold in the secondary market and participation interests in other, non-SBA originated loans and residential real estate loans. The total principal amount of the guaranteed portionportions of SBA loans sold during the three months ended SeptemberJune 30, 20172022, and 20162021, was $6.3$11.9 million and $3.3$9.0 million, respectively. The total principal amount of the guaranteed portionportions of SBA loans sold during the ninesix months ended SeptemberJune 30, 20172022, and 20162021, was $15.5
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$17.4 million and $36.4$19.6 million, respectively. Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the three and nine months ended SeptemberJune 30, 20172022, and 20162021, have been derecognized in the unaudited Consolidated Financial Statements. The guaranteed portionportions 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 SeptemberJune 30, 20172022, and December 31, 20162021, was $103.3$95.9 million and $105.1$93.0 million, respectively.


The total principal amount of transferred participation interests in other, non-SBA originated commercial loans during the three months ended SeptemberJune 30, 20172022, and 20162021, was $9.0$23.0 million and $7.9$11.8 million, respectively. The total principal amount of transferred participation interests in other, non-SBA originated commercial loans during the ninesix months ended SeptemberJune 30, 20172022, and 20162021, was $17.0$45.2 million and $17.7$16.9 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 SeptemberJune 30, 20172022, and December 31, 20162021, was $91.7$199.0 million and $102.7$195.2 million, respectively. As of SeptemberJune 30, 20172022, and December 31, 2016,2021, the total amount of the Corporation’s partial ownership of these transferred loans on the unaudited Consolidated Balance Sheets was $146.2$320.2 million and $106.1$314.5 million, respectively. No loans in this participation portfolio were considered impaired asAs of SeptemberJune 30, 20172022 and December 31, 2016.2021, 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. The total amount ofThere were no loan participations purchased on the unaudited Consolidated Balance Sheets as of SeptemberJune 30, 20172022 and December 31, 2016 was $669,000 and $1.2 million, respectively.2021.

The Corporation also previously sold residential real estate loans, servicing released, in the secondary market. No residential real estate loans were sold during the three months ended September 30, 2017 and $8.0 million were sold during the three months ended September 30, 2016. The total principal amount of residential real estate loans sold during the nine months ended September 30, 2017 and 2016 was $1.6 million and $15.2 million, respectively. Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred have been derecognized in the unaudited Consolidated Financial Statements. The loans were transferred at their fair value and the related gain was recognized as non-interest income upon the transfer in the unaudited Consolidated Financial Statements.


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 asindicators:
June 30, 2022
 Category 
IIIIIIIVTotal
 (Dollars in Thousands)
Commercial real estate:     
Commercial real estate — owner occupied$203,127 $36,688 $18,447 $113 $258,375 
Commercial real estate — non-owner occupied540,971 92,025 18,924 — 651,920 
Land development42,221 324 — — 42,545 
Construction162,066 17,475 24,372 — 203,913 
Multi-family280,188 23,018 11,186 — 314,392 
1-4 family13,470 3,832 — 33 17,335 
      Total commercial real estate1,242,043 173,362 72,929 146 1,488,480 
Commercial and industrial576,320 119,543 39,922 5,578 741,363 
Direct financing leases, net9,136 320 4,213 49 13,718 
Consumer and other:    
Home equity and second mortgages3,047 1,822 263 — 5,132 
Other42,153 234 — — 42,387 
      Total consumer and other45,200 2,056 263 — 47,519 
Total gross loans and leases receivable$1,872,699 $295,281 $117,327 $5,773 $2,291,080 
Category as a % of total portfolio81.74 %12.89 %5.12 %0.25 %100.00 %
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Table of September 30, 2017 and December 31, 2016:
Contents
  September 30, 2017
  Category  
  I II III IV Total
  (Dollars in Thousands)
Commercial real estate:          
Commercial real estate — owner occupied $147,603
 $19,324
 $8,690
 $7,138
 $182,755
Commercial real estate — non-owner occupied 438,874
 19,769
 1,117
 1,826
 461,586
Land development 37,659
 795
 275
 2,770
 41,499
Construction 109,102
 773
 431
 5,354
 115,660
Multi-family 125,080
 —
 —
 —
 125,080
1-4 family 29,051
 7,824
 1,233
 2,065
 40,173
      Total commercial real estate 887,369
 48,485
 11,746
 19,153
 966,753
Commercial and industrial 348,179
 26,605
 58,470
 13,969
 447,223
Direct financing leases, net 26,854
 305
 1,709
 —
 28,868
Consumer and other:         
Home equity and second mortgages 7,764
 —
 8
 4
 7,776
Other 17,066
 —
 —
 381
 17,447
      Total consumer and other 24,830
 —
 8
 385
 25,223
Total gross loans and leases receivable $1,287,232
 $75,395
 $71,933
 $33,507
 $1,468,067
Category as a % of total portfolio 87.68% 5.14% 4.90% 2.28% 100.00%

  December 31, 2016
  Category  
  I II III IV Total
  (Dollars in Thousands)
Commercial real estate:          
Commercial real estate — owner occupied $142,704
 $20,294
 $11,174
 $2,287
 $176,459
Commercial real estate — non-owner occupied 447,895
 20,933
 2,721
 1,609
 473,158
Land development 52,082
 823
 293
 3,440
 56,638
Construction 93,510
 3,154
 1,624
 2,918
 101,206
Multi-family 87,418
 1,937
 3,407
 —
 92,762
1-4 family 38,504
 3,144
 1,431
 2,572
 45,651
      Total commercial real estate 862,113
 50,285
 20,650
 12,826
 945,874
Commercial and industrial 348,201
 42,949
 46,675
 12,473
 450,298
Direct financing leases, net 29,351
 1,600
 —
 —
 30,951
Consumer and other:          
Home equity and second mortgages 8,271
 121
 12
 8
 8,412
Other 15,714
 —
 11
 604
 16,329
      Total consumer and other 23,985
 121
 23
 612
 24,741
Total gross loans and leases receivable $1,263,650
 $94,955
 $67,348
 $25,911
 $1,451,864
Category as a % of total portfolio 87.04% 6.54% 4.64% 1.78% 100.00%

Credit underwriting through a committee process is a key component of the Corporation’s operating philosophy. Commercial lenders have relatively low individual lending authority limits, and thus a significant portion of the Corporation’s new credit extensions require approval from a loan approval committee regardless of the type of loan or lease, asset quality grade of the credit, amount of the credit or the related complexities of each proposal.
December 31, 2021
 Category 
IIIIIIIVTotal
 (Dollars in Thousands)
Commercial real estate:     
Commercial real estate — owner occupied$192,849 $31,611 $10,781 $348 $235,589 
Commercial real estate — non-owner occupied540,572 88,880 31,971 — 661,423 
Land development41,745 1,047 — — 42,792 
Construction130,285 18,973 30,583 — 179,841 
Multi-family280,183 28,623 11,266 — 320,072 
1-4 family12,057 2,113 402 339 14,911 
      Total commercial real estate1,197,691 171,247 85,003 687 1,454,628 
Commercial and industrial594,388 97,678 32,964 5,789 730,819 
Direct financing leases, net10,829 168 4,647 99 15,743 
Consumer and other:     
Home equity and second mortgages2,473 1,683 67 — 4,223 
Other35,249 269 — — 35,518 
      Total consumer and other37,722 1,952 67 — 39,741 
Total gross loans and leases receivable$1,840,630 $271,045 $122,681 $6,575 $2,240,931 
Category as a % of total portfolio82.14 %12.10 %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 subcommittees of the Bank’s Loan Committee.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 the Bank’s Loan Committeeasset quality review committees on a monthly basis and the Bank’s Board of Directors at each of their regularly scheduled meetings.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
19
Table of Contents
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 the Bank’s Loan Committeeasset quality review committees on a monthly basis and the Bank’s Board of Directors at each of their regularly scheduled meetings.
Utilizing regulatory classification terminology, the Corporation identified $36.7 million and $34.3 million of loans and leases as Substandard as of September 30, 2017 and December 31, 2016, respectively. The Corporation identified $5.1 million of loans and leases as Doubtful as of September 30, 2017. No loans and leases were considered Doubtful as of December 31, 2016. Additionally, no loans were considered Special Mention, or Loss as of either September 30, 2017 or December 31, 2016. The population of Substandard loans is a subset of Category III and Category IV loans.basis.
The delinquency aging of the loan and lease portfolio by class of receivable as of September 30, 2017 and December 31, 2016 was as follows:

20
Table of Contents
June 30, 2022
30-59
Days Past Due		60-89
Days Past Due		Greater
Than 90 Days Past Due		Total Past DueCurrentTotal Loans and Leases
 (Dollars in Thousands)
Accruing loans and leases      
Commercial real estate:      
Owner occupied$— $— $— $— $258,262 $258,262 
Non-owner occupied— — — — 651,920 651,920 
Land development— — — — 42,545 42,545 
Construction13,400 — — 13,400 190,513 203,913 
Multi-family— — — — 314,392 314,392 
1-4 family— — — — 17,302 17,302 
Commercial and industrial3,685 437 — 4,122 731,851 735,973 
Direct financing leases, net2,827 59 — 2,886 10,783 13,669 
Consumer and other:     
Home equity and second mortgages— — — — 5,132 5,132 
Other— — — — 42,387 42,387 
Total19,912 496 — 20,408 2,265,087 2,285,495 
Non-accruing loans and leases      
Commercial real estate:      
Owner occupied— — 113 113 — 113 
Non-owner occupied— — — — — — 
Land development— — — — — — 
Construction— — — — — — 
Multi-family— — — — — — 
1-4 family— — — — 33 33 
Commercial and industrial77 79 1,377 1,533 3,857 5,390 
Direct financing leases, net— — 49 49 — 49 
Consumer and other:      
Home equity and second mortgages— — — — — — 
Other— — — — — — 
Total77 79 1,539 1,695 3,890 5,585 
Total loans and leases      
Commercial real estate:      
Owner occupied— — 113 113 258,262 258,375 
Non-owner occupied— — — — 651,920 651,920 
Land development— — — — 42,545 42,545 
Construction13,400 — — 13,400 190,513 203,913 
Multi-family— — — — 314,392 314,392 
1-4 family— — — — 17,335 17,335 
Commercial and industrial3,762 516 1,377 5,655 735,708 741,363 
Direct financing leases, net2,827 59 49 2,935 10,783 13,718 
Consumer and other:     
Home equity and second mortgages— — — — 5,132 5,132 
Other— — — — 42,387 42,387 
Total$19,989 $575 $1,539 $22,103 $2,268,977 $2,291,080 
Percent of portfolio0.87 %0.03 %0.07 %0.97 %99.03 %100.00 %
21
Table of Contents
 September 30, 2017December 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 Leases30-59
Days Past Due		60-89
Days Past Due		Greater
Than 90 Days Past Due		Total Past DueCurrentTotal Loans and Leases
 (Dollars in Thousands) (Dollars in Thousands)
Accruing loans and leases            Accruing loans and leases      
Commercial real estate:            Commercial real estate:      
Owner occupied $—
 $—
 $—
 $—
 $175,675
 $175,675
Owner occupied$420 $— $— $420 $234,821 $235,241 
Non-owner occupied —
 —
 —
 —
 459,760
 459,760
Non-owner occupied— — — — 661,423 661,423 
Land development —
 —
 —
 —
 38,729
 38,729
Land development— — — — 42,792 42,792 
Construction 392
 ��
 —
 392
 109,914
 110,306
Construction394 — — 394 179,447 179,841 
Multi-family —
 —
 —
 —
 125,080
 125,080
Multi-family— — — — 320,072 320,072 
1-4 family —
 —
 —
 —
 38,309
 38,309
1-4 family100 — — 100 14,472 14,572 
Commercial and industrial 2,257
 470
 —
 2,727
 430,539
 433,266
Commercial and industrial907 536 — 1,443 723,804 725,247 
Direct financing leases, net —
 —
 —
 —
 28,868
 28,868
Direct financing leases, net281 14 — 295 15,349 15,644 
Consumer and other:       

    Consumer and other:      
Home equity and second mortgages 229
 —
 —
 229
 7,547
 7,776
Home equity and second mortgages— — — — 4,223 4,223 
Other —
 —
 —
 —
 17,066
 17,066
Other— — — — 35,518 35,518 
Total 2,878
 470
 —
 3,348
 1,431,487
 1,434,835
Total2,102 550 — 2,652 2,231,921 2,234,573 
Non-accruing loans and leases            Non-accruing loans and leases      
Commercial real estate:            Commercial real estate:      
Owner occupied —
 —
 4,825
 4,825
 2,255
 7,080
Owner occupied— — 113 113 235 348 
Non-owner occupied —
 —
 1,791
 1,791
 35
 1,826
Non-owner occupied— — — — — — 
Land development —
 —
 —
 —
 2,770
 2,770
Land development— — — — — — 
Construction —
 —
 5,353
 5,353
 1
 5,354
Construction— — — — — — 
Multi-family —
 —
 —
 —
 —
 —
Multi-family— — — — — — 
1-4 family 529
 10
 1,041
 1,580
 284
 1,864
1-4 family— — — — 339 339 
Commercial and industrial 207
 497
 11,005
 11,709
 2,248
 13,957
Commercial and industrial23 36 1,445 1,504 4,068 5,572 
Direct financing leases, net —
 —
 —
 —
 —
 —
Direct financing leases, net— — 84 84 15 99 
Consumer and other:            Consumer and other:      
Home equity and second mortgages —
 —
 —
 —
 —
 —
Home equity and second mortgages— — — — — — 
Other —
 —
 358
 358
 23
 381
Other— — — — — — 
Total 736
 507
 24,373
 25,616
 7,616
—
33,232
Total23 36 1,642 1,701 4,657 6,358 
Total loans and leases            Total loans and leases      
Commercial real estate:            Commercial real estate:      
Owner occupied —
 —
 4,825
 4,825
 177,930
 182,755
Owner occupied420 — 113 533 235,056 235,589 
Non-owner occupied —
 —
 1,791
 1,791
 459,795
 461,586
Non-owner occupied— — — — 661,423 661,423 
Land development —
 —
 —
 —
 41,499
 41,499
Land development— — — — 42,792 42,792 
Construction 392
 —
 5,353
 5,745
 109,915
 115,660
Construction394 — — 394 179,447 179,841 
Multi-family —
 —
 —
 —
 125,080
 125,080
Multi-family— — — — 320,072 320,072 
1-4 family 529
 10
 1,041
 1,580
 38,593
 40,173
1-4 family100 — — 100 14,811 14,911 
Commercial and industrial 2,464
 967
 11,005
 14,436
 432,787
 447,223
Commercial and industrial930 572 1,445 2,947 727,872 730,819 
Direct financing leases, net —
 —
 —
 —
 28,868
 28,868
Direct financing leases, net281 14 84 379 15,364 15,743 
Consumer and other:           
Consumer and other:      
Home equity and second mortgages 229
 —
 —
 229
 7,547
 7,776
Home equity and second mortgages— — — — 4,223 4,223 
Other —
 —
 358
 358
 17,089
 17,447
Other— — — — 35,518 35,518 
Total $3,614
 $977
 $24,373
 $28,964
 $1,439,103
 $1,468,067
Total$2,125 $586 $1,642 $4,353 $2,236,578 $2,240,931 
Percent of portfolio 0.24% 0.07% 1.66% 1.97% 98.03% 100.00%Percent of portfolio0.09 %0.03 %0.07 %0.19 %99.81 %100.00 %
22
  December 31, 2016
  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 $—
 $—
 $—
 $—
 $174,236
 $174,236
Non-owner occupied —
 —
 —
 —
 471,549
 471,549
Land development —
 —
 —
 —
 53,198
 53,198
Construction —
 —
 —
 —
 98,288
 98,288
Multi-family —
 —
 —
 —
 92,762
 92,762
1-4 family 75
 —
 —
 75
 43,639
 43,714
Commercial and industrial 55
 468
 —
 523
 437,312
 437,835
Direct financing leases, net —
 —
 —
 —
 30,951
 30,951
Consumer and other:            
Home equity and second mortgages —
 —
 —
 —
 8,412
 8,412
Other —
 —
 —
 —
 15,725
 15,725
Total 130
 468
 —
 598
 1,426,072
 1,426,670
Non-accruing loans and leases            
Commercial real estate:            
Owner occupied —
 —
 1,183
 1,183
 1,040
 2,223
Non-owner occupied —
 —
 —
 —
 1,609
 1,609
Land development —
 —
 —
 —
 3,440
 3,440
Construction 2,482
 —
 436
 2,918
 —
 2,918
Multi-family —
 —
 —
 —
 —
 —
1-4 family —
 —
 1,240
 1,240
 697
 1,937
Commercial and industrial 3,345
 168
 6,740
 10,253
 2,210
 12,463
Direct financing leases, net —
 —
 —
 —
 —
 —
Consumer and other:            
Home equity and second mortgages —
 —
 —
 —
 —
 —
Other 186
 —
 378
 564
 40
 604
Total 6,013
 168
 9,977
 16,158
 9,036
 25,194
Total loans and leases            
Commercial real estate:            
Owner occupied —
 —
 1,183
 1,183
 175,276
 176,459
Non-owner occupied —
 —
 —
 —
 473,158
 473,158
Land development —
 —
 —
 —
 56,638
 56,638
Construction 2,482
 —
 436
 2,918
 98,288
 101,206
Multi-family —
 —
 —
 —
 92,762
 92,762
1-4 family 75
 —
 1,240
 1,315
 44,336
 45,651
Commercial and industrial 3,400
 636
 6,740
 10,776
 439,522
 450,298
Direct financing leases, net —
 —
 —
 —
 30,951
 30,951
Consumer and other:            
Home equity and second mortgages —
 —
 —
 —
 8,412
 8,412
Other 186
 —
 378
 564
 15,765
 16,329
Total $6,143
 $636
 $9,977
 $16,756
 $1,435,108
 $1,451,864
Percent of portfolio 0.42% 0.04% 0.69% 1.15% 98.85% 100.00%
Table of Contents

The Corporation’s total impaired assets consisted of the following at Septemberfollowing:
June 30,
2022		December 31,
2021
 (In Thousands)
Non-accrual loans and leases  
Commercial real estate:  
Commercial real estate — owner occupied$113 $348 
Commercial real estate — non-owner occupied— — 
Land development— — 
Construction— — 
Multi-family— — 
1-4 family33 339 
Total non-accrual commercial real estate146 687 
Commercial and industrial5,390 5,572 
Direct financing leases, net49 99 
Consumer and other:  
Home equity and second mortgages— — 
Other— — 
Total non-accrual consumer and other loans— — 
Total non-accrual loans and leases5,585 6,358 
Foreclosed properties, net124 164 
Total non-performing assets5,709 6,522 
Performing troubled debt restructurings188 217 
Total impaired assets$5,897 $6,739 
June 30,
2022		December 31,
2021
Total non-accrual loans and leases to gross loans and leases0.24 %0.28 %
Total non-performing assets to total gross loans and leases plus foreclosed properties, net0.25 0.29 
Total non-performing assets to total assets0.21 0.25 
Allowance for loan and lease losses to gross loans and leases1.05 1.09 
Allowance for loan and lease losses to non-accrual loans and leases431.58 382.76 
As of June 30, 20172022 and December 31, 2016, respectively.
  September 30,
2017		 December 31,
2016
  (Dollars in Thousands)
Non-accrual loans and leases    
Commercial real estate:    
Commercial real estate — owner occupied $7,080
 $2,223
Commercial real estate — non-owner occupied 1,826
 1,609
Land development 2,770
 3,440
Construction 5,354
 2,918
Multi-family —
 —
1-4 family 1,864
 1,937
Total non-accrual commercial real estate 18,894
 12,127
Commercial and industrial 13,957
 12,463
Direct financing leases, net —
 —
Consumer and other:    
Home equity and second mortgages —
 —
Other 381
 604
Total non-accrual consumer and other loans 381
 604
Total non-accrual loans and leases 33,232
 25,194
Foreclosed properties, net 2,585
 1,472
Total non-performing assets 35,817
 26,666
Performing troubled debt restructurings 275
 717
Total impaired assets
$36,092
 $27,383
  September 30,
2017		 December 31,
2016
Total non-accrual loans and leases to gross loans and leases 2.26% 1.74%
Total non-performing assets to total gross loans and leases plus foreclosed properties, net 2.44
 1.83
Total non-performing assets to total assets 2.01
 1.50
Allowance for loan and lease losses to gross loans and leases 1.36
 1.44
Allowance for loan and lease losses to non-accrual loans and leases 59.95
 83.00
As of September 30, 20172021, $615,000 and December 31, 2016, $10.9 million and $12.8 million$627,000 of the non-accrual loans and leases were considered troubled debt restructurings,TDRs, respectively. The Corporation has allocated $138,000 and $134,000 of specific reserves to TDRs as of June 30, 2022 and December 31, 2021, respectively. There were no unfunded commitments associated with troubled debt restructuredTDR loans and leases as of SeptemberJune 30, 2017.


The following table provides the number of loans modified in a troubled debt restructuring and the pre- and post-modification recorded investment by class of receivable as of September 30, 2017 and December 31, 2016.
  As of September 30, 2017 As of December 31, 2016
  
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 real estate:            
Commercial real estate — owner occupied 3 $1,065
 $888
 3 $1,065
 $930
Commercial real estate — non-owner occupied 1 158
 35
 1 158
 39
Land development 1 5,745
 2,770
 1 5,745
 3,440
Construction — —
 —
 2 331
 314
Multi-family — —
 —
 — —
 —
1-4 family 10 1,287
 1,353
 11 1,391
 1,393
Commercial and industrial 11 8,944
 5,759
 10 8,094
 7,058
Consumer and other:            
Home equity and second mortgage 1 37
 4
 1 37
 8
Other 2 2,094
 359
 1 2,076
 378
Total 29 $19,330
 $11,168
 30 $18,897
 $13,560

2022.
All loans and leases modified as a troubled debt restructuringTDRs 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.

23
As
Contents
  As of September 30, 2017 As of December 31, 2016
  
Number of
Loans
 Recorded Investment 
Number of
Loans
 Recorded Investment
  (Dollars in Thousands)
Commercial real estate:        
   Extension of term —
 $—
 1
 $8
   Interest rate concession 1
 49
 1
 52
   Combination of extension of term and interest rate concession 14
 4,997
 16
 6,056
Commercial and industrial:        
   Combination of extension of term and interest rate concession 11
 5,759
 10
 7,058
Consumer and other:        
   Extension of term 1
 342
 1
 378
   Combination of extension of term and interest rate concession 2
 21
 1
 8
Total 29
 $11,168
 30
 $13,560

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 months ended June 30, 2021:
For the Three Months Ended June 30,For the Six Months Ended June 30,
20212021
Number of LoansPre-Modification
Recorded
Investment		Post-Modification
Recorded
Investment		Number of LoansPre-Modification
Recorded
Investment		Post-Modification
Recorded
Investment
 (Dollars in Thousands)
Commercial and industrial—— — 1$56 $43 
During the three and six months ended SeptemberJune 30, 2017, two commercial and industrial loans totaling $800,000 were modified to a troubled debt restructuring. During the nine months ended September 30, 2017, four commercial and industrial loans and one consumer loan totaling $4.4 million and $17,000, respectively, were modified to a troubled debt restructuring. No2022, no loans were modified toas a troubled debt restructuring duringTDR.
Restructured loan modifications may include payment schedule modifications, interest rate concessions, maturity date extensions, principal reduction, or some combination of these concessions. During the three and ninesix months ended SeptemberJune 30, 2016.2021, the modification of terms primarily consisted of payment schedule modifications.


There were fiveno loans and leases modified inas a troubled debt restructuringTDR during the previous 12 months ended June 30, 2022 which subsequently defaulted during the three and ninesix months ended SeptemberJune 30, 2017.2022 and 1 with a recorded investment of $269,000 that defaulted during the three and six months ended June 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 30, 2022, the Corporation had no deferrals outstanding. As of December 31, 2021, the Corporation had 3 deferrals outstanding, representing $293,000 in total loans.
24
The following represents additional information regarding the Corporation’s impaired loans and leases, including performing troubled debt restructurings,TDRs, by class:
As of and for the Six Months Ended June 30, 2022
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$113 $151 $— $343 $13 $735 $(722)
Non-owner occupied— — — — — 1 (1)
Land development— — — — — — — 
Construction— — — — — — — 
Multi-family— — — — — — — 
1-4 family33 38 — 193 6 29 (23)
Commercial and industrial3,998 4,099 — 4,256 135 45 90 
Direct financing leases, net— — — 26 — 2 (2)
Consumer and other:       
Home equity and second mortgages— — — — — — — 
Other— — — — — — — 
Total4,144 4,288 — 4,818 154 812 (658)
With impairment reserve recorded:       
Commercial real estate:       
Owner occupied— — — — — — — 
Non-owner occupied— — — — — — — 
Land development— — — — — — — 
Construction— — — — — — — 
Multi-family— — — — — — — 
1-4 family— — — — — — — 
Commercial and industrial1,580 1,580 1,205 1,142 51 1 50 
Direct financing leases, net49 49 49 49 1 — 1 
Consumer and other:       
Home equity and second mortgages— — — — — — — 
Other— — — — — — — 
Total1,629 1,629 1,254 1,191 52 1 51 
Total:       
Commercial real estate:       
Owner occupied113 151 — 343 13 735 (722)
Non-owner occupied— — — — — 1 (1)
Land development— — — — — — — 
Construction— — — — — — — 
Multi-family— — — — — — — 
1-4 family33 38 — 193 6 29 (23)
Commercial and industrial5,578 5,679 1,205 5,398 186 46 140 
Direct financing leases, net49 49 49 75 1 2 (1)
Consumer and other:       
Home equity and second mortgages— — — — — — — 
Other— — — — — — — 
Grand total$5,773 $5,917 $1,254 $6,009 $206 $813 $(607)
(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.
25
 As of and for the Nine Months Ended September 30, 2017As of and for the Year Ended December 31, 2021
 Recorded
Investment		 Unpaid
Principal
Balance		 Impairment
Reserve		 
Average
Recorded
Investment(1)
 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:       
Commercial real estate:              Commercial real estate:       
Owner occupied $6,727
 $6,727
 $—
 $4,898
 $394
 $—
 $394
 Owner occupied$348 $386 $— $2,217 $145 $218 $(73)
Non-owner occupied 1,826
 1,866
 —
 1,932
 99
 —
 99
 Non-owner occupied— — — 2,281 233 16 217 
Land development 2,770
 5,441
 —
 3,218
 65
 —
 65
 Land development— — — 7 — — — 
Construction 2,482
 2,482
 —
 611
 208
 —
 208
 Construction— — — — — — — 
Multi-family —
 —
 —
 1
 —
 —
 —
 Multi-family— — — — — — — 
1-4 family 2,065
 2,319
 —
 2,387
 69
 —
 69
 1-4 family339 344 — 285 60 24 36 
Commercial and industrial 1,740
 2,103
 —
 6,782
 509
 —
 509
Commercial and industrial3,717 3,819 — 7,914 522 179 343 
Direct financing leases, net —
 —
 —
 —
 —
 —
 —
Direct financing leases, net15 15 — 2 1 — 1 
Consumer and other:              Consumer and other:       
Home equity and second mortgages 4
 4
 —
 6
 —
 —
 —
 Home equity and second mortgages— — — 40 7 9 (2)
Other 358
 1,025
 —
 397
 45
 —
 45
 Other— — — 8 23 — 23 
Total 17,972
 21,967
 —
 20,232
 1,389
 —
 1,389
 Total4,419 4,564 — 12,754 991 446 545 
With impairment reserve recorded:              With impairment reserve recorded:       
Commercial real estate:              Commercial real estate:       
Owner occupied 411
 411
 15
 424
 19
 —
 19
 Owner occupied— — — — — — — 
Non-owner occupied —
 —
 —
 —
 —
 —
 —
 Non-owner occupied— — — — — — — 
Land development —
 —
—
—
 —
—
—
—
—
 —
 Land development— — — — — — — 
Construction 2,872
 2,872
—
94
 4,091
—
108
—
—
 108
 Construction— — — — — — — 
Multi-family —
 —
 —
 —
 —
 —
 —
 Multi-family— — — — — — — 
1-4 family —
 —
 —
 —
 —
 —
 —
 1-4 family— — — — — — — 
Commercial and industrial 12,229
 12,702
 5,658
 10,114
 453
 —
 453
Commercial and industrial2,072 2,072 1,439 1,456 109 8 101 
Direct financing leases, net —
 —
 —
 —
 —
 —
 —
Direct financing leases, net84 84 66 50 4 — 4 
Consumer and other:              Consumer and other:       
Home equity and second mortgages —
 —
 —
 —
 —
 —
 —
 Home equity and second mortgages— — — — — — — 
Other 23
 23
 23
 10
 —
 —
 —
 Other— — — — — — — 
Total 15,535
 16,008
 5,790
 14,639
 580
 —
 580
 Total2,156 2,156 1,505 1,506 113 8 105 
Total:              Total:       
Commercial real estate:              Commercial real estate:       
Owner occupied 7,138
 7,138
 15
 5,322
 413
 —
 413
 Owner occupied348 386 — 2,217 145 218 (73)
Non-owner occupied 1,826
 1,866
 —
 1,932
 99
 —
 99
 Non-owner occupied— — — 2,281 233 16 217 
Land development 2,770
 5,441
 —
 3,218
 65
 —
 65
 Land development— — — 7 — — — 
Construction 5,354
 5,354
 94
 4,702
 316
 —
 316
 Construction— — — — — — — 
Multi-family —
 —
 —
 1
 —
 —
 —
 Multi-family— — — — — — — 
1-4 family 2,065
 2,319
 —
 2,387
 69
 —
 69
 1-4 family339 344 — 285 60 24 36 
Commercial and industrial 13,969
 14,805
 5,658
 16,896
 962
 —
 962
Commercial and industrial5,789 5,891 1,439 9,370 631 187 444 
Direct financing leases, net —
 —
 —
 —
 —
 —
 —
Direct financing leases, net99 99 66 52 5 — 5 
Consumer and other:              Consumer and other:      
Home equity and second mortgages 4
 4
 —
 6
 —
 —
 —
Home equity and second mortgages— — — 40 7 9 (2)
Other 381
 1,048
 23
 407
 45
 —
 45
Other— — — 8 23 — 23 
Grand total $33,507
 $37,975
 $5,790
 $34,871
 $1,969
 $—
 $1,969
 Grand total$6,575 $6,720 $1,505 $14,260 $1,104 $454 $650 

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

(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.
26
  As of and for the Year Ended December 31, 2016
  
Recorded
Investment
 
Unpaid
Principal
Balance
 
Impairment
Reserve
 
Average
Recorded
Investment(1)
 
Foregone
Interest
Income
 
Interest
Income
Recognized
 
Net
Foregone
Interest
Income
  (In Thousands)
With no impairment reserve recorded:              
Commercial real estate:              
   Owner occupied $1,788
 $1,788
 $—
 $3,577
 $328
 $118
 $210
   Non-owner occupied 1,609
 1,647
 —
 1,318
 91
 79
 12
   Land development 3,440
 6,111
 —
 3,898
 107
 —
 107
   Construction 436
 438

—

291

20

—
 20
   Multi-family —
 —
 —
 —
 1
 134
 (133)
   1-4 family 2,379
 2,379
 —
 2,755
 125
 94
 31
Commercial and industrial 1,307
 1,307
 —
 709
 79
 62
 17
Direct financing leases, net —
 —
 —
 6
 —
 —
 —
Consumer and other:              
   Home equity and second mortgages 8
 8
 —
 307
 16
 127
 (111)
   Other 378
 1,044
 —
 510
 71
 —
 71
      Total 11,345
 14,722
 —
 13,371
 838
 614
 224
With impairment reserve recorded:              
Commercial real estate:              
   Owner occupied 499
 499
 70
 111
 28
 —
 28
   Non-owner occupied —
 —
 —
 —
 —
 —
 —
   Land development —
 —

—

—

—

—
 —
   Construction 2,482
 2,482

1,790

834

45

—
 45
   Multi-family —
 —
 —
 —
 —
 —
 —
   1-4 family 193
 199
 39
 203
 5
 —
 5
Commercial and industrial 11,166
 11,166
 3,700
 8,448
 701
 —
 701
Direct financing leases, net —
 —
 —
 —
 —
 —
 —
Consumer and other:              
   Home equity and second mortgages —
 —
 —
 —
 —
 —
 —
   Other 226
 226
 —
 19
 —
 —
 —
      Total 14,566
 14,572
 5,599
 9,615
 779
 —
 779
Total:              
Commercial real estate:              
   Owner occupied 2,287
 2,287
 70
 3,688
 356
 118
 238
   Non-owner occupied 1,609
 1,647
 —
 1,318
 91
 79
 12
   Land development 3,440
 6,111
 —
 3,898
 107
 —
 107
   Construction 2,918
 2,920
 1,790
 1,125
 65
 —
 65
   Multi-family —
 —
 —
 —
 1
 134
 (133)
   1-4 family 2,572
 2,578
 39
 2,958
 130
 94
 36
Commercial and industrial 12,473
 12,473
 3,700
 9,157
 780
 62
 718
Direct financing leases, net —
 —
 —
 6
 —
 —
 —
Consumer and other:              
Home equity and second mortgages 8
 8
 —
 307
 16
 127
 (111)
Other 604
 1,270
 —
 529
 71
 —
 71
      Grand total $25,911
 $29,294
 $5,599
 $22,986
 $1,617
 $614
 $1,003
(1)Average recorded investment is calculated primarily using daily average balances.

The difference between the recorded investment of loans and leases and the unpaid principal balance of $4.5 million$144,000 and $3.4 million$145,000 as of SeptemberJune 30, 20172022, and December 31, 2016,2021, 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 $275,000$188,000 and $717,000$217,000 of loans as of SeptemberJune 30, 20172022, and December 31, 2016,2021, respectively, that were performing troubled debt restructurings,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
Commercial
Real Estate		Commercial
and
Industrial		Consumer
and Other		Total
 (In Thousands)
Beginning balance$13,765 $8,912 $992 $23,669 
Charge-offs— (85)— (85)
Recoveries4,121 117 9 4,247 
Net recoveries (charge-offs)4,121 32 9 4,162 
Provision for loan and lease losses(4,476)922 (173)(3,727)
Ending balance$13,410 $9,866 $828 $24,104 
 As of and for the Three Months Ended June 30, 2021
Commercial
Real Estate		Commercial
and
Industrial		Consumer
and Other		Total
 (In Thousands)
Beginning balance$18,445 $9,544 $993 $28,982 
Charge-offs(249)(2,621)(24)(2,894)
Recoveries84 460 1 545 
Net (charge-offs) recoveries(165)(2,161)(23)(2,349)
Provision for loan and lease losses(1,404)498 (52)(958)
Ending balance$16,876 $7,881 $918 $25,675 
  As of and for the Three Months Ended September 30, 2017
  
Commercial
Real Estate
 
Commercial
and
Industrial
 
Consumer
and Other
 Total
  (Dollars in Thousands)
Beginning balance $12,003
 $9,090
 $584
 $21,677
Charge-offs (8) (3,217) (5) (3,230)
Recoveries 2
 2
 1
 5
Net charge-offs (6) (3,215) (4) (3,225)
Provision for credit losses (2,462) 3,968
 (35) 1,471
Ending balance $9,535
 $9,843
 $545
 $19,923
27
  As of and for the Three Months Ended September 30, 2016
  
Commercial
Real Estate
 
Commercial
and
Industrial
 
Consumer
and Other
 Total
  (Dollars in Thousands)
Beginning balance $11,436
 $6,017
 $701
 $18,154
Charge-offs (259) (1,396) (1) (1,656)
Recoveries 31
 —
 1
 32
Net charge-offs (228) (1,396) —
 (1,624)
Provision for credit losses 1,607
 2,051
 (121) 3,537
Ending balance $12,815
 $6,672
 $580
 $20,067

 As of and for the Six Months Ended June 30, 2022
Commercial
Real Estate		Commercial
and
Industrial		Consumer
and Other		Total
 (In Thousands)
Beginning balance$15,110 $8,413 $813 $24,336 
Charge-offs— (107)— (107)
Recoveries4,237 201 19 4,457 
Net recoveries (charge-offs)4,237 94 19 4,350 
Provision for loan and lease losses(5,937)1,359 (4)(4,582)
Ending balance$13,410 $9,866 $828 $24,104 

 As of and for the Six Months Ended June 30, 2021
Commercial
Real Estate		Commercial
and
Industrial		Consumer
and Other		Total
 (In Thousands)
Beginning balance$17,157 $10,593 $771 $28,521 
Charge-offs(249)(2,765)(24)(3,038)
Recoveries2,303 913 2 3,218 
Net (charge-offs) recoveries2,054 (1,852)(22)180 
Provision for loan and lease losses(2,335)(860)169 (3,026)
Ending balance$16,876 $7,881 $918 $25,675 

28
  As of and for the Nine Months Ended September 30, 2017
  
Commercial
Real Estate
 
Commercial
and
Industrial
 
Consumer
and Other
 Total
  (Dollars in Thousands)
Beginning balance $12,384
 $7,970
 $558
 $20,912
Charge-offs (126) (6,978) (92) (7,196)
Recoveries 152
 314
 42
 508
Net recoveries (charge-offs) 26
 (6,664) (50) (6,688)
Provision for credit loss (2,875) 8,537
 37
 5,699
Ending balance $9,535
 $9,843
 $545
 $19,923

  As of and for the Nine Months Ended September 30, 2016
  
Commercial
Real Estate
 
Commercial
and
Industrial
 
Consumer
and Other
 Total
  (Dollars in Thousands)
Beginning balance $11,220
 $4,387
 $709
 $16,316
Charge-offs (1,194) (2,048) (8) (3,250)
Recoveries 170
 2
 5
 177
Net charge-offs (1,024) (2,046) (3) (3,073)
Provision for credit loss 2,619
 4,331
 (126) 6,824
Ending balance $12,815
 $6,672
 $580
 $20,067

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
Commercial
Real Estate		Commercial
and
Industrial		Consumer
and Other		Total
 (In Thousands)
Allowance for loan and lease losses:    
Collectively evaluated for impairment$13,410 $8,612 $828 $22,850 
Individually evaluated for impairment— 1,254 — 1,254 
Total$13,410 $9,866 $828 $24,104 
Loans and lease receivables:    
Collectively evaluated for impairment$1,488,334 $749,454 $47,519 $2,285,307 
Individually evaluated for impairment146 5,627 — 5,773 
Total$1,488,480 $755,081 $47,519 $2,291,080 
 As of September 30, 2017 As of December 31, 2021
 
Commercial
Real Estate
 
Commercial
and
Industrial
 
Consumer
and Other
 TotalCommercial
Real Estate		Commercial
and
Industrial		Consumer
and Other		Total
 (Dollars in Thousands) (In Thousands)
Allowance for loan and lease losses:        Allowance for loan and lease losses:    
Collectively evaluated for impairment $9,426
 $4,185
 $522
 $14,133
Collectively evaluated for impairment$15,110 $6,908 $813 $22,831 
Individually evaluated for impairment 109
 5,658
 23
 5,790
Individually evaluated for impairment— 1,505 — 1,505 
Loans acquired with deteriorated credit quality —
 —
 —
 —
Total $9,535
 $9,843
 $545
 $19,923
Total$15,110 $8,413 $813 $24,336 
Loans and lease receivables:        Loans and lease receivables:    
Collectively evaluated for impairment $947,600
 $462,122
 $24,838
 $1,434,560
Collectively evaluated for impairment$1,453,941 $740,674 $39,741 $2,234,356 
Individually evaluated for impairment 18,535
 13,962
 385
 32,882
Individually evaluated for impairment687 5,888 — 6,575 
Loans acquired with deteriorated credit quality 618
 7
 —
 625
Total $966,753
 $476,091
 $25,223
 $1,468,067
Total$1,454,628 $746,562 $39,741 $2,240,931 



  As of December 31, 2016
  
Commercial
Real Estate
 
Commercial
and
Industrial
 
Consumer
and Other
 Total
  (Dollars in Thousands)
Allowance for loan and lease losses:        
Collectively evaluated for impairment $10,485
 $4,270
 $558
 $15,313
Individually evaluated for impairment 1,899
 3,700
 —
 5,599
Loans acquired with deteriorated credit quality —
 —
 —
 —
Total $12,384
 $7,970
 $558
 $20,912
Loans and lease receivables:        
Collectively evaluated for impairment $933,048
 $468,776
 $24,129
 $1,425,953
Individually evaluated for impairment 11,222
 12,452
 612
 24,286
Loans acquired with deteriorated credit quality 1,604
 21
 —
 1,625
Total $945,874
 $481,249
 $24,741
 $1,451,864


Note 6 — Other AssetsLeases
The Corporation is a limited partner in several limited partnership investments.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 the general partner, does not have controlling ownership and is not the primary beneficiaryresult in any impairment.
29
The components of total lease expense were as follows:
For the Three Months Ended June 30,For the Six Months Ended June 30,
2022202120222021
(In Thousands)
Operating lease cost$382 $374 $765 $749 
Short-term lease cost37 49 74 88 
Variable lease cost140 111 266 239 
Less: sublease income(45)(43)(90)(82)
Total lease cost, net$514 $491 $1,015 $994 

Quantitative information regarding the Corporation’s operating leases was as follows:
June 30, 2022December 31, 2021
Weighted-average remaining lease term (in years)6.845.05
Weighted-average discount rate2.72 %2.51 %
The following maturity analysis shows the undiscounted cash flows due on the Corporation’s operating lease liabilities:
(In Thousands)
2022$832 
20231,248 
20241,073 
2025949 
2026935 
Thereafter3,003 
Total undiscounted cash flows8,040 
Discount on cash flows(833)
Total lease liability$7,207 


Note 7 — Other Assets
A summary of accrued interest receivable and the limited partnerships have not been consolidated. These investments are accounted for using the equity methodother assets was as follows:
 June 30, 2022December 31, 2021
 (In Thousands)
Accrued interest receivable$6,433 $5,497 
Net deferred tax asset7,870 6,175 
Investment in historic development entities2,369 2,299 
Investment in low-income housing development entity8,901 2,964 
Investment in limited partnerships11,435 9,874 
Investment in Trust II— 315 
Prepaid expenses3,760 2,689 
Other assets8,100 9,577 
Total accrued interest receivable and other assets$48,868 $39,390 
As of accounting and are evaluated for impairment at the end of each reporting period. For historic rehabilitation tax credits,March 30, 2022, the Corporation begins to evaluatesurrendered its investmentscommon shares for impairment atno gain or loss and exited the time the credit is earned,Trust II entity, which is typically in the year the project is placed in service, through the end of its five-year compliance period. New market tax credits are also evaluated for impairment beginning at the time the tax credits are earned on the project through the seven-year compliance period.
Historic Rehabilitation Tax Credits
In 2015,was subsequently dissolved. Previously, the Corporation invested in a development entity through BOC, a wholly-owned subsidiary of FBB, to acquire, rehabilitate and operate a historic building in Madison, Wisconsin. At September 30, 2017 and December 31, 2016, the net carrying value of the investment was $174,000.
In 2016, the Corporation also invested in a development entity through Mitchell Street, a wholly-owned subsidiary of FBB, to rehabilitate a historic building in Milwaukee, Wisconsin. At September 30, 2017 and December 31, 2016, the net carrying value of the investment was $563,000. The aggregate capital contributions to the project will depend upon the final amount of the certified project costs, but are expected to approximate $5.5 million. The Corporation is also anticipating the sale of the state credits associated with the investment to a third party. No historic tax credits were received at September 30, 2017. The credits will be taken when the project is placed in service and are subject to a five-year recapture period.
In 2017, the Corporation also invested in a development entity through FBB Tax Credit, a wholly-owned subsidiary of FBB, to rehabilitate a historic building in Kenosha, Wisconsin. At September 30, 2017, the net carrying value of the investment was $417,000. The aggregate capital contributions to the project will depend upon the final amount of the certified project costs, but are expected to approximate $2.1 million. The credits will be taken when the project is placed in service and are subject to a five-year recapture period.
New Market Tax Credits
The Corporation invested in a community development entity (“CDE”) through Rimrock Road, a wholly-owned subsidiary of FBB, to develop and operate a real estate project located in a low-income community. At September 30, 2017 and December 31, 2016, Rimrock had one CDE investment with a net carrying value of $6.7 million and $7.1 million, respectively. The investment provides federal new market tax credits over a seven-year credit allowance period through 2020. The remaining federal new market tax credit to be utilized over a maximum of seven years was $1.5 million as of September 30, 2017. The Corporation’s use of the federal new market tax credit during the nine months ended September 30, 2017 and 2016 was $338,000 and $281,000, respectively.
Other Investments

The Corporation has an equity investment in Aldine Capital Fund, LP, a mezzanine fund, of $948,000 and $883,000 recorded as of September 30, 2017 and December 31, 2016, respectively. The Corporation’s equity investment in Aldine Capital Fund II, LP, also a mezzanine fund, totaled $3.7 million and $3.1 million as of September 30, 2017 and December 31, 2016, respectively. The Corporation’s share of these partnerships’ income included in the unaudited Consolidated Statements of Income for the nine months ended September 30, 2017 and 2016 was $236,000 and $708,000, respectively.
The Corporation is the sole owner of $315,000 of common securities issued by Trust II, a Delaware business 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 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 September 30, 2017 and December 31, 20162021 is included in accrued interest receivable and other assets.
A summary
30
  September 30, 2017 December 31, 2016
  (In Thousands)
Accrued interest receivable $4,722
 $4,677
Net deferred tax asset 5,543
 4,052
Investment in historic development entities 1,154
 737
Investment in a CDE 6,719
 7,106
Investment in limited partnerships 4,607
 3,963
Investment in Trust II 315
 315
Fair value of interest rate swaps 1,380
 352
Prepaid expenses 3,338
 3,074
Other assets 4,450
 4,331
Total accrued interest receivable and other assets $32,228
 $28,607

Note 78 — Deposits
The composition of deposits at September 30, 2017 and December 31, 2016 is shown below. Average balances represent year-to-dateyear to date averages.
 June 30, 2022December 31, 2021
BalanceAverage
Balance		Average RateBalanceAverage
Balance		Average Rate
 (Dollars in Thousands)
Non-interest-bearing transaction accounts$544,507 $559,793 — %$589,559 $536,981 — %
Interest-bearing transaction accounts466,785 517,923 0.23 530,225 506,693 0.19 
Money market accounts731,718 775,808 0.22 754,410 693,608 0.17 
Certificates of deposit114,000 63,098 0.54 54,091 47,020 0.84 
Wholesale deposits12,321 14,282 2.94 29,638 119,831 0.82 
Total deposits$1,869,331 $1,930,904 0.19 $1,957,923 $1,904,133 0.19 
  September 30, 2017 December 31, 2016
  Balance 
Average
Balance
 Average Rate Balance 
Average
Balance
 Average Rate
  (Dollars in Thousands)
Non-interest-bearing transaction accounts $253,320
 $228,231
 —% $252,638
 $246,182
 —%
Interest-bearing transaction accounts 251,355
 221,526
 0.53
 183,992
 169,571
 0.27
Money market accounts 527,705
 601,455
 0.45
 627,090
 642,784
 0.48
Certificates of deposit 58,144
 55,888
 0.98
 58,454
 65,608
 0.90
Wholesale deposits 333,200
 374,083
 1.68
 416,681
 467,826
 1.62
Total deposits $1,423,724
 $1,481,183
 0.72
 $1,538,855
 $1,591,971
 0.74


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

(In Thousands)
Maturities during the year ended December 31, 
2022$90,092 
202316,724 
202416,541 
2025402 
2026490 
Thereafter2,072 
$126,321 


Wholesale deposits include $12.3 million of wholesale certificates of deposit and no non-reciprocal interest-bearing transaction accounts at June 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 million and $7.9 million of certificates of deposit and wholesale deposits which are denominated in amounts greater than $250,000 at June 30, 2022 and December 31, 2021, respectively.

Note 89 — FHLB Advances, Other Borrowings and Junior Subordinated Notes
The composition of borrowed funds at September 30, 2017 and December 31, 2016 is shown below. Average balances represent year-to-dateyear to date averages.
 June 30, 2022December 31, 2021
BalanceWeighted Average
Balance		Weighted
Average Rate		BalanceWeighted Average
Balance		Weighted
Average Rate
 (Dollars in Thousands)
Federal funds purchased$— $22 2.01 %$— $— — %
FHLB advances554,100 417,518 1.29 %368,800 376,781 1.30 %
Line of credit— 171 2.76 500 78 2.90 
Other borrowings8,267 9,600 4.05 10,363 8,090 4.11 
Subordinated notes payable34,275 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 
31
  September 30, 2017 December 31, 2016
  Balance 
Weighted Average
Balance
 
Weighted
Average Rate
 Balance 
Weighted Average
Balance
 
Weighted
Average Rate
  (Dollars in Thousands)
Federal funds purchased $—
 $88
 1.21% $—
 $178
 0.92%
FHLB advances 143,500
 83,987
 1.24
 33,578
 14,485
 0.97
Line of credit 10
 435
 3.63
 1,010
 2,079
 3.26
Other borrowings(1)
 675
 1,432
 15.37
 2,590
 1,739
 7.64
Subordinated notes payable 23,699
 22,978
 7.04
 22,498
 22,467
 7.13
Junior subordinated notes 10,015
 10,009
 11.08
 10,004
 9,997
 11.07
  $177,899
 $118,929
 3.38
 $69,680
 $50,945
 6.03
             
Short-term borrowings $54,510
     $20,588
    
Long-term borrowings 123,389
     49,092
    
  $177,899
     $69,680
    
(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.
(1)Weighted average rate of other borrowings reflects the cost of prepaying a secured borrowing during the second quarter of 2017.

A summary of annual maturities of borrowings at June 30, 2022 is as follows:
(In Thousands)
Maturities during the year ended December 31, 
2022$338,300 
202342,300 
202435,500 
202548,000 
202660,000 
Thereafter72,542 
$596,642 
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 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 performance debt covenants of which the Corporation was in compliance. 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 30, 2022, $725,000 of debt issuance costs remain in the subordinated note payable balance, of which $456,000 is related to the recently issued subordinated note.
As of SeptemberJune 30, 20172022, the Corporation had other borrowings of $8.2 million, which consisted of sold loans accounted for as secured borrowings because they did not qualify for true sale accounting.
As of June 30, 2022 and December 31, 2016,2021, 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, 2017,2022, the Corporation pays a commitment fee on this line of credit. During both the ninesix months ended SeptemberJune 30, 20172022 and 2016,2021, the Corporation incurred interest expense of $6,600 due to this fee of $10,000.fee.

Note 910 — 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 months ended June 30, 2022, the Board of Directors declared a cash preferred stock dividend of $246,000. 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.
32
Note 11 — Commitments and Contingencies
In the ordinarynormal 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 portionportions 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 portionportions 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 $2.7 million$673,000 at SeptemberJune 30, 2017,2022, which is reported in accrued interest payable and other liabilities on the unaudited Consolidated Balance Sheets. During the nine months ended September 30, 2017, a $2.1 million recourse provision was recorded.


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,
2022202120222021
 (In Thousands)
Balance at the beginning of the period$559 $593 $635 $723 
SBA recourse provision114 245 38 115 
Charge-offs, net— (8)— (8)
Balance at the end of the period$673 $830 $673 $830 
  As of and for the Nine Months Ended September 30, 2017 As of and for the Year Ended December 31, 2016
  (In Thousands)
Balance at the beginning of the period $1,750
 $—
SBA recourse provision 2,095
 2,068
Charge-offs, net (1,141) (318)
Balance at the end of the period $2,704
 $1,750

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.

Note 1012 — 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, 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
33
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
Fair Value Measurements Using 
Level 1Level 2Level 3Total
 (In Thousands)
Assets:   
Securities available-for-sale:
U.S. treasuries$— $4,573 $— $4,573 
U.S. government agency securities - government-sponsored enterprises— 16,914 — 16,914 
Municipal securities— 38,774 — 38,774 
Residential mortgage-backed securities - government issued— 15,866 — 15,866 
Residential mortgage-backed securities - government-sponsored enterprises— 95,958 — 95,958 
Commercial mortgage-backed securities - government issued— 3,497 — 3,497 
Commercial mortgage-backed securities - government-sponsored enterprises— 32,080 — 32,080 
Other securities— 981 — 981 
Interest rate swaps— 44,461 — 44,461 
Liabilities:   
Interest rate swaps— 40,357 — 40,357 
 September 30, 2017December 31, 2021
 Fair Value Measurements Using   Fair Value Measurements Using 
 Level 1 Level 2 Level 3 TotalLevel 1Level 2Level 3Total
 (In Thousands) (In Thousands)
Assets:        Assets:   
Securities available-for-sale:        Securities available-for-sale:
U.S. Government agency obligations - government-sponsored enterprises $—
 $3,807
 $—
 $3,807
Municipal obligations —
 9,332
 —
 9,332
Collateralized mortgage obligations - government issued —
 22,902
 —
 22,902
Collateralized mortgage obligations - government-sponsored enterprises —
 95,089
 —
 95,089
U.S. treasuriesU.S. treasuries$— $4,914 $— $4,914 
U.S. government agency securities - government-sponsored enterprisesU.S. government agency securities - government-sponsored enterprises— 19,935 — 19,935 
Municipal securitiesMunicipal securities— 30,957 — 30,957 
Residential mortgage-backed securities - government issuedResidential mortgage-backed securities - government issued— 19,661 — 19,661 
Residential mortgage-backed securities - government-sponsored enterprisesResidential mortgage-backed securities - government-sponsored enterprises— 85,705 — 85,705 
Commercial mortgage-backed securities - government issuedCommercial mortgage-backed securities - government issued— 5,771 — 5,771 
Commercial mortgage-backed securities - government-sponsored enterprisesCommercial mortgage-backed securities - government-sponsored enterprises— 36,531 — 36,531 
Other securitiesOther securities— 2,228 — 2,228 
Interest rate swaps —
 1,380
 —
 1,380
Interest rate swaps— 26,343 — 26,343 
Liabilities:       
Liabilities: 
Interest rate swaps —
 1,380
 —
 1,380
Interest rate swaps— 28,283 — 28,283 

  December 31, 2016
  Fair Value Measurements Using  
  Level 1 Level 2 Level 3 Total
  (In Thousands)
Assets:        
Securities available-for-sale:        
U.S. Government agency obligations - government-sponsored enterprises $—
 $6,295
 $—
 $6,295
Municipal obligations —
 8,156
 —
 8,156
Asset backed securities —
 1,081
 —
 1,081
Collateralized mortgage obligations - government issued —
 31,213
 —
 31,213
Collateralized mortgage obligations - government-sponsored enterprises —
 99,148
 —
 99,148
Interest rate swaps —
 352
 —
 352
Liabilities:        
Interest rate swaps —
 352
 —
 352

For assets and liabilities measured at fair value on a recurring basis, there were no transfers between the levels during the ninethree and six months ended SeptemberJune 30, 20172022 or the year ended December 31, 20162021 related to the above measurements.

34
Assets and liabilities measured at fair value on a non-recurring basis, segregated by fair value hierarchy are summarized below:
June 30, 2022
 Fair Value Measurements Using
 Level 1Level 2Level 3Total
 (In Thousands)
Impaired loans$— $— $720 $720 
Foreclosed properties— — 124 124 
Loan servicing rights— — 1,594 1,594 
 September 30, 2017December 31, 2021
 Fair Value Measurements Using   Fair Value Measurements Using
 Level 1 Level 2 Level 3 Total Level 1Level 2Level 3Total
 (In Thousands) (In Thousands)
Impaired loans $—
 $7,637
 $8,661
 $16,298
Impaired loans$— $— $1,000 $1,000 
Foreclosed properties —
 1,472
 —
 1,472
Foreclosed properties— — 164 164 
Loan servicing rightsLoan servicing rights— — 1,601 1,601 


  December 31, 2016
  Fair Value Measurements Using  
  Level 1 Level 2 Level 3 Total
  (In Thousands)
Impaired loans $—
 $12,268
 $1,097
 $13,365
Foreclosed properties —
 1,472
 —
 1,472

Impaired loans were written down to the fair value of their underlying collateral less costs to sell of $16.3$720,000 and $1.0 million and $13.4 million at SeptemberJune 30, 20172022 and December 31, 2016,2021, 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 and primarilyvalue. 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 are reflected within Level 2 of the hierarchy. In cases where an input is unobservable specificallyinputs, typically when discounts are applied to appraisal values to adjust such values to current market conditions or to reflect net realizable value, the impaired loan balance is reflected within Level 3 of the hierarchy.values. The quantification of unobservable inputs for Level 3 impaired loan values range from 13%8% - 90%100% as of the measurement date of SeptemberJune 30, 2017.2022. The weighted average of those unobservable inputs was 20%32%. The majority of the impaired loans in the Level 3 category are considered collateral dependent loans or are supported by aan SBA guaranty.
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 Level 2 inputs based on observable market data, typically a current appraisal, or Level 3 inputs based upon assumptions specific to the individual property or equipment. Level 3 inputs typically include unobservable inputsequipment, such as management applied discounts used to further reduce values to a net realizable value and may be used in situations when observable inputs become stale. Foreclosed property fair value inputs may transition to Level 1
Loan servicing rights represent the asset retained upon receipt of an accepted offer for the sale of the related foreclosed property.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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Table of Contents
 September 30, 2017June 30, 2022
 
Carrying
Amount
 Fair ValueCarrying
Amount		Fair Value
   Total Level 1 Level 2 Level 3TotalLevel 1Level 2Level 3
 (In Thousands) (In Thousands)
Financial assets:          Financial assets:  
Cash and cash equivalents $73,196
 $73,218
 $56,487
 $16,731
 $—
Cash and cash equivalents$95,484 $95,484 $95,484 $— $— 
Securities available-for-sale 131,130
 131,130
 —
 131,130
 —
Securities available-for-sale208,643 208,643 — 208,643 — 
Securities held-to-maturity 38,873
 39,274
 —
 39,274
 —
Securities held-to-maturity13,968 13,849 — 13,849 — 
Loans held for sale —
 —
 —
 —
 —
Loans held for sale2,256 2,437 — 2,437 — 
Loans and lease receivables, net 1,446,790
 1,427,071
 —
 7,637
 1,419,434
Loans and lease receivables, net2,265,996 2,258,728 — — 2,258,728 
Bank-owned life insurance 39,988
 39,988
 39,988
 —
 —
Federal Home Loan Bank and Federal Reserve Bank stock 5,083
 5,083
 —
 —
 5,083
Federal Home Loan Bank stockFederal Home Loan Bank stock22,959 N/AN/AN/AN/A
Accrued interest receivable 4,722
 4,722
 4,722
 —
 —
Accrued interest receivable6,433 6,433 6,433 — — 
Interest rate swaps 1,380
 1,380
 —
 1,380
 —
Interest rate swaps44,461 44,461 — 44,461 — 
Financial liabilities:   
      Financial liabilities: 
Deposits 1,423,724
 1,424,275
 1,032,379
 391,896
 —
Deposits1,869,331 1,869,191 1,743,010 126,181 — 
Federal Home Loan Bank advances and other borrowings 167,884
 152,391
 —
 152,391
 —
Federal Home Loan Bank advances and other borrowings596,642 587,308 — 587,308 — 
Junior subordinated notes 10,015
 8,829
 —
 —
 8,829
Accrued interest payable 2,317
 2,317
 2,317
 —
 —
Accrued interest payable1,708 1,708 1,708 — — 
Interest rate swaps 1,380
 1,380
 —
 1,380
 —
Interest rate swaps40,357 40,357 — 40,357 — 
Off-balance-sheet items:   
      
Off-balance sheet items:Off-balance sheet items: 
Standby letters of credit 86
 86
 —
 —
 86
Standby letters of credit116 116 — — 116 

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

 December 31, 2021
Carrying
Amount		Fair Value
TotalLevel 1Level 2Level 3
 (In Thousands)
Financial assets:  
Cash and cash equivalents$57,110 $57,110 $57,110 $— $— 
Securities available-for-sale205,702 205,702 — 205,702 — 
Securities held-to-maturity19,746 20,276 — 20,276 — 
Loans held for sale3,570 3,927 — 3,927 — 
Loans and lease receivables, net2,215,072 2,241,093 — — 2,241,093 
Federal Home Loan Bank stock13,336 N/AN/AN/AN/A
Accrued interest receivable5,497 5,497 5,497 — — 
Interest rate swaps26,343 26,343 — 26,343 — 
Financial liabilities: 
Deposits1,957,923 1,968,195 1,894,273 73,922 — 
Federal Home Loan Bank advances and other borrowings403,451 409,894 — 409,894 — 
Junior subordinated notes10,076 8,844 — — 8,844 
Accrued interest payable1,008 1,008 1,008 — — 
Interest rate swaps28,283 28,283 — 28,283 — 
Off-balance sheet items: 
Standby letters of credit203 203 — — 203 

N/A = The fair value is not applicable due to restrictions placed on transferability
36
  December 31, 2016
  
Carrying
Amount
 Fair Value
    Total Level 1 Level 2 Level 3
  (In Thousands)
Financial assets:          
Cash and cash equivalents $77,517
 $77,517
 $55,622
 $21,895
 $—
Securities available-for-sale 145,893
 145,893
 —
 145,893
 —
Securities held-to-maturity 38,612
 38,520
 —
 38,520
 —
Loans held for sale 1,111
 1,222
 —
 1,222
 —
Loans and lease receivables, net 1,429,763
 1,447,044
 —
 12,268
 1,434,776
Bank-owned life insurance 39,048
 39,048
 —
 39,048
 —
Federal Home Loan Bank and Federal Reserve Bank stock 2,131
 2,131
 —
 2,131
 —
Accrued interest receivable 4,677
 4,677
 4,677
 —
 —
Interest rate swaps 352
 352
 —
 352
 —
Financial liabilities:          
Deposits 1,538,855
 1,539,413
 1,063,720
 475,693
 —
Federal Home Loan Bank advances and other borrowings 59,676
 60,893
 —
 60,893
 —
Junior subordinated notes 10,004
 9,072
 —
 —
 9,072
Accrued interest payable 1,765
 1,765
 1,765
 —
 —
Interest rate swaps 352
 352
 —
 352
 —
Off-balance-sheet items:          
Standby letters of credit 58
 58
 —
 —
 58
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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.
Cash and Cash Equivalents: The carrying amount reported for cash and due from banks and interest-bearing deposits held by the Corporation approximates fair value because of its immediate availability and because it does not present unanticipated credit concerns. As of September 30, 2017 and December 31, 2016, the Corporation held $13.4 million and $20.3 million, respectively, of commercial paper. The fair value of commercial paper is classified as a Level 2 input due to the lack of available independent pricing sources. The carrying value of brokered certificates of deposit purchased approximates the fair value for these instruments. The fair value of brokered certificates of deposits purchased is based on the discounted value of contractual cash flows using a discount rate reflective of rates currently offered for deposits of similar remaining maturities. As of both September 30, 2017 and December 31, 2016, the Corporation held $3.3 million and $1.6 million of brokered certificates of deposits, respectively.

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 portionportions 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.
Loans and Lease Receivables, net: The fair value estimation process for the loan portfolio uses an exit price concept and reflects discounts that the Corporation believes are consistent with liquidity discounts in the market place. Fair values are estimated for portfolios of loans with similar financial characteristics. The fair value of performing and nonperforming loans is calculated by discounting scheduled and expected cash flows through the estimated maturity using estimated market rates that reflect the credit and interest rate risk inherent in the portfolio of loans and then applying a discount factor based upon the embedded credit risk of the loan and the fair value of collateral securing nonperforming loans when the loan is collateral dependent. The estimate of maturity is based on the Bank’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. Significant unobservable inputs include, but are not limited to, discounts (investor yield premiums) applied to fair value calculations to further determine the exit price value of a portfolio of loans.
Federal Home Loan Bank and Federal Reserve Bank Stock: The carrying amount of FHLB and Federal Reserve Bank (“FRB”) stock equals its fair value because the shares may be redeemed by the FHLB and the FRB at their carrying amount of $100 per share.
Bank-Owned Life Insurance: The carrying amount of the cash surrender value of life insurance approximates its fair value as the carrying value represents the current settlement amount.
Accrued Interest Receivable and Accrued Interest Payable: The carrying amounts reported for accrued interest receivable and accrued interest payable approximate fair value because of their immediate availability and because they do not present unanticipated credit concerns.
Deposits: The fair value of deposits with no stated maturity, such as demand deposits and money market accounts, is equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the intangible value that results from the funding provided by deposit liabilities compared to borrowing funds in the market.
Borrowed Funds: Market rates currently available to the Corporation and Bank for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.
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 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.
Financial Instruments with Off-Balance-Sheet Risks: The fair value of the Corporation’s off-balance-sheet instruments is based on quoted market prices and fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the credit standing of the related counterparty. Commitments to extend credit and standby letters of credit are generally not marketable. Furthermore, interest rates on any amounts drawn under such commitments would generally be established at market rates at the time of the draw. Fair value would principally derive from the present value of fees received for those products.

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.


37
Table of Contents
Note 1113 — 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 designated as accounting hedge relationshipsconsidered hedging instruments and are marked- to-marketmarked-to-market through earnings each period. The derivative contracts have mirror-image terms, which results in the positions’ changes in fair value primarily 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 30, 2022 and December 31, 2021, the credit valuation allowance was $191,000.
At September 30, 2017, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was $52.3 million. The Corporation receives fixed rates and pays floating rates based upon LIBORdesignated benchmark interest rates used on the swaps with commercial borrowers. These interest rate swaps mature between September 2018 and March 2034. Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements. These commercial borrower swaps were reported on the unaudited Consolidated Balance Sheets as a derivative asset of $1.4 million, included in accrued interest receivable and other assets as of September 30, 2017. In the event of default on a commercial borrower interest rate swap by the counterparty, a right of offset exists to allow for the commercial borrower to set off amounts due against the related commercial loan. As of September 30, 2017, no interest rate swaps were in default and therefore all values for the commercial borrower swaps are recorded on a gross basis on the unaudited Consolidated Balance Sheets.
At September 30, 2017, the aggregate amortizing notional value of interest rate swaps with dealer counterparties was also $52.3 million. The Corporation pays fixed rates and receives floating rates based upon LIBORdesignated benchmark interest rates used on the swaps with dealer counterparties. These interest rate swaps mature in September 2018 through March 2034. Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and wereare reported on the unaudited Consolidated Balance Sheets as a net derivative liability of $1.4 million. The value of these swaps was included in accrued interest payable and other liabilities as of September 30, 2017.Sheet. The gross amount of dealer counterparty swaps, without regard to the enforceable master netting agreement, was also $1.4a gross derivative liability of $3.2 million as noand $40.3 million gross derivative asset. No right of offset existed with the dealer counterparty swaps as of SeptemberJune 30, 2017.2022.
The table below provides information about the balance sheet location and fair value of the Corporation’s derivative instruments as of September 30, 2017 and December 31, 2016.

  Interest Rate Swap Contracts
  Asset Derivatives Liability Derivatives
  Balance Sheet Location Fair Value Balance Sheet Location Fair Value
  (In Thousands)
Derivatives not designated as hedging instruments        
September 30, 2017 Accrued interest receivable and other assets $1,380
 Accrued interest payable and other liabilities $1,380
December 31, 2016 
Accrued interest receivable and other assets

 $352
 
Accrued interest payable and other liabilities

 $352

No derivative instruments held by the Corporation for the nine months ended September 30, 2017 were considered hedging instruments. 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 ninethree and six months ended SeptemberJune 30, 20172022 and 20162021 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 million and $5.7 million was recognized in other comprehensive income for the three and six months ended June 30, 2022, and there were no ineffective portions of 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. A pre-tax unrealized gain of $426,000 and $376,000 was recognized in other comprehensive income for the three and six months ended June 30, 2022 and there was no ineffective portion of these hedges.

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Table of Contents
As of June 30, 2022
Number of InstrumentsNotional AmountWeighted 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 customers12 $131,393 8.91$3,215 
Interest rate swap agreements on loans with third-party counter parties81 646,078 8.1237,142 
Derivatives designated as hedging instruments
Interest rate swap related to AFS securities11 $12,500 9.78$377 
Interest rate swap related to FHLB borrowings12 $124,400 3.19$3,727 
Included in Derivative liabilities
Derivatives not designated as hedging instruments
Interest rate swap agreements on loans with commercial loan customers69 $514,685 7.92$40,357 
As of December 31, 2021
Number of InstrumentsNotional AmountWeighted 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 customers41 $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 customers39 $228,676 8.70$6,595 
Interest rate swap agreements on loans with third-party counter parties80 640,589 8.3719,748 
Derivatives designated as hedging instruments
Interest rate swap related to FHLB borrowings10 $106,000 3.17$1,940 

Note 1214 — Regulatory Capital


The Corporation and the Bank are subject to various regulatory capital requirements administered by Federal and the State of 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-sheetoff-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 Boards of DirectorsBoard 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 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
39
Table of Contents
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 stockholdersshareholders with preferential rights superior to those stockholdersshareholders 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.
QualitativeQuantitative 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-sheetoff-balance sheet commitments and obligations.

40
Table of Contents

In July 2013,As of June 30, 2022, the FRB and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision’sCorporation’s capital guidelines for U.S. banks. These rules are applicable to all financial institutions that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as bank and savings and loan holding companies other than “small bank holding companies” (generally non-publicly traded bank holding companies with consolidated assets of less than $1 billion). Under the final rules, minimum requirements increased for both the quantity and quality of capital held by the Corporation. The rules include a new Common Equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, require a minimum ratio of Total Capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. The rules also permit banking organizations with less than $15 billion in assets to retain, through a one-time election, the past treatment for accumulated other comprehensive income, which did not affect regulatory capital. The Corporation elected to retain this treatment, which reduces the volatility of regulatory capital ratios. A new capital conservation buffer, comprised of Common Equity Tier 1 capital, was also established abovelevels exceeded the regulatory minimum capital requirements. This capital conservation buffer will be phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and will increase each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. As of September 30, 2017, both the Corporation’sminimums and the Bank’s capital levels remained characterized as well capitalized under the new rules.
regulatory framework. The following table summarizestables summarize both the Corporation’s and the Bank’s capital ratios and the ratios required by their federal regulators at September 30, 2017:regulators:

As of June 30, 2022
ActualMinimum Required for Capital Adequacy PurposesFor Capital Adequacy Purposes Plus Capital Conservation BufferMinimum Required to Be Well
Capitalized Under Prompt Corrective Action Requirements
 AmountRatioAmountRatioAmountRatioAmountRatio
 (Dollars in Thousands)
Total capital
(to risk-weighted assets)
Consolidated$309,573 11.56 %$214,312 8.00 %$281,285 10.50 %N/AN/A
First Business Bank301,151 11.25 214,190 8.00 281,125 10.50 $267,738 10.00 %
Tier 1 capital
(to risk-weighted assets)
Consolidated$250,331 9.34 %$160,734 6.00 %$227,707 8.50 %N/AN/A
First Business Bank276,184 10.32 160,643 6.00 227,577 8.50 $214,190 8.00 %
Common equity tier 1 capital
(to risk-weighted assets)
Consolidated$238,339 8.90 %$120,551 4.50 %$187,523 7.00 %N/AN/A
First Business Bank276,184 10.32 120,482 4.50 187,417 7.00 $174,030 6.50 %
Tier 1 leverage capital
(to adjusted assets)
Consolidated$250,331 9.19 %$108,923 4.00 %$108,923 4.00 %N/AN/A
First Business Bank276,184 10.15 108,823 4.00 108,823 4.00 $136,029 5.00 %
As of December 31, 2021
 ActualMinimum Required for Capital Adequacy PurposesFor Capital Adequacy Purposes Plus Capital Conservation BufferMinimum Required to Be Well
Capitalized Under Prompt Corrective Action Requirements
 AmountRatioAmountRatioAmountRatioAmountRatio
 (Dollars in Thousands)
Total capital
(to risk-weighted assets)		      
Consolidated$281,745 10.82 %$208,337 8.00 %$273,443 10.50 %N/AN/A
First Business Bank280,448 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/AN/A
First Business Bank255,286 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/AN/A
First Business Bank255,286 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/AN/A
First Business Bank255,286 9.81 104,045 4.00 104,045 4.00 $130,056 5.00 %
41
  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)
As of September 30, 2017                
Total capital
(to risk-weighted assets)
                
Consolidated $209,495
 11.91% $140,737
 8.00% $162,727
 9.25% N/A
 N/A
First Business Bank 205,877
 11.75
 140,132
 8.00
 162,027
 9.25
 $175,164
 10.00%
Tier 1 capital
(to risk-weighted assets)
                
Consolidated $165,873
 9.43% $105,553
 6.00% $127,543
 7.25% N/A
 N/A
First Business Bank 185,954
 10.62
 105,099
 6.00
 126,994
 7.25
 $140,132
 8.00%
Common equity tier 1 capital
(to risk-weighted assets)
                
Consolidated $155,858
 8.86% $79,164
 4.50% $101,155
 5.75% N/A
 N/A
First Business Bank 185,954
 10.62
 78,824
 4.50
 100,720
 5.75
 $113,857
 6.50%
Tier 1 leverage capital
(to adjusted assets)
                
Consolidated $165,873
 9.39% $70,654
 4.00% $70,654
 4.00% N/A
 N/A
First Business Bank 185,954
 10.56
 70,409
 4.00
 70,409
 4.00
 $88,011
 5.00%


The following table summarizes both the Corporation’s and the Corporation’s legacy bank charters’ ratios and the ratios required by their federal regulators at December 31, 2016:
Table of Contents
  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)
As of December 31, 2016                
Total capital
(to risk-weighted assets)
                
Consolidated $204,117
 11.74% $139,101
 8.00% $149,968
 8.625% N/A
 N/A
First Business Bank 147,811
 11.55
 102,362
 8.00
 110,360
 8.625
 $127,953
 10.00%
First Business Bank — Milwaukee 24,347
 11.02
 17,680
 8.00
 19,062
 8.625
 22,101
 10.00
Alterra Bank 31,699
 13.27
 19,106
 8.00
 20,599
 8.625
 23,882
 10.00
Tier 1 capital
(to risk-weighted assets)
                
Consolidated $160,964
 9.26% $104,326
 6.00% $115,193
 6.625% N/A
 N/A
First Business Bank 134,208
 10.49
 76,772
 6.00
 84,769
 6.625
 $102,362
 8.00%
First Business Bank — Milwaukee 22,323
 10.10
 13,260
 6.00
 14,642
 6.625
 17,680
 8.00
Alterra Bank 28,685
 12.01
 14,329
 6.00
 15,822
 6.625
 19,106
 8.00
Common equity tier 1 capital
(to risk-weighted assets)
                
Consolidated $150,960
 8.68% $78,244
 4.50% $89,111
 5.125% N/A
 N/A
First Business Bank 134,208
 10.49
 57,579
 4.50
 65,576
 5.125
 $83,170
 6.50%
First Business Bank — Milwaukee 22,323
 10.10
 9,945
 4.50
 11,327
 5.125
 14,365
 6.50
Alterra Bank 28,685
 12.01
 10,747
 4.50
 12,240
 5.125
 15,524
 6.50
Tier 1 leverage capital
(to adjusted assets)
                
Consolidated $160,964
 9.07% $70,985
 4.00% $70,985
 4.00% N/A
 N/A
First Business Bank 134,208
 10.40
 51,600
 4.00
 51,600
 4.00
 $64,500
 5.00%
First Business Bank — Milwaukee 22,323
 9.15
 9,758
 4.00
 9,758
 4.00
 12,198
 5.00
Alterra Bank 28,685
 10.58
 10,842
 4.00
 10,842
 4.00
 13,552
 5.00

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 subsidiaries.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 First Business’sour 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:

Competitive pressures among depository and other financial institutions nationally and in our markets.
•Adverse changes in the economy or business conditions, either nationally or in our markets.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.
The consequences of continued bank acquisitions and mergers in our markets, resulting in fewer but much larger and financially stronger competitors.
•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 portionportions 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 shareholdersstockholders and potential investors. See Part I, Item 1A — Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 20162021 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 the BankFBB and certainFirst Business Specialty Finance, LLC (“FBSF”), a wholly-owned subsidiary of its subsidiaries.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- tosmall 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, asset-based lending, equipment financing, factoring, trust and investment services, treasury management services, and a broad range of deposit products.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 bank consulting experts provide investment portfolio administrative services, asset liability management services, and asset liability management process validation. We do not utilize a branch network to attract retail clients. Our operating philosophy is predicated on deep client relationships fostered by localwithin 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. We believe we have a niche business bankingOur focused model and we consistently operate within our model. This allows our experienced staff to provide the level of financial expertise needed to develop and maintain long-term relationships with our clients.
OperationalFinancial Performance Summary
Effective June 1, 2017, we completed the consolidation
    Results as of our three former bank charters into a single charter and rebranded Alterra Bank to First Business Bank. We believe the charter consolidation and brand consistency will be meaningful contributors to improved operating efficiency and profitability as we move forward into 2018.
Results for the three and ninesix months ended SeptemberJune 30, 20172022 include:

Total assets increased•Net income available to $1.786 billion ascommon shareholders totaled $11.0 million, or diluted earnings per share of September 30, 2017 compared to $1.781 billion as of December 31, 2016.
Net income$1.29, for the three months ended SeptemberJune 30, 2017 was $2.6 million2022, compared to net income of $2.7$8.2 million, for the three months ended September 30, 2016. Net income for the nine months ended September 30, 2017 was $7.9 million compared to net income of $10.9 million for the nine months ended September 30, 2016.
Diluted earnings per common share for the three months ended September 30, 2017 were $0.30 compared to or diluted earnings per common share of $0.31$0.95, for the three months ended September 30, 2016. Diluted earnings persame period in 2021. Net income available to common share for the nine months ended September 30, 2017 were $0.90 compared toshareholders totaled $19.6 million, or diluted earnings per common share of $1.26$2.31, for the ninesix months ended SeptemberJune 30, 2016.
2022, compared to $18.0 million, or diluted earnings per share of $2.08, for the same period in 2021.
•Annualized return on average assets (“ROAA”ROA”) and annualized return on average common equity (“ROAE”ROCE”) were 0.58% and 6.22%, respectively, for the three month periodmonths ended SeptemberJune 30, 2017,2022 measured 1.61% and 18.79%, respectively, compared to 0.59%1.26% and 6.69%, respectively,15.09% for the same time period in 2016. ROAA2021. Annualized ROA and ROAE were 0.59%annualized ROCE for the six months ended June 30, 2022 measured 1.46% and 6.36%16.74%, respectively, for the nine month period ended September 30, 2017 compared to 0.80%1.38% and 9.26%, respectively,16.75% for the same time period in 2016.2021.
Trust•Pre-tax, pre-provision adjusted earnings, which excludes certain one-time and investment services fee income increased 21.2% to $1.7discrete items, totaled $10.8 million for the three months ended SeptemberJune 30, 20172022, increasing $835,000, or 8.3%, 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 $1.41.53% for the same period in 2021. Excluding PPP interest and fee income, pre-tax, pre-provision adjusted earnings totaled $10.6 million for the three months ended SeptemberJune 30, 2016. For2022, up $3.7 million, or 53.8%, from the ninesame period in 2021. Pre-tax, pre-provision adjusted ROA, excluding the impact of PPP, was 1.57% for the three months ended SeptemberJune 30, 2017, trust and investment services fee income increased 23.8% to $4.9 million2022, compared to $4.01.15% for the same period in 2021.
•Pre-tax, pre-provision adjusted earnings totaled $20.8 million for the ninesix months ended SeptemberJune 30, 2016.2022, up $153,000, or 0.7%, 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 adjusted earnings totaled $20.2 million for the six months ended June 30, 2022, up $5.6 million, or 37.8%, 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.
Top line revenue, the sum•Fees in lieu of net interest, incomedefined as prepayment fees, asset-based loan fees, non-accrual interest, and non-interest income, increased 1.5% to $19.2loan fee amortization, totaled $1.9 million for the three months ended SeptemberJune 30, 20172022 compared to $18.9$3.5 million for the three months ended SeptemberJune 30, 2016. For the nine months ended September 30, 2017, top line revenue decreased 3.7% to $58.4 million compared to $60.6 million for the nine months ended September 30, 2016.
Net interest margin increasedtwo basis points to 3.52%2021. PPP fee income, included in loan fee amortization, was $196,000 for the three months ended SeptemberJune 30, 20172022 compared to 3.50%$2.5 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 period in 2021.
•Net interest margin was 3.71% for the three months ended SeptemberJune 30, 2016. Net2022 compared to 3.49% for the same period in 2021. Adjusted net interest margin, which excludes certain one-time and volatile items, was 3.56% for both the nine months ended September 30, 2017 and nine months ended September 30, 2016.
Efficiency ratio was 66.56%3.45% for the three months ended SeptemberJune 30, 2017,2022 up from 3.20% for the same period in 2021. Net interest margin was 3.55% for the six months ended June 30, 2022 compared to 63.63%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% for the same period in 2021.
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•Top line revenue, defined as net interest income plus non-interest income, totaled $30.5 million for the three months ended SeptemberJune 30, 2016. For2022, up $2.6 million, or 9.1% from the ninesame period in 2021. Excluding PPP interest income and fees, top line revenue increased $5.4 million, up 21.9% from the same period in 2021. Top line revenue totaled $59.3 million for the six months ended SeptemberJune 30, 2017 our efficiency ratio was 67.55% compared to 62.35% for2022, up $3.3 million, or 5.9% from the same time period in 2016.
2021. Excluding PPP interest income and fees, top line revenue increased $8.7 million, up 17.4% from the same period in 2021.
•Provision for loan and lease losses was $1.5a benefit of $3.7 million for the three months ended SeptemberJune 30, 20172022 compared to $3.5 milliona benefit of $958,000 for the same period in the prior year.2021. Provision for loan and lease losses was $5.7a benefit of $4.6 million for the ninesix months ended SeptemberJune 30, 20172022 compared to $6.8a benefit of $3.0 million for the same time period in 2016.
2021.

•Total assets at June 30, 2022 increased $124.1 million, or 9.4% annualized, to $2.777 billion from $2.653 billion at December 31, 2021.
SBA recourse provision was $1.3 million for the three months ended September 30, 2017, compared to $375,000 for the three months ended September 30, 2016. For the nine months ended September 30, 2017, SBA recourse provision was $2.1 million compared to $449,000 for the nine months ended September 30, 2016.
Net charge-offs of $3.2 million represented an annualized 0.88% of average loans and leases for the three months ended September 30, 2017 compared to annualized net charge-offs of 0.44% for the three months ended September 30, 2016. Net charge-offs of $6.7 million represented an annualized 0.61% of average loans and leases for the nine months ended September 30, 2017 compared to annualized net charge-offs of 0.28% for the nine months ended September 30, 2016.
Gross•Period-end gross loans and leases receivable increased $16.0$50.1 million, or 4.5% annualized, to $1.467$2.291 billion as of June 30, 2022 compared to $2.241 billion as of December 31, 2021. Average gross loans and leases of $2.259 billion increased $55.6 million, or 2.5%, for the six months ended June 30, 2022, compared to $2.203 billion for the same period in 2021.
•Period-end gross loans and leases receivable, excluding PPP loans, at SeptemberJune 30, 20172022 increased $69.7 million, or 6.3% annualized, to $2.283 billion from $1.451$2.213 billion as of December 31, 2021. Average gross loans and leases, excluding net PPP loans, of $2.243 billion increased $275.0 million, or 14.0%, for the six months ended June 30, 2022, compared to $1.968 billion for the same period in 2021.
•Period-end gross PPP loans and PPP deferred processing fees were $8.3 million and $113,000, respectively, at June 30, 2022 compared to $27.9 million and $557,000 at December 31, 2016.
2021. Average PPP loans, net of deferred processing fees, were $16.3 million for the six months ended June 30, 2022 compared to $235.7 million for the same period in 2021.
•Non-performing assets were $5.7 million and 0.21% of total assets as of June 30, 2022, compared to $6.5 million and 0.25% of total assets as of December 31, 2021.
Allowance•The allowance for loan and lease losses as a percentage of gross loans and leases was 1.36% at September 30, 2017decreased $232,000, or 1.0%, compared to 1.44%December 31, 2021. The allowance for loan and lease losses decreased to 1.05% of total loans, compared to 1.09% at December 31, 2016.
Non-performing assets as a percentage2021. Excluding net PPP loans, the allowance for loan and lease losses decreased to 1.06% of total assets was 2.01% at Septemberloans as of June 30, 20172022, compared to 1.50%1.10% as of December 31, 2021.
•Period-end in-market deposits at June 30, 2022 decreased $71.3 million, or 3.7%, to $1.857 billion from $1.928 billion as of December 31, 2021. Average in-market deposits of $1.917 billion increased $187.8 million, or 10.9%, for the six months ended June 30, 2022, compared to $1.729 billion for the same period in 2021.
•Private wealth and trust assets under management and administration decreased by $280.3 million, or 9.9%, to $2.554 billion at June 30, 2022, compared to $2.921 billion at December 31, 2016.2021. Private wealth management service fees increased $108,000, or 3.9%, and $542,000, or 10.5%, for the three and six months ended June 30, 2022, compared to the three and six months ended June 30, 2021.


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Non-accrual loans increased by $8.0 million, or 31.9%, to $33.2 million at September 30, 2017 from $25.2 million at December 31, 2016.
Table of Contents

Results of Operations
Top Line Revenue
Top line revenue, is comprised of net interest income and non-interest income. This measurement is also commonly referred to as operating revenue.
Forincome, increased $2.6 million, or 9.1%, for the three months ended SeptemberJune 30, 2017, top line revenue increased 1.5%2022, compared to the same period in the prior year primarily2021, due to a 9% increase in net interest income and non-interest income. The increase in net interest income, driven by an increase in average loans and leases outstanding, was partially offset by a decrease in PPP interest and fees of $2.9 million. Excluding PPP interest and fees, top line revenue grew 21.9%. The increase in non-interest income was due to an increase in trust and investment fee income,commercial loan swap fee income, private wealth fee income, loan fee income, and services charges on deposits, partially offset by a reduction in gains fromon the sale of SBA loans. This increase was partially offset by a shift inTop line revenue increased $3.3 million, or 5.9%, for the mix of loan originations toward lower-yielding conventional commercial loans, alongside runoff in the Company’s higher-yielding specialty lending portfolios.
For the ninesix months ended SeptemberJune 30, 2017, top line revenue decreased 3.7%2022, compared to the same period in the prior year primarily2021, due to the anticipated decline in the gain on sale of SBA loans based on management’s third quarter 2016 decision to rebuild the SBA platform, as well as from a shift in the mix of loan originations toward lower-yielding conventional commercial loans in recent quarters. These 2017 revenue headwinds were partially offset by increased trust and investment services fee income, an6% increase in swap feenet interest income and non-interest income, combined with a decreasebenefit from above-average returns from the Corporation’s investments in mezzanine funds. Excluding PPP interest expense guided by successful efforts to manage various in-market deposit rates and utilize an efficient mix of wholesale funding sources.
Topfees, top line revenue has also benefited moderately in 2017 from increased rates on certain variable-rate loans following the Federal Open Market Committee’s (“FOMC”) decision to raise the targeted federal funds rate in December 2016, March 2017 and June 2017.grew 17.4%.
The components of top line revenue were as follows:
 For the Three Months Ended September 30, For the Nine Months Ended September 30, For the Three Months Ended June 30,For the Six Months Ended June 30,
 2017 2016 Change 2017 2016 Change 20222021$ Change% Change20222021$ Change% Change
 (Dollars in Thousands) (Dollars in Thousands)
Net interest income $14,883
 $15,295
 (2.7)% $45,250
 $46,575
 (2.8)%Net interest income$23,660 $21,652 $2,008 9.3%$45,087 $42,515 $2,572 6.0%
Non-interest income 4,339
 3,640
 19.2
 13,140
 14,057
 (6.5)Non-interest income6,872 6,321 551 8.714,258 13,516 742 5.5
Total top line revenue $19,222
 $18,935
 1.5
 $58,390
 $60,632
 (3.7)
Top line revenueTop line revenue$30,532 $27,973 $2,559 9.1$59,345 $56,031 $3,314 5.9
Annualized Return on Average Assets and Annualized Return on Average Common Equity
ROAA    ROA for the three and six months ended SeptemberJune 30, 2017 decreased2022 increased to 0.58%1.61% and 1.46%, respectively, compared to 0.59%1.26% and 1.38% for the three and six months ended SeptemberJune 30, 2016. During the third quarter of 2016, in accordance with the applicable accounting guidance, the Corporation recognized $3.2 million in nonrecurring tax credit investment impairment expense, which corresponded with the $3.6 million in historic tax credits recognized during the quarter, providing a net benefit to after-tax earnings of $430,000. Excluding the impairment impact of tax credit investments, third quarter 2016 ROAA was 0.49%.2021, respectively. The increase in ROAA for the three months ended September 30, 2017ROA was primarily due to a decrease in provision for loan and lease losses combined with an increase in trusttop line revenue and investment fee income, swap fee income and gains from the sale of SBA loans. This improvementincrease in profitability wasloan loss provision benefit, partially offset by an increase in SBA recourse provision. ROAAoperating expenses. Please refer to the operating results analysis below for further discussion on the nine months ended September 30, 2017 decreased to 0.59% compared to 0.80% forreasons driving the nine months ended September 30, 2016. Excluding the impairment impact of tax credit investments, ROAA for the nine months ended September 30, 2016 was 0.77%. The decline in ROAA for the nine months ended September 30, 2017 was primarily due to management’s strategic decision during the third quarter of 2016 to temporarily slow SBA production in order to accommodate significant investment in both SBA personnel and infrastructure, combined with an increase in SBA recourse provision, partially offset by a decrease in provision for loan and lease losses. ROAA isprofitability. We consider ROA a critical metric used by us to measure the profitability of our organization and how efficiently our assets are deployed. It is a measurement thatROA also allows us to better benchmark our profitability to our peers without the need to consider different degrees of leverage thatwhich can ultimately influence return on equity measures.
ROAE    ROCE for the three and six months ended SeptemberJune 30, 20172022 was 6.22%18.79% and 16.74%, respectively, compared to 6.69%15.09% and 16.75% for the three and six months ended SeptemberJune 30, 2016. Excluding the aforementioned impairment impact of tax credit investments, third quarter 2016 ROAE was 5.61%.2021, respectively. The reasonsprimary reason for the increasechange in ROAE areROCE is consistent with the explanationsnet income variance explanation as discussed above with respect to ROAA for the three months ended September 30, 2017. ROAE for the nine months ended September 30, 2017 was 6.36% compared to 9.26% for the nine months ended September 30, 2016. Excluding the impairment impact of tax credit investments, ROAE for the nine months ended September 30, 2016 was 8.90%. The reasons for the decline in ROAE are consistent with the explanations discussed above with respect to ROAA for the nine months ended September 30, 2017.under Return on Average Assets above. We view ROAE to beROCE as an important measure ofmeasurement for monitoring profitability and we continue to focus on improving theour return to our shareholders by enhancing the overall profitability of our client relationships, controlling our expenses, and seeking to minimizeminimizing our credit costs.costs of credit.
Efficiency Ratio and Pre-Tax, Pre-Provision Adjusted Earnings
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, lossesnet gains or gainslosses 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.
The efficiency ratio was 66.56% and 67.55% for Pre-tax, pre-provision adjusted earnings is defined as operating revenue less operating expense. In the three and nine months ended September 30, 2017, respectively, compared to 63.63% and 62.35% for the three and nine months ended September 30, 2016, respectively. Despite this reported reduction in operating efficiency in both periodsjudgment of comparison, we believe we continue to progress towards enhancing the Corporation’s long-term efficiency ratio, building onmanagement, the strategic changes we haveadjustments made to datenon-interest expense and laying the foundation to generate sustainable and high-quality revenue growth. After significant investment in 2016 and 2017, we believe we now have a high-quality SBA infrastructure, with the people and processes in place to resume production in the quarters and years ahead as we begin to enhance our SBA sales presence. At the same time, we expect our recently completed charter consolidation and impending core system conversion to create capacity within our existing workforce to accommodate future growth in a highly efficient manner. We believe these strategic initiatives will act as a catalyst for earnings growth in 2018 and beyond. Management will continue to take proactive measures to drive positive operating leverage with the objective of moving the efficiency ratio back within the Corporation’s long-term operating goal of 58-62%.
We believe the efficiency ratio allowsnon-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 that is associated with certain non-recurring orone-time items and other discrete items. The efficiency ratio alsopre-tax, pre-provision 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 ROAAROA and ROAE.ROCE. The information provided below reconciles the efficiency ratio to its most comparable GAAP measure.

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Please refer to both the Non-Interest Income and Non-Interest Expense sections below for discussion on the primaryadditional drivers of the year-over-year increasechange in the efficiency ratio.
ratio and pre-tax, pre-provision adjusted earnings.
 For the Three Months Ended September 30, For the Nine Months Ended September 30,For the Three Months Ended June 30,For the Six Months Ended June 30,
 2017 2016 $ Change % Change 2017 2016 $ Change % Change20222021$ Change% Change20222021$ Change% Change
 (Dollars in Thousands)(Dollars in Thousands)
Total non-interest expense $14,231
 $15,753
 $(1,522) (9.7)% $42,012
 $41,910
 $102
 0.2 %Total non-interest expense$19,456 $18,184 $1,272 7.0%$38,280 $35,514 $2,766 7.8%
Less:                Less:
Net loss on foreclosed properties

 —
 —
 —
 NM
 —
 93
 (93) (100.0)
Net loss (gain) on foreclosed propertiesNet loss (gain) on foreclosed properties8 (1)9 NM20 1 19 NM
Amortization of other intangible assets 14
 16
 (2) (12.5) 41
 48
 (7) (14.6)Amortization of other intangible assets— 8 (8)NM— 15 (15)NM
SBA recourse provision 1,315
 375
 940
 250.7
 2,095
 449
 1,646
 366.6
SBA recourse provision114 245 (131)(53.5)38 115 (77)(67.0)
Impairment of tax credit investments 112
 3,314
 (3,202) (96.6) 338
 3,520

(3,182) (90.4)
Deconversion fees —
 —
 —
 NM
 101
 —
 101
 NM
Total adjusted operating expense $12,790
 $12,048
 $742
 6.2
 $39,437
 $37,800
 $1,637
 4.3
Tax credit investment impairment recoveryTax credit investment impairment recovery(351)— (351)NM(351)— (351)NM
Total operating expenseTotal operating expense$19,685 $17,932 $1,753 9.8$38,573 $35,383 $3,190 9.0
Net interest income $14,883
 $15,295
 $(412) (2.7) $45,250
 $46,575
 (1,325) (2.8)Net interest income$23,660 $21,652 $2,008 9.3$45,087 $42,515 $2,572 6.0
Total non-interest income 4,339
 3,640
 699
 19.2
 13,140
 14,057
 (917) (6.5)Total non-interest income6,872 6,321 551 8.714,258 13,516 742 5.5
Less:                Less:
Gain on sale of securities 5
 —
 5
 NM
 6
 7
 (1) (14.3)
Net gain on sale of securitiesNet gain on sale of securities— 29 (29)NM— 29 (29)NM
Adjusted non-interest incomeAdjusted non-interest income6,872 6,292 580 9.2$14,258 $13,487 $771 5.7
Total operating revenue $19,217
 $18,935
 $282
 1.5
 $58,384
 $60,625
 $(2,241) (3.7)Total operating revenue$30,532 $27,944 $2,588 9.3$59,345 $56,002 $3,343 6.0
Efficiency ratio 66.56% 63.63% 

 

 67.55% 62.35% 

 
Efficiency ratio64.47 %64.17 %65.00 %63.18 %
Pre-tax, pre-provision adjusted earningsPre-tax, pre-provision adjusted earnings$10,847 $10,012 $835 8.3$20,772 $20,619 $153 0.7
Average total assetsAverage total assets$2,716,707 $2,621,340 $95,367 3.62,691,613 2,599,373 92,240 3.5
Pre-tax, pre-provision adjusted return on average assetsPre-tax, pre-provision adjusted return on average assets1.60 %1.53 %1.54 %1.59 %
NM = Not meaningfulMeaningful



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 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 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,
20222021$ Change% Change20222021$ Change% Change
(Dollars in Thousands)
Total non-interest expense$19,456 $18,184 $1,272 7.0%$38,280 $35,514 $2,766 7.8%
Less: 
Net loss on foreclosed properties8 (1)9 NM20 1 19 NM
Amortization of other intangible assets— 8 (8)NM— 15 (15)NM
SBA recourse provision114 245 (131)(53.5)38 115 (77)(67.0)
Tax credit investment impairment recovery(351)— (351)NM(351)— (351)NM
Total operating expense$19,685 $17,932 $1,753 9.8$38,573 $35,383 $3,190 9.0
Net interest income$23,660 $21,652 $2,008 9.3$45,087 $42,515 $2,572 6.0
Less:
PPP interest income29 566 (537)(94.9)81 1,169 (1,088)(93.1)
PPP loan fee amortization196 2,541 (2,345)(92.3)445 4,754 (4,309)(90.6)
Adjusted net interest income23,435 18,545 4,890 26.444,561 36,592 7,969 21.8
Total non-interest income6,872 6,321 551 8.714,258 13,516 742 5.5
Less:
Net gain on sale of securities— 29 (29)NM— 29 (29)NM
Adjusted non-interest income6,872 6,292 580 9.214,258 13,487 771 5.7
Adjusted operating revenue$30,307 $24,837 $5,470 22.0$58,819 $50,079 $8,740 17.5
Efficiency ratio64.95 %72.20 %65.58 %70.65 %
Pre-tax, pre-provision adjusted earnings$10,622 $6,905 $3,717 53.8$20,246 $14,696 $5,550 37.8
Average total assets$2,716,707 $2,621,340 $95,367 3.6$2,691,613 $2,599,373 $92,240 3.5
Average PPP loans, net11,650 229,165 (217,515)(94.9)16,266 235,668 (219,402)(93.1)
Adjusted average total assets$2,705,057 $2,392,175 $312,882 13.1$2,675,347 $2,363,705 $311,642 13.2
Pre-tax, pre-provision adjusted return on average assets1.57 %1.15 %1.51 %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.









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Table of Contents
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 ninesix months ended SeptemberJune 30, 20172022 compared to the same periodsperiod in 2016.2021. 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,
 2022 Compared to 20212022 Compared to 2021
RateVolumeNetRateVolumeNet
 (In Thousands)
Interest-earning assets   
Commercial real estate and other mortgage loans(1)
$1,414 $842 $2,256 $1,264 $1,810 $3,074 
Commercial and industrial loans(1)
330 (495)(165)310 (999)(689)
Direct financing leases(1)
3 (49)(46)14 (115)(101)
Consumer and other loans(1)
(3)54 51 (2)91 89 
Total loans and leases receivable1,744 352 2,096 1,586 787 2,373 
Mortgage-related securities51 122 173 56 211 267 
Other investment securities14 61 75 6 97 103 
FHLB and FRB Stock9 41 50 9 60 69 
Short-term investments48 (10)38 54 (6)48 
Total net change in income on interest-earning assets1,866 566 2,432 1,711 1,149 2,860 
Interest-bearing liabilities
Transaction accounts93 2 95 91 8 99 
Money market accounts178 49 227 183 108 291 
Certificates of deposit(50)52 2 (173)54 (119)
Wholesale deposits266 (475)(209)549 (958)(409)
Total deposits487 (372)115 650 (788)(138)
FHLB advances231 151 382 (33)202 169 
Other borrowings(34)238 204 (101)406 305 
Junior subordinated notes(2)
— (277)(277)327 (375)(48)
Total net change in expense on interest-bearing liabilities684 (260)424 843 (555)288 
Net change in net interest income$1,182 $826 $2,008 $868 $1,704 $2,572 
(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 months ended June 30, 2022 includes $12,000 and $248,000 in accelerated amortization of debt issuance costs, respectively.


48
Table of Contents
  Increase (Decrease) for the Three Months Ended September 30, Increase (Decrease) for the Nine Months Ended September 30,
  2017 Compared to 2016 2017 Compared to 2016
  Rate Volume Net Rate Volume Net
  (In Thousands)
Interest-earning assets            
Commercial real estate and other mortgage loans(1)
 $45
 $221
 $266
 $(1,283) $777
 $(506)
Commercial and industrial loans(1)
 (309) (155) (464) (290) (679) (969)
Direct financing leases (20) (18) (38) (56) (51) (107)
Consumer and other loans (135) 41
 (94) (161) 75
 (86)
Total loans and leases receivable (419) 89
 (330) (1,790) 122
 (1,668)
Mortgage-related securities 99
 (53) 46
 183
 (59) 124
Other investment securities 19
 8
 27
 38
 61
 99
FHLB and FRB Stock (40) 44
 4
 (15) 27
 12
Short-term investments 118
 (129) (11) 292
 (349) (57)
Total net change in income on interest-earning assets (223) (41) (264) (1,292) (198) (1,490)
Interest-bearing liabilities            
Transaction accounts 207
 44
 251
 490
 122
 612
Money market accounts (6) (52) (58) (256) (178) (434)
Certificates of deposit 13
 (15) (2) 51
 (81) (30)
Wholesale deposits 148
 (501) (353) 234
 (1,303) (1,069)
Total deposits 362
 (524) (162) 519
 (1,440) (921)
FHLB advances (7) 340
 333
 18
 698
 716
Other borrowings (14) (10) (24) 152
 (108) 44
Junior subordinated notes 1
 —
 1
 5
 (8) (3)
Total net change in expense on interest-bearing liabilities 342
 (194) 148
 694
 (858) (164)
Net change in net interest income $(565) $153
 $(412) $(1,986) $660
 $(1,326)
(1)Includes loans held for sale.



The tabletables below showsshow 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 ninesix months ended SeptemberJune 30, 20172022 and 2016.2021. The average balances are derived from average daily balances.
 For the Three Months Ended June 30,
 20222021
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)
$1,472,075 $15,343 4.17 %$1,386,187 $13,087 3.78 %
Commercial and industrial loans(1)
734,299 9,710 5.29 772,257 9,875 5.11 
Direct financing leases(1)
15,527 176 4.53 19,883 222 4.47 
Consumer and other loans(1)
51,045 458 3.59 45,026 407 3.62 
Total loans and leases receivable(1)
2,272,946 25,687 4.52 2,223,353 23,591 4.24 
Mortgage-related securities(2)
176,747 804 1.82 149,253 631 1.69 
Other investment securities(3)
54,591 260 1.91 41,569 185 1.78 
FHLB and FRB stock17,355 226 5.21 14,172 176 4.97 
Short-term investments29,541 54 0.73 55,100 16 0.12 
Total interest-earning assets2,551,180 27,031 4.24 2,483,447 24,599 3.96 
Non-interest-earning assets165,527   137,893   
Total assets$2,716,707   $2,621,340   
Interest-bearing liabilities      
Transaction accounts$502,763 343 0.27 $499,040 248 0.20 
Money market accounts767,433 509 0.27 662,919 282 0.17 
Certificates of deposit73,560 114 0.62 45,993 112 0.97 
Wholesale deposits12,350 92 2.98 162,580 301 0.74 
Total interest-bearing deposits1,356,106 1,058 0.31 1,370,532 943 0.28 
FHLB advances449,599 1,666 1.48 405,855 1,284 1.27 
Other borrowings51,018 647 5.07 32,447 443 5.46 
Junior subordinated notes(5)
— — — 10,066 277 11.01 
Total interest-bearing liabilities1,856,723 3,371 0.73 1,818,900 2,947 0.65 
Non-interest-bearing demand deposit accounts557,086   527,441   
Other non-interest-bearing liabilities57,615   56,691   
Total liabilities2,471,424   2,403,032   
Stockholders’ equity245,283   218,308   
Total liabilities and stockholders’ equity$2,716,707   $2,621,340   
Net interest income $23,660   $21,652  
Interest rate spread  3.51 %  3.31 %
Net interest-earning assets$694,457   $664,547   
Net interest margin  3.71 %  3.49 %
Average interest-earning assets to average interest-bearing liabilities137.40 %  136.54 %  
Return on average assets(4)
1.61   1.26   
Return on average common equity(4)
18.79   15.09   
Average equity to average assets9.03   8.33   
Non-interest expense to average assets(4)
2.86   2.77   
(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.
(5)The calculation for the three months ended June 30, 2022 includes $12,000 in accelerated amortization of debt issuance costs.

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Table of Contents
 For the Three Months Ended September 30, For the Six Months Ended June 30,
 2017 2016 20222021
 Average
Balance		 Interest 
Average
Yield/Rate(5)
 Average
Balance		 Interest 
Average
Yield/Rate(5)
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      
Commercial real estate and other mortgage loans(1)
 $966,711
 $10,922
 4.52% $947,167
 $10,656
 4.50%
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)
 448,955
 6,187
 5.51
 459,871
 6,651
 5.79
Commercial and industrial loans(1)
726,376 18,811 5.18 765,117 19,500 5.10 
Direct financing leases(1)
 28,648
 303
 4.23
 30,231
 341
 4.51
Direct financing leases(1)
16,030 365 4.55 21,071 466 4.42 
Consumer and other loans(1)
 26,577
 274
 4.12
 23,662
 368
 6.22
Consumer and other loans(1)
50,449 894 3.54 45,335 805 3.55 
Total loans and leases receivable(1)
 1,470,891
 17,686
 4.81
 1,460,931
 18,016
 4.93
Total loans and leases receivable(1)
2,258,872 48,759 4.32 2,203,267 46,386 4.21 
Mortgage-related securities(2)
 136,330
 613
 1.80
 149,414
 567
 1.52
Mortgage-related securities(2)
180,832 1,564 1.73 156,249 1,297 1.66 
Other investment securities(3)
 36,106
 158
 1.75
 34,042
 131
 1.54
Other investment securities(3)
52,584 475 1.81 41,871 372 1.78 
FHLB and FRB stock 3,949
 25
 2.53
 2,163
 21
 3.88
FHLB and FRB stock15,688 398 5.07 13,323 329 4.94 
Short-term investments 44,478
 152
 1.37
 103,549
 163
 0.63
Short-term investments30,321 70 0.46 39,922 22 0.11 
Total interest-earning assets 1,691,754
 18,634
 4.41
 1,750,099
 18,898
 4.32
Total interest-earning assets2,538,297 51,266 4.04 2,454,632 48,406 3.94 
Non-interest-earning assets 85,768
     67,884
    Non-interest-earning assets153,316 144,741 
Total assets $1,777,522
     $1,817,983
    Total assets$2,691,613 $2,599,373 
Interest-bearing liabilities            Interest-bearing liabilities
Transaction accounts $240,035
 364
 0.61
 $182,743
 113
 0.25
Transaction accounts$517,923 597 0.23 $510,024 498 0.20 
Money market accounts 588,811
 700
 0.48
 632,415
 758
 0.48
Money market accounts775,808 848 0.22 660,319 557 0.17 
Certificates of deposit 57,716
 150
 1.04
 63,581
 152
 0.96
Certificates of deposit63,098 169 0.54 51,677 288 1.11 
Wholesale deposits 346,641
 1,494
 1.72
 465,273
 1,847
 1.59
Wholesale deposits14,282 210 2.94 164,654 619 0.75 
Total interest-bearing deposits 1,233,203
 2,708
 0.88
 1,344,012
 2,870
 0.85
Total interest-bearing deposits1,371,111 1,824 0.27 1,386,674 1,962 0.28 
FHLB advances 103,401
 351
 1.36
 4,991
 18
 1.44
FHLB advances417,518 2,702 1.29 386,371 2,533 1.31 
Other borrowings(4)
 24,400
 411
 6.74
 24,976
 435
 6.97
Junior subordinated notes 10,013
 281
 11.23
 9,998
 280
 11.20
Other borrowingsOther borrowings45,694 1,149 5.03 29,886 844 5.65 
Junior subordinated notes(5)
Junior subordinated notes(5)
4,898 504 20.58 10,064 552 10.97 
Total interest-bearing liabilities 1,371,017
 3,751
 1.09
 1,383,977
 3,603
 1.04
Total interest-bearing liabilities1,839,221 6,179 0.67 1,812,995 5,891 0.65 
Non-interest-bearing demand deposit accounts 224,961
     263,627
    Non-interest-bearing demand deposit accounts559,793 506,767 
Other non-interest-bearing liabilities 15,376
     11,098
    Other non-interest-bearing liabilities50,117 65,146 
Total liabilities 1,611,354
     1,658,702
    Total liabilities2,449,131 2,384,908 
Stockholders’ equity 166,168
     159,281
    Stockholders’ equity242,482 214,465 
Total liabilities and stockholders’ equity $1,777,522
     $1,817,983
    Total liabilities and stockholders’ equity$2,691,613 $2,599,373 
Net interest income   $14,883
     $15,295
  Net interest income$45,087 $42,515 
Interest rate spread     3.32%     3.28%Interest rate spread3.37 %3.29 %
Net interest-earning assets $320,737
     $366,122
    Net interest-earning assets$699,076 $641,637 
Net interest margin     3.52%     3.50%Net interest margin3.55 %3.46 %
Average interest-earning assets to average interest-bearing liabilities 123.39%     126.45%    Average interest-earning assets to average interest-bearing liabilities138.01 %  135.39 %  
Return on average assets(5)
 0.58
     0.59
    
Return on average equity(5)
 6.22
     6.69
    
Return on average assets(4)
Return on average assets(4)
1.46   1.38   
Return on average common equity(4)
Return on average common equity(4)
16.74   16.75   
Average equity to average assets 9.35
     8.76
    Average equity to average assets9.01   8.25   
Non-interest expense to average assets(5)
 3.20
     3.47
    
Non-interest expense to average assets(4)
Non-interest expense to average assets(4)
2.84   2.73   
(1)The average balances of loans and leases include non-performing loans and leases and loans held for sale. Interest income related to non-performing loans and leases is recognized when collected. Interest income includes net loan fees collected in lieu of interest.
(2)Includes amortized cost basis of assets available-for-sale and held-to-maturity.
(3)Yields on tax-exempt municipal obligations are not presented on a tax-equivalent basis in this table.
(4)Average rate of other borrowings reflects the cost of prepaying a secured borrowing during the second quarter of 2017.
(5)Represents annualized yields/rates.

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




50
  For the Nine Months Ended September 30,
  2017 2016
  
Average
Balance
 Interest 
Average
Yield/Rate(5)
 
Average
Balance
 Interest 
Average
Yield/Rate(5)
  (Dollars in Thousands)
Interest-earning assets            
Commercial real estate and other mortgage loans(1)
 $957,408
 $31,861
 4.44% $934,615
 $32,366
 4.62%
Commercial and industrial loans(1)
 451,352
 19,863
 5.87
 466,729
 20,833
 5.95
Direct financing leases(1)
 29,161
 932
 4.26
 30,683
 1,039
 4.51
Consumer and other loans(1)
 27,780
 837
 4.02
 25,581
 923
 4.81
Total loans and leases receivable(1)
 1,465,701
 53,493
 4.87
 1,457,608
 55,161
 5.04
Mortgage-related securities(2)
 140,705
 1,845
 1.75
 145,599
 1,721
 1.58
Other investment securities(3)
 37,466
 480
 1.71
 32,518
 381
 1.56
FHLB and FRB stock 3,779
 73
 2.58
 2,482
 61
 3.28
Short-term investments 48,375
 415
 1.14
 107,369
 472
 0.59
Total interest-earning assets 1,696,026
 56,306
 4.43
 1,745,576
 57,796
 4.41
Non-interest-earning assets 82,628
     75,969
    
Total assets $1,778,654
     $1,821,545
    
Interest-bearing liabilities            
Transaction accounts $221,526
 885
 0.53
 $164,278
 273
 0.22
Money market accounts 601,455
 2,019
 0.45
 650,864
 2,453
 0.50
Certificates of deposit 55,888
 415
 0.99
 67,440
 446
 0.88
Wholesale deposits 374,083
 4,720
 1.68
 478,038
 5,789
 1.61
Total interest-bearing deposits 1,252,952
 8,039
 0.86
 1,360,620
 8,961
 0.88
FHLB advances 83,987
 784
 1.24
 8,941
 68
 1.01
Other borrowings(4)
 24,933
 1,401
 7.49
 26,982
 1,357
 6.71
Junior subordinated notes 10,009
 832
 11.08
 10,101
 835
 11.02
Total interest-bearing liabilities 1,371,881
 11,056
 1.07
 1,406,644
 11,221
 1.06
Non-interest-bearing demand deposit accounts 228,231
     246,238
    
Other non-interest-bearing liabilities 13,726
     11,126
    
Total liabilities 1,613,838
     1,664,008
    
Stockholders’ equity 164,816
     157,537
    
Total liabilities and stockholders’ equity $1,778,654
     $1,821,545
    
Net interest income   $45,250
     $46,575
  
Interest rate spread     3.36%     3.35%
Net interest-earning assets $324,145
     $338,932
    
Net interest margin     3.56%     3.56%
Average interest-earning assets to average interest-bearing liabilities 123.63%     124.10%    
Return on average assets(5)
 0.59
     0.80
    
Return on average equity(5)
 6.36
     9.26
    
Average equity to average assets 9.27
     8.65
    
Non-interest expense to average assets(5)
 3.15
     3.07
    
Table of Contents

(1)The average balances of loans and leases include non-performing loans and leases and loans held for sale. Interest income related to non-performing loans and leases is recognized when collected. Interest income includes net loan fees collected in lieu of interest.
(2)Includes amortized cost basis of assets available-for-sale and held-to-maturity.
(3)Yields on tax-exempt municipal obligations are not presented on a tax-equivalent basis in this table.
(4)Average rate of other borrowings reflects the cost of prepaying a secured borrowing during the second quarter of 2017.
(5)Represents annualized yields/rates.

Comparison of Net Interest Income for the Three and NineSix Months Ended SeptemberJune 30, 20172022 and 20162021


Net interest income decreased$412,000,increased $2.0 million, or 2.7%9.3%, and $1.3$2.6 million, or 2.8%6.0%, during the three and ninesix months ended SeptemberJune 30, 2017,2022, respectively, compared to the three and six months ended June 30, 2021. The increase in net interest income reflected an 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 and $3.2 million for the three and six months ended June 30, 2022, respectively, compared to $3.5 million and $6.6 million for the same periods in 2021. Excluding fees in lieu of interest and interest income from PPP loans, net interest income for the three and six months ended June 30, 2022 increased $4.2 million, or 24.0%, and $7.1 million, or 20.5%, respectively. Average gross loans and leases for the three and six months ended June 30, 2022 increased $49.6 million, or 2.2%, and $55.6 million, or 2.5%, respectively, compared to the three and six months ended June 30, 2021. Excluding net PPP loans, average gross loans and leases for the three and six months ended June 30, 2022 increased $267.1 million, or 13.4%, and $275.0 million, or 14.0%, respectively, compared to the three and six months ended June 30, 2021.
Net interest margin increased to 3.71% and 3.55% for the three and six months ended June 30, 2022, respectively, compared to 3.49% and 3.46% for the three and six months ended June 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% and 3.35% for the three and six months ended June 30, 2022, respectively, compared to 3.20% for both the three and six months ended June 30, 2021. Adjusted net interest margin is a non-GAAP measure representing net interest income excluding the 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 months ended June 30, 2022 was 4.52% and 4.32%, respectively, compared to 4.24% and 4.21% for the three and six months ended June 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 months ended June 30, 2022 was 4.21% and 4.06%, respectively, compared to 3.91% and 3.92% for the three and six months ended June 30, 2021. Similarly, the yield on average interest-earning assets for the three and six months ended June 30, 2022 measured 4.24% and 4.04%, respectively, compared to 3.96% and 3.94% for the three and six months ended June 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 months ended June 30, 2022 was 3.96% and 3.81%, respectively, compared to 3.64% and 3.66% for the three and six months ended June 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 basis points during the first half 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 months ended June 30, 2022 increased to 0.29% and 0.24%, respectively, from 0.21% and 0.22% for the three and six months ended June 30, 2021. The average rate paid on total interest-bearing liabilities for the three and six months ended June 30, 2022 increased to 0.73% and 0.67%, respectively, from 0.65% for both the three and six months ended June 30, 2021. 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 of maturing FHLB advances at higher fixed rates. The daily average effective federal funds rate for the three and six months ended June 30, 2022 increased 70 and 38 basis points, respectively, compared to the same periods in 2016. In both periods of comparison, the decrease in net interest income was primarily attributable2021. This equates to a decrease in the yield on average total loansbeta of 11% and leases receivable resulting from a decrease in loan prepayment fees and interest income collected on loans previously in non-accrual status, combined with a shift in the mix of loan originations toward lower-yielding conventional commercial loans. The decrease was partially offset by increased rates on certain variable-rate loans following the FOMC’s decision to raise the targeted federal funds rate in December 2016, March 2017 and June 2017 and successful efforts to manage various in-market deposit rates and utilize an efficient mix of wholesale funding sources.
The yield on average earning assets for the three months ended September 30, 2017 increased nine basis points to 4.41%, compared to 4.32% for the three months ended September 30, 2016. The increase was principally due to a $68.6 million year-over-year decrease in average cash held at the Federal Reserve, a higher yielding securities portfolio and increased rates on certain variable-rate loans following the FOMC’s decision to raise the targeted federal funds rate in December 2016, March 2017 and June 2017. The decrease in average cash held at the Federal Reserve was primarily due to growth in our loan and lease portfolio combined with a purposeful net reduction in wholesale funding sources. The increase in the yield on average earning assets was partially offset by a decrease in loan prepayment fees and interest income collected on loans previously in non-accrual status, combined with a shift in the mix of loan originations toward lower-yielding conventional commercial loans and a year-over-year increase in average non-accrual loans.
The yield on average earning assets for the nine months ended September 30, 2017 increased two basis points to 4.43%, compared to 4.41% for the nine months ended September 30, 2016. The reasons for the increase are consistent with the explanations discussed above with respect to yield on average earning assets for the three months ended September 30, 2017.
The weighted average rate paid on our interest-bearing deposits for the three months ended September 30, 2017 increased three basis points to 0.88%, compared to 0.85% for the three months ended September 30, 2016. The moderate rate increase is primarily attributable to a shift in our in-market deposit funding base as average transaction account balances increased $57.3 million to $240.0 million with a weighted average rate paid of 0.61%, while average money market account balances decreased $43.6 million to $588.8 million with a weighted average rate paid of 0.48%. The increase in transaction account balances is related to successful efforts in attracting stable in-market deposits from municipality relationships throughout our markets, more than offsetting the decrease in money market account balances which was driven by pricing discipline. Despite the resulting increase in weighted average rate paid due to the change in in-market deposit mix, the increase in transaction account balances at markets rates has reduced our need to fully replenish the Bank’s wholesale funding sources as wholesale deposits are purposefully runoff in favor of the currently more cost effective Federal Home Loan Bank (“FHLB”) advances.
The weighted average rate paid on our interest-bearing deposits for the nine months ended September 30, 2017 decreased two basis points to 0.86%, compared to 0.88% for the nine months ended September 30, 2016. The decrease was primarily attributable to a positive interest-bearing deposit mix change, as average in-market deposit accounts decreased only $3.7 million for the nine months ended September 30, 2017, while average higher-rate wholesale deposits decreased $104.0 million during the same period.
The rising rate environment has resulted in modest increases in deposit pricing as necessary to serve the Company’s client relationships. Management believes a modest increase in average total interest-bearing deposit costs may continue as the Company looks to effectively manage deposit relationships amid intense competition and continued expectation of a rising rate environment.
The overall weighted average rate paid on interest-bearing liabilities was 1.09% and 1.07%5% for the three and ninesix months ended SeptemberJune 30, 2017, compared to 1.04% and 1.06% for the three and nine months ended September 30, 2016. The primary reason for only a moderate increase in rate paid, despite a rising rate environment, was a favorable change in the Corporation’s wholesale funding mix as fixed rate maturing wholesale deposits with longer original maturity terms were replaced with fixed rate FHLB advances at lower rates. In addition, the weighted average rate paid2022, respectively, on interest-bearing liabilities continued to benefit from a relatively stable level of in-market interest-bearing deposits, on average. Consistent with the Corporation’s longstanding funding strategy to use the most efficient and cost effective source of wholesale funds, management will continue to replace maturing wholesale deposits with fixed rate FHLB advances at various maturity terms commensurate with the Bank’s funding needs. Average FHLB advances for the three and nine months ended September 30, 2017 increased $98.4 million and $75.0 million to $103.4 million and $84.0 million at a weighted average rate paid of 1.36% and 1.24%, respectively. As of September 30, 2017, the weighted average original maturity of our FHLB term advances was 2.3 years.deposits.

We expect to continue to effectively manage the Corporation’s liability structure in both term and rate to deliver a stable net interest margin within our target range. Further, we expect continuedManagement believes its success in attractinggrowing in-market deposit relationships, disciplined loan pricing, and increased production in our Wisconsin and Kansas markets which we believe will contribute to our ability to maintain an appropriate costexisting higher-yielding specialized lending lines of funds. Average in-market client deposits - comprised of all transaction accounts, money market accounts and non-wholesale deposits - were $1.112 billion and $1.107 billion for the three and nine months ended September 30, 2017, compared to $1.142 billion and $1.129 billion for the three and nine months ended September 30, 2016.
Net interest margin increased two basis points to 3.52% for the three months ended September 30, 2017, compared to 3.50% for the three months ended September 30, 2016 primarily due to a positive change in earning asset mix. Average total loans and leases receivable represented 83% of total average assets for the three months ended September 30, 2017, compared to 80% for the same period in 2016 which benefited net interest margin by eight basis points. This was offset by an eight basis point decrease attributable to the increase in FHLB term advances during the period of comparison. In addition, the Corporation’s ability to manage in-market deposit rates during a rising rate environment while also allowing higher-rate wholesale deposits to runoff, positively affected net interest margin by approximately two basis points. Replacing wholesale deposits with FHLB advances is consistent with our funding philosophy to utilize the most efficient and cost effective sources of wholesale funds and is expected to lower our FDIC assessment rate in future periods. Net interest margin for the nine months ended September 30, 2017 and 2016 was 3.56%.
Management believes the successful efforts to optimize funding costs and profitably expand loan balancesbusiness will allow the Company to continueCorporation to maintain a net interest margin of at least 3.50% or better. However,, 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, given the nature of the Company’s asset-based lending business.margin. Net interest margin may also experience volatility due to events such as the collection of interest on loans previously in non-accrual status or the accumulation of significant short-term deposit inflows. 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 based upon credit risk and other subjective factors pursuant to our allowance for loan and lease loss methodology, which is based on the magnitude of current and historical net charge-offs recorded inthroughout 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 the section in this MD&A entitled Allowance for Loan and Lease Losses, below, for further information regarding our allowance for loan and lease loss methodology.
We recorded provision expense of $1.5The Corporation recognized a $3.7 million and $5.7$4.6 million provision benefit for the three and six months ended June 30, 2022, respectively, compared to a benefit of $1.0 million and $3.0 million for the three and ninesix months ended SeptemberJune 30, 2017, respectively, compared2021. The provision benefit for the three months ended June 30, 2022 was primarily due to $3.5a net recovery of $4.2 million and $6.8 million for the same time periods in 2016. Provision for the nine months ended September 30, 2017 reflected $4.6 million of estimated losses relateda $185,000 reduction due to the previously disclosed $6.7 million Wisconsin-based commercial and industrial impaired loan. Management continues to pursue all potential repayment sources related to this credit. The provision for the nine months ended September 30, 2017 also reflected $5.0 million in charge-offs related to the Corporation’s remaining energy sector exposure, which wasqualitative risk factor improvements, partially offset by a $2.3$527,000 increase in the general reserve due to loan growth. The provision benefit for the six months ended June 30, 2022 was primarily due to a net recovery of $4.4 million, a $601,000 reduction due to qualitative risk factor improvements, and a $251,000 net decrease in specific reserve related to this credit as of December 31, 2016. These increases were alsoreserves, partially offset by a $762,000 increase in the reversal ofgeneral reserve due to loan growth. The net recovery for the three and six months ended June 30, 2022 included a $1.8$4.1 million specific reserve based on the full repayment ofprincipal recovery relating to a previously disclosed impaired construction loanlegacy SBA relationship originated in our Kansas City market. May 2016 and fully charged-off in December 2020.
The payoff proceeds were received in October 2017, which will reduce non-performing loans by $2.5 million infollowing table shows the fourth quartercomponents of 2017.the provision for loan and lease losses for the three and six months ended June 30, 2022 compared to the three months ended June 30, 2021.
For the Three Months Ended June 30,For the Six Months Ended June 30,
2022202120222021
(In Thousands)
Change in general reserve due to subjective factor changes$(185)$(652)$(601)$430 
Change in general reserve due to historical loss factor changes64 (1,687)(142)(2,671)
Charge-offs85 2,894 107 3,038 
Recoveries(4,247)(545)(4,457)(3,218)
Change in specific reserves on impaired loans, net29 (1,466)(251)(1,660)
Change due to loan growth, net527 498 762 1,055 
Total provision for loan and lease losses$(3,727)$(958)$(4,582)$(3,026)
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The addition of specific reserves on impaired loans represents new specific reserves established when collateral shortfalls or government guaranty deficiencies are present, while conversely 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 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 ratio.loss rate. Refer to the section in this MD&A entitled 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 NineSix Months Ended SeptemberJune 30, 20172022 and 20162021
Non-Interest Income
Non-interest income consists primarily of fees earnedincreased $551,000, or 8.7%, to $6.9 million for trust and investment services, gains on sale of SBA loans, service charges on deposits and loan fee income. For the three months ended SeptemberJune 30, 2017 non-interest income increased by $699,000, or 19.2%,2022 compared to $4.3 million from $3.6$6.3 million for the same period in 2016. For2021. The increase in total non-interest income for the ninethree months ended SeptemberJune 30, 2017 non-interest2022 was due to increases in private wealth management services fee income, decreasedloan fee income, service charges on deposits, and commercial loan swap fee income. These favorable variances were partially offset by $917,000,a decrease in gains on the sale of SBA loans. Non-interest income for the six months ended June 30, 2022 increased $742,000, or 6.5%5.5%, to $13.1$14.3 million from $14.1compared to $13.5 million for the same period in 2016.2021. The increase in total non-interest income for the six months ended June 30, 2022 reflected strong private wealth management services fee income, an increase in other non-interest income, led by mezzanine fund investment income, and an increase in commercial loan swap fee income, loan fee income, and service charges on deposits. These favorable variances were partially offset by a decrease in gains on the sale of SBA loans.
Management continues to focus on revenue growth from multiple non-interest income sources in order to maintain a diversified revenue stream through greater contributioncontributions from fee-based revenues. Total non-interest income accounted for 22.6%22.5% and 22.5%24.0% of our total revenues for the three and ninesix months ended SeptemberJune 30, 2017,2022, respectively, compared to 19.2%22.6% and 23.2%24.1% for the three and ninesix months ended SeptemberJune 30, 2016. Management believes the expected steady and gradual expansion of our rebuilt SBA lending program will drive our fee income ratio towards our current strategic target of 25.0%.2021.
The components of non-interest income were as follows for the three and nine months ended September 30, 2017 and 2016:follows:
For the Three Months Ended June 30,For the Six Months Ended June 30,
For the Three Months Ended September 30, For the Nine Months Ended September 30,20222021$ Change% Change20222021$ Change% Change
2017 2016 $ Change % Change 2017 2016 $ Change % Change(Dollars in Thousands)
(In Thousands)
Trust and investment services fee income$1,653
 $1,364
 $289
 21.2 % 4,930
 3,981
 $949
 23.8 %
Private wealth management services fee incomePrivate wealth management services fee income$2,852 $2,744 $108 3.9%$5,693 $5,151 $542 10.5%
Gain on sale of SBA loans606
 347
 259
 74.6
 1,501
 3,854
 (2,353) (61.1)Gain on sale of SBA loans951 1,203 (252)(20.9)1,537 2,281 (744)(32.6)
Gain on sale of residential mortgage loans—
 198
 (198) (100.0) 26
 540
 (514) (95.2)
Service charges on deposits756
 772
 (16) (2.1) 2,287
 2,247
 40
 1.8
Service charges on deposits1,041 941 100 10.62,040 1,859 181 9.7
Loan fees391
 506
 (115) (22.7) 1,525
 1,791
 (266) (14.9)Loan fees697 569 128 22.51,349 1,114 235 21.1
Increase in cash surrender value of bank-owned life insurance314
 244
 70
 28.7
 940
 730
 210
 28.8
Increase in cash surrender value of bank-owned life insurance350 350 — NM698 699 (1)(0.1)
Net gain (loss) on sale of securitiesNet gain (loss) on sale of securities— 29 (29)NM— 29 (29)NM
Swap feesSwap fees471 — 471 NM697 684 13 1.9
Other non-interest income619
 209
 410
 196.2
 1,931
 914
 1,017
 111.3
Other non-interest income510 485 25 5.22,244 1,699 545 32.1
Total non-interest income$4,339
 $3,640
 $699
 19.2
 $13,140
 $14,057
 $(917) (6.5)Total non-interest income$6,872 $6,321 $551 8.7$14,258 $13,516 $742 5.5
Fee income ratio(1)
22.6% 19.2%     22.5% 23.2%    
Fee income ratio(1)
22.5 %22.6 %24.0 %24.1 %
(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).
The decrease in total non-interest income for the nine months ended September 30, 2017 primarily reflected lower gains from SBA and residential mortgage loans sales stemming from the Corporation’s decision to rebuild its SBA platform and to exit the residential mortgage loan origination business. The decrease was partially offset by record trust and investment services fee income, an increase in loan swap fee income and an increase in bank-owned life insurance (“BOLI”) fee income driven by a $9.8 million purchase of additional BOLI in December 2016.
Trust and investment services fee income    Private wealth management service fees increased by $289,000,$108,000, or 21.2%3.9%, and $949,000,$542,000, or 23.8%10.5%, to a record $1.7 million and $4.9 million for the three and ninesix months ended SeptemberJune 30, 2017, respectively,2022, compared to $1.4 million and $4.0 million for the three and ninesix months ended SeptemberJune 30, 2016. This increase was2021. Private wealth management fee income is primarily driven by growth inthe amount of assets under management and administration, attributable to both increased equity market valuesas well as the mix of business at different fee structures, and new client relationships. At Septembercan be positively or negatively influenced by the timing and magnitude of volatility within the capital markets. As of June 30, 2017, there were a record $1.240 billion of2022, private wealth and trust assets under management and administration totaled $2.554 billion, decreasing $10.6 million, or 0.4%, compared to $977.0 million at December 31, 2016$2.564 billion as of June 30, 2021, as new client relationships and $935.6 million at Septembernew money from existing clients was more than offset by the decline in market values.
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Commercial loan interest rate swap fee income was $471,000 and $697,000 for the three and six months ended June 30, 2016. Assets under administration were $176.5 million at September 30, 20172022, respectively, compared to $227.4no activity for the three months ended June 30, 2021 and $684,000 for the six months ended June 30, 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 million at December 31, 2016as of June 30, 2022, compared to $637.0 million as of June 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 $231.8 million at Septemberthe interest rate environment in any given quarter.
Loan fees increased $128,000, or 22.5%, and $235,000, or 21.1%, for the three and six months ended June 30, 2016.2022, respectively, compared to same periods in 2021. The decreaseincrease was due to an increase in assets under administration reflectedconventional, SBA, and floorplan financing activity generating additional service fee income.
Service charges on deposits increased $100,000, or 10.6%, and $181,000, or 9.7%, for the transferthree and six 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 client assets from assets under administration to assets under management. The retirement plan services industry is undergoing a migration from advisednew services to fiduciary services. Consequently, duringexisting client relationships.
Other non-interest income increased $25,000, or 5.2%, and $545,000, or 32.1% for the first quarter of 2017, one largethree and several smaller retirement plans changed their service model, which resultedsix months ended June 30, 2022, respectively, compared to the same periods in assets moving2021. The increase for the six months ended June 30, 2022 was primarily due to full fiduciary status. We anticipate there will be similar migration of additional assets because of this trendabove average returns from the Corporation’s investments in the future.mezzanine funds.

GainsGain on sale of SBA loans for the three and ninesix months ended SeptemberJune 30, 2017 totaled $606,000 and $1.5 million, respectively, an increase of $259,000,2022 decreased $252,000, or 74.6%, compared to the three months ended September 30, 2016 and a decrease of $2.4 million, or 61.1%, compared to the nine months ended September 30, 2016. In order to meet market demand and drive high-quality growth, we continue to ensure current and future SBA loan production is achieved in a sustainable manner. In 2018, we anticipate production to continue to grow at a moderate pace in tandem with the steady and gradual expansion of our rebuilt SBA lending program.
Loan fees for the three and nine months ended September 30, 2017 totaled $391,000 and $1.5 million, respectively, a decrease of $115,000, or 22.7%20.9%, and $266,000,$744,000, or 14.9%32.6%, fromrespectively, compared to the same periods in 2016. The decrease in loan fees was primarily attributable to a decrease in fees commensurate with a decrease in both SBA and asset-based lending production, specifically the fee income generated from packaging SBA loans and asset-based lending audit fee income.
Other non-interest income for the three and nine months ended September 30, 2017 totaled $619,000 and $1.9 million, respectively, an increase of $410,000, or 196.2%, and $1.0 million, or 111.3%, from the same periods in 2016. During the three and nine months ended September 30, 2017, the Corporation originated commercial real estate loans in which the Corporation offered the client a floating rate and interest rate swap and then offset the client swap with a counter-party dealer. The execution of these transactions generated $418,000 and $866,000 in swap fee income for the three and nine months ended September 30, 2017, respectively, compared to no swap fee income for the three months ended September 30, 2016 and $21,000 for the nine months ended September 30, 2016. We believe due to the market’s assumption of a rising interest rate environment throughout 2017 and into 2018, we could see additional loan demand for these types of relationship-based opportunities.2021.
Comparison of Non-Interest Expense for the Three and NineSix Months Ended SeptemberJune 30, 20172022 and 20162021
Non-Interest Expense
The components of non-interest expense were as follows for the three and nine months ended September 30, 2017 and 2016:
 For the Three Months Ended September 30, For the Nine Months Ended September 30,
 2017 2016 $ Change % Change 2017 2016 $ Change % Change
 (Dollars in Thousands)
Compensation$7,645
 $7,637
 $8
 0.1 % $24,710
 $24,454
 $256
 1.0 %
Occupancy527
 530
 (3) (0.6) 1,521
 1,538
 (17) (1.1)
Professional fees995
 1,065
 (70) (6.6) 3,046
 2,888
 158
 5.5
Data processing592
 623
 (31) (5.0) 1,810
 1,971
 (161) (8.2)
Marketing594
 528
 66
 12.5
 1,546
 1,710
 (164) (9.6)
Equipment285
 292
 (7) (2.4) 868
 913
 (45) (4.9)
Computer software715
 539
 176
 32.7
 2,037
 1,607
 430
 26.8
FDIC insurance320
 444
 (124) (27.9) 1,081
 989
 92
 9.3
Collateral liquidation costs371
 89
 282
 316.9
 556
 204
 352
 172.5
Net loss on foreclosed properties—
 —
 —
 NM
 —
 93
 (93) (100.0)
Impairment on tax credit investments112
 3,314
 (3,202) (96.6) 338
 3,520
 (3,182) (90.4)
SBA recourse provision1,315
 375
 940
 250.7
 2,095
 449
 1,646
 366.6
Other non-interest expense760
 317
 443
 139.7
 2,404
 1,574
 830
 52.7
Total non-interest expense$14,231
 $15,753
 $(1,522) (9.7) $42,012
 $41,910
 $102
 0.2
Total adjusted operating expense (1)
$12,790
 $12,048
     $39,437
 $37,800
    
Compensation expense to total adjusted operating expense59.77% 63.39%     62.66% 64.69%    
Full-time equivalent employees251
 263
            

(1)Total adjusted operating expense excludes the impact of discrete items as previously defined in the non-GAAP efficiency ratio calculation.
Non-interest expense for the three and six months ended SeptemberJune 30, 2017 decreased2022 increased by $1.5$1.3 million, or 9.7%7.0%, to $14.2and $2.8 million, or 7.8%, respectively, compared to $15.8the 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 million, or 9.8%, and $3.2 million, or 9.0%, for the three and six months ended June 30, 2022, respectively, compared to the same periodperiods in 2016. During the third quarter of 2016, in accordance with the

applicable accounting guidance, the Corporation recognized $3.2 million in nonrecurring tax credit investment impairment expense, which corresponded with the $3.6 million in historic tax credits recognized during the quarter, providing a net benefit to after-tax earnings of $430,000. Excluding the impairment impact of tax credit investments, third quarter 2016 non-interest expense totaled $12.6 million.2021. The increase in non-interestoperating expense was primarily due to an increase in collateral liquidation costscompensation, professional fees, and SBA recourse provision, partially offset by a decreasemarketing expenses.    
The components of non-interest expense were as follows:
For the Three Months Ended June 30,For the Six Months Ended June 30,
20222021$ Change% Change20222021$ Change% Change
(Dollars in Thousands)
Compensation$14,020 $13,255 $765 5.8 %$27,658 $25,912 $1,746 6.7 %
Occupancy568 533 35 6.6 1,123 1,085 38 3.5 
Professional fees1,298 913 385 42.2 2,468 1,778 690 38.8 
Data processing892 798 94 11.8 1,673 1,569 104 6.6 
Marketing670 511 159 31.1 1,170 902 268 29.7 
Equipment235 261 (26)(10.0)479 506 (27)(5.3)
Computer software1,117 1,129 (12)(1.1)2,199 2,244 (45)(2.0)
FDIC insurance296 280 16 5.7 610 642 (32)(5.0)
Other non-interest expense360 504 (144)(28.6)900 876 24 2.7 
Total non-interest expense$19,456 $18,184 $1,272 7.0 $38,280 $35,514 $2,766 7.8 
Total operating expense(1)
$19,685 $17,932 $1,753 9.8 $38,573 $35,383 $3,190 9.0 
Full-time equivalent employees333 319 333 319 

(1)Total operating expense represents total non-interest expense, adjusted to exclude the impact of discrete items as previously defined in FDIC insurancethe non-GAAP efficiency ratio calculation, above.
    Compensation expense for the three and six months ended June 30, 2022 increased $765,000, or 5.8%, and $1.7 million, or 6.7%, respectively, compared to the three and six months ended June 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 to support the Bank’s growth plans. Management believes there will be upward pressure on compensation throughout the remainder of the year as the CorporationBank continues to reduce its reliance on wholesale depositsopportunistically invest in favor of FHLB advances.    
Collateral liquidation costsnew talent and retain existing talent in the competitive market. Average full-time equivalent employees for the three months ended SeptemberJune 30, 2017 were $371,0002022 increased to 321, up 2.89%, compared to $89,000 for the same period in 2016. The increase primarily reflected the Corporation’s workout process related to two non-performing loans.    
SBA recourse provision312 for the three months ended SeptemberJune 30, 2017 was $1.3 million compared to $375,000 for the same period in 2016. The increase reflected refinements to the recourse reserve estimate due to the migration of certain credits with potential guaranty eligibility issues during the third quarter.2021.
Management has extensively overhauled the previously acquired SBA lending platformProfessional fees increased $385,000, or 42.2%, and implemented best practices in the critical areas of credit, operations and compliance. These essential functions are overseen by a team of experienced SBA professionals, including a Director of SBA Credit, Director of SBA Operations and SBA Compliance Manager, who all joined the team within the past 12 months. With these major pieces of the rebuild in place in 2017, we are now actively recruiting more producers in order to achieve the appropriate mix of producers and internal support staff to drive an optimal level of efficiency in our SBA business model.
Despite these enhancements to the SBA platform, changes to SBA recourse provision may be a source of non-interest expense volatility in future quarters; however, we believe the frequency and volatility in SBA recourse provision should diminish over time as we continue to originate new SBA loans with our rebuilt platform, the existing portfolio amortizes down and ongoing remediation efforts mitigate potential losses. As of September 30, 2017, the total outstanding balance of sold SBA loans originated prior to 2017 was $97.3 million, of which $8.4 million were impaired. The total outstanding balance of sold SBA loans originated in 2017 was $6.0 million. Based on management’s estimate of losses in the guaranteed portion of sold SBA loans, a recourse reserve of $2.7 million was outstanding as of September 30, 2017.
Other non-interest expense increased by $443,000,$690,000, or 139.7%38.8%, to $760,000 for the three and six months ended SeptemberJune 30, 2017 from $317,000 for2022, respectively, compared to the three and six months ended SeptemberJune 30, 2016.2021. The increase was primarily due to the Corporation historically reflecting its quarterly allocation of net income/loss from its equity investments in two mezzanine funds in other non-interest expense. Due to the underlying funds being in an earnings position for a sustained period of time, the Corporation recognized its share of earnings in other non-interest income for the three months ended September 30, 2017.
Non-interest expense for the nine months ended September 30, 2017 increased by $102,000, or 0.2%, to $42.0 million compared to $41.9 million for the same period in 2016. Excluding the impairment impact of tax credit investments, non-interest expense for the nine months ended September 30, 2016 totaled $38.4 million. The increase in non-interest expense was primarily due to an increase in computer softwarerecruiting expense, collateral liquidation costs, SBA recourse provisionaudit expenses, and a general increase in other non-interest expense, partially offset by a decrease in marketing costs, data processing and net losses on foreclosed properties.professional consulting services for various projects.
Computer softwareMarketing expense increased by $430,000,$159,000, or 26.8%31.1%, to $2.0 million for the nine months ended September 30, 2017 from $1.6 million for the nine months ended September 30, 2016. The increase was principally due to investments in technology platforms, continuing our strategic focus on scaling the Corporation to efficiently execute our growth strategy.
SBA recourse provision for the nine months ended September 30, 2017 was $2.1 million compared to $449,000 for the same period in 2016. The reasons for the increase in SBA recourse provision are consistent with the explanations discussed above with respect to SBA recourse provisionand $268,000, or 29.7%, for the three and six months ended SeptemberJune 30, 2017.    
Other non-interest expense increased by $830,000, or 52.7%,2022, respectively, compared to $2.4 million for the ninethree and six months ended SeptemberJune 30, 2017 from $1.6 million for the nine months ended September 30, 2016.2021. The increase was primarily due to an increase in business development efforts as the Corporation historically reflecting its quarterly allocation of net income/loss from its equity investments in two mezzanine funds in other non-interest expense. Duereturns to the underlying funds being in an earnings position for a sustained period of time, the Corporation recognized its share of earnings in other non-interest income for the nine months ended September 30, 2017.pre-pandemic spending levels.
Marketing costs decreased $164,000, or 9.6%, to $1.5 million for the nine months ended September 30, 2017 from $1.7 million for the nine months ended September 30, 2016. The favorable variance is primarily due to a purposeful reduction

or delay of certain advertising initiatives during the current year as management works to align expense growth with expected revenue production.
Expense management and strategic investments are critical components of our growth strategy and our culture, from our limited branch network and unique funding model, to our investments in talent and technology. We are diligently managing our operating costs to align with revenue expectations while continuing to make investments that enhance our business and our ability to serve current and prospective clients.
Income Taxes
Income tax expense was $2.8totaled $5.8 million for the ninesix months ended SeptemberJune 30, 2017, with2022 compared to an income tax expense of $5.6 million for the six months ended June 30, 2021. The effective tax rate for the six months ended June 30, 2022 was 23.7% compared to 23.6% for the six months ended June 30, 2021. For 2022, the Corporation expects to report an effective tax rate of 26.3%, comparedapproximately 23% as management intends to incomecontinue actively pursuing tax expense of $1.0 million for the nine months ended September 30, 2016, with an effective tax rate of 8.0%. During the third quarter of 2016, the Corporation recognized $3.6 million in historic tax credits. No significant discrete items were recognized during 2017.credit opportunities.
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 $5.0$124.1 million,, or 0.3%4.7%, to $1.786$2.777 billion as of SeptemberJune 30, 20172022 compared to $1.781$2.653 billion at December 31, 2016.2021. The increase in total assets was primarily driven by an increase in cash and loans and leases receivablereceivable. Total liabilities increased by $106.6 million, or 4.4%, to $2.527 billion at June 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 other assets,subordinated debentures, partially offset by a declinedecrease in ourdeposits and payoff of junior subordinated debentures. Total stockholders’ equity increased by $17.5 million, or 7.5%, to $249.9 million at June 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.
Cash and Cash Equivalents
    Cash and cash equivalents include short-term investments and available-for-sale securities portfolio.
Short-Term Investments
cash and due from banks. Cash and due from banks increased $29.6 million to $39.3 million at June 30, 2022 principally due to a routine temporary increase in cash related to client funds in-transit. Short-term investments decreasedincreased by $10.4$8.8 million, or 16.5%, to $52.5$56.2 million at SeptemberJune 30, 20172022 from $62.9$47.4 million at December 31, 2016.2021. 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-sheeton-balance sheet liquidity program. The decrease in short-term investments primarily reflected a reduction in cashAs of June 30, 2022 and December 31, 2021, interest-bearing deposits held at the FRB driven by a decrease in both in-marketwere $55.5 million and wholesale deposits and modest loan growth. As of September 30, 2017, our total investment in commercial paper, which is also considered a short-term investment, was $13.4$47.0 million, as compared to $20.3 million at December 31, 2016. We approach our decisions to purchase commercial paper with similar rigor and underwriting standards as applied to our loan and lease portfolio. The original maturities of the commercial paper are usually 60 days or less and provide an attractive yield in comparison to other short-term alternatives. These investments also assist us in maintaining a shorter duration of our overall investment portfolio which we believe is necessary to take advantage of an anticipated rising-rate environment. 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, when opportunities are presented and the level of our available-for-sale securities portfolio. Please refer to the section entitled Liquidity and Capital Resources, below, for further discussion.
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Securities
Total securities, including available-for-sale and held-to-maturity, decreased by $14.5$2.8 million, or 1.3%, to $170.0$222.6 million, or 8.0% of total assets at SeptemberJune 30, 20172022 compared to $184.5$225.4 million, or 8.5% of total assets at December 31, 2016.2021. During the ninesix months ended SeptemberJune 30, 2017, we2022 the Corporation recognized unrealized gainslosses of $199,000$19.7 million before income taxes through other comprehensive income.income, compared to unrealized losses of $1.6 million for the same period in 2021. These unrealized losses are solely driven by the recent shift in interest rates. As of SeptemberJune 30, 20172022 and December 31, 2016,2021, our overall securities portfolio, including available-for-sale securities and held-to-maturity securities, had an estimated weighted averageweighted-average expected maturity of 3.476.3 years and 3.305.7 years, respectively. Generally, ourOur 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 prior period prices and 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 SeptemberJune 30, 2017.2022.
We sold approximately $11.7 million of securities issued by government-sponsored enterprises during the nine months ended September 30, 2017 to proactively manage our securities portfolio to meet our long-term investment objectives.
Loans and Leases Receivable
Loans and leases receivable, net of allowance for loan and lease losses, increased by $17.0$50.9 million, or 1.2%, to $1.447$2.266 billion at SeptemberJune 30, 20172022 from $1.430$2.215 billion at December 31, 2016. As of September 30, 2017, multi-family loans were the largest contributor to2021 which was driven by commercial loan growth, increasing $32.3partially 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 million or 34.8%, to $125.1 million$2.258 billion at June 30, 2022 from $92.8 million$2.188 billion at December 31, 2016. 2021.
Total commercial real estate (“CRE”) loans increased $33.9 million to $1.488 billion, up from $1.455 billion at December 31, 2021. Owner occupied CRE and construction financing drove CRE loan growth as of June 30, 2022, increasing $22.8 million, and $24.1 million, respectively, from December 31, 2021, partially offset by a $5.7 million and $9.5 million decline in multi-family and non-owner occupied CRE loans, respectively.
There continues to be a concentration in commercial real estate (“CRE”), however, in general our composition of total loans and leases has remained relatively consistent due to balanced growth across our product offerings. CRE loans which represented 66%65.2% and 65%65.8% of our total loans, excluding net PPP loans, as of SeptemberJune 30, 20172022 and December 31, 2016,2021, respectively. As of SeptemberJune 30, 2017, approximately 19%2022, 17.4% of the CRE loans were owner-occupied CRE.CRE, compared to 16.2% as of December 31, 2021. We consider owner-occupied CRE more characteristic of the Corporation’s commercial and industrial (“C&I”)&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.
OurExcluding PPP loans, C&I portfolio decreased $3.1loans increased $30.1 million, or 0.7%, to $447.2$733.1 million at September 30, 2017 from $450.3$703.0 million at December 31, 2016 reflecting specialty finance prepayments2021. Despite elevated payoffs during the first quarter of 2022, management believes timely prior-period investments in conventional and continued competitive pressure amid softspecialized commercial loan demand overall. The countercyclical nature of the asset-based lending business may resulthas positioned C&I lending for strong and sustainable growth in 2022 and beyond. Including PPP loans, our C&I portfolio increased payoffs and fees collected in lieu of interest in periods of economic stability, with increased loan fundings and interest income during weaker economic markets. $10.5 million to $741.4 million from $730.8 million at December 31, 2021.
We will continue to emphasize actively pursuingpursue 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 trust and investmentprivate 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 asfrom banks operating in our primary geographic areas, attempt to deploy liquidity, 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, andallowing us to continue to grow at a modest pacegrowing in future quarters.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.
Non-performing loans increased $8.0 million, or 31.9%, to $33.2 million at September 30, 2017, compared to $25.2 million at December 31, 2016. The Corporation’s non-performing loans as a percentage
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Table of total gross loans and leases measured 2.26% and 1.74% at September 30, 2017 and December 31, 2016, respectively. Likewise, the ratio of non-performing assets to total assets increased to 2.01% at September 30, 2017, compared to 1.50% at December 31, 2016. Please refer to the section entitled Asset Quality, below, for additional information.Contents
Deposits
As of SeptemberJune 30, 2017,2022, deposits decreased by $115.1$88.6 million or 7.5% to $1.424$1.869 billion from $1.539$1.958 billion at December 31, 2016. The2021, primarily due to a $108.5 million and $22.7 million decrease in deposits was primarily driven by pricing discipline, in addition to a purposeful reduction in the level of wholesale deposits, which decreased by $83.5 million, or 20.0%, to $333.2 million at September 30, 2017 from $416.7 million at December 31, 2016. The decrease in wholesale deposits wastransaction accounts and money market accounts, respectively, partially offset by ana $59.9 million increase in certificates of deposit. The decline in balances was due to movement of client deposits to investment alternatives, seasonality within the levelBank’s municipality clients, tax payments, and normal course of interest-bearing transaction accounts, which increasedbusiness for continuing client relationships. Management believes the Bank’s deposit-centric sales strategy, led by $67.4 million, or 36.6%,treasury management sales, will contribute to $251.4 million at September 30, 2017 from $184.0 million at December 31, 2016 related to successful effortsa net increase in attracting stable in-market deposits from municipality relationships throughout our markets. Deposit endingannually; 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 service and maintain client relationshipsexisting and new client deposit relationships.
Strategic    Our strategic efforts continue to beremain focused on adding in-market relationships and related transaction deposit accounts.relationships. We measure the success of in-market deposit gathering efforts based on our ability to maintain the number and average balances of our in-market deposit accounts consistent withas compared to ending balances due to the volatility of some of our current period mix and recent trends.larger relationships. The Bank’s average in-market deposits, consisting of all transaction accounts, money market accounts, and non-wholesale deposits, are obtained primarily from the South Central, Northeastern and Southeastern regionscertificates of Wisconsin and the greater Kansas City area. Of our total average bank funding sources, approximately $1.107deposit, were $1.917 billion, or 70.7%, were considered in-market deposits for the ninesix months ended SeptemberJune 30, 2017. This compares2022 compared to in-market deposits of $1.129$1.729 billion, or 69.9%, for the same period in 2016.     six months ended June 30, 2021.

FHLB Advances and Other Borrowings
As of SeptemberJune 30, 2017,2022, FHLB advances and other borrowings increased by $108.2$193.2 million,, or 181.3%47.9%, to $167.9$596.6 million from $59.7$403.5 million at December 31, 2016.2021. The FHLB advances were used to fund the seasonal decline of in-market deposits and to match-fund existing and new fixed-rate loan growth to mitigate interest risk.
The Corporation’s targeted operating range of bank wholesale funds to total deposits is 30%-40%. As of SeptemberJune 30, 2017,2022 and December 31, 2021, the ratioCorporation had other borrowings of end$8.3 million and $10.4 million respectively, which consisted of period bank wholesale fundssold 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.
    On March 4, 2022, the Corporation completed a private placement of $20.0 million in new subordinated debt to endone institutional investor. Management used a portion of period total bank fundsthe 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 performance debt covenants of which the Corporation was 30.4%.in compliance as of June 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 match-fund long-term fixedmanage interest rate loans withrisk, we will use the most efficient and cost effective source of wholesale funds,funds. We will utilize FHLB advances to the extent we maintain an adequate level of excess borrowing capacity for liquidity and given current market conditions, we expectcontingency funding purposes and pricing remains favorable in comparison to allow ourthe wholesale deposit alternative. We will use FHLB advances and/or brokered certificatecertificates of deposit portfolioin specific maturity periods needed, typically three to mature and/or amortize downfive years, to within 10%-15%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 total assets and replace with the now more cost effective FHLB advances in order to lower our FDIC assessment rate in future periods. Referusage of wholesale funds. Please refer to the section entitled Liquidity and Capital Resources, below, for further information regarding our use and monitoring of wholesale deposits.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 months ended June 30, 2022, the Corporation paid $246,000 in preferred cash dividends. 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 30, 2022, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was approximately $646.1 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. Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements. As of June 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 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. 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 million as of June 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 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 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 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 million and $5.7 million was recognized in other comprehensive income for the three and six months ended June 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 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 of $376,000 was recognized in other comprehensive income for the six months ended June 30, 2022 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
Non-performingImpaired Assets
Total impaired assets consisted of the following at SeptemberJune 30, 20172022 and December 31, 2016,2021, respectively:
June 30,
2022		December 31,
2021
 (Dollars in Thousands)
Non-accrual loans and leases  
Commercial real estate:  
Commercial real estate - owner occupied$113 $348 
Commercial real estate - non-owner occupied— — 
Land development— — 
Construction— — 
Multi-family— — 
1-4 family33 339 
Total non-accrual commercial real estate146 687 
Commercial and industrial5,390 5,572 
Direct financing leases, net49 99 
Consumer and other:  
Home equity and second mortgages— — 
Other— — 
Total non-accrual consumer and other loans— — 
Total non-accrual loans and leases5,585 6,358 
Foreclosed properties, net124 164 
Total non-performing assets5,709 6,522 
Performing troubled debt restructurings188 217 
Total impaired assets$5,897 $6,739 
Total non-accrual loans and leases to gross loans and leases0.24 %0.28 %
Total non-performing assets to gross loans and leases plus foreclosed properties, net0.25 0.29 
Total non-performing assets to total assets0.21 0.25 
Allowance for loan and lease losses to gross loans and leases1.05 1.09 
Allowance for loan and lease losses to non-accrual loans and leases431.58 382.76 
  September 30,
2017		 December 31,
2016
  (Dollars in Thousands)
Non-accrual loans and leases    
Commercial real estate:    
Commercial real estate - owner occupied $7,080
 $2,223
Commercial real estate - non-owner occupied 1,826
 1,609
Land development 2,770
 3,440
Construction 5,354
 2,918
Multi-family —
 —
1-4 family 1,864
 1,937
Total non-accrual commercial real estate 18,894
 12,127
Commercial and industrial 13,957
 12,463
Direct financing leases, net —
 —
Consumer and other:    
Home equity and second mortgages —
 —
Other 381
 604
Total non-accrual consumer and other loans 381
 604
Total non-accrual loans and leases 33,232
 25,194
Foreclosed properties, net 2,585
 1,472
Total non-performing assets 35,817
 26,666
Performing troubled debt restructurings 275
 717
Total impaired assets $36,092
 $27,383
     
Total non-accrual loans and leases to gross loans and leases 2.26% 1.74%
Total non-performing assets to gross loans and leases plus foreclosed properties, net 2.44
 1.83
Total non-performing assets to total assets 2.01
 1.50
Allowance for loan and lease losses to gross loans and leases 1.36
 1.44
Allowance for loan and lease losses to non-accrual loans and leases 59.95
 83.00
As    Net PPP loans outstanding as of SeptemberJune 30, 20172022 and December 31, 2016, $10.92021, were $8.2 million and $12.8$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
Total non-accrual loans and leases to gross loans and leases0.24 %0.29 %
Total non-performing assets to gross loans and leases plus foreclosed properties, net0.25 0.29 
Total non-performing assets to total assets0.21 0.25 
Allowance for loan and lease losses to gross loans and leases1.06 1.10 
Non-accrual loans decreased $773,000, or 12.2%, to $5.6 million at June 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 of charge-offs. The Corporation’s non-accrual loans as a percentage of total gross loans and leases measured 0.24% and 0.28% at June 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% and 0.29% at June 30, 2022 and December 31, 2021, respectively. As of
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June 30, 2022 and December 31, 2021, $615,000 and $627,000 of non-accrual loans and leases were considered troubled debt restructurings,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 increased $9.2 million, or 34.3%, to $35.8 millionas a percentage of total assets was 0.21% and 0.25% at SeptemberJune 30, 2017 from $26.7 million at2022 and December 31, 2016. The increase reflected $12.3 million of additional non-performing assets primarily related to three loan relationships that were moved to impaired status during the first quarter of 2017. During the third quarter of 2017, non–performing assets decreased $3.9 million primarily due to $3.2 million of net charge-offs associated with the aforementioned Wisconsin-based commercial and industrial and energy sector impaired loans. In addition, full payoff proceeds were received in October 2017 for a previously disclosed construction loan originated in our Kansas City market, which will reduce non-performing loans by $2.5 million in the fourth quarter of 2017.
We also monitor early stage delinquencies to assist in the identification of potential future problems.2021, respectively. As of SeptemberJune 30, 2017, 98.0%2022, the payment performance of our loans and leases did not point to any new areas of concern, as approximately 99.0% of the loan and leasetotal portfolio was in a current payment status, compared to 98.8%99.8% as of December 31, 2016.2021. We also monitor our asset quality through our established credit quality indicator categories.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 workare 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 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 Nine Months Ended September 30, 
As of and for the
Year Ended December 31,
  2017 2016 2016
  (In Thousands)
Impaired loans and leases with no impairment reserves required $17,972
 $15,829
 $11,345
Impaired loans and leases with impairment reserves required 15,535
 10,615
 14,566
Total impaired loans and leases 33,507
 26,444
 25,911
Less:      
Impairment reserve (included in allowance for loan and lease losses) 5,790
 4,636
 5,599
Net impaired loans and leases $27,717
 $21,808
 $20,312
Average impaired loans and leases $34,871
 $21,103
 $22,986
Foregone interest income attributable to impaired loans and leases $1,969
 $1,059
 $1,617
Less: Interest income recognized on impaired loans and leases —
 373
 614
Net foregone interest income on impaired loans and leases $1,969
 $686
 $1,003
Non-performing assets also include foreclosed properties. Following the planned discontinuation of all banking activities at the Corporation’s Overland Park branch in the second quarter of 2017, the building and land were reclassified to other real estate owned at that time. Management is in the process of selling the property, which is expected to be completed by the end of the year.
A summary of our current-period foreclosed properties activity is as follows:
(In Thousands) 
Foreclosed properties as of December 31, 2016$1,472
Premises and equipment transferred to foreclosed properties1,113
Foreclosed properties as of September 30, 2017$2,585

As of and for the Six Months Ended June 30,As of and for the
Year Ended December 31,
 202220212021
 (In Thousands)
Impaired loans and leases with no impairment reserves required$4,144 $7,948 $4,419 
Impaired loans and leases with impairment reserves required1,629 3,530 2,156 
Total impaired loans and leases5,773 11,478 6,575 
Less: Impairment reserve (included in allowance for loan and lease losses)1,254 2,021 1,505 
Net impaired loans and leases$4,519 $9,457 $5,070 
Average impaired loans and leases$6,009 $19,420 $14,260 
Foregone interest income attributable to impaired loans and leases$206 $1,081 $1,104 
Less: Interest income recognized on impaired loans and leases813 153 454 
Net foregone interest income on impaired loans and leases$(607)$928 $650 
Allowance for Loan and Lease Losses
The allowance for loan and lease losses decreased $989,000$232,000, or 1.0%, to $24.1 million as of June 30, 2022 from $20.9$24.3 million as of December 31, 2016 to $19.9 million as of September 30, 2017.2021. The allowance for loan and lease losses as a percentage of gross loans and leases also decreased to 1.05% as of June 30, 2022 from 1.44%1.09% as of December 31, 2016 to 1.36%2021. The allowance for loan and lease losses as a percentage of gross loans and leases, excluding net PPP loans, was 1.06% as of SeptemberJune 30, 2017.2022 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 in specific reserves and qualitative risk factor improvements. These general and specific reserve releases were partially offset by an increase in general reserve commensurate with loan growth. 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.
    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 threesix months ended SeptemberJune 30, 2017,2022, we recorded net charge-offsrecoveries on impaired loans and leases of approximately $3.2$4.4 million, or 0.88% of average loans and leases annualized, comprised of $3.2 million$107,000 of charge-offs and $5,000$4.5 million of recoveries. During the three months ended September 30, 2016,While we recorded net charge-offs on impaired loans and leases of approximately $1.6 million, or 0.44% of average loans and leases annualized, comprised of $1.7 million of charge-offs and $32,000 of recoveries.
During the nine months ended September 30, 2017, we recorded net charge-offs on impaired loans and leases of approximately $6.7 million, or 0.61% of average loans and leases annualized, comprised of $7.2 million of charge-offs and $508,000 of recoveries. During the nine months ended September 30, 2016, we recorded net charge-offs on impaired loans and leases of approximately $3.1 million, or 0.28% of average loans and leases annualized, comprised of $3.3 million of charge-offs and $177,000 of recoveries.
Welikely will continue to experience some level of periodic charge-offs in the future as exit strategies are considered and executed.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. Based upon the application of our methodology for estimating the appropriate level of allowance for loan and lease loss reserves, which includes actively monitoring the asset quality and inherent risks within the loan and lease portfolio, management concluded that an allowance for loan and lease losses of $19.9 million, or 1.36% of total loans and leases, was appropriate as of September 30, 2017. Given ongoing complexities with current workout situations, 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 appropriateness of the allowance for loan and lease losses. These agencies could require certain loan and lease balances to be classified differently or charged off if their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination.
As of SeptemberJune 30, 20172022 and December 31, 2016,2021, our ratio of allowance for loan and lease losses to total non-accrual loans and leases was 59.95%431.58% and 83.00%382.76%, respectively. This ratio decreasedincreased primarily due to the collateral positions relatedsubstantial decrease in non-accrual loans and leases discussed above, in comparison to the additional non-accrual loans during 2017. During the third quarter of 2017,decrease in the allowance for loan and lease losses to total non-accrual loans increased 1.62% from the linked quarter.leases losses. Impaired loans and leases exhibit weaknesses that inhibit repayment in compliance with the original terms of the note or lease. However,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 endeavortry to ensure that we have appropriatesufficient 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 either doesmay not require additional specific reserves or requiresrequire only a minimal amount of required specific reserve, as we believe the loans and leases are adequately collateralized as of the measurement period. In addition, managementreserve. 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 lossesloss to non-accrual loans and leases ratio as compared to our peers or industry expectations. OurAs 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 to see this ratio rise as we continue to grow our loan and lease portfolio.rise. Conversely, if we identify additionalfurther impaired loans, or leases whichthis ratio could fall if the impaired loans are adequately collateralized and therefore require no specific or general reserve, this ratio could fall.reserve. Given our business practices and evaluation of our existing loan and lease portfolio, we believe this coverage ratio wasis appropriate for the probable losses inherent in our loan and lease portfolio as of SeptemberJune 30, 2017.2022.

    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 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% of gross loans and leases, at June 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 tabular 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,
 2022202120222021
 (Dollars in Thousands)
Allowance at beginning of period$23,669 $28,982 $24,336 $28,521 
Charge-offs:   
Commercial real estate:   
Commercial real estate — owner occupied— (4)— (4)
Commercial real estate — non-owner occupied— — — — 
Construction and land development— — — — 
Multi-family— — — — 
1-4 family— (245)— (245)
Commercial and industrial(85)(2,621)(107)(2,765)
Direct financing leases— — — — 
Consumer and other:  
Home equity and second mortgages— — — — 
Other— (24)— (24)
Total charge-offs(85)(2,894)(107)(3,038)
Recoveries:   
Commercial real estate:   
Commercial real estate — owner occupied4,121 84 4,236 225 
Commercial real estate — non-owner occupied— — 1 — 
Construction and land development— — — 2,078 
Multi-family— — — — 
1-4 family— — — — 
Commercial and industrial117 460 201 913 
Direct financing leases— — — — 
Consumer and other:   
Home equity and second mortgages— — — 1 
Other9 1 19 1 
Total recoveries4,247 545 4,457 3,218 
Net recoveries4,162 (2,349)4,350 180 
Provision for loan and lease losses(3,727)(958)(4,582)(3,026)
Allowance at end of period$24,104 $25,675 $24,104 $25,675 
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)%


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  As of and for the Three Months Ended September 30, As of and for the Nine Months Ended September 30,
  2017 2016 2017 2016
  (Dollars in Thousands)
Allowance at beginning of period $21,677
 $18,154
 $20,912
 $16,316
Charge-offs:        
Commercial real estate:        
Commercial real estate — owner occupied —
 —
 (9) (41)
Commercial real estate — non-owner occupied —
 —
 (80) —
Construction and land development —
 (250) —
 (948)
Multi-family —
 —
 —
 —
1-4 family (8) (9) (37) (205)
Commercial and industrial (3,217) (1,396) (6,978) (2,048)
Direct financing leases —
 —
 —
 —
Consumer and other:        
Home equity and second mortgages —
 —
 —
 —
Other (5) (1) (92) (8)
Total charge-offs (3,230) (1,656) (7,196) (3,250)
Recoveries:        
Commercial real estate:        
Commercial real estate — owner occupied —
 —
 42
 —
Commercial real estate — non-owner occupied 1
 1
 2
 74
Construction and land development —
 28
 101
 28
Multi-family —
 —
 —
 —
1-4 family 1
 2
 7
 68
Commercial and industrial 2
 —
 314
 2
Direct financing leases —
 —
 —
 —
Consumer and other:        
Home equity and second mortgages 1
 1
 2
 3
Other —
 —
 40
 2
Total recoveries 5
 32
 508
 177
Net charge-offs (3,225) (1,624) (6,688) (3,073)
Provision for loan and lease losses 1,471
 3,537
 5,699
 6,824
Allowance at end of period $19,923
 $20,067
 $19,923
 $20,067
Annualized net charge-offs as a % of average gross loans and leases 0.88% 0.44% 0.61% 0.28%

Table of Contents


Liquidity and Capital Resources
The Corporation expects to meet its liquidity needs through existing cash on hand, established cash flow sources, its third party senior line of credit, and dividends received from the Bank. While the Bank is subject to certain generally applicable regulatory limitations regarding its ability to pay dividends to the Corporation, we do not believe that the Corporation will be adversely affected by these dividend limitations. The Corporation’s principal liquidity requirements at SeptemberJune 30, 20172022 were the interest payments due on subordinated notes and junior subordinated notes. On October 25, 2017, the Bank’s Board of Directors declared a dividend in the amount of $4.5 million bringing year-to-date dividend declarationscash dividends payable to $14.5 million.both common and preferred stockholders. The capital ratios of the Corporation and its subsidiaries continue to meetBank met all applicable regulatory capital adequacy requirements.requirements in effect on June 30, 2022, and continue to meet the heightened requirements imposed by Basel III, including the capital conservation buffer. The Corporation’s and the Bank’s respective Boards of DirectorsBoard 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 sourcessource of funds are principal and interest repaymentspayments 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.
On-balance-sheetWe view on-balance sheet liquidity isas a critical element to maintaining adequate liquidity to meet our cash and collateral obligations. We define our on-balance-sheeton-balance sheet liquidity as the total of our short-term investments, our unencumbered securities’ fair valuesecurities available-for-sale, and our unencumbered pledged loans. As of SeptemberJune 30, 20172022 and December 31, 2016,2021, our immediate on-balance-sheeton-balance sheet liquidity was $450.2$413.0 million and $543.1$529.5 million, respectively. At SeptemberJune 30, 20172022 and December 31, 2016,2021, the Bank had $35.4$55.5 million and $40.9$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-sheeton-balance sheet 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-offrun off of maturing bank wholesale fundingcertificates of deposit or invest in securities to maintain adequate liquidity at an improved margin.
We had $476.7$566.4 million of outstanding wholesale funds at SeptemberJune 30, 2017,2022, compared to $450.3$398.4 million of wholesale funds as of December 31, 2016,2021, which represented 30.4%23.4% and 28.6%17.1%, respectively, of ending balance total Bankbank funding. Wholesale funds include FHLB advances, brokered certificates of deposit, and deposits gathered from internet listing services and FHLB advances.services. Total Bankbank funding is defined as total deposits plus FHLB advances. We are committed to raising in-market deposits while maintaining our overall target mix ofutilizing wholesale funds and in-market deposits.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.
Our     Period-end in-market deposits decreased $71.3 million, or 3.7%, to $1.857 billion at June 30, 2022 from $1.928 billion at December 31, 2021. The decline was due to movement of deposits to investment alternatives and to pay taxes, seasonality within the Bank’s municipality clients, and normal course of business for continuing client relationships. The decline in in-market deposits was not the result of the loss of any significant client relationships, remain stable; however, deposit balances associated with those relationships will fluctuate. Weand we expect to continue to establish new client relationships and continue marketing efforts aimed at increasing theincrease deposit balances inwith existing clients’ deposit 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, allnone of our wholesale funds are certificates of deposit which do not 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 and no call provisions.terms. The Bank limits the percentage of wholesale funds to total Bankbank funds in accordance with liquidity policies approved by its Board of Directors. The Corporation’s overall operating range of wholesale funds to total Bank funds is 30%-40%.Board. The Bank was in compliance with its policy limits as of SeptemberJune 30, 2017 and December 31, 2016.2022.
The Bank was able to access the wholesale depositfunding market as needed at rates and terms comparable to market standards during the nine month periodyear ended SeptemberJune 30, 2017.2022. In the event that there is a disruption in the availability of wholesale depositsfunds 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-sheeton-balance sheet liquidity. These potential funding sources include deposits withmaintained at the FRB and borrowings from the FHLB or Federal Reserve Discount Window utilizing currently unencumbered

securities and acceptable loans as collateral.
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As of SeptemberJune 30, 2017,2022, 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 theirits 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 ninesix months ended SeptemberJune 30, 2017,2022, operating activities resulted in a net cash inflow of $19.4$16.8 million, which included net income of $7.9 million.$19.9 million, partially offset by a $4.6 million provision for loan and lease loss benefit. Net cash used inby investing activities for the ninesix months ended SeptemberJune 30, 20172022 was approximately $13.3$79.4 million which consisted of cash outflowsprimarily due to fundinvestments made in securities available for sale, net loan growthdisbursements, and reinvestment ofa net increase in FHLB stock. Net cash flows within purchases of additional securities,provided by financing activities was $101.0 million for the six months ended June 30, 2022 primarily due to a net increase in FHLB advances, partially offset by cash inflows from maturities, redemptions and paydowns of available-for-sale and held-to-maturity securities. Net cash useda net decrease in financing activities for the nine months ended September 30, 2017 was $10.5 million primarily from net decreases in deposits and cash dividends paid to shareholders, partially offset by net increases in FHLB advances.deposits. 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-SheetOff-Balance Sheet Arrangements
As of SeptemberJune 30, 2017,2022, there were no material changes to our contractual obligations and off-balance-sheetoff-balance sheet arrangements disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.2021. 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
Our primary market risk is interest rate risk, which arises from exposure of our financial position to changes in interest rates. It is our strategy to reduce the impact of interest rate risk on net interest margin by maintaining a favorable match between the maturities and repricing dates of interest-earning assets and interest-bearing liabilities. This strategy is monitored by the Bank’s Asset/Liability Management Committee, in accordance with policies approved by the Bank’s Board. This committee meets regularly to review the sensitivity of the Bank’s assets and liabilities to changes in interest rates, liquidity needs and sources, and pricing and funding strategies.    Not applicable.
We use two techniques to measure interest rate risk. The first is simulation of earnings. In this measurement technique the balance sheet is modeled as an ongoing entity whereby future growth, pricing and funding assumptions are implemented. These assumptions are modeled under different rate scenarios that include a parallel, instantaneous and sustained change in interest rates. Key assumptions include:
the behavior of interest rates and pricing spreads;
the changes in product balances; and
the behavior of loan and deposit clients in different rate environments.
This analysis incorporates several assumptions, the most material of which relate to the re-pricing characteristics and balance fluctuations of deposits with indeterminate or non-contractual maturities, and is measured as a percentage change in net interest income for the next 12 months due to instantaneous movements in benchmark interest rates from a baseline scenario. Estimated changes are dependent upon material assumptions such as those previously discussed.
The earnings simulation analysis does not incorporate any management actions that may be used to mitigate negative consequences of actual interest rate movement. For that reason and others, they do not reflect the likely actual results but serve as conservative estimates of interest rate risk. The simulation analysis is not comparable to actual results or directly predictive of future values of other measures provided.
The second measurement technique used is static gap analysis. Gap analysis involves measurement of the difference in asset and liability repricing on a cumulative basis within a specified time frame. In general, a positive gap indicates that more interest-earning assets than interest-bearing liabilities reprice/mature in a time frame and a negative gap indicates the opposite. In addition to the gap position, other determinants of net interest income are the shape of the yield curve, general rate levels and

the corresponding effect of contractual interest rate floors, reinvestment spreads, balance sheet growth and mix, and interest rate spreads. Our success in attracting in-market deposits adds to the interest rate liability sensitivity of the organization.
We manage the structure of interest-earning assets and interest-bearing liabilities by adjusting their mix, yield, maturity and/or repricing characteristics based on market conditions. Wholesale certificates of deposit and FHLB advances are a significant source of our funding and we use a variety of maturities to augment our management of interest rate exposure. Currently, we do not employ any derivatives to assist in managing our interest rate risk exposure; however, management has the authorization, as permitted within applicable approved policies, and ability to utilize such instruments should they be appropriate to manage interest rate exposure.
The process of asset and liability management requires management to make a number of assumptions as to when an asset or liability will reprice or mature. Management believes that its assumptions approximate actual experience and considers these assumptions to be reasonable, although the actual amortization and repayment of assets and liabilities may vary substantially. Our economic sensitivity to changes in interest rates at September 30, 2017 has not changed materially since December 31, 2016.

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 SeptemberJune 30, 2017.2022.
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 SeptemberJune 30, 20172022 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
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, 2016.2021.

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 30, 2022, the Corporation had repurchased a total of 30,600 shares for approximately $1.0 million at an average cost of $33.28 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 30, 2022.
Period
Total Number of Shares Purchased(1)
Average Price Paid Per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsTotal Number of Shares that May Yet Be Purchased Under the Plans or Programs
April 1, 2022 - April 30, 202222,797 $33.15 7,809 — 
May 1, 2022 - May 31, 202210,557 33.74 9,743 — 
June 1, 2022 - June 30, 20227,646 32.78 8,546 — 
Total41,000 33.24 26,098 124,075 
(1)During the second quarter of 2022, the Corporation repurchased an aggregate 41,000 shares of the Corporation’s common stock in open-market transactions, of which 26,098 shares were purchased pursuant to the repurchase program publicly announced on March 4, 2022, and of which 14,902 shares were surrendered to us to satisfy income tax withholding obligations in connection with the vesting of restricted awards.
(a)None.
(b)Not applicable.
(c)None.
Item 3. Defaults Upon Senior Securities
Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.


Item 5. Other Information
None.


Item 6. Exhibits
31.1

Item 6. Exhibits
31.1 
31.2
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101
The following financial information from First Business Financial Services, Inc.’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2017,2022, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of SeptemberJune 30, 20172022 and December 31, 2016,2021, (ii) Consolidated Statements of Income for the three and ninesix months ended SeptemberJune 30, 20172022 and 2016,2021, (iii) Consolidated Statements of Comprehensive Income for the three and ninesix months ended SeptemberJune 30, 20172022 and 2016,2021, (iv) Consolidated Statements of Changes in Stockholders’ Equity for the ninethree and six months ended SeptemberJune 30, 20172022 and 2016,2021, (v) Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20172022 and 2016,2021, 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 30, 2022 has been formatted in Inline XBRL and contained in Exhibit 101.






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Table of Contents
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.
 
October 27, 2017July 29, 2022/s/ Corey A. Chambas
Corey A. Chambas 
Chief Executive Officer
October 27, 2017July 29, 2022/s/ Edward G. Sloane, Jr.
Edward G. Sloane, Jr.
Chief Financial Officer
(principal financial officer)



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