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 September 30, 20172023
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, 20172023 was 8,759,6738,314,901 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
3839
Item 3. Quantitative and Qualitative Disclosures about Market Risk
5862
Item 4. Controls and Procedures
5963
5963
Item 1. Legal Proceedings
5964
Item 1A. Risk Factors
5964
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
5964
Item 3. Defaults Upon Senior Securities
59
Item 4. Mine Safety Disclosures
59
Item 5. Other Information
6064
Item 6. Exhibits
6064
6065




Table of Contents
PART I. Financial Information
Item 1. Financial Statements
First Business Financial Services, Inc.
Consolidated Balance Sheets
September 30,
2023		December 31,
2022
(Unaudited)
 (In Thousands, Except Share Data)
Assets  
Cash and due from banks$23,303 $25,811 
Short-term investments109,612 76,871 
Cash and cash equivalents132,915 102,682 
Securities available-for-sale, at fair value272,163 212,024 
Securities held-to-maturity, at amortized cost8,689 12,635 
Loans held for sale4,168 2,632 
Loans and leases receivable, net of allowance for credit losses of $29,331 and $24,230, respectively2,734,683 2,418,836 
Premises and equipment, net6,157 4,340 
Repossessed assets61 95 
Right-of-use assets, net6,800 7,690 
Bank-owned life insurance55,123 54,018 
Federal Home Loan Bank stock, at cost13,528 17,812 
Goodwill and other intangible assets12,110 12,159 
Derivatives93,702 68,581 
Accrued interest receivable and other assets78,751 63,107 
Total assets$3,418,850 $2,976,611 
Liabilities and Stockholders’ Equity  
Deposits$2,657,007 $2,168,206 
Federal Home Loan Bank advances and other borrowings363,891 456,808 
Lease liabilities9,236 10,175 
Derivatives78,696 61,419 
Accrued interest payable and other liabilities29,262 19,363 
Total liabilities3,138,092 2,715,971 
Stockholders’ equity:  
Preferred stock, $0.01 par value, 2,500,000 shares authorized, 12,500 shares of 7% non-cumulative perpetual preferred stock, Series A, outstanding at September 30, 2023 and December 31, 2022, respectively11,992 11,992 
Common stock, $0.01 par value, 25,000,000 shares authorized, 9,418,413 and 9,371,078 shares issued, 8,315,186 and 8,362,085 shares outstanding at September 30, 2023 and December 31, 2022, respectively95 94 
Additional paid-in capital89,947 87,512 
Retained earnings223,068 203,507 
Accumulated other comprehensive loss(14,234)(15,310)
Treasury stock, 1,103,227 and 1,008,993 shares at September 30, 2023 and December 31, 2022, respectively, at cost(30,110)(27,155)
Total stockholders’ equity280,758 260,640 
Total liabilities and stockholders’ equity$3,418,850 $2,976,611 
  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 September 30,For the Nine Months Ended September 30,
 2023202220232022
 (In Thousands, Except Per Share Data)
Interest income    
Loans and leases$47,868 $30,174 $131,962 $78,934 
Securities2,198 1,165 5,601 3,204 
Short-term investments875 447 2,604 915 
Total interest income50,941 31,786 140,167 83,053 
Interest expense    
Deposits19,803 3,181 48,774 5,005 
Federal Home Loan Bank advances and other borrowings2,542 2,721 8,344 6,573 
Junior subordinated notes— — — 504 
Total interest expense22,345 5,902 57,118 12,082 
Net interest income28,596 25,884 83,049 70,971 
Provision for credit losses1,817 12 5,610 (4,569)
Net interest income after provision for credit losses26,779 25,872 77,439 75,540 
Non-interest income    
Private wealth management service fees2,945 2,618 8,492 8,311 
Gain on sale of Small Business Administration loans851 732 1,771 2,269 
Service charges on deposits835 1,018 2,283 3,058 
Loan fees786 814 2,495 2,163 
Increase in cash surrender value of bank-owned life insurance376 359 1,106 1,057 
Net loss on sale of securities— — (45)— 
Swap fees992 341 2,526 1,038 
Other non-interest income1,645 2,315 5,586 4,559 
Total non-interest income8,430 8,197 24,214 22,455 
Non-interest expense    
Compensation15,573 14,817 46,610 42,475 
Occupancy575 566 1,809 1,689 
Professional fees1,429 1,203 4,012 3,671 
Data processing953 719 2,889 2,391 
Marketing758 543 2,165 1,713 
Equipment349 253 1,000 732 
Computer software1,289 1,128 3,668 3,327 
FDIC insurance680 230 1,653 840 
Other non-interest expense1,583 569 3,181 1,469 
Total non-interest expense23,189 20,028 66,987 58,307 
Income before income tax expense12,020 14,041 34,666 39,688 
Income tax expense2,079 3,215 7,409 8,986 
Net income9,941 10,826 27,257 30,702 
Preferred stock dividend218 218 656 464 
Net income available to common shareholders$9,723 $10,608 $26,601 $30,238 
Earnings per common share    
Basic$1.17 $1.25 $3.19 $3.57 
Diluted1.17 1.25 3.19 3.57 
Dividends declared per share0.2275 0.1975 0.6825 0.5925 
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 September 30,For the Nine Months Ended September 30,
2023202220232022
(In Thousands)
Net income$9,941 $10,826 $27,257 $30,702 
Other comprehensive (loss) income
Securities available-for-sale:
Unrealized securities losses arising during the period(6,194)(10,174)(6,446)(29,839)
Reclassification adjustment for net loss realized in net income— — 45 — 
Securities held-to-maturity:
Amortization of net unrealized losses transferred from available-for-sale1 3 4 11 
Interest rate swaps:
Unrealized gains on interest rate swaps arising during the period5,713 3,452 7,844 9,496 
Income tax benefit (expense)123 1,719 (371)5,201 
     Total other comprehensive (loss) income(357)(5,000)1,076 (15,131)
Comprehensive income$9,584 $5,826 $28,333 $15,571 
  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, 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 loss— — — — — (3,725)— (3,725)
Share-based compensation - restricted shares and employee stock purchase plan27,114 — — 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, 20228,475,953 $11,992 $94 $86,123 $186,302 $(11,588)$(23,000)$249,923 
Net income— — — — 10,826 — — 10,826 
Other comprehensive loss— — — — — (5,000)— (5,000)
Share-based compensation - restricted shares and employee stock purchase plan1,291 — — 651 — — — 651 
Issuance of common stock under the employee stock purchase plan1,006 — — 29 — — — 29 
Preferred stock dividends— — — — (218)— — (218)
Cash dividends ($0.1975 per share)— — — — (1,675)— — (1,675)
Treasury stock purchased(46,202)— — — — — (1,532)(1,532)
Balance at September 30, 20228,432,048 $11,992 $94 $86,803 $195,235 $(16,588)$(24,532)$253,004 
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 December 31, 20228,362,085 $11,992 $94 $87,512 $203,507 $(15,310)$(27,155)$260,640 
Cumulative change in accounting principle— — — — (1,353)— — (1,353)
Balance at January 1, 20238,362,085 11,992 94 87,512 202,154 (15,310)(27,155)259,287 
Net income— — — — 8,979 — — 8,979 
Other comprehensive income— — — — — 1,639 — 1,639 
Share-based compensation - restricted shares and employee stock purchase plan(426)— — 634 — — — 634 
Issuance of common stock under the employee stock purchase plan1,005 — — 27 — — — 27 
Preferred stock dividends— — — — (219)— — (219)
Cash dividends ($0.2275 per share)— — — — (1,906)— — (1,906)
Treasury stock purchased(56,394)— — — — — (1,860)(1,860)
Balance at March 31, 20238,306,270 11,992 94 88,173 209,008 (13,671)(29,015)266,581 
Net income— — — — 8,337 — — 8,337 
Other comprehensive loss— — — — — (206)— (206)
Share-based compensation - restricted shares and employee stock purchase plan45,280 — 1 1,071 — — — 1,072 
Issuance of common stock under the employee stock purchase plan1,044 — — 28 — — — 28 
Preferred stock dividends— — — — (219)— — (219)
Cash dividends ($0.2275 per share)— — — — (1,889)— — (1,889)
Treasury stock purchased(37,129)— — — — — (1,072)(1,072)
Balance at June 30, 20238,315,465 $11,992 $95 $89,272 $215,237 $(13,877)$(30,087)$272,632 
Net income— — — — 9,941 — — 9,941 
Other comprehensive loss— — — — — (357)— (357)
Share-based compensation - restricted shares and employee stock purchase plan(702)— — 643 — — — 643 
Issuance of common stock under the employee stock purchase plan1,134 — — 32 — — — 32 
Preferred stock dividends— — — — (218)— — (218)
Cash dividends ($0.2275 per share)— — — — (1,892)— — (1,892)
Treasury stock purchased(711)— — — — — (23)(23)
Balance at September 30, 20238,315,186 $11,992 $95 $89,947 $223,068 $(14,234)$(30,110)$280,758 

  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 Nine Months Ended September 30,
 20232022
(In Thousands)
Operating activities  
Net income$27,257 $30,702 
Adjustments to reconcile net income to net cash provided by operating activities:  
Deferred income taxes, net(733)(2,258)
Impairment of tax credit investments— (351)
Provision for credit losses5,610 (4,569)
Depreciation, amortization and accretion, net2,838 3,088 
Share-based compensation2,349 1,905 
Net loss on disposal of fixed assets73 — 
Gain on disposal of lease equipment— (478)
Amortization of tax credit investments2,882 552 
Bank-owned life insurance policy income(1,106)(1,057)
Origination of loans for sale(115,925)(94,433)
Sale of loans originated for sale116,160 99,499 
Gain on sale of loans originated for sale(1,771)(2,269)
Net loss on repossessed assets9 27 
Loan servicing right impairment valuation— 15 
Return on investment in limited partnerships3,542 314 
Excess tax benefit expense from share-based compensation185 183 
Net payments on operating lease liabilities(1,061)(1,096)
Net decrease in accrued interest receivable and other assets(8,825)(4)
Net increase in accrued interest payable and other liabilities7,474 1,620 
Net cash provided by operating activities38,958 31,390 
Investing activities  
Proceeds from maturities, redemptions, and paydowns of available-for-sale securities16,536 32,699 
Proceeds from maturities, redemptions, and paydowns of held-to-maturity securities3,932 6,190 
Proceeds from sale of available-for-sale securities5,028 — 
Purchases of available-for-sale securities(88,563)(54,098)
Proceeds from sale of repossessed assets25 37 
Net increase in loans and leases(321,570)(86,487)
Investments in limited partnerships(1,106)(797)
Returns of investments in limited partnerships7 17 
Investment in tax credit investments(11,430)(11,146)
Distribution from tax credit investments33 474 
Investment in Federal Home Loan Bank stock(30,540)(35,650)
Proceeds from the sale of Federal Home Loan Bank stock34,824 33,285 
Purchases of leasehold improvements and equipment, net(2,574)(1,847)
Purchases of bank-owned life insurance policies— (25)
Proceeds from redemption of Trust II stock— 315 
Net cash used in investing activities(395,398)(117,033)
Financing activities  
Net increase in deposits488,801 129,622 
Repayment of Federal Home Loan Bank advances(1,536,255)(1,993,844)
Proceeds from Federal Home Loan Bank advances1,434,375 2,002,844 
Proceeds from issuance of subordinated notes and debentures15,000 20,000 
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  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 subordinated notes and debentures— (9,090)
Repayment of junior subordinated notes payable— (10,076)
Net decrease in long-term borrowed funds(6,037)(3,064)
Cash dividends paid(5,687)(5,023)
Preferred stock dividends paid(656)(464)
Proceeds from issuance of common stock under ESPP87 104 
Proceeds from issuance of preferred stock— 11,992 
Purchase of treasury stock(2,955)(3,503)
Net cash provided by financing activities386,673 139,498 
Net increase in cash and cash equivalents30,233 53,855 
Cash and cash equivalents at the beginning of the period102,682 57,110 
Cash and cash equivalents at the end of the period$132,915 $110,965 
Supplementary cash flow information  
Cash paid during the period for:
Interest paid on deposits and borrowings$51,092 $11,083 
Net income taxes paid (received)5,022 3,263 
Non-cash investing and financing activities:
Transfer of loans to repossessed assets— 50 
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 financial institutions. The Bank is subject to competition from other financial institutions and service providers and is also subject to state and federal regulations. As of September 30, 2023, FBB 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”), BOC Investment, LLC (“BOC”FBB RE 2”), 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, 2016.2022. 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”) has not been consolidated into the financial statements.
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 leasecredit 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 three and nine month periodmonths ended September 30, 20172023, are not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, 2017.2023. 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, 2016.2022 and updates from the adoption of new accounting standards disclosed in the Corporation’s Form 10-Q for the quarter ended March 31, 2023.
Recent Accounting Pronouncements
In May 2014,March 2023, the Financial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update No. 2014-09, “Revenue from Contracts with Customers2023-02 “Investments-Equity Method and Joint Ventures (Topic 606),” with an original effective date323): Accounting for annual reporting periods beginning after December 15, 2016. The ASU is a converged standard betweenInvestments in Tax Credit Structures Using the FASB and the IASB that provides a single comprehensive revenue recognition model for all contracts with customers across transactions and industries. The primary objectiveProportional Amortization Method (a consensus of the ASU is revenue recognition that representsEmerging Issues Task Force).” The amendments in this Update permit reporting entities to elect to account for their tax equity investments, regardless of the transfer of promised goods or services to customers in an amount that reflects the consideration toprogram from which the income tax credits are received, using the proportional amortization method if certain conditions are met. A reporting entity expectsmay make an accounting policy election to be entitledapply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis rather than electing to in exchange for those goods or services. In August 2015,apply 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)proportional amortization method at the commencement date: (1) a lease liability, which is a lessees’ obligationreporting entity level or 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 ASU No. 2016-13, “Financial Instruments- Credit Losses (Topic 326).” The ASU replaces the incurred loss impairment methodology for recognizing credit losses with a methodology that reflects all expected credit losses. The ASU also requires consideration of a broader range of information to inform credit loss estimates, including such factors as past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, and any other financial asset not excluded from the scope that have 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, 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, “Compensation- Stock Compensation (Topic 718).” The ASU provides clarity about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The ASU is effective for all entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted.individual investments. The Corporation is in the process of evaluatingassessing the impact of this standard but does not expect this standard to have a material impact on its resultsstandard.
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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 September 30,For the Nine Months Ended September 30,
 2023202220232022
(Dollars in Thousands, Except Share Data)
Basic earnings per common share  
Net income$9,941 $10,826 $27,257 $30,702 
Less: preferred stock dividends218 218 656 464 
Less: earnings allocated to participating securities242 281 690 834 
Basic earnings allocated to common shareholders$9,481 $10,327 $25,911 $29,404 
Weighted-average common shares outstanding, excluding participating securities8,107,641 8,230,902 8,134,587 8,237,879 
Basic earnings per common share$1.17 $1.25 $3.19 $3.57 
Diluted earnings per common share  
Earnings allocated to common shareholders, diluted$9,481 $10,327 $25,911 $29,404 
Weighted-average diluted common shares outstanding, excluding participating securities8,107,641 8,230,902 8,134,587 8,237,879 
Diluted earnings per common share$1.17 $1.25 $3.19 $3.57 

  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 initially 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, restricted stock, restricted stock units, dividend equivalent units, and any other type of award permitted by the Plan. As of September 30, 2017, 217,4752023, 328,787 shares were available for future grants under the Plan.Plan, as amended. 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. RSUs do not have voting rights. RSUs granted prior to 2023 are provided dividend equivalents concurrent with dividends paid to shareholders while RSUs granted in 2023 and after will accrue dividend equivalents payable upon vesting. 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 also issue performance-based restricted stock units (“PRSU”). Vesting of the performance-based restricted stock units will be measured on the relative Total Shareholder Return (“TSR”) and relative Return on Average Equity (“ROAE”) for issuances prior to 2023 or Return on Average Common Equity (“ROACE”) for issuances after 2022, and will cliff-vest after a three-year measurement period based on the Corporation’s TSR performance and ROAE or ROACE
9
Table of Contents
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 restricted stock awards and units 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 ROAE or ROACE metric will be adjusted if there is a change in the expectation of ROAE or ROACE. The compensation expense for the awards expected to vest for the percentage of performance based restricted stock units subject to the TSR metric are never adjusted and are amortized utilizing the accounting fair value provided using a Monte Carlo pricing model.
Restricted stock activity for the year ended December 31, 20162022 and the nine months ended September 30, 20172023 was as follows:
RSAWeighted Average Grant PricePRSUWeighted Average Grant PriceRSUWeighted Average Grant PriceTotalWeighted Average Grant Price
Nonvested balance as of December 31, 2021141,617 $23.06 63,120 $28.20 5,052 $23.56 209,789 $24.62 
Granted (1)
62,560 34.04 37,335 24.71 3,115 27.95 103,010 30.47 
Vested(62,353)23.21 (43,020)18.91 (2,062)23.20 (107,435)21.49 
Forfeited(8,507)26.15 — — — — (8,507)26.15 
Nonvested balance as of December 31, 2022133,317 27.95 57,435 32.89 6,105 25.92 196,857 29.32 
Granted (1)
— — 34,840 35.79 52,765 34.43 87,605 34.97 
Vested(55,500)27.01 (36,120)31.32 (3,253)26.07 (94,873)28.61 
Forfeited(3,340)29.00 — — (180)36.42 (3,520)29.37 
Nonvested balance as of September 30, 202374,477 $28.60 56,155 $35.70 55,437 $33.98 186,069 $32.34 
Unrecognized compensation cost (in thousands)$1,509 $1,091 $1,510 $4,110 
Weighted average remaining recognition period (in years)1.971.772.902.26
  
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

As(1)The number of September 30, 2017,restricted shares/units shown includes the Corporation had $2.6 millionshares that would be granted if the target level of deferred unvested compensation expense, whichperformance is achieved related to the Corporation expects to recognize over a weighted-average periodperformance based restricted stock units. The number of approximately 3.03 years.

Forshares actually issued may vary. During the three and nine months ended September 30, 20172023, an additional 18,060 were issued related to actual performance results of previously granted awards.
Employee Stock Purchase Plan
During 2020, an employee stock purchase plan ("ESPP") was approved by the Corporation’s shareholders and 2016,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 nine months ended September 30, 2023, the Corporation issued 3,183 shares of common stock under the ESPP. As of September 30, 2023, 231,783 shares remained available for issuance under the ESPP.
Share-based compensation expense related to restricted stock and ESPP included in the unaudited Consolidated Statements of Income was as follows:
For the Three Months Ended September 30,For the Nine Months Ended September 30,
2023202220232022
(In Thousands)
Share-based compensation expense$643 $651 $2,349 $1,905 

10
 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 September 30, 2023
Amortized CostGross
Unrealized Gains		Gross
Unrealized Losses		Fair Value
 (In Thousands)
Available-for-sale:
U.S. treasuries$14,075 $— $(534)13,541 
U.S. government agency securities - government-sponsored enterprises28,568 40 (669)27,939 
Municipal securities40,510 — (7,470)33,040 
Residential mortgage-backed securities - government issued59,274 — (3,514)55,760 
Residential mortgage-backed securities - government-sponsored enterprises128,609 — (15,626)112,983 
Commercial mortgage-backed securities - government issued3,272 — (595)2,677 
Commercial mortgage-backed securities - government-sponsored enterprises31,983 — (5,760)26,223 
 $306,291 $40 $(34,168)$272,163 
 As of December 31, 2022
Amortized CostGross
Unrealized Gains		Gross
Unrealized Losses		Fair Value
 (In Thousands)
Available-for-sale:
U.S. treasuries$4,977 $— $(532)$4,445 
U.S. government agency securities - government-sponsored enterprises13,666 70 (531)13,205 
Municipal securities45,088 90 (5,867)39,311 
Residential mortgage-backed securities - government issued21,790 — (2,359)19,431 
Residential mortgage-backed securities - government-sponsored enterprises119,265 — (12,942)106,323 
Commercial mortgage-backed securities - government issued3,450 — (518)2,932 
Commercial mortgage-backed securities - government-sponsored enterprises31,515 — (5,138)26,377 
 $239,751 $160 $(27,887)$212,024 

11
  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


Table of Contents
  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 unrealizedunrecognized gains and losses were as follows:

 As of September 30, 2023
Amortized CostGross
Unrecognized Gains		Gross
Unrecognized Losses		Fair Value
 (In Thousands)
Held-to-maturity:
Municipal securities$4,213 $— $(140)$4,073 
Residential mortgage-backed securities - government issued1,312 — (99)1,213 
Residential mortgage-backed securities - government-sponsored enterprises1,159 — (82)1,077 
Commercial mortgage-backed securities - government-sponsored enterprises2,005 — (155)1,850 
 $8,689 $— $(476)$8,213 
 As of December 31, 2022
Amortized CostGross
Unrecognized Gains		Gross
Unrecognized Losses		Fair Value
 (In Thousands)
Held-to-maturity:
Municipal securities$7,467 $7 $(70)$7,404 
Residential mortgage-backed securities - government issued1,625 — (107)1,518 
Residential mortgage-backed securities - government-sponsored enterprises1,537 — (93)1,444 
Commercial mortgage-backed securities - government-sponsored enterprises2,006 — (102)1,904 
 $12,635 $7 $(372)$12,270 
  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 contain 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. There were 14 sales ofFHLB. The Corporation sold no available-for-sale securities that occurredduring the three months ended September 30, 2023 and 16 available-for-sale securities during the nine months ended September 30, 2017 and three2023. There were no sales of available-for-sale securities that occurred during the three and nine months ended September 30, 2016.2022.


At September 30, 20172023 and December 31, 2016,2022, securities with a fair value of $1.9$43.3 million and $22.4$35.9 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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Table of Contents
The amortized cost and fair value of securities by contractual maturity at September 30, 20172023 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$20,496 $20,439 $1,060 $1,048 
Due in one year through five years17,471 16,103 3,153 3,025 
Due in five through ten years15,325 13,381 — — 
Due in over ten years29,861 24,597 — — 
83,153 74,520 4,213 4,073 
Residential mortgage-backed securities187,883 168,743 2,471 2,290 
Commercial mortgage-backed securities35,255 28,900 2,005 1,850 
 $306,291 $272,163 $8,689 $8,213 
  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 September 30, 20172023 and December 31, 2016.2022. At September 30, 2017,2023, the Corporation held 106183 available-for-sale securities that were in an unrealized loss position. Such securitiesposition, 153 of which have not experienced credit rating downgrades; however, they have primarily declined in value due to the current interest rate environment. At September 30, 2017, the Corporation held 56 available-for-sale securities that had 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.assess declines in fair value for credit losses. Consideration is given to such factors as the lengthcredit rating of time and extentthe borrower, market conditions such as current interest rates, any adverse conditions specific to which the security, has been in an unrealized loss position, changes in security ratings and an evaluation ofdelinquency status on contractual payments. For 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 thethree and nine months ended September 30, 20172023 and 2016.2022, management concluded that in all instances securities with fair value less than carrying value was due to market and other factors; thus, no credit loss provision was required.

13
Table of Contents

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

 As of September 30, 2023
 Less than 12 Months12 Months or LongerTotal
Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses
 (In Thousands)
Available-for-sale:
U.S. treasuries$9,079 $14 $4,462 $520 $13,541 $534 
U.S. government agency securities - government-sponsored enterprises16,295 107 2,938 562 19,233 669 
Municipal securities— — 33,040 7,470 33,040 7,470 
Residential mortgage-backed securities - government issued29,423 907 13,828 2,607 43,251 3,514 
Residential mortgage-backed securities - government-sponsored enterprises36,314 1,308 76,669 14,318 112,983 15,626 
Commercial mortgage-backed securities - government issued— — 2,677 595 2,677 595 
Commercial mortgage-backed securities - government-sponsored enterprises874 42 25,349 5,718 26,223 5,760 
 $91,985 $2,378 $158,963 $31,790 $250,948 $34,168 
 As of December 31, 2022
 Less than 12 Months12 Months or LongerTotal
Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses
 (In Thousands)
Available-for-sale:
U.S. treasuries$— $— $4,446 $532 $4,446 $532 
U.S. government agency securities - government-sponsored enterprises— — 2,969 531 2,969 531 
Municipal securities26,759 3,132 10,133 2,735 36,892 5,867 
Residential mortgage-backed securities - government issued9,624 436 9,807 1,923 19,431 2,359 
Residential mortgage-backed securities - government-sponsored enterprises71,474 6,433 34,849 6,509 106,323 12,942 
Commercial mortgage-backed securities - government issued1,236 112 1,696 406 2,932 518 
Commercial mortgage-backed securities - government-sponsored enterprises7,758 984 18,619 4,154 26,377 5,138 
 $116,851 $11,097 $82,519 $16,790 $199,370 $27,887 
  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 September 30, 20172023 and December 31, 2016.2022. At September 30, 2017,2023, the Corporation held 1430 held-to-maturity securities that were in an unrealized loss position. Such securitiesposition, 24 of which have not experienced credit rating downgrades; however, they have primarily declined in value due to the current interest rate environment. There were seven held-to-maturity securities that had been in a continuous unrealized loss position for twelve months or greater asgreater. Management assesses held-to-maturity securities for credit losses on a quarterly basis. The assessment includes review of September 30, 2017. It is expected that the Corporation will recover the entire amortized cost basiscredit ratings,
14
Table of each held-to-maturity security based upon anContents
identification of delinquency and evaluation of aforementionedmarket factors. Based on this analysis, management concludes the decline in fair value is due to market factors, specifically changes in interest rates. Accordingly, no other-than-temporary impairmentcredit loss provision was recorded in the unaudited Consolidated Statements of Income for the three and nine months ended September 30, 20172023 and 2016.2022.


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

 As of September 30, 2023
 Less than 12 Months12 Months or LongerTotal
Fair ValueUnrecognized
Losses		Fair ValueUnrecognized
Losses		Fair ValueUnrecognized
Losses
 (In Thousands)
Held-to-maturity:
Municipal securities$1,896 $46 $2,177 $94 $4,073 $140 
Residential mortgage-backed securities - government issued— — 1,213 99 1,213 99 
Residential mortgage-backed securities - government-sponsored enterprises— — 1,077 82 1,077 82 
Commercial mortgage-backed securities - government-sponsored enterprises— — 1,850 155 1,850 155 
 $1,896 $46 $6,317 $430 $8,213 $476 

 As of December 31, 2022
 Less than 12 Months12 Months or LongerTotal
Fair ValueUnrecognized
Losses		Fair ValueUnrecognized
Losses		Fair ValueUnrecognized
Losses
 (In Thousands)
Held-to-maturity:
Municipal securities$6,035 $52 $267 $18 $6,302 $70 
Residential mortgage-backed securities - government issued1,518 107 — — 1,518 107 
Residential mortgage-backed securities - government-sponsored enterprises1,444 93 — — 1,444 93 
Commercial mortgage-backed securities - government-sponsored enterprises1,904 102 — — 1,904 102 
 $10,901 $354 $267 $18 $11,168 $372 

On January 1, 2023, the Corporation adopted ASU 2016-13, which replaced the legacy GAAP other-than-temporary impairment (“OTTI”) model with a credit loss model. ASU 2016-13 requires an allowance on lifetime expected credit losses on held to maturity debt securities. As of January 1, 2023 and September 30, 2023, the Corporation estimated the expected credit losses to be immaterial based on the composition of the securities portfolio.
15
  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

Table of Contents
  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 LeaseCredit Losses


Loan and lease receivables consist of the following:
  September 30,
2017		 December 31,
2016
  (In Thousands)
Commercial real estate:    
Commercial real estate — owner occupied $182,755
 $176,459
Commercial real estate — non-owner occupied 461,586
 473,158
Land development 41,499
 56,638
Construction 115,660
 101,206
Multi-family 125,080
 92,762
1-4 family 40,173
 45,651
Total commercial real estate 966,753
 945,874
Commercial and industrial 447,223
 450,298
Direct financing leases, net 28,868
 30,951
Consumer and other:    
Home equity and second mortgages 7,776
 8,412
Other 17,447
 16,329
Total consumer and other 25,223
 24,741
Total gross loans and leases receivable 1,468,067
 1,451,864
Less:    
   Allowance for loan and lease losses 19,923
 20,912
   Deferred loan fees 1,354
 1,189
Loans and leases receivable, net $1,446,790
 $1,429,763
As of September 30, 2017 and December 31, 2016, the total amount of the Corporation’s ownership of SBA loans on the unaudited Consolidated Balance Sheets comprised of the following:
  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 September 30, 2017 and December 31, 2016, $11.9 million and $5.5 million of loans in this portfolio were considered impaired, respectively.
September 30,
2023		December 31,
2022
 (In Thousands)
Commercial real estate:  
Commercial real estate — owner occupied$236,058 $268,354 
Commercial real estate — non-owner occupied753,517 687,091 
Construction211,828 218,751 
Multi-family409,714 350,026 
1-4 family24,235 17,728 
Total commercial real estate1,635,352 1,541,950 
Commercial and industrial1,083,698 853,327 
Consumer and other44,808 47,938 
Total gross loans and leases receivable2,763,858 2,443,215 
Less:  
   Allowance for credit losses29,331 24,230 
   Deferred loan fees and costs, net(156)149 
Loans and leases receivable, net$2,734,683 $2,418,836 
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 September 30, 20172023, and 20162022, was $6.3$10.7 million and $3.3$9.2 million, respectively. The total principal amount of the guaranteed portionportions of SBA loans sold during the nine months ended September 30, 20172023, and 20162022, was $15.5$20.5 million and $36.4$26.6 million, respectively. Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the three and nine months ended September 30, 20172023, and 20162022, 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 September 30, 20172023, and December 31, 20162022, was $103.3$91.1 million and $105.1$88.5 million, respectively.


The total principal amount of transferred participation interests in other, non-SBA originated commercial loans during the three months ended September 30, 20172023, and 20162022, was $9.0$39.2 million and $7.9$25.4 million, respectively.respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer. The total principal amount of transferred participation interests in other, non-SBA originated commercial loans during the nine months ended September 30, 20172023, and 20162022, was $17.0$93.9 million and $17.7$70.6 million, respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer. No gain or loss was recognized on participation interests in other, non-SBA originated loans as they were transferred at or near the date of loan origination and the payments received for servicing the portion of the loans participated represents adequate compensation. The total outstanding balance of these transferred loans at September 30, 20172023, and December 31, 20162022, was $91.7$265.2 million and $102.7$222.9 million, respectively. As of September 30, 20172023, and December 31, 2016,2022, the total amount of the Corporation’s partial ownership of these transferred loans on the unaudited Consolidated Balance Sheets was $146.2$362.9 million and $106.1$339.0 million, respectively. No loans in this participation portfolio were considered impaired asAs of September 30, 20172023 and December 31, 2016.2022, the non-SBA originated participation portfolio contained no non-performing loans. The Corporation does not share in the participant’s portion of any potential charge-offs. The total amount ofThere were no loan participations purchased on the unaudited Consolidated Balance Sheets as of September 30, 20172023 and December 31, 2016 was $669,000 and $1.2 million, respectively.2022.


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


16
Table 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.Contents

The following tables illustratetable illustrates ending balances of the Corporation’s loan and lease portfolio, including impairednon-performing loans by class of receivable, and considering certain credit quality indicators asindicators:
September 30, 2023Term Loans Amortized Cost Basis by Origination Year
(In Thousands)20232022202120202019PriorRevolving Loans Amortized Cost BasisTotal
Commercial real estate — owner occupied
Category
I$23,686 $35,050 $30,899 $45,517 $22,815 $74,599 $854 $233,420 
II— — — — — 2,638 — 2,638 
III— — — — — — — — 
IV— — — — — — — — 
Total$23,686 $35,050 $30,899 $45,517 $22,815 $77,237 $854 $236,058 
Commercial real estate — non-owner occupied
Category
I$63,933 $88,468 $73,530 $50,707 $61,700 $327,526 $30,764 $696,628 
II— — — 2,277 16,621 9,177 — 28,075 
III— — — — 8,709 20,105 — 28,814 
IV— — — — — — — — 
Total$63,933 $88,468 $73,530 $52,984 $87,030 $356,808 $30,764 $753,517 
Construction
Category
I$22,994 $83,860 $48,685 $34,645 $439 $7,055 $14,150 $211,828 
II— — — — — — — — 
III— — — — — — — — 
IV— — — — — — — — 
Total$22,994 $83,860 $48,685 $34,645 $439 $7,055 $14,150 $211,828 
Multi-family
Category
I$66,904 $35,342 $48,858 $113,872 $23,015 $118,710 $3,013 $409,714 
II— — — — — — — — 
III— — — — — — — — 
IV— — — — — — — — 
Total$66,904 $35,342 $48,858 $113,872 $23,015 $118,710 $3,013 $409,714 
1-4 family
Category
I$— $8,161 $2,710 $2,378 $451 $2,941 $7,570 $24,211 
II— — — — — — — — 
III— — — — — — — — 
IV— — — — — 24 — 24 
Total$— $8,161 $2,710 $2,378 $451 $2,965 $7,570 $24,235 
17
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.
September 30, 2023Term Loans Amortized Cost Basis by Origination Year
(In Thousands)20232022202120202019PriorRevolving Loans Amortized Cost BasisTotal
Commercial and industrial
Category
I$238,317 $154,061 $92,754 $43,801 $23,071 $30,303 $426,772 $1,009,079 
II1,005 8,967 866 248 3,372 167 8,537 23,162 
III945 9,024 5,134 6,136 1,184 4,077 7,353 33,853 
IV592 5,325 1,272 425 126 315 9,549 17,604 
Total$240,859 $177,377 $100,026 $50,610 $27,753 $34,862 $452,211 $1,083,698 
Consumer and other
Category
I$6,102 $9,068 $3,266 $12,588 $2,162 $3,579 $8,043 $44,808 
II— — — — — — — — 
III— — — — — — — — 
IV— — — — — — — — 
Total$6,102 $9,068 $3,266 $12,588 $2,162 $3,579 $8,043 $44,808 
Total Loans
Category
I$421,936 $414,010 $300,702 $303,508 $133,653 $564,713 $491,166 $2,629,688 
II1,005 8,967 866 2,525 19,993 11,982 8,537 53,875 
III945 9,024 5,134 6,136 9,893 24,182 7,353 62,667 
IV592 5,325 1,272 425 126 339 9,549 $17,628 
Total$424,478 $437,326 $307,974 $312,594 $163,665 $601,216 $516,605 $2,763,858 
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
18
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 have been placed on non-accrual as managementnon-performing loans. 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. ImpairedNon-performing loans are 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.annually. 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.recorded. 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.basis.
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.
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:

September 30, 2023
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)
Performing loans and leases      
Commercial real estate:      
Owner occupied$— $— $— $— $236,058 $236,058 
Non-owner occupied— — — — 753,517 753,517 
Construction— — — — 211,828 211,828 
Multi-family— — — — 409,714 409,714 
1-4 family— — — — 24,211 24,211 
Commercial and industrial1,874 1,269 — 3,143 1,062,951 1,066,094 
Consumer and other— — — — 44,808 44,808 
Total1,874 1,269 — 3,143 2,743,087 2,746,230 
Non-performing loans and leases      
Commercial real estate:      
Owner occupied— — — — — — 
Non-owner occupied— — — — — — 
Construction— — — — — — 
Multi-family— — — — — — 
1-4 family— — — — 24 24 
Commercial and industrial408 1,406 5,184 6,998 10,606 17,604 
Consumer and other— — — — — — 
Total408 1,406 5,184 6,998 10,630 17,628 
Total loans and leases      
Commercial real estate:      
Owner occupied— — — — 236,058 236,058 
Non-owner occupied— — — — 753,517 753,517 
Construction— — — — 211,828 211,828 
Multi-family— — — — 409,714 409,714 
1-4 family— — — — 24,235 24,235 
Commercial and industrial2,282 2,675 5,184 10,141 1,073,557 1,083,698 
Consumer and other— — — — 44,808 44,808 
Total$2,282 $2,675 $5,184 $10,141 $2,753,717 $2,763,858 
Percent of portfolio0.08 %0.10 %0.19 %0.37 %99.63 %100.00 %
19
December 31, 2022
 September 30, 201730-59
Days Past Due		60-89
Days Past Due		Greater
Than 90
Days Past Due		Total Past DueCurrentTotal Loans and Leases
 30-59
Days Past Due		 60-89
Days Past Due		 Greater
Than 90 Days Past Due		 Total Past Due Current Total Loans and Leases (Dollars in Thousands)
 (Dollars in Thousands)
Accruing loans and leases            
Performing loans and leasesPerforming loans and leases      
Commercial real estate:            Commercial real estate:      
Owner occupied $—
 $—
 $—
 $—
 $175,675
 $175,675
Owner occupied$— $— $— $— $268,354 $268,354 
Non-owner occupied —
 —
 —
 —
 459,760
 459,760
Non-owner occupied215 — — 215 686,876 687,091 
Land development —
 —
 —
 —
 38,729
 38,729
Construction 392
 ��
 —
 392
 109,914
 110,306
Construction— — — — 218,751 218,751 
Multi-family —
 —
 —
 —
 125,080
 125,080
Multi-family— — — — 350,026 350,026 
1-4 family —
 —
 —
 —
 38,309
 38,309
1-4 family— — — — 17,698 17,698 
Commercial and industrial 2,257
 470
 —
 2,727
 430,539
 433,266
Commercial and industrial1,437 403 — 1,840 847,858 849,698 
Direct financing leases, net —
 —
 —
 —
 28,868
 28,868
Consumer and other:       

    
Home equity and second mortgages 229
 —
 —
 229
 7,547
 7,776
Other —
 —
 —
 —
 17,066
 17,066
Consumer and otherConsumer and other— — — — 47,938 47,938 
Total 2,878
 470
 —
 3,348
 1,431,487
 1,434,835
Total1,652 403 — 2,055 2,437,501 2,439,556 
Non-accruing loans and leases            
Non-performing loans and leasesNon-performing loans and leases      
Commercial real estate:            Commercial real estate:      
Owner occupied —
 —
 4,825
 4,825
 2,255
 7,080
Owner occupied— — — — — — 
Non-owner occupied —
 —
 1,791
 1,791
 35
 1,826
Non-owner occupied— — — — — — 
Land development —
 —
 —
 —
 2,770
 2,770
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— — — — 30 30 
Commercial and industrial 207
 497
 11,005
 11,709
 2,248
 13,957
Commercial and industrial439 126 2,464 3,029 600 3,629 
Direct financing leases, net —
 —
 —
 —
 —
 —
Consumer and other:            
Home equity and second mortgages —
 —
 —
 —
 —
 —
Other —
 —
 358
 358
 23
 381
Other— — — — — — 
Total 736
 507
 24,373
 25,616
 7,616
—
33,232
Total439 126 2,464 3,029 630 3,659 
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 occupied— — — — 268,354 268,354 
Non-owner occupied —
 —
 1,791
 1,791
 459,795
 461,586
Non-owner occupied215 — — 215 686,876 687,091 
Land development —
 —
 —
 —
 41,499
 41,499
Construction 392
 —
 5,353
 5,745
 109,915
 115,660
Construction— — — — 218,751 218,751 
Multi-family —
 —
 —
 —
 125,080
 125,080
Multi-family— — — — 350,026 350,026 
1-4 family 529
 10
 1,041
 1,580
 38,593
 40,173
1-4 family— — — — 17,728 17,728 
Commercial and industrial 2,464
 967
 11,005
 14,436
 432,787
 447,223
Commercial and industrial1,876 529 2,464 4,869 848,458 853,327 
Direct financing leases, net —
 —
 —
 —
 28,868
 28,868
Consumer and other:           
Home equity and second mortgages 229
 —
 —
 229
 7,547
 7,776
Other —
 —
 358
 358
 17,089
 17,447
Consumer and otherConsumer and other— — — — 47,938 47,938 
Total $3,614
 $977
 $24,373
 $28,964
 $1,439,103
 $1,468,067
Total$2,091 $529 $2,464 $5,084 $2,438,131 $2,443,215 
Percent of portfolio 0.24% 0.07% 1.66% 1.97% 98.03% 100.00%Percent of portfolio0.09 %0.02 %0.10 %0.21 %99.79 %100.00 %
20
  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%

The Corporation’s total impairednon-performing assets consisted of the following at September 30, 2017 and December 31, 2016, respectively.following:
September 30,
2023		December 31,
2022
 (In Thousands)
Non-performing loans and leases  
Commercial real estate:  
Commercial real estate — owner occupied$— $— 
Commercial real estate — non-owner occupied— — 
Construction— — 
Multi-family— — 
1-4 family24 30 
Total non-performing commercial real estate24 30 
Commercial and industrial17,604 3,629 
Consumer and other— — 
Total non-performing loans and leases17,628 3,659 
Repossessed assets, net61 95 
Total non-performing assets$17,689 $3,754 
  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,
2023		December 31,
2022
Total non-performing loans and leases to gross loans and leases0.64 %0.15 %
Total non-performing assets to total gross loans and leases plus repossessed assets, net0.64 0.15 
Total non-performing assets to total assets0.52 0.13 
Allowance for credit losses to gross loans and leases1.12 0.99 
Allowance for credit losses to non-performing loans and leases176.06 662.20 
  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, 2017 and December 31, 2016, $10.9 million and $12.8 million ofOccasionally, the non-accrualCorporation modifies loans and leases were considered troubled debt restructurings, respectively.to borrowers in financial distress. There wereno unfunded commitments associated with troubled debt restructured loans and leases as of September 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

All loans and leases modified as a troubled debt restructuring 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.

As of September 30, 2017 and December 31, 2016, the Corporation’s troubled debt restructurings grouped by type of concession were as follows:
  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

During the three months ended September 30, 2017, two commercial and industrial loans totaling $800,000 werefor a total of $716,000 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. No loans were modified to a troubled debt restructuring during the three and nine months ended September 30, 2016.

2023. The modifications consisted of payment deferrals. These loans are included in total non-performing loans and are currently 25 and 117 days past due, respectively. No loans were modified during the three and nine ended September 30, 2022. There were fiveno loans and leasesto borrowers experiencing financial distress that were modified in a troubled debt restructuring during the previous 12 months and which subsequently defaulted during the three and nine months ended September 30, 2017.2023 and 2022. There were no unfunded commitments associated with loans modified for borrowers experiencing financial distress as of September 30, 2023.

21
The following represents additional information regarding the Corporation’s impairednon-performing loans and leases, including performing troubled debt restructurings, by class:portfolio segment:
As of and for the Nine Months Ended September 30, 2023
Recorded
Investment(1)
Unpaid
Principal
Balance		Individual
Reserve
Average
Recorded
Investment(2)
Foregone
Interest
Income		Interest
Income
Recognized		Net
Foregone
Interest
Income
 (In Thousands)
With no individual reserve recorded:       
Commercial real estate:       
Owner occupied$— $— $— $— $— $— $— 
Non-owner occupied— — — — — — — 
Construction— — — — — — — 
Multi-family— — — — — — — 
1-4 family24 29 — 27 3 17 (14)
Commercial and industrial11,357 11,361 — 4,263 436 70 366 
Consumer and other— — — — — — — 
Total11,381 11,390 — 4,290 439 87 352 
With individual reserve recorded:       
Commercial real estate:       
Owner occupied— — — — — — — 
Non-owner occupied— — — — — — — 
Construction— — — — — — — 
Multi-family— — — — — — — 
1-4 family— — — — — — — 
Commercial and industrial6,247 6,247 3,982 3,412 265 21 244 
Consumer and other— — — — — — — 
Total6,247 6,247 3,982 3,412 265 21 244 
Total:       
Commercial real estate:       
Owner occupied— — — — — — — 
Non-owner occupied— — — — — — — 
Construction— — — — — — — 
Multi-family— — — — — — — 
1-4 family24 29 — 27 3 17 (14)
Commercial and industrial17,604 17,608 3,982 7,675 701 91 610 
Consumer and other— — — — — — — 
Grand total$17,628 $17,637 $3,982 $7,702 $704 $108 $596 
(1)The recorded investment represents the unpaid principal balance net of any partial charge-offs.
(2)Average recorded investment is calculated primarily using daily average balances.
22
As of and for the Year Ended December 31, 2022
 As of and for the Nine Months Ended September 30, 2017
Recorded
Investment(1)
Unpaid
Principal
Balance		Individual
Reserve
Average
Recorded
Investment(2)
Foregone
Interest
Income		Interest
Income
Recognized		Net
Foregone
Interest
Income
 Recorded
Investment		 Unpaid
Principal
Balance		 Impairment
Reserve		 
Average
Recorded
Investment(1)
 Foregone
Interest
Income		 Interest
Income
Recognized		 Net
Foregone
Interest
Income		 (In Thousands)
 (In Thousands)
With no impairment reserve recorded:              
With no individual reserve recorded:With no individual reserve recorded:       
Commercial real estate:              Commercial real estate:       
Owner occupied $6,727
 $6,727
 $—
 $4,898
 $394
 $—
 $394
 Owner occupied$— $— $— $180 $14 $759 $(745)
Non-owner occupied 1,826
 1,866
 —
 1,932
 99
 —
 99
 Non-owner occupied— — — — — 1 (1)
Land development 2,770
 5,441
 —
 3,218
 65
 —
 65
Construction 2,482
 2,482
 —
 611
 208
 —
 208
 Construction— — — — — 47 (47)
Multi-family —
 —
 —
 1
 —
 —
 —
 Multi-family— — — — — — — 
1-4 family 2,065
 2,319
 —
 2,387
 69
 —
 69
 1-4 family30 35 — 112 8 41 (33)
Commercial and industrial 1,740
 2,103
 —
 6,782
 509
 —
 509
Commercial and industrial1,037 1,037 — 3,153 277 587 (310)
Direct financing leases, net —
 —
 —
 —
 —
 —
 —
Consumer and other:              
Home equity and second mortgages 4
 4
 —
 6
 —
 —
 —
Other 358
 1,025
 —
 397
 45
 —
 45
Consumer and otherConsumer and other— — — — — — — 
Total 17,972
 21,967
 —
 20,232
 1,389
 —
 1,389
 Total1,067 1,072 — 3,445 299 1,435 (1,136)
With impairment reserve recorded:              
With individual reserve recorded:With individual 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 —
 —
—
—
 —
—
—
—
—
 —
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 industrial2,592 2,612 1,650 1,454 101 1 100 
Direct financing leases, net —
 —
 —
 —
 —
 —
 —
Consumer and other:              
Home equity and second mortgages —
 —
 —
 —
 —
 —
 —
Other 23
 23
 23
 10
 —
 —
 —
Consumer and otherConsumer and other— — — — — — — 
Total 15,535
 16,008
 5,790
 14,639
 580
 —
 580
 Total2,592 2,612 1,650 1,454 101 1 100 
Total:              Total:       
Commercial real estate:              Commercial real estate:       
Owner occupied 7,138
 7,138
 15
 5,322
 413
 —
 413
 Owner occupied— — — 180 14 759 (745)
Non-owner occupied 1,826
 1,866
 —
 1,932
 99
 —
 99
 Non-owner occupied— — — — — 1 (1)
Land development 2,770
 5,441
 —
 3,218
 65
 —
 65
Construction 5,354
 5,354
 94
 4,702
 316
 —
 316
 Construction— — — — — 47 (47)
Multi-family —
 —
 —
 1
 —
 —
 —
 Multi-family— — — — — — — 
1-4 family 2,065
 2,319
 —
 2,387
 69
 —
 69
 1-4 family30 35 — 112 8 41 (33)
Commercial and industrial 13,969
 14,805
 5,658
 16,896
 962
 —
 962
Commercial and industrial3,629 3,649 1,650 4,607 378 588 (210)
Direct financing leases, net —
 —
 —
 —
 —
 —
 —
Consumer and other:              
Home equity and second mortgages 4
 4
 —
 6
 —
 —
 —
Other 381
 1,048
 23
 407
 45
 —
 45
Consumer and otherConsumer and other— — — — — — — 
Grand total $33,507
 $37,975
 $5,790
 $34,871
 $1,969
 $—
 $1,969
 Grand total$3,659 $3,684 $1,650 $4,899 $400 $1,436 $(1,036)

(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.

  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$9,000 and $3.4 million$26,000 as of September 30, 20172023, and December 31, 2016,2022, 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 and $717,000 of loans as of September 30, 2017 and December 31, 2016, respectively, that were performing troubled debt restructurings, 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
23
Allowance for Credit Losses
The ACL is an estimate of the allowance for loan and leaseexpected credit losses the Corporation categorizes the portfolio into segmentson financial assets measured at amortized cost, which is measured using relevant information about past events, including historical credit loss experience on financial assets with similar risk characteristics. First,characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. A provision for credit losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors as discussed within Note 1 – Nature of Operations and Summary of Significant Accounting Policies included in the Corporation’s Form 10-Q for the period ended March 31, 2023.
During the first quarter of 2023, the Corporation evaluates loansadopted ASU 2016-13, including the CECL methodology for estimating the ACL. This standard was adopted using a modified retrospective approach on January 1, 2023, resulting in a $484,000 increase to the ACL and leases for potential impairment classification. The Corporation analyzes each loana $1.3 million increase to the unfunded credit commitments reserve. A cumulative effect adjustment resulting in an $1.4 million decrease to retained earnings and lease determineda $465,000 increase to be impaired on an individual basis to determine a specific reserve based upon the estimated valuedeferred tax assets was also recorded as of the underlying collateraladoption of ASU 2016-13.
Quantitative Considerations
The ACL is primarily calculated utilizing a discounted cash flow (“DCF”) model. Key inputs and assumptions used in this model are discussed below:
•Forecast model - For each portfolio segment, a loss driver analysis (“LDA”) was performed in order to identify appropriate loss drivers and create a regression model for collateral-dependent loans, or alternatively, the present value of expecteduse in forecasting cash flows. The LDA analysis utilized peer FFIEC Call Report data for all pools. The Corporation applies historical trends from established risk factorsplans to each categoryupdate the LDA annually.
•Probability of loans and leasesdefault – PD is the probability that an asset will be in default within a given time frame. The Corporation has not been individually evaluated fordefined default as when a charge-off has occurred, a loan goes to non-accrual status, or a loan is greater than 90 days past due. The forecast model is utilized to estimate PDs.
•Loss given default – LGD is the purpose of establishing the general portionpercentage of the allowance.asset not expected to be collected due to default. The LGD is derived from using a method referred to as Frye Jacobs which uses industry data.
•Prepayments and curtailments – Prepayments and curtailments are calculated based on the Corporation’s own data. This analysis is updated annually.
•Forecast and reversion – the Corporation has established a one-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average.
•Economic forecast – the Corporation utilizes a third party to provide economic forecasts under various scenarios, which are assessed against economic indicators and management’s observations in the market. As of June 30, 2023, the Corporation selected a forecast which forecasts unemployment between 3.81% and 4.58% and GDP growth change between 0.66% and 1.39% over the next four quarters. As of September 30, 2023, the Corporation selected a forecast which forecasts unemployment between 3.89% and 4.10% and GDP growth change between 1.06% and 1.87% over the next four quarters. Following the forecast period, the model reverts to long-term averages over four quarters. Management believes that the resulting quantitative reserve appropriately balances economic indicators with identified risks.

Qualitative Considerations
In addition to the quantitative model, management considers the need for qualitative adjustment for risks not considered in the DCF. Factors that are considered by management in determining loan collectability and the appropriate level of the ACL are listed below:
•The Corporation’s lending policies and procedures, including changes in lending strategies, underwriting standards and practices for collections, write-offs, and recoveries;
•Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the Corporation operates that affect the collectability of financial assets;
•The experience, ability, and depth of the Corporation’s lending, investment, collection, and other relevant management and staff;
•The volume of past due financial assets, the volume of non-performing assets, and the volume and severity of adversely classified or graded assets;
•The existence and effect of industry concentrations of credit;
•The nature and volume of the portfolio segment or class;
•The quality of the Corporation’s credit review function;
•The effect of other external factors such as the regulatory, legal and technological environments, competition, and events such as natural disasters or pandemics.

24
ACL Activity
A summary of the activity in the allowance for loan and leasecredit losses by portfolio segment is as follows:

 As of and for the Three Months Ended September 30, 2023
Owner OccupiedNon-Owner OccupiedConstructionMulti-Family1-4 FamilyCommercial
and
Industrial		Consumer
and Other		Total
 (In Thousands)
Beginning balance$1,721 $5,241 $2,293 $3,426 $249 $16,223 $544 $29,697 
Charge-offs— — — — — (562)— (562)
Recoveries3 — — — 9 72 — 84 
Net recoveries (charge-offs)3 — — — 9 (490)— (478)
Provision for credit losses(151)26 68 96 (10)1,833 (45)1,817 
Ending balance$1,573 $5,267 $2,361 $3,522 $248 $17,566 $499 $31,036 
Components:
Allowance for loan losses1,556 5,209 1,441 3,512 228 16,946 439 29,331 
Allowance for unfunded credit commitments17 58 920 10 20 620 60 1,705 
Total ACL$1,573 $5,267 $2,361 $3,522 $248 $17,566 $499 $31,036 
 As of and for the Three Months Ended September 30, 2022
Commercial Real EstateCommercial
and
Industrial		Consumer and OtherTotal
 (In Thousands)
Beginning balance$13,410 $9,866 $828 $24,104 
Charge-offs— (33)(21)(54)
Recoveries23 50 8 81 
Net recoveries23 17 (13)27 
Provision for credit losses(492)629 (125)12 
Ending balance$12,941 $10,512 $690 $24,143 
 As of and for the Nine Months Ended September 30, 2023
Owner OccupiedNon-Owner OccupiedConstructionMulti-Family1-4 FamilyCommercial
and
Industrial		Consumer
and Other		Total
 (In Thousands)
Beginning balance$1,766 $5,108 $1,646 $2,634 $207 $12,403 $466 $24,230 
Impact of adopting ASC 326(204)(242)796 (386)(45)1,873 26 1,818 
Charge-offs— — — — — (1,057)— (1,057)
Recoveries5 1 — — 30 386 13 435 
Net recoveries (charge-offs)5 1 — — 30 (671)13 (622)
Provision for credit losses6 400 (81)1,274 56 3,961 (6)5,610 
Ending balance$1,573 $5,267 $2,361 $3,522 $248 $17,566 $499 $31,036 
Components:
Allowance for loan losses1,556 5,209 1,441 3,512 228 16,946 439 29,331 
Allowance for unfunded credit commitments17 58 920 10 20 620 60 1,705 
Total ACL$1,573 $5,267 $2,361 $3,522 $248 $17,566 $499 $31,036 
  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
25
  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 Nine Months Ended September 30, 2022
Commercial Real EstateCommercial
and
Industrial		Consumer and OtherTotal
 (In Thousands)
Beginning balance$15,110 $8,413 $813 $24,336 
Charge-offs— (140)(21)(161)
Recoveries4,259 251 27 4,537 
Net recoveries (charge-offs)4,259 111 6 4,376 
Provision for credit losses(6,428)1,988 (129)(4,569)
Ending balance$12,941 $10,512 $690 $24,143 


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

  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 leasecredit losses and balances by type of allowance methodology.
 As of September 30, 2023
Owner OccupiedNon-Owner OccupiedConstructionMulti-Family1-4 FamilyCommercial
and
Industrial		Consumer
and Other		Total
 (In Thousands)
Allowance for credit losses:    
Collectively evaluated for credit losses$1,556 $5,209 $1,441 $3,512 $228 $12,964 $439 $25,349 
Individually evaluated for credit loss— — — — — 3,982 — 3,982 
Total$1,556 $5,209 $1,441 $3,512 $228 $16,946 $439 $29,331 
Loans and lease receivables:    
Collectively evaluated for credit losses$236,058 $753,517 $211,828 $409,714 $24,211 $1,066,094 $44,808 $2,746,230 
Individually evaluated for credit loss— — — — 24 17,604 — 17,628 
Total$236,058 $753,517 $211,828 $409,714 $24,235 $1,083,698 $44,808 $2,763,858 
 As of December 31, 2022
Commercial Real EstateCommercial
and
Industrial		Consumer
and Other		Total
 (In Thousands)
Allowance for credit losses:    
Collectively evaluated for credit losses$11,361 $10,753 $466 $22,580 
Individually evaluated for credit loss— 1,650 — 1,650 
Total$11,361 $12,403 $466 $24,230 
Loans and lease receivables:    
Collectively evaluated for credit losses$1,541,920 $849,698 $47,938 $2,439,556 
Individually evaluated for credit loss30 3,629 — 3,659 
Total$1,541,950 $853,327 $47,938 $2,443,215 


26
  As of September 30, 2017
  
Commercial
Real Estate
 
Commercial
and
Industrial
 
Consumer
and Other
 Total
  (Dollars in Thousands)
Allowance for loan and lease losses:        
Collectively evaluated for impairment $9,426
 $4,185
 $522
 $14,133
Individually evaluated for impairment 109
 5,658
 23
 5,790
Loans acquired with deteriorated credit quality —
 —
 —
 —
Total $9,535
 $9,843
 $545
 $19,923
Loans and lease receivables:        
Collectively evaluated for impairment $947,600
 $462,122
 $24,838
 $1,434,560
Individually evaluated for impairment 18,535
 13,962
 385
 32,882
Loans acquired with deteriorated credit quality 618
 7
 —
 625
Total $966,753
 $476,091
 $25,223
 $1,468,067

  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 is notalso leases office equipment. The Corporation recognizes a right-of-use asset and an operating lease liability for all leases, with the general partner, does not have controlling ownershipexception of short-term leases. Right-of-use assets represent the right to use an underlying asset for the lease term and is not the primary beneficiary in any of these limited partnerships and the limited partnerships have not been consolidated. These investmentslease liabilities are accounted for using the equity method of accounting and are evaluated for impairmentrecognized at the endlease commencement date based on the estimated present value of each reporting period. For historic rehabilitation tax credits,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.
In June 2023, the Corporation beginsrelocated its Kansas City metropolitan area office resulting in a $2.6 million right-of-use asset and $3.7 million lease liability. The Corporation received a $1.1 million tenant improvement allowance related to evaluate its investments for impairment at the time the credit is earned,this lease, which is typically inrecognized as a lease incentive and deducted from the yearright-of-use asset.
The components of total lease expense were as follows:
For the Three Months Ended September 30,For the Nine Months Ended September 30,
2023202220232022
(In Thousands)
Operating lease cost$338 $382 $1,088 $1,147 
Short-term lease cost36 38 145 112 
Variable lease cost139 142 436 408 
Less: sublease income— (45)(75)(134)
Total lease cost, net$513 $517 $1,594 $1,533 

Quantitative information regarding the project is placed in service, throughCorporation’s operating leases was as follows:
September 30, 2023December 31, 2022
Weighted-average remaining lease term (in years)7.898.06
Weighted-average discount rate3.56 %3.40 %
The following maturity analysis shows 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 earnedundiscounted cash flows due on the project through the seven-year compliance period.Corporation’s operating lease liabilities:
Historic Rehabilitation Tax Credits
(In Thousands)
2023$374 
20241,527 
20251,408 
20261,400 
20271,428 
Thereafter4,688 
Total undiscounted cash flows10,825 
Discount on cash flows(1,589)
Total lease liability$9,236 
In 2015, the Corporation invested in a development entity through BOC, a wholly-owned subsidiary

27
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.Note 7 — Other Assets
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. 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, 2016 is included in accrued interest receivable and other assets.
A summary of accrued interest receivable and other assets iswas as follows:
 September 30, 2017 December 31, 2016 September 30, 2023December 31, 2022
 (In Thousands) (In Thousands)
Accrued interest receivable $4,722
 $4,677
Accrued interest receivable$12,380 $9,403 
Net deferred tax asset 5,543
 4,052
Net deferred tax asset10,624 11,711 
Investment in historic development entities 1,154
 737
Investment in historic development entities2,461 2,176 
Investment in a CDE 6,719
 7,106
Investment in low-income housing development entityInvestment in low-income housing development entity21,744 13,514 
Investment in limited partnerships 4,607
 3,963
Investment in limited partnerships15,196 13,599 
Investment in Trust II 315
 315
Fair value of interest rate swaps 1,380
 352
Prepaid expenses 3,338
 3,074
Prepaid expenses4,762 3,821 
Other assets 4,450
 4,331
Other assets11,584 8,883 
Total accrued interest receivable and other assets $32,228
 $28,607
Total accrued interest receivable and other assets$78,751 $63,107 


Note 78 — Deposits
The composition of deposits at September 30, 2017 and December 31, 2016 is shown below. Average balances represent year-to-date averages.
 September 30, 2023December 31, 2022
BalanceAverage
Balance		Average RateBalanceAverage
Balance		Average Rate
 (Dollars in Thousands)
Non-interest-bearing transaction accounts$430,011 $455,653 — %$537,107 $566,230 — %
Interest-bearing transaction accounts779,789 657,155 3.26 576,601 503,668 0.79 
Money market accounts694,199 663,284 3.01 698,505 761,469 0.82 
Certificates of deposit285,265 271,684 3.95 153,757 97,448 1.39 
Wholesale deposits467,743 311,038 4.15 202,236 48,825 3.31 
Total deposits$2,657,007 $2,358,814 2.76 $2,168,206 $1,977,640 0.67 

A summary of annual maturities of in-market and wholesale certificates of deposit at September 30, 2023 is as follows:
(In Thousands)
Maturities during the year ended December 31, 
2023$365,358 
2024121,040 
202517,504 
202650,660 
202773,837 
Thereafter14,609 
$643,008 

Wholesale deposits include $357.7 million and $110.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at September 30, 2023, compared to $187.2 million and $15.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at December 31, 2022. The Corporation has entered into derivative contracts hedging a portion of the certificates of deposit included in the 2023 maturities above. As of September 30, 2023, the notional amount of derivatives designated as cash flow hedges totaled $256.3 million with a weighted average remaining maturity of 4.4 years and a weighted average rate of 3.79%.

28
  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
Certificates of deposit and wholesale deposits denominated in amounts greater than $250,000 were $109.0 million at September 30, 2023 and $81.6 million at December 31, 2022.




Note 89 — FHLB Advances, Other Borrowings and Junior Subordinated Notes and Debentures
The composition of borrowed funds at September 30, 2017 and December 31, 2016 is shown below. Average balances represent year-to-date averages.
 September 30, 2023December 31, 2022
BalanceWeighted Average
Balance		Weighted
Average Rate		BalanceWeighted Average
Balance		Weighted
Average Rate
 (Dollars in Thousands)
Federal funds purchased$— $4 5.35 %$— $14 7.42 %
FHLB advances314,500 368,913 2.54 416,380 414,191 1.70 
Line of credit— 50 7.24 — 85 2.78 
Other borrowings— 802 8.31 6,088 8,624 5.23 
Subordinated notes and debentures49,391 34,495 4.84 34,340 35,095 5.06 
Junior subordinated notes(1)
— — — — 2,429 20.75 
 $363,891 $404,264 2.75 $456,808 $460,438 2.12 
(1)Weighted average rate of junior subordinated notes and debentures reflects the accelerated amortization of subordinated debt issuance costs as a result of the early redemption of the junior subordinated notes during the first quarter of 2022.
A summary of annual maturities of borrowings at September 30, 2023 is as follows:
(In Thousands)
Maturities during the year ended December 31, 
2023$103,000 
202435,500 
202548,000 
202660,000 
202728,000 
Thereafter89,391 
$363,891 
The Corporation issued new subordinated debentures as of September 29, 2023. The aggregate principal amount of the newly issued subordinated debentures was $15.0 million which qualified as Tier 2 capital. The subordinated debentures bear a fixed interest rate of 8.0% with a maturity date of September 29, 2033. The Corporation may, at its option, redeem the debentures, in whole or part, at any time after the fifth anniversary of issuance. As of September 30, 2023, $608,000 of debt issuance costs remain in the subordinated note and debenture payable balance, of which $50,000 is related to the recently issued subordinated debentures.
  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 other borrowings reflects the cost of prepaying a secured borrowing during the second quarter of 2017.

As of December 31, 2022, the Corporation had other borrowings of $6.1 million, which consisted of sold loans accounted for as secured borrowings because they did not qualify for true sale accounting. As of September 30, 2023, the Corporation had no other borrowings. The Corporation has entered into derivative contracts hedging a portion of the borrowings included in the 2023 maturities above. As of September 30, 2023, the notional amount of derivatives designated as cash flow hedges totaled $96.4 million with a weighted average remaining maturity of 2.7 years and a weighted average rate of 1.78%.
As of September 30, 20172023 and December 31, 2016,2022, the Corporation was in compliance with its debt covenants under its third-party secured senior line of credit. PerOn February 20, 2023, the promissory note datedcredit line was renewed for one additional year with pricing terms of 1-month term SOFR + 2.36% and a maturity date of February 19, 2017,2024.
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Note 10 — Preferred Stock
On March 4, 2022, the Corporation paysissued 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 commitment feeliquidation 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 this linethe Series A Preferred Stock when and if declared by the Board, at a fixed rate of credit.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 both the three and nine months ended September 30, 20172023, the Board of Directors declared an aggregate preferred stock dividend of $218,000 and 2016,$656,000, respectively. The Series A Preferred Stock is perpetual and has no stated maturity. The Corporation may redeem the Corporation incurred interest expense dueSeries A Preferred Stock at its option at a redemption price equal to this fee$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 $10,000.the Series A Preferred Stock.

Note 911 — 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$983,000 at September 30, 2017,2023, 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 September 30,As of and for the Nine Months Ended September 30,
2023202220232022
 (In Thousands)
Balance at the beginning of the period$752 $673 $441 $635 
SBA recourse provision242 96 565 134 
Charge-offs, net(11)(6)(23)(6)
Balance at the end of the period$983 $763 $983 $763 
  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,
30
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 particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Assets and liabilities measured at fair value on a recurring basis, segregated by fair value hierarchy level, are summarized below:
September 30, 2023
Fair Value Measurements Using 
Level 1Level 2Level 3Total
 (In Thousands)
Assets:   
Securities available-for-sale:
U.S. treasuries$— $13,541 $— $13,541 
U.S. government agency securities - government-sponsored enterprises— 27,939 — 27,939 
Municipal securities— 33,040 — 33,040 
Residential mortgage-backed securities - government issued— 55,760 — 55,760 
Residential mortgage-backed securities - government-sponsored enterprises— 112,983 — 112,983 
Commercial mortgage-backed securities - government issued— 2,677 — 2,677 
Commercial mortgage-backed securities - government-sponsored enterprises— 26,223 — 26,223 
Interest rate swaps— 93,702 — 93,702 
Liabilities:   
Interest rate swaps— 78,696 — 78,696 
31
 September 30, 2017December 31, 2022
 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
 $—
 $3,807
Municipal obligations —
 9,332
 —
 9,332
Collateralized mortgage obligations - government issued —
 22,902
 —
 22,902
Collateralized mortgage obligations - government-sponsored enterprises —
 95,089
 —
 95,089
U.S. treasuriesU.S. treasuries$— $4,445 $— $4,445 
U.S. government agency securities - government-sponsored enterprisesU.S. government agency securities - government-sponsored enterprises— 13,205 — 13,205 
Municipal securitiesMunicipal securities— 39,311 — 39,311 
Residential mortgage-backed securities - government issuedResidential mortgage-backed securities - government issued— 19,431 — 19,431 
Residential mortgage-backed securities - government-sponsored enterprisesResidential mortgage-backed securities - government-sponsored enterprises— 106,323 — 106,323 
Commercial mortgage-backed securities - government issuedCommercial mortgage-backed securities - government issued— 2,932 — 2,932 
Commercial mortgage-backed securities - government-sponsored enterprisesCommercial mortgage-backed securities - government-sponsored enterprises— 26,377 — 26,377 
Interest rate swaps —
 1,380
 —
 1,380
Interest rate swaps— 68,581 — 68,581 
Liabilities:       
Liabilities: 
Interest rate swaps —
 1,380
 —
 1,380
Interest rate swaps— 61,419 — 61,419 

  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 three and nine months ended September 30, 20172023 or the year ended December 31, 20162022 related to the above measurements.

Assets and liabilities measured at fair value on a non-recurring basis, segregated by fair value hierarchy are summarized below:
September 30, 2023
 Fair Value Measurements Using
 Level 1Level 2Level 3Total
 (In Thousands)
Collateral-dependent loans$— $— $2,559 $2,559 
Repossessed assets— — 61 61 
Loan servicing rights— — 1,443 1,443 
 September 30, 2017December 31, 2022
 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
 $16,298
Impaired loans$— $— $1,022 $1,022 
Foreclosed properties —
 1,472
 —
 1,472
Repossessed assetsRepossessed assets— — 95 95 
Loan servicing rightsLoan servicing rights— — 1,491 1,491 


  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

ImpairedCollateral-dependent loans were written down to the fair value of their underlying collateral less costs to sell of $16.3$2.6 million and $13.4$1.0 million at September 30, 20172023 and December 31, 2016,2022, respectively, through the establishment of specific reserves or by recording charge-offs when the carrying value exceeded the fair value of the underlying collateral of impaired loans. 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%10% - 90%100% as of the measurement date of September 30, 2017.2023. The weighted average of those unobservable inputs was 20%41%. 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,
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Table of Contents
Repossessed assets, upon initial recognition, are remeasured and reported at fair value through a charge-off to the allowance for loan and leasecredit losses, if deemed necessary, based upon the fair value of the foreclosed property.repossessed asset. The fair value of a foreclosed property,repossessed asset, 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:
September 30, 2023
Carrying
Amount		Fair Value
TotalLevel 1Level 2Level 3
 (In Thousands)
Financial assets:  
Cash and cash equivalents$132,915 $132,915 $132,915 $— $— 
Securities available-for-sale272,163 272,163 — 272,163 — 
Securities held-to-maturity8,689 8,213 — 8,213 — 
Loans held for sale4,168 4,501 — 4,501 — 
Loans and lease receivables, net2,734,683 2,689,337 — — 2,689,337 
Federal Home Loan Bank stock13,528 N/AN/AN/AN/A
Accrued interest receivable12,380 12,380 12,380 — — 
Interest rate swaps93,702 93,702 — 93,702 — 
Financial liabilities: 
Deposits2,657,007 2,650,876 2,013,999 636,877 — 
Federal Home Loan Bank advances and other borrowings363,891 346,586 — 346,586 — 
Accrued interest payable10,079 10,079 10,079 — — 
Interest rate swaps78,696 78,696 — 78,696 — 
Off-balance sheet items: 
Standby letters of credit132 132 — — 132 
N/A = The fair value is not applicable due to restrictions placed on transferability
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 September 30, 2017 December 31, 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$102,682 $102,682 $102,682 $— $— 
Securities available-for-sale 131,130
 131,130
 —
 131,130
 —
Securities available-for-sale212,024 212,024 — 212,024 — 
Securities held-to-maturity 38,873
 39,274
 —
 39,274
 —
Securities held-to-maturity12,635 12,270 — 12,270 — 
Loans held for sale —
 —
 —
 —
 —
Loans held for sale2,632 2,829 — 2,829 — 
Loans and lease receivables, net 1,446,790
 1,427,071
 —
 7,637
 1,419,434
Loans and lease receivables, net2,418,836 2,394,702 — — 2,394,702 
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 stock17,812 N/AN/AN/AN/A
Accrued interest receivable 4,722
 4,722
 4,722
 —
 —
Accrued interest receivable9,403 9,403 9,403 — — 
Interest rate swaps 1,380
 1,380
 —
 1,380
 —
Interest rate swaps68,581 68,543 — 68,543 — 
Financial liabilities:   
      Financial liabilities: 
Deposits 1,423,724
 1,424,275
 1,032,379
 391,896
 —
Deposits2,168,206 2,167,444 1,827,215 340,229 — 
Federal Home Loan Bank advances and other borrowings 167,884
 152,391
 —
 152,391
 —
Federal Home Loan Bank advances and other borrowings456,808 440,242 — 440,242 — 
Junior subordinated notes 10,015
 8,829
 —
 —
 8,829
Accrued interest payable 2,317
 2,317
 2,317
 —
 —
Accrued interest payable4,053 4,053 4,053 — — 
Interest rate swaps 1,380
 1,380
 —
 1,380
 —
Interest rate swaps61,419 61,419 — 61,419 — 
Off-balance-sheet items:   
      
Off-balance sheet items:Off-balance sheet items: 
Standby letters of credit 86
 86
 —
 —
 86
Standby letters of credit184 184 — — 184 



  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
N/A = The fair value is not applicable due to restrictions placed on transferability
Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the unaudited Consolidated Balance Sheets. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Corporation.
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
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contracts for the effect of nonperformance risk, the Corporation considers the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
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.


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.
At As of September 30, 2017,2023 and December 31, 2022, the aggregate amortizing notional value of interest rate swaps with various commercial borrowerscredit valuation allowance was $52.3 million. $38,000.
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 asset of $78.7 million and gross liability of $291,000 as noof September 30, 2023. No right of offset existed with the dealer counterparty swaps as of September 30, 2017.2023.
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 three and nine months ended September 30, 20172023 and 20162022 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 related to cash outflows attributable to future wholesale deposit or short-term FHLB advance borrowings. The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affect earnings. A pre-tax unrealized gain of $5.3 million and $7.5 million was recognized in other comprehensive income for the three and nine months ended September 30, 2023 and there were no ineffective portions of the hedges. A pre-tax unrealized gain of $3.2 million and $8.9 million was recognized in other comprehensive income for the three and nine months ended September 30, 2022 and there were no ineffective portions of the hedges.

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
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rate. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affect earnings. A pre-tax unrealized gain of $421,000 and $353,000 was recognized in other comprehensive income for the three and nine months ended September 30, 2023 and there was no ineffective portion of these hedges. A pre-tax unrealized gain of $215,000 and $592,000 was recognized in other comprehensive income for the three and nine months ended September 30, 2022 and there was no ineffective portion of these hedges.

As of September 30, 2023
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 clients4 $59,167 5.29$291 
Interest rate swap agreements on loans with third-party counterparties99 $908,576 6.36$78,405 
Derivatives designated as hedging instruments
Interest rate swap related to AFS securities11 $12,500 8.53$955 
Interest rate swap related to wholesale funding32 352,655 7.1514,051 
Included in Derivative liabilities
Derivatives not designated as hedging instruments
Interest rate swap agreements on loans with commercial loan clients95 $849,409 6.44$78,696 
As of December 31, 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 clients2 $65,352 4.83$1,010 
Interest rate swap agreements on loans with third-party counter parties84 744,233 7.3760,409 
Derivatives designated as hedging instruments
Interest rate swap related to AFS securities11 $12,500 9.28$602 
Interest rate swap related to wholesale funding11 116,400 2.886,560 
Included in Derivative liabilities
Derivatives not designated as hedging instruments
Interest rate swap agreements on loans with commercial loan clients82 $678,881 7.61$61,419 

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
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amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The Corporation regularly reviews and updates, when appropriate, its Capital and Liquidity Action Plan, which is designed to help ensure appropriate capital adequacy, to plan for future capital needs, and to ensure that the Corporation serves as a source of financial strength to the Bank. The Corporation’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 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 (“FRB”) 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.


In July 2013, the FRB and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision’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 above 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, both2023, the Corporation’s capital levels exceeded the regulatory minimums 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:
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As of September 30, 2023
 Actual Minimum Required for Capital Adequacy Purposes For Capital Adequacy Purposes Plus Capital Conservation Buffer Minimum Required to Be Well
Capitalized Under Prompt Corrective Action Requirements
Actual (1)
Minimum Required for Capital Adequacy PurposesFor Capital Adequacy Purposes Plus Capital Conservation BufferMinimum Required to Be Well
Capitalized Under Prompt Corrective Action Requirements
 Amount Ratio Amount Ratio Amount Ratio Amount Ratio AmountRatioAmountRatioAmountRatioAmountRatio
 (Dollars in Thousands) (Dollars in Thousands)
As of September 30, 2017                
Total capital
(to risk-weighted assets)
                Total capital
(to risk-weighted assets)
Consolidated $209,495
 11.91% $140,737
 8.00% $162,727
 9.25% N/A
 N/A
Consolidated$365,058 11.20 %$260,796 8.00 %$342,295 10.50 %N/AN/A
First Business Bank 205,877
 11.75
 140,132
 8.00
 162,027
 9.25
 $175,164
 10.00%First Business Bank365,705 11.22 260,850 8.00 342,366 10.50 $326,063 10.00 %
Tier 1 capital
(to risk-weighted assets)
                Tier 1 capital
(to risk-weighted assets)
Consolidated $165,873
 9.43% $105,553
 6.00% $127,543
 7.25% N/A
 N/A
Consolidated$284,974 8.74 %$195,597 6.00 %$277,096 8.50 %N/AN/A
First Business Bank 185,954
 10.62
 105,099
 6.00
 126,994
 7.25
 $140,132
 8.00%First Business Bank335,012 10.27 195,638 6.00 277,154 8.50 $260,850 8.00 %
Common equity tier 1 capital
(to risk-weighted assets)
                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
Consolidated$272,982 8.37 %$146,698 4.50 %$228,197 7.00 %N/AN/A
First Business Bank 185,954
 10.62
 78,824
 4.50
 100,720
 5.75
 $113,857
 6.50%First Business Bank335,012 10.27 146,728 4.50 228,244 7.00 $211,941 6.50 %
Tier 1 leverage capital
(to adjusted assets)
                Tier 1 leverage capital
(to adjusted assets)
Consolidated $165,873
 9.39% $70,654
 4.00% $70,654
 4.00% N/A
 N/A
Consolidated$284,974 8.65 %$131,840 4.00 %$131,840 4.00 %N/AN/A
First Business Bank 185,954
 10.56
 70,409
 4.00
 70,409
 4.00
 $88,011
 5.00%First Business Bank335,012 10.16 131,845 4.00 131,845 4.00 $164,807 5.00 %

(1)2023 capital amounts include $1.0 million of additional stockholders’ equity as elected by the Corporation and permitted by federal banking regulatory agencies. Risk-weighted assets were also adjusted accordingly.

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:
As of December 31, 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$323,893 11.26 %$230,180 8.00 %$302,111 10.50 %N/AN/A
First Business Bank323,021 11.22 230,367 8.00 302,357 10.50 $287,959 10.00 %
Tier 1 capital
(to risk-weighted assets)
Consolidated$264,843 9.20 %$172,635 6.00 %$244,566 8.50 %N/AN/A
First Business Bank298,312 10.36 172,775 6.00 244,765 8.50 $230,367 8.00 %
Common equity tier 1 capital
(to risk-weighted assets)
Consolidated$252,851 8.79 %$129,476 4.50 %$201,407 7.00 %N/AN/A
First Business Bank298,312 10.36 129,581 4.50 201,571 7.00 $187,173 6.50 %
Tier 1 leverage capital
(to adjusted assets)
Consolidated$264,843 9.17 %$115,464 4.00 %$115,464 4.00 %N/AN/A
First Business Bank298,312 10.34 115,402 4.00 115,402 4.00 $144,252 5.00 %
38
  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

Table of Contents
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, or any future public health epidemics.
•Competitive pressures among depository and other financial institutions nationally and in our markets.
•Increases in defaults by borrowers and other delinquencies.
•Our ability to manage growth effectively, including the successful expansion of our client support, administrative infrastructure, and internal management systems.
•Fluctuations in interest rates and market prices.
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.
•Recent volatility in the banking sector may result in new legislation, regulations or policy changes that could subject the Corporation and the Bank to increased government regulation and supervision.
•The proportion of the Corporation’s deposit account balances that exceed FDIC insurance limits may expose the Bank to enhanced liquidity risk.
•The Corporation may be subject to increases in FDIC insurance assessments as a result of the recent bank failures.
These risks could cause actual results to differ materially from what we have anticipated or projected. These risk factors and uncertainties should be carefully considered by our shareholders and potential investors. See Part I, Item 1A — Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 20162022, Part II, Item 1A — Risk Factors of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, and in this report, below, for discussion relating to risk factors impacting us. Investors should not place undue reliance on any such forward-looking statements, which speak only as of the date made. TheThese 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 rangecompany retirement plans. Our private wealth management services include trust and estate administration, financial planning, investment management, and private banking for executives and owners of deposit products.our business banking clients and others. Our bank consulting experts provide investment portfolio administrative services, asset liability management services, and asset liability management process validation for other financial institutions. We do not utilize a branch network to attract retail clients. Our operating philosophymodel is predicated on deep client relationships, fostered by localfinancial expertise, combined with the efficiency ofand an efficient, centralized administrative functions such as information technology, loan and deposit operations, finance and accounting, credit administration compliance and human resources. We believe we have a niche business bankingfunction delivering best in class client satisfaction. Our 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 nine months ended September 30, 20172023 include:

Total assets increased•Net income available to $1.786 billion ascommon shareholders totaled $9.7 million, or diluted earnings per share of September 30, 2017 compared to $1.781 billion as of December 31, 2016.
Net income$1.17, for the three months ended September 30, 2017 was $2.6 million2023, compared to net$10.6 million, or diluted earnings per share of $1.25, for the same period in 2022. Net income available to common shareholders totaled $26.6 million, or diluted earnings per share of $2.7$3.19, for the nine months ended September 30, 2023, compared to $30.2 million, or diluted earnings per share of $3.57, for the same period in 2022.
•Annualized return on average assets (“ROAA”) for the three months ended September 30, 2016. Net income2023 measured 1.19% compared to 1.54% for the same period in 2022. Annualized ROAA for the nine months ended September 30, 2017 was $7.9 million2023 measured 1.13% compared to 1.49% for the same period in 2022.
•Return on average common equity (“ROACE”) is defined as net income available to common shareholders divided by average equity less average preferred stock, if any. ROACE was 14.62% for the three months ended September 30, 2023, compared to 17.44% for the same period in 2022. ROACE was 13.72% for the nine months ended September 30, 2023, compared to 16.97% for the same period in 2022.
•Pre-tax, pre-provision (“PTPP”) adjusted earnings, which excludes certain one-time and discrete items, and PTPP ROAA for the three months ended September 30, 2023 were $14.1 million and 1.72%, respectively, compared to $14.2 million and 2.05% in the same period in 2022. PTPP and PTPP ROAA were $40.9 million and 1.74%, respectively, for the nine months ended September 30, 2023, compared to $34.9 million and 1.72% in the same period in 2022.
•Fees in lieu of $10.9interest, defined as prepayment fees, asset-based loan fees, non-accrual interest, and loan fee amortization, totaled $582,000 for the three months ended September 30, 2023, compared to $807,000 for the same period in 2022. Fees in lieu of interest totaled $2.2 million for the nine months ended September 30, 2016.
2023, compared to $4.0 million for the same period in 2022.
Diluted earnings per common share•Net interest margin was 3.76% for the three months ended September 30, 2017 were $0.302023 compared to diluted earnings per common share4.01% for the same period in 2022. Adjusted net interest margin, which excludes certain one-time and volatile items including fees in lieu of $0.31interest, was 3.66% for the three months ended September 30, 2016. Diluted earnings per common share2023, compared to 3.89% for the same period in 2022. Net interest margin was 3.81% for the nine months ended September 30, 2017 were $0.902023 compared to diluted earnings per common share of $1.263.71% for the same period in 2022. Adjusted net interest margin, which excludes certain one-time and volatile items, was 3.68% for the nine months ended September 30, 2016.
Annualized return on average assets (“ROAA”) and annualized return on average equity (“ROAE”) were 0.58% and 6.22%, respectively, for the three month period ended September 30, 2017,2023, compared to 0.59% and 6.69%, respectively,3.53% for the same time period in 2016. ROAA and ROAE were 0.59% and 6.36%, respectively, for the nine month period ended September 30, 2017 compared to 0.80% and 9.26%, respectively, for the same time period in 2016.2022.
Trust and investment services fee•Top line revenue, defined as net interest income increased 21.2% to $1.7plus non-interest income, totaled $37.0 million for the three months ended September 30, 20172023, compared to $1.4$34.1 million in the same period in 2022. Top line revenue totaled $107.3 million for the nine months ended September 30, 2023, compared to $93.4 million in the same period in 2022.
•Effective tax rate, including the benefit from Low-Income Housing Tax Credits, was 17.3% for the three months ended September 30, 2023 compared to 22.9% for the same period in 2022. Effective tax rate, including the benefit from Low-Income Housing Tax Credits, was 21.0% for the nine months ended September 30, 2023 compared to 22.6% for the same period in 2022.
•Provision for credit losses was an expense of $1.8 million for the three months ended September 30, 2016. For the nine months ended September 30, 2017, trust and investment services fee income increased 23.8% to $4.9 million2023 compared to $4.0$12,000 for the same period in 2022. Provision for credit losses was an expense of $5.6 million for the nine months ended September 30, 2016.
Top line revenue, the sum2023 compared to a benefit of net interest income and non-interest income, increased 1.5% to $19.2$4.6 million for the three months endedsame period in 2022.
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•Total assets at September 30, 20172023 increased $442.2 million, or 19.8% annualized, to $3.419 billion from $2.977 billion at December 31, 2022.
•Period-end gross loans and leases receivable increased $320.6 million, or 17.5% annualized, to $2.764 billion as of September 30, 2023 compared to $18.9$2.443 billion as of December 31, 2022. Average gross loans and leases of $2.593 billion increased $314.6 million, for the three months ended September 30, 2016. For the nine months ended September 30, 2017, top line revenue decreased 3.7% to $58.4 million compared to $60.6 millionor 13.8%, for the nine months ended September 30, 2016.
Net interest margin increasedtwo basis points to 3.52% for the three months ended September 30, 20172023, compared to 3.50% for the three months ended September 30, 2016. Net interest margin was 3.56% for both the nine months ended September 30, 2017 and nine months ended September 30, 2016.
Efficiency ratio was 66.56% for the three months ended September 30, 2017, compared to 63.63% for the three months ended September 30, 2016. For the nine months ended September 30, 2017 our efficiency ratio was 67.55% compared to 62.35% for the same time period in 2016.
Provision for loan and lease losses was $1.5 million for the three months ended September 30, 2017 compared to $3.5 million$2.278 billion for the same period in the prior year. Provision2022.
•Non-performing assets were $17.7 million and 0.52% of total assets as of September 30, 2023, compared to $3.8 million and 0.13% of total assets as of December 31, 2022.
•The allowance for loan and leasecredit losses, was $5.7including reserve for unfunded credit commitments, increased $6.8 million compared to December 31, 2022. The allowance for credit losses increased to 1.12% of total loans, compared to 0.99% at December 31, 2022.
•Period-end in-market deposits at September 30, 2023 increased $223.3 million, or 15.1% annualized, to $2.189 billion from $1.966 billion as of December 31, 2022. Average in-market deposits of $2.048 billion increased $126.3 million, or 6.6%, for the nine months ended September 30, 20172023, compared to $6.8 million$1.921 billion for the same time period in 2016.
2022.

SBA recourse provision was $1.3•Private wealth and trust assets under management and administration increased by $254.6 million, for the three months ended or 12.8% annualized, to $2.915 billion at September 30, 2017,2023, 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 loans and leases receivable increased $16.0 million to $1.467 billion at September 30, 2017 from $1.451$2.660 billion at December 31, 2016.
Allowance for loan2022. Private wealth trust assets under management and lease losses as a percentage of gross loans and leases was 1.36% at September 30, 2017administration increased $422.0 million, or 16.9%, compared to 1.44% at December 31, 2016.
the same period in 2022.
Non-performing assets as a percentage of total assets was 2.01% at September 30, 2017 compared to 1.50% at December 31, 2016.

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.

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 $2.9 million, or 8.6%, for the three months ended September 30, 2017, top line revenue increased 1.5%2023, compared to the same period in the prior year primarily2022, due to a 10.5% and 2.8% increase in net interest income and non-interest income, respectively. The increase in net interest income was driven by an increase in average loans and leases outstanding. The increase in non-interest income was due to an increase in trust and investment fee income, swap fee income and gains fromon the sale of SBA loans. This increase wasloans, and commercial loan swap fee income, partially offset by a shiftreduction in the mix of loan originations toward lower-yielding conventional commercial loans, alongside runoffincome from investments in the Company’s higher-yielding specialty lending portfolios.mezzanine funds and service charges on deposits.
ForTop line revenue increased $13.8 million, or 14.8%, for the nine months ended September 30, 2017, top line revenue decreased 3.7%2023, compared to the same period in the prior year primarily2022, due to the anticipated declinea 17.0% and 7.8% increase in net interest income and non-interest income, respectively. The increase in net interest income was driven by an increase in net interest margin and average loans and leases outstanding. The increase in non-interest income was due to an increase trust fee income, commercial loan swap fee income, loan fee income, and income from investments in mezzanine funds, partially offset by a reduction in gains on the gain on sale of SBA loans basedand service charges on management’s third quarter 2016 decision to rebuild the SBA platform, as well as from a shift in the mix of loan originations toward lower-yielding conventional commercial loans in recent quarters. These 2017 revenue headwinds were partially offset by increased trust and investment services fee income, an increase in swap fee income and a decrease in interest expense guided by successful efforts to manage various in-market deposit rates and utilize an efficient mix of wholesale funding sources.deposits.
Top line revenue has also benefited moderately in 2017 from increased rates on certain variable-rate loans following the Federal Open Market Committee’s (“FOMC”) decision to raise the targeted federal funds rate in December 2016, March 2017 and June 2017.
The components of top line revenue were as follows:
 For the Three Months Ended September 30, For the Nine Months Ended September 30, For the Three Months Ended September 30,For the Nine Months Ended September 30,
 2017 2016 Change 2017 2016 Change 20232022$ Change% Change20232022$ 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$28,596 $25,884 $2,712 10.5%$83,049 $70,971 $12,078 17.0%
Non-interest income 4,339
 3,640
 19.2
 13,140
 14,057
 (6.5)Non-interest income8,430 8,197 233 2.824,214 22,455 1,759 7.8
Total top line revenue $19,222
 $18,935
 1.5
 $58,390
 $60,632
 (3.7)
Top line revenueTop line revenue$37,026 $34,081 $2,945 8.6$107,263 $93,426 $13,837 14.8
Annualized Return on Average Assets (“ROAA”) and Annualized Return on Average Common Equity (“ROACE”)
ROAA for the three and nine months ended September 30, 20172023 decreased to 0.58%1.19% and 1.13%, respectively, compared to 0.59%1.54% and 1.49% for the three and nine months ended September 30, 2016. During the third quarter of 2016,2022, respectively. The decrease 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%. The increase in ROAA for the three months ended September 30, 2017 was primarily due to a decrease in provision for loan and lease losses combined with an increase in trustcredit loss provision and investment fee income, swap fee income and gains from the sale of SBA loans. This improvement in profitability wasoperating expenses, partially offset by an increase in SBA recourse provision.top line revenue. We consider ROAA for the nine months ended September 30, 2017 decreased to 0.59% compared to 0.80% for 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 is a critical metric used by us to measure the profitability of our organization and how efficiently our assets are deployed. It is a measurement thatROAA 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    ROACE for the three months ended September 30, 2017 was 6.22% compared to 6.69% for the three months ended September 30, 2016. Excluding the aforementioned impairment impact of tax credit investments, third quarter 2016 ROAE was 5.61%. The reasons for the increase in ROAE are consistent with the explanations discussed above with respect to ROAA for the three months ended September 30, 2017. ROAE for theand nine months ended September 30, 20172023 was 6.36%14.62% and 13.72%, respectively, compared to 9.26%17.44% and 16.97% for the three and 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%.2022, respectively. The reasons for the declinechange in ROAEROACE are consistent with the explanationsnet income variance explanation as discussed above with respect tounder ROAA for the nine months ended September 30, 2017.above. We view ROAE to beROACE as an
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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.
ROAA and ROACE for the nine months ended September 30, 2022 were both favorably impacted by net recoveries of $4.4 million.
Efficiency Ratio and Pre-Tax, Pre-Provision Adjusted Earnings
    Efficiency ratio measured 61.96% and 61.89% for the three and nine months ended September 30, 2023, respectively, compared to 58.46% and 62.61% for the three and nine ended September 30, 2022, respectively, as the percentage increase in top line revenue exceeded the percentage increase in operating expense resulting in positive operating leverage in the year-to-date period of comparison. Efficiency ratio is a non-GAAP measure representing operating expense, which is non-interest expense excluding the effects of the SBA recourse benefit or provision, impairment of tax credit investments, net gains or losses or gains on foreclosed properties,repossessed assets, amortization of other intangible assets, and other discrete items, if any, divided by operating revenue, which is equal to net interest income plus non-interest income less realized net gains or losses on securities, if any.
The efficiency ratioPTPP adjusted earnings for three and nine months ended September 30, 2023 was 66.56%$14.1 million and 67.55%$40.9 million, respectively, compared to $14.2 million and $34.9 million for the three and nine months ended September 30, 2017, respectively, compared to 63.63% and 62.35%2022, respectively. PTPP adjusted earnings is defined as operating revenue less operating expense. The decrease in PTPP for the three months ended was primarily driven by an increase in operating expenses, partially offset by an increase in average loans and leases outstanding. The increase in PTPP for the nine months ended September 30, 2016, respectively. Despite this reported reductionwas primarily driven by an increase in average loans and leases outstanding and net interest margin expansion, partially offset by an increase in operating efficiency in both periodsexpenses as the Corporation continued to invest to achieve its strategic growth objectives. In the judgment 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 alsoPTPP adjusted earnings allows management to benchmark performance of our model to our peers without the influence of the loancredit loss provision and tax considerations, which will ultimately influence other traditional financial measurements, including ROAA and ROAE.ROACE. 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 PTPP adjusted earnings.
 For the Three Months Ended September 30, For the Nine Months Ended September 30,For the Three Months Ended September 30,For the Nine Months Ended September 30,
 2017 2016 $ Change % Change 2017 2016 $ Change % Change20232022$ Change% Change20232022$ 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$23,189 $20,028 $3,161 15.8%$66,987 $58,307 $8,680 14.9%
Less:                Less: 
Net loss on foreclosed properties

 —
 —
 —
 NM
 —
 93
 (93) (100.0)
Amortization of other intangible assets 14
 16
 (2) (12.5) 41
 48
 (7) (14.6)
Net (gain) loss on repossessed assetsNet (gain) loss on repossessed assets4 7 (3)(42.9)8 27 (19)NM
SBA recourse provision 1,315
 375
 940
 250.7
 2,095
 449
 1,646
 366.6
SBA recourse provision242 96 146 152.1565 134 431 NM
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— — — NM— (351)351 NM
Total operating expense (a)Total operating expense (a)$22,943 $19,925 $3,018 15.1$66,414 $58,497 $7,917 13.5
Net interest income $14,883
 $15,295
 $(412) (2.7) $45,250
 $46,575
 (1,325) (2.8)Net interest income$28,596 $25,884 $2,712 10.5$83,049 $70,971 $12,078 17.0
Total non-interest income 4,339
 3,640
 699
 19.2
 13,140
 14,057
 (917) (6.5)Total non-interest income8,430 8,197 233 2.824,214 22,455 1,759 7.8
Less:                Less:
Gain on sale of securities 5
 —
 5
 NM
 6
 7
 (1) (14.3)
Total operating revenue $19,217
 $18,935
 $282
 1.5
 $58,384
 $60,625
 $(2,241) (3.7)
Net loss on sale of securitiesNet loss on sale of securities— — — NM(45)— (45)NM
Adjusted non-interest incomeAdjusted non-interest income8,430 8,197 233 2.824,259 22,455 1,804 8.0
Operating revenue (b)Operating revenue (b)$37,026 $34,081 $2,945 8.6$107,308 $93,426 $13,882 14.9
Efficiency ratio 66.56% 63.63% 

 

 67.55% 62.35% 

 
Efficiency ratio61.96 %58.46 %61.89 %62.61 %
Pre-tax, pre-provision adjusted earnings (b-a)Pre-tax, pre-provision adjusted earnings (b-a)$14,083 $14,156 $(73)(0.5)$40,894 $34,929 $5,965 17.1
Average total assetsAverage total assets$3,276,240 $2,758,961 $517,279 18.7$3,130,426 $2,714,309 $416,117 15.3
Pre-tax, pre-provision adjusted return on average assetsPre-tax, pre-provision adjusted return on average assets1.72 %2.05 %1.74 %1.72 %
NM = Not meaningfulWe believe the Corporation will generate positive operating leverage on an annual basis and progress towards enhancing the long-term efficiency ratio at a measured pace as we focus on strategic initiatives directed toward revenue growth, process improvement, and automation. The Corporation’s recent improvement during the period of comparison is due to the rising interest rate environment, and related expansion of net interest margin coupled with strong loan and in-market deposit growth.



Net Interest Income

Net interest income levels depend on the amount of and yield on interest-earning assets as compared to the amount of and rate paid on interest-bearing liabilities. Net interest income is sensitive to changes in market rates of interest and the asset/liability management processes to prepare for and respond to such changes.
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The following table provides information with respect to (1) the change in net interest income attributable to changes in rate (changes in rate multiplied by prior volume) and (2) the change in net interest income attributable to changes in volume (changes in volume multiplied by prior rate) for the three and nine months ended September 30, 20172023 compared to the same periodsperiod in 2016.2022. The change in net interest income attributable to changes in rate and volume (changes in rate multiplied by changes in volume) has been allocated to the rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.
Increase (Decrease) for the Three Months Ended September 30,Increase (Decrease) for the Nine Months Ended September 30,
 2023 Compared to 20222023 Compared to 2022
RateVolumeNetRateVolumeNet
 (In Thousands)
Interest-earning assets   
Commercial real estate and other mortgage loans(1)
$6,869 $1,474 $8,343 $22,286 $2,756 $25,042 
Commercial and industrial loans(1)
4,067 5,142 9,209 16,101 11,509 27,610 
Consumer and other loans(1)
168 (26)142 448 (72)376 
Total loans and leases receivable11,104 6,590 17,694 38,835 14,193 53,028 
Mortgage-related securities542 224 766 1,642 251 1,893 
Other investment securities176 91 267 362 142 504 
FHLB and FRB Stock311 (277)34 291 (27)264 
Short-term investments300 94 394 1,273 152 1,425 
Total net change in income on interest-earning assets12,433 6,722 19,155 42,403 14,711 57,114 
Interest-bearing liabilities
Transaction accounts5,041 728 5,769 13,861 607 14,468 
Money market accounts4,475 (214)4,261 12,898 (372)12,526 
Certificates of deposit1,664 982 2,646 4,560 2,980 7,540 
Wholesale deposits237 3,709 3,946 373 8,862 9,235 
Total deposits11,417 5,205 16,622 31,692 12,077 43,769 
FHLB advances1,889 (1,945)(56)2,840 (685)2,155 
Other borrowings(23)(100)(123)(35)(349)(384)
Junior subordinated notes(2)
— — — (504)— (504)
Total net change in expense on interest-bearing liabilities13,283 3,160 16,443 33,993 11,043 45,036 
Net change in net interest income$(850)$3,562 $2,712 $8,410 $3,668 $12,078 
(1)The average balances of loans and leases include non-performing loans and leases and loans held for sale.
(2)The rate column for the nine months ended September 30, 2022 included $236,000 in accelerated amortization of debt issuance costs.


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  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 nine months ended September 30, 20172023 and 2016.2022. The average balances are derived from average daily balances.
 For the Three Months Ended September 30,
 20232022
Average
Balance		Interest
Average
Yield/Rate(4)
Average
Balance		Interest
Average
Yield/Rate(4)
 (Dollars in Thousands)
Interest-earning assets      
Commercial real estate and other mortgage loans(1)
$1,605,464 $25,623 6.38 %$1,486,530 $17,280 4.65 %
Commercial and industrial loans(1)
1,059,512 21,635 8.17 780,533 12,426 6.37 
Consumer and other loans(1)
46,875 610 5.21 49,558 468 3.78 
Total loans and leases receivable(1)
2,711,851 47,868 7.06 2,316,621 30,174 5.21 
Mortgage-related securities(2)
204,291 1,681 3.29 168,433 915 2.17 
Other investment securities(3)
67,546 517 3.06 51,812 250 1.93 
FHLB and FRB stock14,770 323 8.75 18,167 289 6.36 
Short-term investments40,318 552 5.48 27,912 158 2.26 
Total interest-earning assets3,038,776 50,941 6.71 2,582,945 31,786 4.92 
Non-interest-earning assets237,464   176,016   
Total assets$3,276,240   $2,758,961   
Interest-bearing liabilities      
Transaction accounts$731,529 6,774 3.70 $486,704 1,005 0.83 
Money market accounts657,183 5,871 3.57 746,227 1,610 0.86 
Certificates of deposit282,674 2,986 4.23 113,529 340 1.20 
Wholesale deposits410,494 4,172 4.07 36,702 226 2.46 
Total interest-bearing deposits2,081,880 19,803 3.80 1,383,162 3,181 0.92 
FHLB advances342,117 2,117 2.48 432,528 2,173 2.01 
Other borrowings34,745 425 4.89 42,800 548 5.12 
Total interest-bearing liabilities2,458,742 22,345 3.64 1,858,490 5,902 1.27 
Non-interest-bearing demand deposit accounts434,330   584,535   
Other non-interest-bearing liabilities105,079   60,705   
Total liabilities2,998,151   2,503,730   
Stockholders’ equity278,089   255,231   
Total liabilities and stockholders’ equity$3,276,240   $2,758,961   
Net interest income $28,596   $25,884  
Interest rate spread  3.07 %  3.65 %
Net interest-earning assets$580,034   $724,455   
Net interest margin  3.76 %  4.01 %
Average interest-earning assets to average interest-bearing liabilities123.59 %  138.98 %  
Return on average assets(4)
1.19   1.54   
Return on average equity(4)
14.62   17.44   
Average equity to average assets8.49   9.25   
Non-interest expense to average assets(4)
2.83   2.90   
(1)The average balances of loans and leases include non-performing loans and leases and loans held for sale. Interest income related to non-performing loans and leases is recognized when collected. Interest income includes net loan fees in lieu of interest.
(2)Includes amortized cost basis of assets available-for-sale and held-to-maturity.
(3)Yields on tax-exempt municipal securities are not presented on a tax-equivalent basis in this table.
(4)Represents annualized yields/rates.

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 For the Three Months Ended September 30, For the Nine Months Ended September 30,
 2017 2016 20232022
 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)
$1,556,988 $71,011 6.08 %$1,472,930 $45,969 4.16 %
Commercial and industrial loans(1)
 448,955
 6,187
 5.51
 459,871
 6,651
 5.79
Commercial and industrial loans(1)
988,359 59,213 7.99 755,254 31,603 5.58 
Direct financing leases(1)
 28,648
 303
 4.23
 30,231
 341
 4.51
Consumer and other loans(1)
 26,577
 274
 4.12
 23,662
 368
 6.22
Consumer and other loans(1)
47,594 1,738 4.87 50,149 1,362 3.62 
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)
2,592,941 131,962 6.79 2,278,333 78,934 4.62 
Mortgage-related securities(2)
 136,330
 613
 1.80
 149,414
 567
 1.52
Mortgage-related securities(2)
193,196 4,372 3.02 176,654 2,479 1.87 
Other investment securities(3)
 36,106
 158
 1.75
 34,042
 131
 1.54
Other investment securities(3)
61,396 1,229 2.67 52,324 725 1.85 
FHLB and FRB stock 3,949
 25
 2.53
 2,163
 21
 3.88
FHLB and FRB stock15,904 952 7.98 16,523 688 5.55 
Short-term investments 44,478
 152
 1.37
 103,549
 163
 0.63
Short-term investments43,437 1,652 5.07 29,509 227 1.03 
Total interest-earning assets 1,691,754
 18,634
 4.41
 1,750,099
 18,898
 4.32
Total interest-earning assets2,906,874 140,167 6.43 2,553,343 83,053 4.34 
Non-interest-earning assets 85,768
     67,884
    Non-interest-earning assets223,552   160,966   
Total assets $1,777,522
     $1,817,983
    Total assets$3,130,426   $2,714,309   
Interest-bearing liabilities            Interest-bearing liabilities      
Transaction accounts $240,035
 364
 0.61
 $182,743
 113
 0.25
Transaction accounts$657,155 16,070 3.26 $507,402 1,602 0.42 
Money market accounts 588,811
 700
 0.48
 632,415
 758
 0.48
Money market accounts663,284 14,984 3.01 765,839 2,458 0.43 
Certificates of deposit 57,716
 150
 1.04
 63,581
 152
 0.96
Certificates of deposit271,684 8,049 3.95 80,093 509 0.85 
Wholesale deposits 346,641
 1,494
 1.72
 465,273
 1,847
 1.59
Wholesale deposits311,038 9,671 4.14 21,838 436 2.66 
Total interest-bearing deposits 1,233,203
 2,708
 0.88
 1,344,012
 2,870
 0.85
Total interest-bearing deposits1,903,161 48,774 3.42 1,375,172 5,005 0.49 
FHLB advances 103,401
 351
 1.36
 4,991
 18
 1.44
FHLB advances368,913 7,030 2.54 422,576 4,875 1.54 
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 borrowings35,351 1,314 4.96 44,719 1,698 5.06 
Junior subordinated notes(5)
Junior subordinated notes(5)
— — — 3,247 504 20.69 
Total interest-bearing liabilities 1,371,017
 3,751
 1.09
 1,383,977
 3,603
 1.04
Total interest-bearing liabilities2,307,425 57,118 3.30 1,845,714 12,082 0.87 
Non-interest-bearing demand deposit accounts 224,961
     263,627
    Non-interest-bearing demand deposit accounts455,653   568,131   
Other non-interest-bearing liabilities 15,376
     11,098
    Other non-interest-bearing liabilities96,883   53,685   
Total liabilities 1,611,354
     1,658,702
    Total liabilities2,859,961   2,467,530   
Stockholders’ equity 166,168
     159,281
    Stockholders’ equity270,465   246,779   
Total liabilities and stockholders’ equity $1,777,522
     $1,817,983
    Total liabilities and stockholders’ equity$3,130,426   $2,714,309   
Net interest income   $14,883
     $15,295
  Net interest income $83,049   $70,971  
Interest rate spread     3.32%     3.28%Interest rate spread  3.13 %  3.46 %
Net interest-earning assets $320,737
     $366,122
    Net interest-earning assets$599,449  $707,629  
Net interest margin     3.52%     3.50%Net interest margin  3.81 %  3.71 %
Average interest-earning assets to average interest-bearing liabilities 123.39%     126.45%    Average interest-earning assets to average interest-bearing liabilities125.98 %  138.34 %  
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)
1.13   1.49   
Return on average equity(4)
Return on average equity(4)
13.72   16.97   
Average equity to average assets 9.35
     8.76
    Average equity to average assets8.64   9.09   
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)
2.85   2.86   
(1)The average balances of loans and leases include non-performing loans and leases and loans held for sale. Interest income related to non-performing loans and leases is recognized when collected. Interest income includes net loan fees 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-performing loans and leases and loans held for sale. Interest income related to non-performing loans and leases is recognized when collected. Interest income includes net loan fees in lieu of interest.
(2)Includes amortized cost basis of assets available-for-sale and held-to-maturity.
(3)Yields on tax-exempt municipal securities are not presented on a tax-equivalent basis in this table.
(4)Represents annualized yields/rates.
(5)The rate column for the nine months ended September 30, 2022 included $236,000 in accelerated amortization of debt issuance costs.



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  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
    
The change in yield of the respective interest-earning asset or the rate paid on interest-bearing liability compared to the change in short-term market rates is commonly referred to as a beta. The table below displays the beta calculations for loans and leases, total interest earning assets, in-market deposits, interest-bearing deposits and total interest-bearing liabilities for the three and nine months ended September 30, 2023 and 2022. Additionally, adjusted total loans and leases and total interest-earning assets excludes the volatile impact of fees in lieu of interest.

For the Three Months Ended September 30,For the Nine Months Ended September 30,
2023202220232022
Asset and Liability Beta Analysis
Average Yield/Rate (4)
Increase (Decrease)
Average Yield/Rate (3)
Increase (Decrease)
Total loans and leases receivable (a)
7.06 %5.21 %1.85 %6.79 %4.62 %2.17 %
Total interest-earning assets(b)
6.71 %4.92 %1.79 %6.43 %4.34 %2.09 %
Adjusted total loans and leases receivable (1)(c)
6.97 %5.07 %1.90 %6.67 %4.39 %2.28 %
Adjusted total interest-earning assets (1)(d)
6.63 %4.80 %1.83 %6.33 %4.13 %2.20 %
Total in-market deposits(e)
2.97 %0.61 %2.36 %2.55 %0.32 %2.23 %
Total bank funding(f)
3.07 %0.89 %2.18 %2.73 %0.56 %2.17 %
Net interest margin(g)
3.76 %4.01 %(0.25)%3.81 %3.71 %0.10 %
Adjusted net interest margin(h)
3.66 %3.89 %(0.23)%3.68 %3.53 %0.15 %
Effective fed funds rate (3)(i)
5.26 %2.18 %3.08 %4.92 %1.03 %3.89 %
Beta Calculations:
Total loans and leases receivable(a)/(i)
60.08 %55.78 %
Total interest-earning assets(b)/(i)
57.89 %53.77 %
Adjusted total loans and leases receivable (1)(c)/(i)
61.82 %58.61 %
Adjusted total interest-earning assets (1)(d)/(i)
59.46 %56.53 %
Total in-market deposits(e)/(i)
76.62 %57.33 %
Total bank funding(2)(f)/(i)
70.78 %55.78 %
Net interest margin(g)/(i)
(8.12)%2.57 %
Adjusted net interest margin(h)/(i)
(7.47)%3.86 %
(1)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)Excluding fees in lieu of interest.
(2)Total bank funding represents total deposits plus FHLB advances.
(3)Board of Governors of the Federal Reserve System (US), Effective Federal Funds Rates [DFF] retrieved from FRED, Federal Reserve Bank of St. Louis.
(4)Represents annualized yields/rates.


Comparison of Net Interest Income for the Three and Nine Months Ended September 30, 20172023 and 20162022


Net interest income decreased$412,000,increased $2.7 million, or 2.7%10.5%, and $1.3$12.1 million, or 2.8%17.0%, during the three and nine months ended September 30, 2017,2023, respectively, compared to the same periods in 2016. In both periods of comparison, the decrease in net interest income was primarily attributable to a decrease in the yield on average total loansthree 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%.2022. 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 modestnet interest income reflected an increase in average total interest-bearing deposit costs may continue as the Company looksgross loans and leases, partially offset by a reduction in fees in lieu of interest. Fees in lieu of interest, which vary from quarter to effectively manage deposit relationships amid intense competitionquarter, totaled $582,000 and continued expectation of a rising rate environment.
The overall weighted average rate paid on interest-bearing liabilities was 1.09% and 1.07%$2.2 million for the three and nine months ended September 30, 2017,2023, respectively, compared to 1.04%$807,000 and 1.06%$4.0 million for the same period in 2022. Excluding fees in lieu of interest, net interest income for the three and nine months ended September 30, 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 paid 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 efficient2023 increased $2.9 million, or 11.7%, 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.$13.9 million, or 20.7%, respectively. Average FHLB advancesgross loans and leases for the three and nine months ended September 30, 20172023 increased $98.4$395.2 million, or 17.1%, and $75.0$314.6 million, or 13.8%, respectively, compared to $103.4 millionthe three and $84.0 million at a weighted average rate paid of 1.36% and 1.24%, respectively. As ofnine months ended September 30, 2017, the weighted2022.
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The yield on average original maturity of our FHLB term advances was 2.3 years.

We expect to continue to effectively manage the Corporation’s liability structure in both termloans and rate to deliver a stable net interest margin within our target range. Further, we expect continued success in attracting in-market deposit relationships in our Wisconsin and Kansas markets which we believe will contribute to our ability to maintain an appropriate cost 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 billionleases for the three and nine months ended September 30, 2017,2023 was 7.06% and 6.79%, respectively, compared to $1.142 billion5.21% and $1.129 billion4.62% for the three and nine months ended September 30, 2016.2022. Excluding the impact of loan fees in lieu of interest, the yield on average loans and leases for the three and nine months ended September 30, 2023 was 6.97% and 6.67%, respectively, compared to 5.07% and 4.39% for the three and nine months ended September 30, 2022. The yield on average interest-earning assets for the three and nine months ended September 30, 2023 measured 6.71% and 6.43%, respectively, compared to 4.92% and 4.34% for the three and nine months ended September 30, 2022. Excluding loan fees in lieu of interest, the yield on average interest-earning assets for the three and nine months ended September 30, 2023 was 6.63% and 6.33%, respectively, compared to 4.80% and 4.13% for the three and nine months ended September 30, 2022. The increase in yields was primarily due to rising rates on variable-rate loans, following the Federal Open Market Committee’s (“FOMC”) decision to raise the target Fed Funds rate 225 basis points over the period of comparison, as well as the reinvestment of cash flows from the securities and fixed-rate loan portfolios in a rising rate environment. The daily average effective federal funds rate for the three and nine months ended September 30, 2023 increased 308 and 389 basis points, compared to the same period in 2022. This equates to an interest-earning asset beta of 59.46% and 56.53%, respectively, for the three and nine months ended September 30, 2023.
The rate paid on average interest-bearing in-market deposits for the three and nine months ended September 30, 2023 increased to 3.74% and 3.27%, respectively, from 0.88% and 0.45% for the three and nine months ended September 30, 2022. The average rate paid on total interest-bearing liabilities for the three and nine months ended September 30, 2023 increased to 3.64% and 3.30%, respectively, from 1.27% and 0.87% for the three and nine months ended September 30, 2022. Total interest-bearing liabilities include interest-bearing deposits, federal funds purchased, FHLB advances, subordinated and junior subordinated notes and debentures payable, and other borrowings. The average rates paid increased due to the increase in short-term market rates and the replacement of maturing wholesale funds at higher fixed rates. This equates to an interest-bearing liability beta of 76.78% and 62.39%, respectively, for the three and nine months ended September 30, 2023.
Net interest margin decreased to 3.76% and increased two basis points to 3.52%3.81%, respectively, for the three and nine months ended September 30, 2023, compared to 4.01% and 3.71% for the three and nine months ended September 30, 2022. The primary driver of the reduction for the three months ended September 30, 2017, compared to 3.50% for the three months ended September 30, 2016 primarilyin net interest margin was mainly due to a positive changedecrease in fees in lieu of interest and an increase in funding costs, partially offset by an increase in earning asset mix. Average total loans and leases receivable represented 83%yields. The primary driver of total average assets for the three months ended September 30, 2017, compared to 80% for the same period in 2016 which benefitedimproved 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 was the aforementioned increase in earning asset yields, partially offset by corresponding increase in funding costs. . Adjusted net interest margin measured 3.66% and 3.68%, respectively, for the three and nine months ended September 30, 20172023, compared to 3.89% and 2016 was 3.56%.3.53% for the three and nine months ended September 30, 2022. Adjusted net interest margin is a non-GAAP measure representing net interest income excluding the impact of fees in lieu of interest, and other recurring, but volatile, components of net interest margin divided by average interest-earning assets less other recurring, but volatile, components of average interest-earning assets.    
Management believes the successful efforts to optimize funding costsits success in growing in-market deposits, disciplined loan pricing, and profitably expand loan balancesincreased production in existing higher-yielding commercial lending products will allow the CompanyCorporation to continue to maintainachieve a net interest margin of 3.50% or better.that supports our long-term profitability goals. However, the collection of loan fees in lieu of interest is an expected source of volatility to quarterly net interest income and net interest margin, given the nature of the Company’s asset-based lending business. Netmargin. In addition, net interest margin may also experience volatility due to events such as the collection of interest on loans previously in non-accrual status or the accumulation of significant short-term deposit inflows. Management anticipates deposit betas may continue to rise and net interest margin may continue to decline at a gradual pace in coming quarters as the Federal Open Market Committee approaches a terminal federal funds rate. Based on current trends, we believe our net interest margin should stabilize above our current strategic plan goal of 3.50%.
Provision for Loan and LeaseCredit Losses
We determine our provision for loan and leasecredit losses based upon credit risk and other subjective factors pursuant to our allowance for loan and leasecredit loss methodology, which was updated on January 1, 2023, for the magnitudeadoption of currentASC 326. It is based on a reasonable and historical net charge-offs recordedsupportable forecast as well as considerations for composition, risk, and performance indicators in the period and the amount of reserves established for impaired loans that present collateral shortfall positions.our credit portfolio. Refer to the section in this MD&A entitled Allowance for Loan and LeaseCredit Losses, below, for further information regarding our allowance for loancredit loss methodology.
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The Corporation recognized $1.8 million and lease loss methodology.
We recorded$5.6 million of provision expense for the three and nine months ended September 30, 2023, respectively, compared to expense of $1.5 million$12,000 and $5.7benefit of $4.6 million for the three and nine months ended September 30, 2017, respectively, compared to $3.5 million and $6.8 million2022. The provision expense for the same time periodsthree months ended September 30, 2023 was primarily due to a $1.3 million increase in 2016. Provisionspecific reserves, an increase of $817,000 related to loan growth, and a $506,000 increase due to qualitative factors, partially offset by a $1.4 million benefit due to the improved economic outlook in our model forecast. Similar to the second quarter, the increase in specific reserves, charge-offs, and qualitative factors was primarily related to the Equipment Finance and SBA Lending loan pools, which management believes is consistent with the cyclical nature of these commercial lending niches. The provision expense for the nine months ended September 30, 2017 reflected $4.62023 was primarily due to a $2.3 million increase in specific reserves, an increase of estimated losses$3.0 million related to loan growth, and a $465,000 increase due to qualitative factors, partially offset by $1.2 million benefit due to the previously disclosed $6.7 million Wisconsin-based commercial and industrial impaired loan. Management continues to pursue all potential repayment sources related to this credit.improved economic outlook in our model forecast. The provision benefit for the nine months ended September 30, 2017 also reflected $5.0 million in charge-offs related2022 was primarily due to a net recovery of $4.4 million.
The following table shows the components of the provision for credit losses for the three and nine months ended September 30, 2023 compared to the Corporation’s remaining energy sector exposure, which was partially offset by a $2.3 million specific reserve related to this credit as of December 31, 2016. These increases were also partially offset by the reversal of a $1.8 million specific reserve based on the full repayment of a previously disclosed impaired construction loan originatedsame periods in our Kansas City market. The payoff proceeds were received in October 2017, which will reduce non-performing loans by $2.5 million in the fourth quarter of 2017.2022.
For the Three Months Ended September 30,For the Nine Months Ended September 30,
2023202220232022
(In Thousands)
Change in qualitative factor changes$506 $132 $465 $(469)
Change in quantitative factor changes(1,372)(940)(1,193)(1,082)
Charge-offs562 54 1,057 161 
Recoveries(84)(81)(435)(4,537)
Change in reserves on individually evaluated loans, net1,265 447 2,322 196 
Change due to loan growth, net817 400 3,023 1,162 
Change in unfunded credit commitment reserves123 — 371 — 
Total provision for credit losses$1,817 $12 $5,610 $(4,569)
The addition of specific reserves on impairedindividually evaluated 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 leasecredit losses due to subjectivequalitative 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 leasecredit losses to maintain the allowance for loan and leasecredit losses at a level deemed appropriate by management. Change in the inherent riskThis amount is net of the portfolio is primarily influenced by the overall growth in gross loans and leases and an analysisrelease of loans previously charged off, as well as, movement of existing loans and leases in and out of an impaired loan classification where aany specific evaluation of a particular creditreserve that may be required rather than the application of a general reserve ratio.have already been provided. 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 Nine Months Ended September 30, 20172023 and 20162022
Non-Interest Income
Non-interest income consists primarily of fees earnedincreased $233,000, or 2.8%, to $8.4 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 September 30, 2017 non-interest income increased by $699,000, or 19.2%,2023 compared to $4.3 million from $3.6$8.2 million for the same period in 2016. For2022. The increase in total non-interest income for the three months ended September 30, 2023 was due to increases in private wealth fee income, commercial loan swap fee income, and gains on sale of SBA loans. These favorable variances were partially offset by a decrease in other non-interest income, driven by a decrease in mezzanine fund investment income, and a decrease in services charges on deposits. Non-interest income for the nine months ended September 30, 2017 non-interest income decreased by $917,000,2023 increased $1.8 million, or 6.5%7.8%, to $13.1$24.2 million from $14.1compared to $22.5 million for the same period in 2016.2022. The increase in total non-interest income for the nine months ended September 30, 2023 was driven by an increase in other non-interest income, led by mezzanine fund investment income, and an increase in commercial loan swap fee income, private wealth fee income, and loan fee income. These favorable variances were partially offset by a decrease in gains on the sale of SBA loans and service charges on deposits.
Management continues to focus on revenue growth from multiple non-interest income sources in order to maintain a diversified revenue stream through greater contributioncontributions from fee-based revenues. Total non-interest income accounted for 22.8% and 22.6% and 22.5% of our total revenues for the three and nine months ended September 30, 2017,2023, respectively, compared to 19.2%24.1% and 23.2%24.0% for the three and nine months ended September 30, 2016. Management believes the expected steady and gradual expansion2022, respectively.
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Table of our rebuilt SBA lending program will drive our fee income ratio towards our current strategic target of 25.0%.Contents
The components of non-interest income were as follows for the three and nine months ended September 30, 2017 and 2016:follows:
For the Three Months Ended September 30,For the Nine Months Ended September 30,
For the Three Months Ended September 30, For the Nine Months Ended September 30,20232022$ Change% Change20232022$ 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$2,945 $2,618 $327 12.5%$8,492 $8,311 $181 2.2%
Gain on sale of SBA loans606
 347
 259
 74.6
 1,501
 3,854
 (2,353) (61.1)Gain on sale of SBA loans851 732 119 16.31,771 2,269 (498)(21.9)
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 deposits835 1,018 (183)(18.0)2,283 3,058 (775)(25.3)
Loan fees391
 506
 (115) (22.7) 1,525
 1,791
 (266) (14.9)Loan fees786 814 (28)(3.4)2,495 2,163 332 15.3
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 insurance376 359 17 4.71,106 1,057 49 4.6
Net loss on sale of securitiesNet loss on sale of securities— — — NM(45)— (45)NM
Swap feesSwap fees992 341 651 190.92,526 1,038 1,488 143.4
Other non-interest income619
 209
 410
 196.2
 1,931
 914
 1,017
 111.3
Other non-interest income1,645 2,315 (670)(28.9)5,586 4,559 1,027 22.5
Total non-interest income$4,339
 $3,640
 $699
 19.2
 $13,140
 $14,057
 $(917) (6.5)Total non-interest income$8,430 $8,197 $233 2.8$24,214 $22,455 $1,759 7.8
Fee income ratio(1)
22.6% 19.2%     22.5% 23.2%    
Fee income ratio(1)
22.8 %24.1 %22.6 %24.0 %
(1)     Fee income ratio is fee income, per the above table, divided by top line revenue (defined as net interest income plus non-interest income).
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,$327,000, or 21.2%12.5%, and $949,000,$181,000, or 23.8%2.2%, to a record $1.7 million and $4.9 million for the three and nine months ended September 30, 2017, respectively,2023, compared to $1.4the same period in 2022. Private wealth management fee income is primarily driven by the amount of assets under management and administration, as well as the mix of business at different fee structures, and can be positively or negatively influenced by the timing and magnitude of volatility within the capital markets. As of September 30, 2023, private wealth and trust assets under management and administration totaled $2.915 billion, increasing $422.0 million, or 16.9%, compared to $2.493 billion as of September 30, 2022, as an increase in market values was bolstered by new client relationships and $4.0new money from existing clients.
Commercial loan interest rate swap fee income increased $651,000, or 190.9%, and $1.5 million, or 143.4%, for the three and nine months ended September 30, 2016. This increase2023, respectively, compared to the same period in 2022. We originate commercial real estate loans in which we offer clients a floating rate and an interest rate swap. The client’s swap is then offset with a counter-party dealer. The execution of these transactions generates swap fee income. The aggregate amortizing notional value of interest rate swaps with various borrowers was driven by growth in assets under management and administration attributable to both increased equity market values and new client relationships. At$908.6 million as of September 30, 2017, there were a record $1.240 billion of trust assets under management2023, compared to $977.0$744.2 million atand $666.2 million as of December 31, 20162022 and $935.6 million at September 30, 2016. Assets under administration were $176.52022, respectively. Interest rate swaps can be an attractive product for our commercial borrowers, although associated fee income can be variable from period to period based on loan activity and the interest rate environment in any given quarter.
Other non-interest income decreased $670,000, or 28.9%, and increased $1.0 million, at September 30, 2017 compared to $227.4 million at December 31, 2016 and $231.8 million at September 30, 2016. The decrease in assets under administration reflected the transfer of client assets from assets under administration to assets under management. The retirement plan services industry is undergoing a migration from advised services to fiduciary services. Consequently, during the first quarter of 2017, one large and several smaller retirement plans changed their service model, which resulted in assets moving to full fiduciary status. We anticipate there will be similar migration of additional assets because of this trend in the future.

Gains on sale of SBA loansor 22.5%, for the three and nine months ended September 30, 2017 totaled $606,000 and $1.5 million,2023, respectively, an increase of $259,000, or 74.6%, compared to the three months ended September 30, 2016same period in 2022. The decrease 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 feesincrease for the three and nine months ended September 30, 2017 totaled $391,000 and $1.5 million,2023, respectively, a decreasewas primarily due to the timing of $115,000,returns from the Corporation’s investments in mezzanine funds.
Service charges on deposits decreased $183,000, or 22.7%18.0%, and $266,000,$775,000, or 14.9%25.3%, from 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 incomerespectively, for the three and nine months ended September 30, 2017 totaled $619,000 and $1.9 million, respectively,2023, compared to the same period in 2022. The decrease was driven by an increase in the earnings credit rate which was adjusted with the rising rate environment. Treasury management business development efforts remain robust as gross treasury management service charges, net of $410,000,waived fees, increased $183,000, or 196.2%13.6%, and $1.0 million,$557,000, or 111.3%14.3%, 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, 2017,2023, compared to the same period in 2022. Management believes growth in gross analyzed service charges is a strong indicator of success for the Corporation given the direct correlation to adding and expanding core business relationships.
Gain on sale of SBA loans increased $119,000, or 16.3%, and decreased $498,000, or 21.9%, for the three and nine months ended September 30, 2023, respectively, compared to no swap fee incomethe same period in 2022. The increase over the prior year quarter was due to an increase in loan sales volume. The decrease for the year-to-date period was driven by lower sales volume.
Loan fees decreased by $28,000, or 3.4%, and increased $332,000, or 15.3%, for the three and nine months ended September 30, 2023, respectively, compared to the same period in 2022. The decrease for the three months ended September 30, 2016 and $21,000was primarily
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due to a decrease in Asset-Based Lending audit fee income. The increase for the nine months ended September 30, 2016. We believewas due to the market’s assumption of a rising interest rate environment throughout 2017an increase in equipment financing and into 2018, we could seefloorplan financing activity generating additional loan demand for these types of relationship-based opportunities.service fee income.
Comparison of Non-Interest Expense for the Three and Nine Months Ended September 30, 20172023 and 20162022
Non-Interest Expense
The components of non-interestNon-interest expense were as follows for the three and nine months ended September 30, 20172023 increased by $3.2 million, or 15.8%, 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$8.7 million, or 14.9%, respectively compared to the same period in 2022. Operating expense, which excludes certain one-time and discrete items as defined in the Efficiency Ratio table above, increased $3.0 million, or 15.1%, and $7.9 million, or 13.5%, respectively, for the three and nine months ended September 30, 2017 decreased by $1.5 million, or 9.7%, to $14.2 million2023, compared to $15.8 million for the same period 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 $12.6 million.2022. The increase in non-interestoperating expense was primarily due to an increase in collateral liquidation costs and SBA recourse provision, partially offsetall major categories led by a decrease incompensation, FDIC insurance, and other non-interest expense.    
The components of non-interest expense were as follows:
For the Three Months Ended September 30,For the Nine Months Ended September 30,
20232022$ Change% Change20232022$ Change% Change
(Dollars in Thousands)
Compensation$15,573 $14,817 $756 5.1 %$46,610 $42,475 $4,135 9.7 %
Occupancy575 566 9 1.6 1,809 1,689 120 7.1 
Professional fees1,429 1,203 226 18.8 4,012 3,671 341 9.3 
Data processing953 719 234 32.5 2,889 2,391 498 20.8 
Marketing758 543 215 39.6 2,165 1,713 452 26.4 
Equipment349 253 96 37.9 1,000 732 268 36.6 
Computer software1,289 1,128 161 14.3 3,668 3,327 341 10.2 
FDIC insurance680 230 450 195.7 1,653 840 813 96.8 
Other non-interest expense1,583 569 1,014 178.2 3,181 1,469 1,712 116.5 
Total non-interest expense$23,189 $20,028 $3,161 15.8 $66,987 $58,307 $8,680 14.9 
Total operating expense(1)
$22,943 $19,925 $3,018 15.1 $66,414 $58,497 $7,917 13.5 
Full-time equivalent employees348 335 348 335 

(1)Total operating expense represents total non-interest expense, adjusted to exclude the Corporation continuesimpact of discrete items as previously defined in the non-GAAP efficiency ratio calculation, above.
    Compensation expense for the three and nine months ended September 30, 2023 increased $756,000, or 5.1%, and $4.1 million, or 9.7%, respectively, compared to reduce its reliance on wholesale deposits in favor of FHLB advances.    
Collateral liquidation coststhe three and nine months ended September 30, 2022. The increase for the three months ended September 30, 2017 were $371,000 compared2023 reflects annual merit and market increases, to $89,000remain competitive in a wage inflation environment, an expanded workforce, an increase in incentive compensation due to outstanding production, partially offset by lower projected annual cash bonus program accrual. In addition, the increase for the same periodnine months ended September 30, 2023 was also driven by payment of, and payroll taxes paid on, a record annual cash bonus earned in 2016. The increase primarily reflected the Corporation’s workout process related2022 but paid in 2023. Successful hiring efforts to two non-performing loans.    
SBA recourse provisionsecure talent resulted in average full-time equivalent employees for the three months ended September 30, 2017 was $1.3 million2023 increasing to 349, up 4.8%, 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.
Management has extensively overhauled the previously acquired SBA lending platform 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, or 139.7%, to $760,000333 for the three months ended September 30, 2017 from $317,0002022.
Other non-interest expense for the three months ended September 30, 2016. 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 theand nine months ended September 30, 20172023 increased by $102,000,$1.0 million, or 0.2%178.2%, to $42.0and $1.7 million, or 116.5%, respectively, compared to $41.9 million for the same period in 2016. Excluding the impairment impact of tax credit investments, non-interest expense for thethree and nine months ended September 30, 2016 totaled $38.4 million.2022. The increase in non-interest expensefor both periods was primarily due to an increase in computer software expense, collateral liquidation costs,expenses related to an Asset-Based Lending relationship, an increase in SBA recourse provision, and other non-interest expense, partially offset by a decreasean increase in marketing costs, data processing and net losses on foreclosed properties.travel expenses.
Computer software expense increased by $430,000, or 26.8%, to $2.0 millionFDIC insurance for the three and nine months ended September 30, 2017 from $1.6 million for2023 increased $450,000, or 195.7%, and $813,000, or 96.8%, respectively, compared to the three and 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 provision for the three months ended September 30, 2017.    
Other non-interest expense increased by $830,000, or 52.7%, to $2.4 million for the nine months ended September 30, 2017 from $1.6 million for the nine months ended September 30, 2016.2022. The increase was primarily due to asset growth, an increase in the Corporation historically reflecting its quarterly allocationassessment rate due to a broad 2 basis point increase by the agency, and an increase in the usage of net income/loss from its equity investmentsbrokered deposits, in two mezzanine funds in other non-interest expense. Duelieu of FHLB advances, commensurate with our funding strategy to the underlying funds being in an earnings position for a sustained periodmatch-fund fixed-rate loans.
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Table of time, the Corporation recognized its share of earnings in other non-interest incomeContents
Marketing expense increased $215,000, or 39.6%, and $452,000, or 26.4%, for the three and nine months ended September 30, 2017.
Marketing costs decreased $164,000, or 9.6%,2023, respectively, compared to $1.5 million for the three and nine months ended September 30, 2017 from $1.7 million for2022. The increase during the three and nine months ended September 30, 2016. The favorable variance is2023 was primarily due to a purposeful reduction

or delay of certainan increase in business development efforts and 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,projects related to our investmentsexpanded sales force and national footprint.
Data processing increased $234,000, or 32.5%, and $498,000, or 20.8%, for the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022, primarily due to an increase in talentcore processing costs commensurate with loan and technology. We are diligently managing our operating costsdeposit account growth, as well as various project implementations..
Professional fees increased $226,000, or 18.8%, and $341,000, or 9.3%, for the three and nine months ended September 30, 2023, respectively, compared to align with revenue expectations while continuingthe three and nine months ended September 30, 2022. The increase was primarily due to make investments that enhance our businessan increase in recruiting expense, audit expenses, legal expense, and our ability to serve current and prospective clients.a general increase in other professional consulting services for various projects.
Income Taxes
Income tax expense was $2.8totaled $7.4 million for the nine months ended September 30, 2017, with an effective tax rate of 26.3%,2023 compared to income tax expense of $1.0$9.0 million for the nine months ended September 30, 2016, with2022. Income tax expense included a $1.1 million net benefit from tax credit investments, compared to a $155,000 benefit in the prior year period. The effective tax rate, including the benefit from Low-Income Housing Tax Credits, for the nine months ended September 30, 2023 was 21.0% compared to 22.6% for the same period in 2022. The Corporation expects to report an effective tax rate 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.between 21% and 22% for 2023 and between 20% and 21% for 2024.
Generally, the provision for income taxes is determined by applying an estimated annual effective income tax rate to income before taxes and adjusting for discrete items. The rate is based on the most recent annualized forecast of pre-tax income, book versus tax differences and tax credits, if any. If we conclude that a reliable estimated annual effective tax rate cannot be determined, the actual effective tax rate for the year-to-date period may be used. We re-evaluate the income tax rates each quarter. Therefore, the current projected effective tax rate for the entire year may change.


Financial Condition
General
Total assets increased by $5.0$442.2 million,, or 0.3%14.9%, to $1.786$3.419 billion as of September 30, 20172023 compared to $1.781$2.977 billion at December 31, 2016.2022. The increase in total assets was primarily driven by an increase in cash, loans and leases receivable, and other assets,available-for-sale securities. Total liabilities increased by $422.1 million, or 15.5%, to $3.138 billion at September 30, 2023 compared to $2.716 billion at December 31, 2022. The increase in total liabilities was principally due to an increase in deposits. Total stockholders’ equity increased by $20.1 million, or 7.7%, to $280.8 million at September 30, 2023 compared to $260.6 million at December 31, 2022. The increase in total stockholders’ equity was due to retention of earnings partially offset by a declinedividends paid to common stockholders, stock repurchased, and cumulative change in ouraccounting principal for ASC 326.
Cash and Cash Equivalents
    Cash and cash equivalents include short-term investments and available-for-sale securities portfolio.
Short-Term Investments
Short-term investments cash and due from banks. Cash and due from banks decreased by $10.4 $2.5 million, or 16.5%, to $52.5$23.3 million at September 30, 20172023 from $62.9$25.8 million at December 31, 2016.2022. Short-term investments increased by $32.7 million to $109.6 million at September 30, 2023 from $76.9 million at December 31, 2022. Our short-term investments primarily consist of interest-bearing deposits held at the FRB. We value the safety and soundness provided by the FRB, and therefore, we incorporate short-term investments in our on-balance-sheetreadily accessible liquidity program. The decrease in short-term investments primarily reflected a reduction in cashAs of September 30, 2023 and December 31, 2022, interest-bearing deposits held at the FRB driven by a decrease in both in-marketwere $109.2 million and wholesale deposits and modest loan growth. As$76.5 million, respectively.
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Table of September 30, 2017, our total investment in commercial paper, which is also considered a short-term investment, was $13.4 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. In general, the level of our short-term investments will be influenced by the timing of deposit gathering, scheduled maturities of wholesale deposits, funding of loan 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.Contents
Securities
Total securities, including available-for-sale and held-to-maturity, decreasedincreased by $14.5$56.2 million, or 25.0%, to $170.0$280.9 million, or 8.2% of total assets at September 30, 20172023 compared to $184.5$224.7 million, or 7.5% of total assets at December 31, 2016.2022. During the nine months ended September 30, 2017, we2023 the Corporation recognized unrealized gainslosses of $199,000$6.4 million before income taxes through other comprehensive income.income, compared to unrealized losses of $29.8 million for the same period in 2022. The unrealized losses in the prior year period were solely driven by the increase in interest rates. As of September 30, 20172023 and December 31, 2016,2022, our overall securities portfolio, including available-for-sale securities and held-to-maturity securities, had an estimated weighted averageweighted-average expected maturity of 3.475.3 years and 3.306.3 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. NoWe did not recognize any credit losses in the securities within our portfolio were deemed to be other-than-temporarily impaired as of September 30, 2017.2023.
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    Period-end loans and leases receivable, net of allowance for loan and leasecredit losses, increased by $17.0$315.8 million, or 1.2%,17.4% annualized to $1.447$2.735 billion at September 30, 20172023 from $1.430$2.419 billion at December 31, 2016. As2022 driven by commercial loan growth. Management does not believe this level of loan growth is sustainable and expects growth to moderate in subsequent quarters. Additionally, management expects to evaluate loan sale strategies as a means of adding to and further diversifying fee income. Due to the adoption of ASC 326, the current year included a change to our portfolio segmentation. The balances as of September 30, 2017, multi-family2023 reflect reclassifications of $43 million to commercial and industrial from commercial real estate and $7 million from consumer and other to commercial real estate.
Including the reclassification impact of adopting ASC 326 in the prior period of comparison, C&I loans wereincreased $186.5 million, or 27.7% annualized, to $1.084 billion. The increase was due to growth across the largest contributor tomajority of the Bank’s C&I products and geographies. Management does not believe this level of C&I loan growth increasing $32.3 million, or 34.8%,is sustainable and expects growth to $125.1 million from $92.8 million at December 31, 2016. There continuesmoderate to be a concentrationlower double-digit levels in subsequent quarters.
Including the reclassification impact of adopting ASC 326 in the prior period of comparison, total commercial real estate (“CRE”), however, in general our composition of total loans and leases has remained relatively consistentincreased $128.7 million, or 11.4% annualized, to $1.635 billion. The increase was primarily due to balanced growth across our product offerings.an increase in non-owner occupied CRE and multi-family loans..
Including the reclassification impact of adopting ASC 326 in the prior period of comparison, CRE loans represented 66%59.2% and 65%61.7% of our total loans as of September 30, 20172023 and December 31, 2016,2022, respectively. The decline in CRE concentration in the period of comparison is the result of management’s success in expanding the Bank’s various C&I products across both its local and national footprints. As of September 30, 2017, approximately 19%2023, 14.4% of the CRE loans were owner-occupied CRE.CRE, compared to 15.2% as of December 31, 2022. 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.
Our C&I portfolio decreased $3.1 million, or 0.7%, to $447.2 million at September 30, 2017 from $450.3 million at December 31, 2016 reflecting specialty finance prepayments and continued competitive pressure amid soft commercial loan demand overall. The countercyclical nature of the asset-based lending business may result in 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. 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. Additionally, management expects to evaluate loan sales strategies as a means of adding to and further diversifying fee income.
    Underwriting of new credit is primarily through approval from a serial sign-off or committee process and is a key component of our operating philosophy. Business development officers have no individual lending authority. To monitor the ongoing credit quality of our loans and leases, each credit is evaluated for proper risk rating using a nine grade risk rating system at the time of origination, subsequent renewal, evaluation of updated financial information from our borrowers, or as other circumstances dictate.
While we continue to experience 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
53
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
Deposit composition
As of
(in thousands)September 30,
2023		June 30,
2023		March 31,
2023		December 31,
2022		September 30,
2022
Non-interest-bearing transaction accounts$430,011 $419,294 $471,904 $537,107 $564,141 
Interest-bearing transaction accounts779,789 719,198 612,500 576,601 461,883 
Money market accounts694,199 641,969 662,157 698,505 742,545 
Certificates of deposit285,265 293,283 308,191 153,757 160,655 
Wholesale deposits467,743 455,108 422,088 202,236 158,321 
Total deposits$2,657,007 $2,528,852 $2,476,840 $2,168,206 $2,087,545 
Uninsured deposits$916,083 $867,397 $974,242 $967,465 $1,007,935 
Less: uninsured deposits collateralized by pledged assets28,873 37,670 32,468 14,326 34,264 
Total uninsured, net collateralized deposits$887,210 $829,727 $941,774 $953,139 $973,671 
% of total deposits33.4 %32.8 %38.0 %44.0 %46.6 %
As of September 30, 2017,2023, total period-end deposits decreasedincreased by $115.1$488.8 million or 7.5% to $1.424$2.657 billion from $1.539$2.168 billion at December 31, 2016. The2022, primarily due to a $265.5 million, $203.2 million, and $131.5 million increase in wholesale deposits, interest bearing transaction accounts, and certificate of deposit accounts, partially offset by a decrease in non-interest-bearing transaction accounts and money market accounts of $107.1 million and $4.3 million, respectively. The large increase in wholesale deposits wasis primarily driven by pricing discipline, in additiona shift from FHLB advances to a purposeful reduction in the level of wholesale deposits which decreased by $83.5to manage interest rate risk and increase excess liquidity.
As of September 30, 2023, total period-end in-market deposits increased $223.3 million, or 20.0%,15.1% annualized, to $333.2 million at September 30, 2017 from $416.7 million$2.189 billion, compared to $1.966 billion at December 31, 2016. The decrease2022. Growth in wholesaleinterest-bearing transaction accounts and certificates of deposits, driven by client movement into extended insurance products, was partially offset by ana decrease in non-interest-bearing transaction accounts and money market accounts. Management believes the Bank’s deposit-centric sales strategy, led by treasury management sales, will contribute to a net increase in the level of interest-bearing transaction accounts, which increased by $67.4 million, or 36.6%, to $251.4 million at September 30, 2017 from $184.0 million at December 31, 2016 related to successful efforts in attracting stable in-market deposits from municipality relationships throughout our markets. Deposit endingdeposits; 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 variability 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, increased $126.3 million, or 6.6%, to $2.048 billion, or 70.7%, were considered in-market deposits for the nine months ended September 30, 2017. This compares2023 compared to in-market deposits of $1.129$1.921 billion, or 69.9%, for the same period in 2016.     nine months ended September 30, 2022.

FHLB Advances and Other Borrowings
As of September 30, 2017,2023, FHLB advances and other borrowings increaseddecreased by $108.2$92.9 million,, or 181.3%20.3%, to $167.9$363.9 million from $59.7$456.8 million at December 31, 2016.2022. As deposit balances have increased, we have been able to reduce our usage of FHLB advances. In addition, we have strategically reduced our usage of FHLB advances in favor of wholesale deposits to increase the Bank’s readily available liquidity. We will continue to utilize FHLB advances and wholesale deposits to manage interest rate risk, liquidity, and contingency funding.
The Corporation’s targeted operating range of bank wholesale funds to total deposits is 30%-40%. As of September 30, 2017,2023, the ratioCorporation had no other borrowings. As of endDecember 31, 2022, the Corporation had other borrowings of period bank wholesale funds to end$6.1 million which consisted of period total bank funds was 30.4%.sold loans which were accounted for as a secured borrowing because they did not qualify for true sale accounting.
On September 29, 2023, the Corporation completed the private placement of $15.0 million in new subordinated debentures which qualify as Tier 2 capital. The proceeds of the issuance will support the Bank’s growth strategy and general corporate purposes. The subordinated debentures bear a fixed interest rate of 8.0% with a maturity date of September 29, 2033. The Corporation may, at its option, redeem the debentures, in whole or part, at any time after the fifth anniversary of issuance.
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    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
The Corporation has 12,500 shares, or $12.5 million in aggregate liquidation preference, of 7.0% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, with a liquidation preference of $1,000 per share (the “Series A Preferred Stock”) outstanding as of September 30, 2023 and December 31, 2022.
The Corporation expects to pay dividends on the Series A Preferred Stock when and if declared by its Board, at a fixed rate of 7.0% per annum, payable quarterly, in arrears, on March 15, June 15, September 15 and December 15 of each year up to, but excluding, March 15, 2027. For each dividend period from and including March 15, 2027, dividends will be paid at a floating rate of Three-Month Term SOFR plus a spread of 539 basis points per annum. During the three and nine months ended September 30, 2023, the Corporation paid $218,000 and $656,000, respectively, in preferred cash dividends with respect to the Series A Preferred Stock. The Series A Preferred Stock is perpetual and has no stated maturity. The Corporation may redeem the Series A Preferred Stock at its option at a redemption price equal to $1,000 per share, plus any declared and unpaid dividends (without regard to any undeclared dividends), subject to regulatory approval, on or after March 15, 2027 or within 90 days following a regulatory capital treatment event, in accordance with the terms of the Series A Preferred Stock.
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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 September 30, 2023, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was approximately $908.6 million, compared to $744.2 million as of December 31, 2022. We receive fixed rates and pay floating rates based upon designated benchmark interest rates on the swaps with commercial borrowers. These swaps mature between May 2024 and March 2040. Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements. As of September 30, 2023, the commercial borrower swaps were reported on the Consolidated Balance Sheet as a derivative asset of $291,000 and liability of $78.7 million compared to a derivative asset of $1.0 million and liability of $61.4 million as of December 31, 2022. On the offsetting swap contracts with dealer counterparties, we pay fixed rates and receive floating rates based upon designated benchmark interest rates. These interest rate swaps also have maturity dates between May 2024 and March 2040. Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and were reported on the Consolidated Balance Sheet as a net derivative asset of $78.4 million as of September 30, 2023, compared to a net derivative liability of $60.4 million as of December 31, 2022. The gross amount of dealer counterparty swaps as of September 30, 2023, without regard to the enforceable master netting agreement, was a gross derivative asset of $78.7 million, compared to a gross derivative liability of $1.0 million and gross derivative asset of $61.4 million as of December 31, 2022.
The Corporation also enters into interest rate swaps to manage interest rate risk and reduce the cost of match-funding certain long-term fixed rate loans. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. The instruments are designated as cash flow hedges as the receipt of floating rate interest from the counterparty is used to manage interest rate risk associated with forecasted issuances of short-term FHLB advances. The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affect earnings. As of September 30, 2023, the aggregate notional value of interest rate swaps designated as cash flow hedges was $352.7 million. These interest rate swaps mature between December 2023 and March 2034. A pre-tax unrealized gain of $5.3 million and $7.5 million was recognized in other comprehensive income for the three and nine months ended September 30, 2023, respectively, and there was no ineffective portion of these hedges.
The Corporation also enters into interest rate swaps to mitigate market value volatility on certain long-term fixed securities. The objective of the hedge is to protect the Corporation against changes in fair value due to changes in benchmark interest rates. The instruments are designated as fair value hedges as the changes in the fair value of the interest rate swap are expected to offset changes in the fair value of the hedged item attributable to changes in the SOFR swap rate, the designated benchmark interest rate. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affect earnings. As of September 30, 2023, the aggregate notional value of interest rate swaps designated as fair value hedges was $12.5 million. These interest rate swaps mature between February 2031 and October 2034. A pre-tax unrealized gain of $421,000 and loss of $353,000 was recognized in other comprehensive income for the three and nine months ended September 30, 2023, respectively, and there was no ineffective portion of these hedges.
For further information and discussion of our derivatives, see Note 13 — Derivative Financial Instruments of the Consolidated Financial Statements.

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Asset Quality
Non-performing Assets
Total impairednon-performing assets consisted of the following at September 30, 20172023 and December 31, 2016,2022, respectively:
September 30,
2023		December 31,
2022
 (Dollars in Thousands)
Non-performing loans and leases  
Commercial real estate:  
Commercial real estate - owner occupied$— $— 
Commercial real estate - non-owner occupied— — 
Construction— — 
Multi-family— — 
1-4 family24 30 
Total non-performing commercial real estate24 30 
Commercial and industrial17,604 3,629 
Consumer and other— — 
Total non-performing loans and leases17,628 3,659 
Repossessed assets, net61 95 
Total non-performing assets17,689 3,754 
Total non-performing loans and leases to gross loans and leases0.64 %0.15 %
Total non-performing assets to gross loans and leases plus repossessed assets, net0.64 0.15 
Total non-performing assets to total assets0.52 0.13 
Allowance for credit losses to gross loans and leases1.12 0.99 
Allowance for credit losses to non-performing loans and leases176.06 662.20 
  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 ofNon-performing loans increased $14.0 million, to $17.6 million at September 30, 20172023, compared to $3.7 million at December 31, 2022. The Corporation’s non-performing loans as a percentage of total gross loans and leases measured 0.64% and 0.15% at September 30, 2023 and December 31, 2016,2022, respectively. The recent elevation in non-performing assets was driven by Equipment Finance and Asset-Based Lending (ABL) pools within the C&I portfolio segment. We continue to expect full repayment related to the second quarter $10.9 million ABL loan in default. Excluding this credit, non-performing assets totaled $8.1 million, or 0.24% of total assets in the current quarter and $12.8$4.9 million, or 0.15% of non-accrual loans were considered troubled debt restructurings, respectively.total assets in the prior quarter. The increase in the Equipment Finance pool, for which defaults and liquidations are not atypical, was due to a cyclical increase in past-due balances.

We use a wide variety of available metrics to assess the overall asset quality of the portfolio and no one metric is used independently to make a final conclusion as to the asset quality of the portfolio. Non-performing assets increased $9.2 million, or 34.3%, to $35.8 millionas a percentage of total assets was 0.52% and 0.13% at September 30, 2017 from $26.7 million at2023 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.2022, respectively. As of September 30, 2017, 98.0%2023 and December 31, 2022, the payment performance of our loans and leases did not point to any new areas of concern, as approximately 99.36% and 99.85%, respectively, of the loan and leasetotal portfolio at the end of each period was in a current payment status, compared to 98.8% as of December 31, 2016.status. We also monitor our asset quality through our established credit quality indicator categories.categories as defined in Note 5 – Loans and Allowance for Credit Losses of the Consolidated Financial Statements. As we continue to actively monitor the credit quality of our loan and lease portfolios, we may identify additional loans and leases for which the borrowers or lessees are having difficulties making the required principal and interest payments based upon factors including, but not limited to, the inability to sell the underlying collateral, inadequate cash flow from the operations of the underlying businesses, liquidation events, or bankruptcy filings. We proactively work proactively with our impaired loan borrowers experiencing financial difficulty to find meaningful solutions to difficult situations that are in the best interests of the Bank.
    As of September 30, 2023, as well as in all previous reporting periods, there were no loans over 90 days past due and still accruing interest. Loans and leases greater than 90 days past due are placed on non-accrual status and individually evaluated for reserve requirement. Cash received while a loan or a lease is on non-accrual status is generally applied solely
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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 impairednon-performing 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 Nine Months Ended September 30,As of and for the
Year Ended December 31,
 202320222022
 (In Thousands)
Individually evaluated loans and leases with no specific reserves required$11,381 $1,028 $1,067 
Individually evaluated loans and leases with specific reserves required6,247 2,789 2,592 
Total individually evaluated loans and leases17,628 3,817 3,659��
Less: Specific reserves (included in allowance for credit losses)3,982 1,701 1,650 
Net non-performing loans and leases$13,646 $2,116 $2,009 
Average non-performing loans and leases$7,702 $5,532 $4,899 
Foregone interest income attributable to non-performing loans and leases$704 $312 $400 
Less: Interest income recognized on non-performing loans and leases108 1,057 1,436 
Net foregone interest income on non-performing loans and leases$596 $(745)$(1,036)
Allowance for Loan and LeaseCredit Losses
The allowance for loan and leasecredit losses, decreased $989,000including unfunded commitment reserves, increased $6.8 million, or 28.1%, to $31.0 million as of September 30, 2023 from $20.9$24.2 million as of December 31, 2016 to $19.9 million as of September 30, 2017.2022. The allowance for loan and leasecredit losses as a percentage of gross loans and leases also decreasedincreased to 1.12% as of September 30, 2023 from 1.44%0.99% as of December 31, 2016 to 1.36% as2022 under the incurred loss model. During the first quarter of September 30, 2017. There have been no substantive changes to our2023, the Corporation adopted ASU 2016-13, including the CECL methodology for estimating the appropriate levelACL. This standard was adopted using a modified retrospective approach on January 1, 2023, resulting in a $484,000 increase to the ACL and a $1.3 million increase to the unfunded credit commitments reserve. In addition to the adoption of ASU 2016-13, the increase in allowance for loan and lease loss reserves from what was previously outlined in our most recent Annual Report on Form 10-K.
During the three months ended September 30, 2017, we recorded net charge-offs on impairedcredit losses as a percent of gross loans and leases of approximately $3.2 million, or 0.88% of average loanswas principally due to loan growth, increase in specific reserves, and leases annualized, comprised of $3.2 million of charge-offschanges to quantitative and $5,000 of recoveries. During the three months ended September 30, 2016, 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.qualitative model factors.
During the nine months ended September 30, 2017,2023, we recorded net charge-offs on impairedindividually evaluated loans and leases of approximately $6.7 million, or 0.61% of average loans and leases annualized,$622,000, comprised of $7.2 million$1,057,000 of charge-offs and $508,000$435,000 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.
We will continue to experience some level of periodic charge-offs in the future as exit strategies are considered and executed. Loans and leases with previously established specific reserves, may ultimately result in a charge-off under a variety of scenarios. Based upon the application
    As of September 30, 2023 and December 31, 2022, our methodology for estimating the appropriate levelratio 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 leasecredit losses of $19.9 million, or 1.36% ofto total non-performing loans and leases was appropriate as of September 30, 2017. Given ongoing complexities with current workout situations, further charge-offs176.06% 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 September 30, 2017 and December 31, 2016, our allowance for loan and lease losses to total non-accrual loans and leases was 59.95% and 83.00%662.20%, respectively. This ratio decreased primarily duebecause of the $10.9 million ABL loan downgraded to the collateral positions related to the additional non-accrual loans during 2017. During the third quarternon-performing as of 2017, the allowance forJune 30, 2023. This loan is fully collateralized and lease losses to total non-accrual loans increased 1.62% from the linked quarter. Impairedrequired no specific reserve. Non-performing loans and leases exhibit weaknesses that inhibit repayment in compliance with the original terms of the note or lease. However,lease; however, the measurementevaluation of impairment onnon-performing loans and leases may not always result in a specific reserve included in the allowance for loan and leasecredit 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 lossescredit loss to non-accrualnon-performing loans and leases ratio as compared to our peers or industry expectations. OurAs asset quality strengthens, our allowance for loan and leasecredit losses is measured more through generalcollective 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 September 30, 2017.2023.

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    To determine the level and composition of the allowance for credit losses, we break out the portfolio by segments with similar risk characteristics. First, we evaluate loans and leases for non-performing classification. We analyze each loan and lease identified as non-performing on an individual basis to determine a specific reserve based upon the estimated value of the underlying collateral for collateral-dependent loans, or alternatively, the present value of expected cash flows. For efficiency, smaller dollar value loans within the Equipment Finance pool are reserved based on a past-due criteria. All loans not evaluated individually are evaluated collectively as part of a portfolio segment or portfolio segment and class. These collective evaluations utilized a reasonable and supportable forecast which includes projections of credit losses based on one of two established methods: discounted cash flow or weighted average remaining maturity. Each model includes a set of assumptions which are evaluated not less than annually by management. Further, the methodology also focuses on evaluation of several qualitative factors for each portfolio segment or portfolio segment and class, including but not limited to: product growth rates, management’s ongoing review and grading of the loan and lease portfolios, consideration of delinquency experience, changes in the size of the loan and lease portfolios, level of loans and leases subject to more frequent review by management, changes in underlying collateral, concentrations in specific industries, and other qualitative factors that could affect credit losses.
    When it is determined that we will not receive our entire contractual principal or the loss is confirmed, we record a charge against the allowance for credit loss reserve to bring the loan or lease to its net realizable value. Many of the impaired loans are collateral dependent. It is typically part of our process to obtain appraisals on impaired loans and leases that are primarily secured by real estate. As we complete new appraisals and/or market evaluations, in specific situations current fair values collateralizing certain impaired loans are inadequate to support the entire amount of the outstanding debt.
    As a result of our review process, we have concluded an appropriate allowance for credit losses for the existing loan and lease portfolio was $31.0 million, or 1.12% of gross loans and leases, at September 30, 2023. However, given ongoing complexities with current workout situations and the uncertainty surrounding future economic conditions, further charge-offs, and increased provisions for credit losses may be recorded if additional facts and circumstances lead us to a different conclusion. In addition, various federal and state regulatory agencies review the allowance for credit losses. These agencies could require certain loan and lease balances to be classified differently or charged off when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination.

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A tabular summary of the activity in the allowance for loan and leasecredit losses follows:
As of and for the Three Months Ended September 30,As of and for the Nine Months Ended September 30,
 2023202220232022
 (Dollars in Thousands)
Allowance at beginning of period$29,697 $24,104 $24,230 $24,336 
Impact of adoption of ASC 326— — 1,818 — 
Charge-offs:   
Commercial real estate:   
Commercial real estate — owner occupied— — — — 
Commercial real estate — non-owner occupied— — — — 
Construction— — — — 
Multi-family— — — — 
1-4 family— — — — 
Commercial and industrial(562)(33)(1,057)(140)
Consumer and other— (21)— (21)
Total charge-offs(562)(54)(1,057)(161)
Recoveries:   
Commercial real estate:   
Commercial real estate — owner occupied3 23 5 4,258 
Commercial real estate — non-owner occupied— — 1 1 
Construction— — — — 
Multi-family— — — — 
1-4 family9 — 30 — 
Commercial and industrial72 50 386 251 
Consumer and other— 8 13 27 
Total recoveries84 81 435 4,537 
Net recoveries(478)27 (622)4,376 
Provision for credit losses1,817 12 5,610 (4,569)
Allowance at end of period$31,036 $24,143 $31,036 $24,143 
Components:
Allowance for loan losses$29,331 $24,143 $29,331 $24,143 
Allowance for unfunded credit commitments1,705 — 1,705 — 
Total ACL$31,036 $24,143 $31,036 $24,143 
Annualized net charge offs (recoveries) as a percent of average gross loans and leases0.07 %— %0.03 %(0.26)%


60
  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 partythird-party senior line of credit, and dividends received from the Bank. While the Bank is subject to certain generally applicable regulatory limitations regarding its ability to pay dividends to the Corporation, we do not believe that the Corporation will be adversely affected by these dividend limitations. The Corporation’s principal liquidity requirements at September 30, 20172023 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 declarationsdebentures and cash 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 September 30, 2023, 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 sources 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 and industry conditions, and competition.
On-balance-sheetSources of liquidity is
As of
(in thousands)September 30,
2023		June 30,
2023		March 31,
2023		December 31,
2022		September 30,
2022
Short-term investments$109,612 $80,510 $159,859 $76,871 $86,707 
Collateral value of unencumbered pledged loans315,067 265,884 296,393 184,415 289,513 
Market value of unencumbered securities236,618 217,074 200,332 188,353 173,013 
Readily available liquidity661,297 563,468 656,584 449,639 549,233 
Fed fund lines45,000 45,000 45,000 45,000 45,000 
Excess brokered CD capacity1
1,090,864 1,017,590 1,027,869 1,162,241 1,100,369 
Total liquidity$1,797,161 $1,626,058 $1,729,453 $1,656,880 $1,694,602 
Total uninsured, net collateralized deposits887,210 829,727 941,774 953,139 973,671 
(1)Bank internal policy limits brokered CDs to 50% of total bank funding when combined with FHLB advances.
We view readily accessible liquidity as a critical element to maintaining adequate liquidity to meet our cash and collateral obligations. We define our on-balance-sheetreadily accessible liquidity as the total of our short-term investments, our unencumbered securities’ fair valuesecurities available-for-sale, and our unencumbered pledged loans. As ofOur readily accessible liquidity increased quarter over quarter. At September 30, 20172023 and December 31, 2016, our immediate on-balance-sheet liquidity was $450.2 million and $543.1 million, respectively. At September 30, 2017 and December 31, 2016,2022, the Bank had $35.4$109.2 million and $40.9$76.5 million on deposit with the FRB recorded in short-term investments, respectively. Any excess funds not used for loan funding or satisfying other cash obligations were maintained as part of our on-balance-sheetreadily accessible liquidity in our interest-bearing accounts with the FRB, as we value the safety and soundness provided by the FRB. We plan to utilize excess liquidity to fund loan and lease portfolio growth, pay down maturing debt, allow run-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$782.2 million of outstanding wholesale funds at September 30, 2017,2023, compared to $450.3$618.6 million of wholesale funds as of December 31, 2016,2022, which represented 30.4%26.3% and 28.6%23.9%, 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. Wholesale funds are also stable as each issuance has a structured maturity date and may only be redeemed in certain limited circumstances. During the time frames necessary to accumulate wholesale funds in an orderly manner, we will use short-term FHLB advances to meet our temporary funding needs. The short-term FHLB advances will typically have terms of one week to one month to cover the overall expected funding demands.
Our
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     Period-end in-market relationships remain stable; however,deposits increased $223.3 million as of September 30, 2023, compared to December 31, 2022. The increase in in-market deposits was principally due to a $203.2 million and $131.5 million increase in interest bearing transaction accounts and certificates of deposits, respectively. This increase was partially offset by a $107.1 million and $4.3 million decrease in non-interest bearing deposit balances associated with those relationships will fluctuate. We expectaccounts and money market accounts, respectively. While non-interest transaction accounts declined $107.1 million from December 31, 2022 to establish new client relationships and continue marketing efforts aimed at increasingJune 30, 2023, we observed a $10.7 million increase during third quarter which may indicate a bottom to the balances in existing clients’ deposit accounts.trend. Nonetheless, we will continue to use wholesale funds in specific maturity periods, typically three to five years, needed to effectively mitigate the interest rate risk measured through our asset/liability management process or in shorter time periods if in-market deposit balances decline. In order to provide for ongoing liquidity and funding, 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 September 30, 2017 and December 31, 2016.2023.
The Bank was able to access the wholesale depositfunding market as needed at rates and terms comparable to market standards during the nine month periodquarter ended September 30, 2017.2023. 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-sheetreadily accessible 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. As of September 30, 2017,2023, the available liquidity was in excess of the stated policy minimum. We believe the Bank will also have access to the unused federal funds lines, cash flows from borrower repayments, and cash flows from security maturities. The Bank also has the ability to raise local market deposits by offering attractive rates to generate the level required to fulfill theirits liquidity needs.
The Bank is required by federal regulationCorporation has a shelf registration statement on file with the Securities and Exchange Commission that would allow the Corporation to maintain sufficient liquidityoffer and sell, from time to ensure safetime and sound operations. We believe the Bank has sufficient liquidityin one or more offerings, up to match the balance$75.0 million in aggregate initial offering price of net withdrawable depositscommon and short-term borrowings in light of present economic conditions and deposit flows.preferred stock, debt securities, warrants, subscription rights, units, or depository shares, or any combination thereof.
During the nine months ended September 30, 2017,2023, operating activities resulted in a net cash inflow of $19.4$39.0 million, which included net income of $7.9$27.3 million. Net cash used inby investing activities for the nine months ended September 30, 20172023 was approximately $13.3$395.4 million which consisted of cash outflowsprimarily due to fund net loan growthdisbursements, investments made in securities available for sale, and reinvestment of cash flows within purchases of additional securities, partially offset by cash inflows from maturities, redemptions and paydowns of available-for-sale and held-to-maturity securities.investments in federal home loan bank stock. Net cash used inprovided by financing activities was $386.7 million for the nine months ended September 30, 2017 was $10.5 million2023 primarily fromdue to a net decreasesincrease in deposits, and cash dividends paid to shareholders, partially offset by net increases inthe repayment of FHLB advances. Please refer to the Consolidated Statements of Cash Flows included in PART I., Item 1. for further details regarding significant sources of cash flow for the Corporation.


Contractual Obligations and Off-Balance-SheetOff-Balance Sheet Arrangements
As of September 30, 2017,2023, 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, 2016.2022. 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 matchlargely match-funded position 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. ThisThe 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.
We
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The primary technique we use two techniques to measure interest rate risk. The firstrisk 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.utilized. These assumptions are modeled under different rate scenarios that include a parallel, instantaneoussimultaneous, instant and sustained change in interest rates. KeyDuring the third quarter of 2023, the Corporation’s interest rate risk exposure model incorporated updated assumptions include:
regarding the behaviorlevel of interest rate, including indeterminable maturity deposits (non-interest bearing deposits, interest bearing transaction accounts and money market accounts). In the current environment of changing short-term rates, deposit pricing can vary by product and client. These assumptions have been developed through a combination of historical analysis and projection of future expected pricing spreads;behavior. This modeling indicated interest rate sensitivity as follows:
Impact on Net Interest Income as of
Instantaneous Rate Change in Basis PointsSeptember 30, 2023
Down 300(1.42)%
Down 2000.72 
Down 1000.96 
No Change— 
Up 1001.24 
Up 2001.37 
Up 3001.52 
The simulations used to manage market risk are based on numerous assumptions regarding the effect of changes in product balances;interest rates on the timing and
the behavior extent of loanrepricing characteristics, future cash flows and deposit clients in different rate environments.
This analysis incorporates severalclient behavior. These assumptions the most material of which relate to the re-pricing characteristicsare inherently uncertain and, balance fluctuations of deposits with indeterminate or non-contractual maturities, and is measured as a percentage change inresult, the model cannot precisely estimate net interest income foror precisely predict the next 12 monthsimpact of higher or lower interest rates on net interest income. Actual results will differ from simulated results 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 reasontiming, magnitude and others, they do not reflect the likely actual results but serve as conservative estimatesfrequency of interest rate risk. The simulation analysis is not comparable to actual results or directly predictive of future values ofchanges as well as changes in market conditions, client behavior and management strategies, among 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.factors.
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 depositFHLB advances and FHLB advanceswholesale deposits are a significant source of our funding and wefunds. 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, managementManagement has the authorization, as permitted within applicable approved policies, and ability to utilize such instrumentsderivatives 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 September 30, 2017.2023.
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 September 30, 20172023 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.



PART II. Other Information
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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.


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, 2016.2022 and the quarterly reports on Form 10-Q for the quarters ended March 31, 2023 and June 30, 2023.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)None.
(b)Not applicable.
(c)None.
Issuer Purchases of Securities
    As previously announced, effective January 27, 2023, the Corporation’s Board of Directors authorized the repurchase by the Corporation of shares of its common stock with a maximum aggregate purchase price of $5.0 million, effective January 31, 2023 through January 31, 2024. As of September 30, 2023, the Company had repurchased a total of 65,112 shares for approximately $2.0 million at an average cost of $30.72 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 September 30, 2023.
Period
Total Number of Shares Purchased(1)
Average Price Paid Per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Total Number of Shares that May Yet Be Purchased Under the Plans or Programs(2)
July 1, 2023 - July 31, 2023— $— — — 
August 1, 2023 - August 31, 2023711 32.10 — — 
September 1, 2023 - September 30, 2023— — — — 
Total711 32.10 — 99,967 
(1)During the third quarter of 2023, the Corporation repurchased an aggregate 711 shares of the Corporation’s common stock in open-market transactions, of which 0 shares were purchased pursuant to the repurchase program publicly announced on January 27, 2023, and of which 711 shares were surrendered to us to satisfy income tax withholding obligations in connection with the vesting of restricted awards.
(2)Number of shares available to be purchased under the January 27, 2023 share repurchase program was calculated by dividing the closing stock price on September 30, 2023 of $30.01 by the $3.0 million remaining capacity.

Item 5. Other Information
During the three months ended September 30, 2023, no director or “officer” of the Corporation adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.


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Item 6. Exhibits
4.1 
Form of 8.0% Subordinated Indenture from Form 8-K filed on October 4, 2023
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
31.2
32
101
The following financial information from First Business Financial Services, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017,2023, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 20172023 and December 31, 2016,2022, (ii) Consolidated Statements of Income for the three and nine months ended September 30, 20172023 and 2016,2022, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 20172023 and 2016,2022, (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 20172023 and 2016,2022, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 20172023 and 2016,2022, 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 September 30, 2023 has been formatted in Inline XBRL and contained in Exhibit 101.






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, 20172023/s/ Corey A. Chambas
Corey A. Chambas 
Chief Executive Officer
October 27, 20172023/s/ Edward G. Sloane, Jr.Brian D. Spielmann
Edward G. Sloane, Jr.Brian D. Spielmann
Chief Financial Officer
(principal financial officer)



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