FIRST BUSINESS FINANCIAL SERVICES, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

0

General

Unless otherwise stated or unless the context otherwise requires, all references in this report to the “Company”, “we”, “us”, “our” or similar references mean First Business Financial Services, Inc. with our subsidiary. “FBB” or the “Bank” means our subsidiary, First business bank.

                           Forward-Looking Statements

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

•Adverse changes in the economy or business conditions, either nationally or in
our markets, including, without limitation, inflation, supply chain issues,
labor shortages, wage pressures, and the adverse effects of the COVID-19
pandemic on the global, national, and local economy.
•Competitive pressures among depository and other financial institutions
nationally and in our markets.
•Increases in defaults by borrowers and other delinquencies.
•Our ability to manage growth effectively, including the successful expansion of
our client support, administrative infrastructure, and internal management
systems.
•Fluctuations in interest rates and market prices.
•Changes in legislative or regulatory requirements applicable to us and our
subsidiaries.
•Changes in tax requirements, including tax rate changes, new tax laws, and
revised tax law interpretations.
•Fraud, including client and system failure or breaches of our network security,
including our internet banking activities.
•Failure to comply with the applicable SBA regulations in order to maintain the
eligibility of the guaranteed portions of SBA loans.

  These risks could cause actual results to differ materially from what we have
anticipated or projected. These risk factors and uncertainties should be
carefully considered by our stockholders and potential investors. See Part I,
Item 1A - Risk Factors in our Annual Report on Form 10-K for the year ended
December 31, 2021 for discussion relating to risk factors impacting us.
Investors should not place undue reliance on any such forward-looking
statements, which speak only as of the date made. The factors described within
this Form 10-Q could affect our financial performance and could cause actual
results for future periods to differ materially from any opinions or statements
expressed with respect to future periods.

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

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

  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.

                                       42

————————————————– ——————————

  Table of Contents

                                    Overview

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

                         Financial Performance Summary

Results as at and for the three and six month periods ended June 30, 2022 to understand:

•Net income available to common shareholders totaled $11.0 million, or diluted
earnings per share of $1.29, for the three months ended June 30, 2022, compared
to $8.2 million, or diluted earnings per share of $0.95, for the same period in
2021. Net income available to common shareholders totaled $19.6 million, or
diluted earnings per share of $2.31, for the six months ended June 30, 2022,
compared to $18.0 million, or diluted earnings per share of $2.08, for the same
period in 2021.
•Annualized return on average assets ("ROA") and annualized return on average
common equity ("ROCE") for the three months ended June 30, 2022 measured 1.61%
and 18.79%, respectively, compared to 1.26% and 15.09% for the same period in
2021. Annualized ROA and annualized ROCE for the six months ended June 30, 2022
measured 1.46% and 16.74%, respectively, compared to 1.38% and 16.75% for the
same period in 2021.
•Pre-tax, pre-provision adjusted earnings, which excludes certain one-time and
discrete items, totaled $10.8 million for the three months ended June 30, 2022,
increasing $835,000, or 8.3%, from the same period in 2021. Pre-tax,
pre-provision adjusted ROA was 1.60% for the three months ended June 30, 2022,
compared to 1.53% for the same period in 2021. Excluding PPP interest and fee
income, pre-tax, pre-provision adjusted earnings totaled $10.6 million for the
three months ended June 30, 2022, up $3.7 million, or 53.8%, from the same
period in 2021. Pre-tax, pre-provision adjusted ROA, excluding the impact of
PPP, was 1.57% for the three months ended June 30, 2022, compared to 1.15% for
the same period in 2021.
•Pre-tax, pre-provision adjusted earnings totaled $20.8 million for the six
months ended June 30, 2022, up $153,000, or 0.7%, from the same period in 2021.
Pre-tax, pre-provision adjusted ROA was 1.54% for the six months ended June 30,
2022, compared to 1.59% for the same period in 2021. Excluding PPP interest and
fee income, pre-tax, pre-provision adjusted earnings totaled $20.2 million for
the six months ended June 30, 2022, up $5.6 million, or 37.8%, from the same
period in 2021. Pre-tax, pre-provision adjusted ROA, excluding the impact of
PPP, was 1.51% for the six months ended June 30, 2022, compared to 1.24% for the
same period in 2021.
•Fees in lieu of interest, defined as prepayment fees, asset-based loan fees,
non-accrual interest, and loan fee amortization, totaled $1.9 million for the
three months ended June 30, 2022 compared to $3.5 million for the three months
ended June 30, 2021. PPP fee income, included in loan fee amortization, was
$196,000 for the three months ended June 30, 2022 compared to $2.5 million for
the same period in 2021.
•Fees in lieu of interest totaled $3.2 million for the six months ended June 30,
2022, compared to $6.6 million for the six months ended June 30, 2021. PPP fee
income, included in loan fee amortization, was $445,000 for the six months ended
June 30, 2022 compared to $4.8 million for the same period in 2021.
•Net interest margin was 3.71% for the three months ended June 30, 2022 compared
to 3.49% for the same period in 2021. Adjusted net interest margin, which
excludes certain one-time and volatile items, was 3.45% for the three months
ended June 30, 2022 up from 3.20% for the same period in 2021. Net interest
margin was 3.55% for the six months ended June 30, 2022 compared to 3.46% for
the same period in 2021. Adjusted net interest margin, which excludes certain
one-time and volatile items, was 3.35% for the six months ended June 30, 2022 up
from 3.20% for the same period in 2021.
                                       43
--------------------------------------------------------------------------------
  Table of Contents
•Top line revenue, defined as net interest income plus non-interest income,
totaled $30.5 million for the three months ended June 30, 2022, up $2.6 million,
or 9.1% from the same period in 2021. Excluding PPP interest income and fees,
top line revenue increased $5.4 million, up 21.9% from the same period in 2021.
Top line revenue totaled $59.3 million for the six months ended June 30, 2022,
up $3.3 million, or 5.9% from the same period in 2021. Excluding PPP interest
income and fees, top line revenue increased $8.7 million, up 17.4% from the same
period in 2021.
•Provision for loan and lease losses was a benefit of $3.7 million for the three
months ended June 30, 2022 compared to a benefit of $958,000 for the same period
in 2021. Provision for loan and lease losses was a benefit of $4.6 million for
the six months ended June 30, 2022 compared to a benefit of $3.0 million for the
same period in 2021.
•Total assets at June 30, 2022 increased $124.1 million, or 9.4% annualized, to
$2.777 billion from $2.653 billion at December 31, 2021.
•Period-end gross loans and leases receivable increased $50.1 million, or 4.5%
annualized, to $2.291 billion as of June 30, 2022 compared to $2.241 billion as
of December 31, 2021. Average gross loans and leases of $2.259
billion increased $55.6 million, or 2.5%, for the six months ended June 30,
2022, compared to $2.203 billion for the same period in 2021.
•Period-end gross loans and leases receivable, excluding PPP loans, at June 30,
2022 increased $69.7 million, or 6.3% annualized, to $2.283 billion from $2.213
billion as of December 31, 2021. Average gross loans and leases, excluding net
PPP loans, of $2.243 billion increased $275.0 million, or 14.0%, for the six
months ended June 30, 2022, compared to $1.968 billion for the same period in
2021.
•Period-end gross PPP loans and PPP deferred processing fees were $8.3 million
and $113,000, respectively, at June 30, 2022 compared to $27.9 million and
$557,000 at December 31, 2021. Average PPP loans, net of deferred processing
fees, were $16.3 million for the six months ended June 30, 2022 compared to
$235.7 million for the same period in 2021.
•Non-performing assets were $5.7 million and 0.21% of total assets as of
June 30, 2022, compared to $6.5 million and 0.25% of total assets as of
December 31, 2021.
•The allowance for loan and lease losses decreased $232,000, or 1.0%, compared
to December 31, 2021. The allowance for loan and lease losses decreased to 1.05%
of total loans, compared to 1.09% at December 31, 2021. Excluding net PPP loans,
the allowance for loan and lease losses decreased to 1.06% of total loans as of
June 30, 2022, compared to 1.10% as of December 31, 2021.
•Period-end in-market deposits at June 30, 2022 decreased $71.3 million, or
3.7%, to $1.857 billion from $1.928 billion as of December 31, 2021. Average
in-market deposits of $1.917 billion increased $187.8 million, or 10.9%, for the
six months ended June 30, 2022, compared to $1.729 billion for the same period
in 2021.
•Private wealth and trust assets under management and administration decreased
by $280.3 million, or 9.9%, to $2.554 billion at June 30, 2022, compared to
$2.921 billion at December 31, 2021. Private wealth management service fees
increased $108,000, or 3.9%, and $542,000, or 10.5%, for the three and six
months ended June 30, 2022, compared to the three and six months ended June 30,
2021.


                                       44

————————————————– ——————————

  Table of Contents

                             Results of Operations

Top Line Revenue

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

The components of revenue were as follows:

                                                    For the Three Months Ended June 30,                                             For the Six 

Months ended June 30th,

                                        2022                2021            $ Change           % Change                2022                2021            $ Change           % Change
                                                                                                  (Dollars in Thousands)
Net interest income               $      23,660          $ 21,652          $  2,008              9.3%            $      45,087          $ 42,515          $  2,572              6.0%
Non-interest income                       6,872             6,321               551               8.7                   14,258            13,516               742               5.5
Top line revenue                  $      30,532          $ 27,973          $  2,559               9.1            $      59,345          $ 56,031          $  3,314               5.9


Annualized return on average assets and annualized return on average common equity

  ROA for the three and six months ended June 30, 2022 increased to 1.61% and
1.46%, respectively, compared to 1.26% and 1.38% for the three and six months
ended June 30, 2021, respectively. The increase in ROA was due to an increase in
top line revenue and increase in loan loss provision benefit, partially offset
by an increase in operating expenses. Please refer to the operating results
analysis below for further discussion on the reasons driving the increase in
profitability. We consider ROA a critical metric to measure the profitability of
our organization and how efficiently our assets are deployed. ROA also allows us
to better benchmark our profitability to our peers without the need to consider
different degrees of leverage which can ultimately influence return on equity
measures.

  ROCE for the three and six months ended June 30, 2022 was 18.79% and 16.74%,
respectively, compared to 15.09% and 16.75% for the three and six months ended
June 30, 2021, respectively. The primary reason for the change in ROCE is
consistent with the net income variance explanation as discussed under Return on
Average Assets above. We view ROCE as an important measurement for monitoring
profitability and continue to focus on improving our return to our shareholders
by enhancing the overall profitability of our client relationships, controlling
our expenses, and minimizing our costs of credit.

Efficiency ratio and adjusted profit before tax and before provision

  Efficiency ratio is a non-GAAP measure representing operating expense, which
is non-interest expense excluding the effects of the SBA recourse benefit or
provision, impairment of tax credit investments, net gains or losses on
foreclosed properties, amortization of other intangible assets, and other
discrete items, if any, divided by operating revenue, which is equal to net
interest income plus non-interest income less realized net gains or losses on
securities, if any. Pre-tax, pre-provision adjusted earnings is defined as
operating revenue less operating expense. In the judgment of the Corporation's
management, the adjustments made to non-interest expense and non-interest income
allow investors and analysts to better assess the Corporation's operating
expenses in relation to its core operating revenue by removing the volatility
associated with certain one-time items and other discrete items. The pre-tax,
pre-provision adjusted earnings allows management to benchmark performance of
our model to our peers without the influence of the loan loss provision and tax
considerations, which will ultimately influence other traditional financial
measurements, including ROA and ROCE. The information provided below reconciles
the efficiency ratio to its most comparable GAAP measure.

                                       45

————————————————– ——————————

Contents

Please refer to the Non-interest income and Non-interest expense sections below for a discussion of additional factors in the year-over-year change in efficiency ratio and adjusted profit before tax. and before provisions.

                                                         For the Three Months Ended June 30,                                               For the 

Semester completed June 30th,

                                           2022                   2021             $ Change           % Change               2022                  2021             $ Change           % Change
                                                                                                        (Dollars in Thousands)
Total non-interest expense           $      19,456           $    18,184          $  1,272              7.0%           $     38,280           $    35,514          $  2,766              7.8%

Less:

Net loss (gain) on foreclosed
properties                                       8                    (1)                9               NM                      20                     1                19               NM
Amortization of other
intangible assets                                -                     8                (8)              NM                       -                    15               (15)              NM
SBA recourse provision                         114                   245              (131)            (53.5)                    38                   115               (77)            (67.0)
Tax credit investment
impairment recovery                           (351)                    -              (351)              NM                    (351)                    -              (351)              NM

Total operating expense              $      19,685           $    17,932          $  1,753              9.8            $     38,573           $    35,383          $  3,190              9.0
Net interest income                  $      23,660           $    21,652          $  2,008              9.3            $     45,087           $    42,515          $  2,572              6.0
Total non-interest income                    6,872                 6,321               551              8.7                  14,258                13,516               742              5.5
Less:
Net gain on sale of securities                   -                    29               (29)              NM                       -                    29               (29)              NM
Adjusted non-interest income                 6,872                 6,292               580              9.2            $     14,258           $    13,487          $    771              5.7
Total operating revenue              $      30,532           $    27,944          $  2,588              9.3            $     59,345           $    56,002          $  3,343              6.0
Efficiency ratio                             64.47   %             64.17  %                                                   65.00   %             63.18  %

Pre-tax, pre-provision
adjusted earnings                    $      10,847           $    10,012          $    835              8.3            $     20,772           $    20,619          $    153              0.7
Average total assets                 $   2,716,707           $ 2,621,340          $ 95,367              3.6               2,691,613            
2,599,373            92,240              3.5
Pre-tax, pre-provision
adjusted return on average
assets                                        1.60   %              1.53  %                                                    1.54   %              1.59  %


NM = Not Meaningful

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









                                       46

————————————————– ——————————

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

                                                          For the Three Months Ended June 30,                                               For the Six Months Ended June 30,
                                            2022                  2021              $ Change           % Change              2022                 2021              $ Change           % Change
                                                                                                        (Dollars in Thousands)
Total non-interest expense            $      19,456          $    18,184          $   1,272              7.0%           $    38,280          $    35,514          $   2,766              7.8%
Less:
Net loss on foreclosed
properties                                        8                   (1)                 9               NM                     20                    1                 19               NM
Amortization of other
intangible assets                                 -                    8                 (8)              NM                      -                   15                (15)              NM
SBA recourse provision                          114                  245               (131)            (53.5)                   38                  115                (77)            (67.0)
Tax credit investment
impairment recovery                            (351)                   -               (351)              NM                   (351)                   -               (351)              NM
Total operating expense               $      19,685          $    17,932          $   1,753              9.8            $    38,573          $    35,383          $   3,190              9.0
Net interest income                   $      23,660          $    21,652          $   2,008              9.3            $    45,087          $    42,515          $   2,572              6.0

Less:

PPP interest income                              29                  566               (537)            (94.9)                   81                1,169             (1,088)            (93.1)
PPP loan fee amortization                       196                2,541             (2,345)            (92.3)                  445                4,754             (4,309)            (90.6)
Adjusted net interest income                 23,435               18,545              4,890              26.4                44,561               36,592              7,969              21.8
Total non-interest income                     6,872                6,321                551              8.7                 14,258               13,516                742              5.5
Less:
Net gain on sale of securities                    -                   29                (29)              NM                      -                   29                (29)              NM
Adjusted non-interest income                  6,872                6,292                580              9.2                 14,258               13,487                771              5.7
Adjusted operating revenue            $      30,307          $    24,837          $   5,470              22.0           $    58,819          $    50,079          $   8,740              17.5
Efficiency ratio                              64.95  %             72.20  %                                                   65.58  %             70.65  %

Pre-tax, pre-provision adjusted
earnings                              $      10,622          $     6,905          $   3,717              53.8           $    20,246          $    14,696          $   5,550              37.8
Average total assets                  $   2,716,707          $ 2,621,340          $  95,367              3.6            $ 2,691,613          $ 2,599,373          $  92,240              3.5
Average PPP loans, net                       11,650              229,165           (217,515)            (94.9)               16,266              235,668           (219,402)            (93.1)

Adjusted average total assets $2,705,057 $2,392,175

       $ 312,882              13.1           $ 2,675,347          $ 2,363,705          $ 311,642              13.2
Pre-tax, pre-provision adjusted
return on average assets                       1.57  %              1.15  %                                                    1.51  %              1.24  %


NM = Not Meaningful

Excluding the impact of PPP in periods of comparison, we believe the Corporation
will generate positive operating leverage on an annual basis and progress
towards enhancing the long-term efficiency ratio at a measured pace as we focus
on strategic initiatives directed toward revenue growth, process improvement,
and automation. These initiatives include efforts to grow our existing
specialized lending revenues, increase our commercial banking market share, and
scale our private wealth management business.









                                       47
--------------------------------------------------------------------------------
  Table of Contents
Net Interest Income

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

  The following table provides information with respect to (1) the change in net
interest income attributable to changes in rate (changes in rate multiplied by
prior volume) and (2) the change in net interest income attributable to changes
in volume (changes in volume multiplied by prior rate) for the three and six
months ended June 30, 2022 compared to the same period in 2021. The change in
net interest income attributable to changes in rate and volume (changes in rate
multiplied by changes in volume) has been allocated to the rate and volume
changes in proportion to the relationship of the absolute dollar amounts of the
change in each.

                                                  Increase (Decrease) for the Three Months     Increase (Decrease) for the Six Months Ended
                                                               Ended June 30,                                    June 30,
                                                           2022 Compared to 2021                          2022 Compared to 2021
                                                       Rate              Volume                   Net               Rate            Volume                  Net
                                                                                        (In Thousands)
Interest-earning assets
Commercial real estate and other mortgage
loans(1)                                          $     1,414          $   842                $   2,256          $ 1,264          $ 1,810                $ 3,074
Commercial and industrial loans(1)                        330             (495)                    (165)             310             (999)            

(689)

Direct financing leases(1)                                  3              (49)                     (46)              14             (115)             

(101)

Consumer and other loans(1)                                (3)              54                       51               (2)              91               

89

Total loans and leases receivable                       1,744              352                    2,096            1,586              787              

2,373

Mortgage-related securities                                51              122                      173               56              211              

267

Other investment securities                                14               61                       75                6               97                    103
FHLB and FRB Stock                                          9               41                       50                9               60                     69
Short-term investments                                     48              (10)                      38               54               (6)                    48
Total net change in income on
interest-earning assets                                 1,866              566                    2,432            1,711            1,149              

2,860

Interest-bearing liabilities
Transaction accounts                                       93                2                       95               91                8                     99
Money market accounts                                     178               49                      227              183              108                    291
Certificates of deposit                                   (50)              52                        2             (173)              54                   (119)
Wholesale deposits                                        266             (475)                    (209)             549             (958)                  (409)
Total deposits                                            487             (372)                     115              650             (788)                  (138)
FHLB advances                                             231              151                      382              (33)             202                    169

Other borrowings                                          (34)             238                      204             (101)             406                    305
Junior subordinated notes(2)                                -             (277)                    (277)             327             (375)            

(48)

Total net change in expense on
interest-bearing liabilities                              684             (260)                     424              843             (555)            

288

Net change in net interest income                 $     1,182          $   826                $   2,008          $   868          $ 1,704              

$2,572


(1)The average balances of loans and leases include non-accrual loans and leases
and loans held for sale.
(2)The rate column for the three and six months ended June 30, 2022 includes
$12,000 and $248,000 in accelerated amortization of debt issuance costs,
respectively.


                                       48

————————————————– ——————————

Contents

  The tables below show our average balances, interest, average yields/rates,
net interest margin, and the spread between the combined average yields earned
on interest-earning assets and average rates on interest-bearing liabilities for
the three and six months ended June 30, 2022 and 2021. The average balances are
derived from average daily balances.

                                                                                                 For the Three Months Ended June 30,
                                                                               2022                                                               2021
                                                      Average                                    Average                 Average                                    Average
                                                      Balance            Interest             Yield/Rate(4)              Balance            Interest             Yield/Rate(4)
                                                                                                       (Dollars in Thousands)
Interest-earning assets
Commercial real estate and other mortgage
loans(1)                                           $ 1,472,075          $ 15,343                        4.17  %       $ 1,386,187          $ 13,087                        3.78  %
Commercial and industrial loans(1)                     734,299             9,710                        5.29              772,257             9,875                        5.11
Direct financing leases(1)                              15,527               176                        4.53               19,883               222                        4.47
Consumer and other loans(1)                             51,045               458                        3.59               45,026               407                        3.62
Total loans and leases receivable(1)                 2,272,946            25,687                        4.52            2,223,353            23,591                        4.24
Mortgage-related securities(2)                         176,747               804                        1.82              149,253               631                        1.69
Other investment securities(3)                          54,591               260                        1.91               41,569               185                        1.78
FHLB and FRB stock                                      17,355               226                        5.21               14,172               176                        4.97
Short-term investments                                  29,541                54                        0.73               55,100                16                        0.12
Total interest-earning assets                        2,551,180            27,031                        4.24            2,483,447            24,599                        3.96
Non-interest-earning assets                            165,527                                                            137,893
Total assets                                       $ 2,716,707                                                        $ 2,621,340
Interest-bearing liabilities
Transaction accounts                               $   502,763               343                        0.27          $   499,040               248                        0.20
Money market accounts                                  767,433               509                        0.27              662,919               282                        0.17
Certificates of deposit                                 73,560               114                        0.62               45,993               112                        0.97
Wholesale deposits                                      12,350                92                        2.98              162,580               301                        0.74
Total interest-bearing deposits                      1,356,106             1,058                        0.31            1,370,532               943                        0.28
FHLB advances                                          449,599             1,666                        1.48              405,855             1,284                        1.27

Other borrowings                                        51,018               647                        5.07               32,447               443                        5.46
Junior subordinated notes(5)                                 -                 -                           -               10,066               277                       11.01
Total interest-bearing liabilities                   1,856,723             3,371                        0.73            1,818,900             2,947                        0.65
Non-interest-bearing demand deposit accounts           557,086                                                            527,441
Other non-interest-bearing liabilities                  57,615                                                             56,691
Total liabilities                                    2,471,424                                                          2,403,032
Stockholders' equity                                   245,283                                                            218,308
Total liabilities and stockholders' equity         $ 2,716,707                                                        $ 2,621,340
Net interest income                                                     $ 23,660                                                           $ 21,652
Interest rate spread                                                                                    3.51  %                                                            3.31  %
Net interest-earning assets                        $   694,457                                                        $   664,547
Net interest margin                                                                                     3.71  %                                                            3.49  %
Average interest-earning assets to average
interest-bearing liabilities                            137.40  %                                                          136.54  %
Return on average assets(4)                               1.61                                                               1.26
Return on average common equity(4)                       18.79                                                              15.09
Average equity to average assets                          9.03                                                               8.33
Non-interest expense to average assets(4)                 2.86                                                               2.77


(1)The average balances of loans and leases include non-accrual loans and leases
and loans held for sale. Interest income related to non-accrual loans and leases
is recognized when collected. Interest income includes net loan fees in lieu of
interest.
(2)Includes amortized cost basis of assets available-for-sale and
held-to-maturity.
(3)Yields on tax-exempt municipal securities are not presented on a
tax-equivalent basis in this table.
(4)Represents annualized yields/rates.
(5)The calculation for the three months ended June 30, 2022 includes $12,000 in
accelerated amortization of debt issuance costs.

                                       49

————————————————– ——————————

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


(1)The average balances of loans and leases include non-accrual loans and leases
and loans held for sale. Interest income related to non-accrual loans and leases
is recognized when collected. Interest income includes net loan fees in lieu of
interest.
(2)Includes amortized cost basis of assets available-for-sale and
held-to-maturity.
(3)Yields on tax-exempt municipal securities are not presented on a
tax-equivalent basis in this table.
(4)Represents annualized yields/rates.
(5)The calculation for the six months ended June 30, 2022 includes $248,000 in
accelerated amortization of debt issuance costs.




                                       50

————————————————– ——————————

Contents

Comparison of net interest income for the three and six months ended June 30th,

                                 2022 and 2021

  Net interest income increased $2.0 million, or 9.3%, and $2.6 million, or
6.0%, during the three and six months ended June 30, 2022, respectively,
compared to the three and six months ended June 30, 2021. The increase in net
interest income reflected an increase in average gross loans and leases and an
increase in net interest margin, partially offset by a reduction in fees in lieu
of interest. Fees in lieu of interest, which can vary from quarter to quarter,
totaled $1.9 million and $3.2 million for the three and six months ended
June 30, 2022, respectively, compared to $3.5 million and $6.6 million for the
same periods in 2021. Excluding fees in lieu of interest and interest income
from PPP loans, net interest income for the three and six months ended June 30,
2022 increased $4.2 million, or 24.0%, and $7.1 million, or 20.5%, respectively.
Average gross loans and leases for the three and six months ended June 30, 2022
increased $49.6 million, or 2.2%, and $55.6 million, or 2.5%, respectively,
compared to the three and six months ended June 30, 2021. Excluding net PPP
loans, average gross loans and leases for the three and six months ended
June 30, 2022 increased $267.1 million, or 13.4%, and $275.0 million, or 14.0%,
respectively, compared to the three and six months ended June 30, 2021.

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

The yield on average loans and leases for the three and six months ended
June 30, 2022 was 4.52% and 4.32%, respectively, compared to 4.24% and 4.21% for
the three and six months ended June 30, 2021. Excluding the impact of loan fees
in lieu of interest and PPP loan interest income, the yield on average loans and
leases excluding net PPP loans for the three and six months ended June 30, 2022
was 4.21% and 4.06%, respectively, compared to 3.91% and 3.92% for the three and
six months ended June 30, 2021. Similarly, the yield on average interest-earning
assets for the three and six months ended June 30, 2022 measured 4.24% and
4.04%, respectively, compared to 3.96% and 3.94% for the three and six months
ended June 30, 2021. Excluding loan fees in lieu of interest and the impact of
PPP loans, the yield on average interest-earning assets for the three and six
months ended June 30, 2022 was 3.96% and 3.81%, respectively, compared to 3.64%
and 3.66% for the three and six months ended June 30, 2021. The increase in
yields was primarily due to rising rates on variable-rate loans, following the
Federal Open Market Committee's ("FOMC") decision to raise the target Fed Funds
rate 150 basis points during the first half of 2022, as well as the reinvestment
of cash flows from the securities and fixed-rate loan portfolios in a rising
rate environment.

  The rate paid on average interest-bearing in-market deposits for the three and
six months ended June 30, 2022 increased to 0.29% and 0.24%, respectively, from
0.21% and 0.22% for the three and six months ended June 30, 2021. The average
rate paid on total interest-bearing liabilities for the three and six months
ended June 30, 2022 increased to 0.73% and 0.67%, respectively, from 0.65% for
both the three and six months ended June 30, 2021. Total interest-bearing
liabilities include interest-bearing deposits, federal funds purchased, FHLB
advances, subordinated and junior subordinated notes payable, and other
borrowings. The average rates paid increased commensurate with the increase in
short-term market rates and the renewal of maturing FHLB advances at higher
fixed rates. The daily average effective federal funds rate for the three and
six months ended June 30, 2022 increased 70 and 38 basis points, respectively,
compared to the same periods in 2021. This equates to a beta of 11% and 5% for
the three and six months ended June 30, 2022, respectively, on interest-bearing
in-market deposits.

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

                                       51

————————————————– ——————————

Contents

Allowance for losses on loans and leases

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

The Corporation recognized a $3.7 million and $4.6 million provision benefit for
the three and six months ended June 30, 2022, respectively, compared to a
benefit of $1.0 million and $3.0 million for the three and six months ended
June 30, 2021. The provision benefit for the three months ended June 30, 2022
was primarily due to a net recovery of $4.2 million and a $185,000 reduction due
to qualitative risk factor improvements, partially offset by a $527,000 increase
in the general reserve due to loan growth. The provision benefit for the six
months ended June 30, 2022 was primarily due to a net recovery of $4.4 million,
a $601,000 reduction due to qualitative risk factor improvements, and a $251,000
net decrease in specific reserves, partially offset by a $762,000 increase in
the general reserve due to loan growth. The net recovery for the three and six
months ended June 30, 2022 included a $4.1 million principal recovery relating
to a legacy SBA relationship originated in May 2016 and fully charged-off in
December 2020.

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

                                        For the Three Months Ended June 30,         For the Six Months Ended June 30,
                                             2022                  2021                 2022                 2021
                                                                        (In

Thousands)

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


                                       52

————————————————– ——————————

Contents

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

Comparison of non-interest income for the three and six month periods ended June 30th,

                                 2022 and 2021

Non-Interest Income

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

Management continues to focus on revenue growth from multiple non-interest
income sources in order to maintain a diversified revenue stream through greater
contributions from fee-based revenues. Total non-interest income accounted for
22.5% and 24.0% of total revenues for the three and six months ended June 30,
2022, respectively, compared to 22.6% and 24.1% for the three and six months
ended June 30, 2021.

The components of non-interest income were as follows:

                                                 For the Three Months Ended June 30,                                             For the Six Months Ended June 30,
                                     2022                2021            $ Change           % Change               2022                 2021             $ Change           % Change
                                                                                               (Dollars in Thousands)
Private wealth
management services fee
income                         $      2,852           $ 2,744          $     108              3.9%           $       5,693           $  5,151          $     542             10.5%
Gain on sale of SBA
loans                                   951             1,203               (252)            (20.9)                  1,537              2,281               (744)            (32.6)
Service charges on
deposits                              1,041               941                100              10.6                   2,040              1,859                181              9.7
Loan fees                               697               569                128              22.5                   1,349              1,114                235              21.1
Increase in cash
surrender value of
bank-owned life
insurance                               350               350                  -               NM                      698                699                 (1)            (0.1)
Net gain (loss) on sale
of securities                             -                29                (29)              NM                        -                 29                (29)              NM
Swap fees                               471                 -                471               NM                      697                684                 13              1.9
Other non-interest
income                                  510               485                 25              5.2                    2,244              1,699                545              32.1
Total non-interest
income                         $      6,872           $ 6,321          $     551              8.7            $      14,258           $ 13,516          $     742              5.5
Fee income ratio(1)                    22.5   %          22.6  %                                                      24.0   %           24.1  %

(1) Commission income ratio is commission income, as per the table above, divided by sales income (defined as net interest income plus non-interest income).

  Private wealth management service fees increased $108,000, or 3.9%, and
$542,000, or 10.5%, for the three and six months ended June 30, 2022, compared
to the three and six months ended June 30, 2021. Private wealth management fee
income is primarily driven by the amount of assets under management and
administration, as well as the mix of business at different fee structures, and
can be positively or negatively influenced by the timing and magnitude of
volatility within the capital markets. As of June 30, 2022, private wealth and
trust assets under management and administration totaled $2.554 billion,
decreasing $10.6 million, or 0.4%, compared to $2.564 billion as of June 30,
2021, as new client relationships and new money from existing clients was more
than offset by the decline in market values.
                                       53

————————————————– ——————————

Contents

Commercial loan interest rate swap fee income was $471,000 and $697,000 for the
three and six months ended June 30, 2022, respectively, compared to no activity
for the three months ended June 30, 2021 and $684,000 for the six months ended
June 30, 2021. We originate commercial real estate loans in which we offer
clients a floating rate and an interest rate swap. The client's swap is then
offset with a counter-party dealer. The execution of these transactions
generates swap fee income. The aggregate amortizing notional value of interest
rate swaps with various borrowers was $646.1 million as of June 30, 2022,
compared to $637.0 million as of June 30, 2021. Interest rate swaps can be an
attractive product for our commercial borrowers, although associated fee income
can be variable from period to period based on loan activity and the interest
rate environment in any given quarter.

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

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

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

Gain on sale of SBA loans for the quarters and six months ended June 30, 2022
decreases $252,000i.e. 20.9%, and $744,000or 32.6%, respectively, compared to the same periods in 2021.

Comparison of non-interest expenses for the three and six month periods ended June 30th,

                                 2022 and 2021

Non-Interest Expense

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

The components of non-interest expense were as follows:

                                                 For the Three Months Ended June 30,                                                   For the Six 

Months ended June 30th,

                                    2022                2021            $ Change            % Change                     2022                2021            $ Change            % Change
                                                                                                  (Dollars in Thousands)
Compensation                  $      14,020          $ 13,255          $    765                  5.8  %             $     27,658          $ 25,912          $  1,746                  6.7  %
Occupancy                               568               533                35                  6.6                       1,123             1,085                38                  3.5
Professional fees                     1,298               913               385                 42.2                       2,468             1,778               690                 38.8
Data processing                         892               798                94                 11.8                       1,673             1,569               104                  6.6
Marketing                               670               511               159                 31.1                       1,170               902               268                 29.7
Equipment                               235               261               (26)               (10.0)                        479               506               (27)                (5.3)
Computer software                     1,117             1,129               (12)                (1.1)                      2,199             2,244               (45)                (2.0)
FDIC insurance                          296               280                16                  5.7                         610               642               (32)                (5.0)

Other non-interest
expense                                 360               504              (144)               (28.6)                        900               876                24                  2.7
Total non-interest
expense                       $      19,456          $ 18,184          $  1,272                  7.0                $     38,280          $ 35,514          $  2,766                  7.8
Total operating
expense(1)                    $      19,685          $ 17,932          $  1,753                  9.8                $     38,573          $ 35,383          $  3,190                  9.0

Full-time equivalent
employees                               333               319                                                                333               319


(1) Total operating expenses represents total non-interest expense, adjusted to exclude the impact of discrete items as previously defined in the non-GAAP efficiency ratio calculation, above .

  Compensation expense for the three and six months ended June 30, 2022
increased $765,000, or 5.8%, and $1.7 million, or 6.7%, respectively, compared
to the three and six months ended June 30, 2021. The increase reflects above
average

                                       54

————————————————– ——————————

Contents

annual merit and market increases, reflecting the competitive job market, as
well as an increase in the annual cash incentive compensation bonus accrual
related to performance and hiring to support the Bank's growth plans. Management
believes there will be upward pressure on compensation throughout the remainder
of the year as the Bank continues to opportunistically invest in new talent and
retain existing talent in the competitive market. Average full-time equivalent
employees for the three months ended June 30, 2022 increased to 321, up 2.89%,
compared to 312 for the three months ended June 30, 2021.

Professional fees increased $385,000, or 42.2%, and $690,000, or 38.8%, for the
three and six months ended June 30, 2022, respectively, compared to the three
and six months ended June 30, 2021. The increase was primarily due to an
increase in recruiting expense, audit expenses, and a general increase in other
professional consulting services for various projects.

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

Income taxes

  Income tax expense totaled $5.8 million for the six months ended June 30, 2022
compared to an income tax expense of $5.6 million for the six months ended
June 30, 2021. The effective tax rate for the six months ended June 30, 2022 was
23.7% compared to 23.6% for the six months ended June 30, 2021. For 2022, the
Corporation expects to report an effective tax rate of approximately 23% as
management intends to continue actively pursuing tax credit opportunities.

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


                              Financial Condition

General

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

Cash and cash equivalents

  Cash and cash equivalents include short-term investments and cash and due from
banks. Cash and due from banks increased $29.6 million to $39.3 million at
June 30, 2022 principally due to a routine temporary increase in cash related to
client funds in-transit. Short-term investments increased by $8.8 million to
$56.2 million at June 30, 2022 from $47.4 million at December 31, 2021. Our
short-term investments primarily consist of interest-bearing deposits held at
the FRB. We value the safety and soundness provided by the FRB, and therefore,
we incorporate short-term investments in our on-balance sheet liquidity program.
As of June 30, 2022 and December 31, 2021, interest-bearing deposits held at the
FRB were $55.5 million and $47.0 million, respectively. In general, the level of
our cash and short-term investments will be influenced by the timing of deposit
gathering, scheduled maturities of wholesale deposits, funding of loan and lease
growth, and the level of our securities portfolio. Please refer to the section
entitled Liquidity and Capital Resources for further discussion.
                                       55

————————————————– ——————————

Contents

Securities

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

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

Loans and Leases Receivable

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

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

There continues to be a concentration in CRE loans which represented 65.2% and
65.8% of our total loans, excluding net PPP loans, as of June 30, 2022 and
December 31, 2021, respectively. As of June 30, 2022, 17.4% of the CRE loans
were owner-occupied CRE, compared to 16.2% as of December 31, 2021. We consider
owner-occupied CRE more characteristic of the Corporation's C&I portfolio as, in
general, the client's primary source of repayment is the cash flow from the
operating entity occupying the commercial real estate property.

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

We will continue to actively pursue C&I loans across the Corporation as this
segment of our loan and lease portfolio provides an attractive yield
commensurate with an appropriate level of credit risk and creates opportunities
for in-market deposit, treasury management, and private wealth management
relationships which generate additional fee revenue.

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

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

                                       56

————————————————– ——————————

Contents

Deposits

  As of June 30, 2022, deposits decreased by $88.6 million to $1.869 billion
from $1.958 billion at December 31, 2021, primarily due to a $108.5 million and
$22.7 million decrease in transaction accounts and money market accounts,
respectively, partially offset by a $59.9 million increase in certificates of
deposit. The decline in balances was due to movement of client deposits to
investment alternatives, seasonality within the Bank's municipality clients, tax
payments, and normal course of business for continuing client relationships.
Management believes the Bank's deposit-centric sales strategy, led by treasury
management sales, will contribute to a net increase in deposits annually;
however, period-end deposit balances associated with in-market relationships
will fluctuate based upon maturity of time deposits, client demands for the use
of their cash, and our ability to maintain existing and new client
relationships.

  Our strategic efforts remain focused on adding in-market deposit
relationships. We measure the success of in-market deposit gathering efforts
based on the number and average balances of our deposit accounts as compared to
ending balances due to the volatility of some of our larger relationships. The
Bank's average in-market deposits, consisting of all transaction accounts, money
market accounts, and certificates of deposit, were $1.917 billion for the six
months ended June 30, 2022 compared to $1.729 billion for the six months ended
June 30, 2021.

FHLB advances and other borrowings

  As of June 30, 2022, FHLB advances and other borrowings increased by $193.2
million, or 47.9%, to $596.6 million from $403.5 million at December 31, 2021.
The FHLB advances were used to fund the seasonal decline of in-market deposits
and to match-fund existing and new fixed-rate loan growth to mitigate interest
risk.

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

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

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

Preferred Stock

On March 4, 2022, the Corporation issued 12,500 shares, or $12.5 million in
aggregate liquidation preference, of its 7.0% Fixed-to-Floating Rate
Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share,
with a liquidation preference of $1,000 per share (the "Series A Preferred
Stock") in a private placement to institutional investors. The net proceeds
received from the issuance of the Series A Preferred Stock were $12.0 million.
The proceeds were used to redeem $10.1 million of junior subordinated notes in
the first quarter of 2022.
                                       57

————————————————– ——————————

Contents

The Corporation expects to pay dividends on the Series A Preferred Stock when
and if declared by its Board, at a fixed rate of 7.0% per annum, payable
quarterly, in arrears, on March 15, June 15, September 15 and December 15 of
each year up to, but excluding, March 15, 2027. For each dividend period from
and including March 15, 2027, dividends will be paid at a floating rate of
Three-Month Term SOFR plus a spread of 539 basis points per annum. During the
three months ended June 30, 2022, the Corporation paid $246,000 in preferred
cash dividends. The Series A Preferred Stock is perpetual and has no stated
maturity. The Corporation may redeem the Series A Preferred Stock at its option
at a redemption price equal to $1,000 per share, plus any declared and unpaid
dividends (without regard to any undeclared dividends), subject to regulatory
approval, on or after March 15, 2027 or within 90 days following a regulatory
capital treatment event, in accordance with the terms of the Series A Preferred
Stock.
                                       58

————————————————– ——————————

Contents

Derivatives

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

As of June 30, 2022, the aggregate amortizing notional value of interest rate
swaps with various commercial borrowers was approximately $646.1 million,
compared to $640.6 million as of December 31, 2021. We receive fixed rates and
pay floating rates based upon designated benchmark interest rates on the swaps
with commercial borrowers. These swaps mature between May 2024 and March 2038.
Commercial borrower swaps are completed independently with each borrower and are
not subject to master netting arrangements. As of June 30, 2022, the commercial
borrower swaps were reported on the Consolidated Balance Sheet as a derivative
asset of $3.2 million and as a derivative liability of $40.4 million compared to
a derivative asset and liability of $26.3 million and $6.6 million,
respectively, as of December 31, 2021. On the offsetting swap contracts with
dealer counterparties, we pay fixed rates and receive floating rates based upon
designated benchmark interest rates. These interest rate swaps also have
maturity dates between May 2024 and March 2038. Dealer counterparty swaps are
subject to master netting agreements among the contracts within our Bank and
were reported on the Consolidated Balance Sheet as a net derivative asset of
$37.1 million as of June 30, 2022, compared to a net derivative liability of
$19.7 million as of December 31, 2021. The gross amount of dealer counterparty
swaps as of June 30, 2022, without regard to the enforceable master netting
agreement, was a gross derivative liability of $3.2 million and a gross
derivative asset of $40.4 million, compared to a gross derivative liability of
$26.3 million and gross derivative asset of $6.6 million as of December 31,
2021.

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

The Corporation also enters into interest rate swaps to mitigate market value
volatility on certain long-term fixed securities. The objective of the hedge is
to protect the Corporation against changes in fair value due to changes in
benchmark interest rates. The instruments are designated as fair value hedges as
the changes in the fair value of the interest rate swap are expected to offset
changes in the fair value of the hedged item attributable to changes in the SOFR
swap rate, the designated benchmark interest rate. These derivative contracts
involve the receipt of floating rate interest from a counterparty in exchange
for the Corporation making fixed-rate payments over the life of the agreement,
without the exchange of the underlying notional value. The change in the fair
value of these hedging instruments is recorded in accumulated other
comprehensive income and is subsequently reclassified into earnings in the
period that the hedged transactions affects earnings. As of June 30, 2022, the
aggregate notional value of interest rate swaps designated as fair value hedges
was $12.5 million. These interest rate swaps mature between February 2031 and
October 2034. A pre-tax unrealized loss of $376,000 was recognized in other
comprehensive income for the six months ended June 30, 2022 and there was no
ineffective portion of these hedges.

For further information and analysis of our derivatives, see Note 13 – Derivative financial instruments to the consolidated financial statements.

                                       59

————————————————– ——————————

  Table of Contents

                                 Asset Quality

Impaired Assets

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

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

$5,897 $6,739

Total non-accrual loans and leases to gross loans and leases                      0.24  %              0.28  %

Total non-performing assets to gross loans and leases plus foreclosed assets, net

                                                                   0.25                 0.29
Total non-performing assets to total assets                                       0.21                 0.25
Allowance for loan and lease losses to gross loans and leases                     1.05                 1.09

Allowance for losses on loans and leases on unaccrued loans and leases

     431.58               382.76


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

                                                                           June 30,                 December 31,
                                                                             2022                       2021
Total non-accrual loans and leases to gross loans and leases                     0.24  %                      0.29  %

Total non-performing assets to gross loans and leases plus foreclosed assets, net

                                                       0.25                         0.29
Total non-performing assets to total assets                                      0.21                         0.25
Allowance for loan and lease losses to gross loans and leases                    1.06                         1.10


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

                                       60

————————————————– ——————————

Contents

June 30, 2022 and December 31, 2021, $615,000 and $627,000 outstanding loans and leases were considered as TDRs, respectively.

  We use a wide variety of available metrics to assess the overall asset quality
of the portfolio and no one metric is used independently to make a final
conclusion as to the asset quality of the portfolio. Non-performing assets as a
percentage of total assets was 0.21% and 0.25% at June 30, 2022 and December 31,
2021, respectively. As of June 30, 2022, the payment performance of our loans
and leases did not point to any new areas of concern, as approximately 99.0% of
the total portfolio was in a current payment status, compared to 99.8% as of
December 31, 2021. We also monitor asset quality through our established
categories as defined in Note 5 - Loan and Lease Receivables, Impaired Loans and
Leases and Allowance for Loan and Lease Losses of the Consolidated Financial
Statements. As we continue to actively monitor the credit quality of our loan
and lease portfolios, we may identify additional loans and leases for which the
borrowers or lessees are having difficulties making the required principal and
interest payments based upon factors including, but not limited to, the
inability to sell the underlying collateral, inadequate cash flow from the
operations of the underlying businesses, liquidation events, or bankruptcy
filings. We are proactively working with our impaired loan borrowers to find
meaningful solutions to difficult situations that are in the best interests of
the Bank.

  As of June 30, 2022, as well as in all previous reporting periods, there were
no loans over 90 days past due and still accruing interest. Loans and leases
greater than 90 days past due are considered impaired and are placed on
non-accrual status. Cash received while a loan or a lease is on non-accrual
status is generally applied solely against the outstanding principal. If
collectability of the contractual principal and interest is not in doubt,
payments received may be applied to both interest due on a cash basis and
principal.

  The following represents additional information regarding our impaired loans
and leases:

                                                                                                      As of and for
                                                                                                           the
                                                          As of and for the Six Months Ended            Year Ended
                                                                       June 30,                        December 31,
                                                               2022                  2021                  2021
                                                                                (In Thousands)
Impaired loans and leases with no impairment
reserves required                                        $       4,144      

$7,948 $4,419
Impaired loans and leases with required allowances

                                                         1,629                3,530                  2,156
Total impaired loans and leases                                  5,773               11,478                  6,575
Less: Impairment reserve (included in allowance
for loan and lease losses)                                       1,254                2,021                  1,505
Net impaired loans and leases                            $       4,519          $     9,457          $       5,070
Average impaired loans and leases                        $       6,009          $    19,420          $      14,260
Foregone interest income attributable to impaired
loans and leases                                         $         206      

$1,081 $1,104
Less: Interest income recognized on impaired loans and leases

                                                         813                  153                    454

Net interest income lost on impaired loans and leases

                                                   $        (607)     

$928 $650

Allowance for losses on loans and leases

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

  There have been no substantive changes to our methodology for estimating the
appropriate level of allowance for loan and lease loss reserves from what was
previously outlined in our most recent Annual Report on Form 10-K.
                                       61

————————————————– ——————————

Contents

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

  As of June 30, 2022 and December 31, 2021, our ratio of allowance for loan and
lease losses to total non-accrual loans and leases was 431.58% and 382.76%,
respectively. This ratio increased primarily due to the substantial decrease in
non-accrual loans and leases discussed above, in comparison to the decrease in
the allowance for loan and leases losses. Impaired loans and leases exhibit
weaknesses that inhibit repayment in compliance with the original terms of the
note or lease; however, the measurement of impairment on loans and leases may
not always result in a specific reserve included in the allowance for loan and
lease losses. As part of the underwriting process, as well as our ongoing
monitoring efforts, we try to ensure that we have sufficient collateral to
protect our interest in the related loan or lease. As a result of this practice,
a significant portion of our outstanding balance of non-performing loans or
leases may not require additional specific reserves or require only a minimal
amount of required specific reserve. Management is proactive in recording
charge-offs to bring loans to their net realizable value in situations where it
is determined with certainty that we will not recover the entire amount of our
principal. This practice may lead to a lower allowance for loan and lease loss
to non-accrual loans and leases ratio as compared to our peers or industry
expectations. As asset quality strengthens, our allowance for loan and lease
losses is measured more through general characteristics, including historical
loss experience, of our portfolio rather than through specific identification
and we would therefore expect this ratio to rise. Conversely, if we identify
further impaired loans, this ratio could fall if the impaired loans are
adequately collateralized and therefore require no specific or general reserve.
Given our business practices and evaluation of our existing loan and lease
portfolio, we believe this coverage ratio is appropriate for the probable losses
inherent in our loan and lease portfolio as of June 30, 2022.

  To determine the level and composition of the allowance for loan and lease
losses, we break out the portfolio by segments with similar risk
characteristics. First, we evaluate loans and leases for potential impairment
classification. We analyze each loan and lease identified as impaired on an
individual basis to determine a specific reserve based upon the estimated value
of the underlying collateral for collateral-dependent loans, or alternatively,
the present value of expected cash flows. For each segment of loans and leases
that has not been individually evaluated, management segregates the Bank's loss
factors into a quantitative general reserve component based on historical loss
rates throughout the defined look back period. The quantitative general reserve
component also considers an estimate of the historical loss emergence period,
which is the period of time between the event that triggers the loss to the
charge-off of that loss. The methodology also focuses on evaluation of several
qualitative factors for each portfolio category, including but not limited to:
management's ongoing review and grading of the loan and lease portfolios,
consideration of delinquency experience, changes in the size of the loan and
lease portfolios, existing economic conditions, level of loans and leases
subject to more frequent review by management, changes in underlying collateral,
concentrations of loans to specific industries, and other qualitative factors
that could affect credit losses.

  When it is determined that we will not receive our entire contractual
principal or the loss is confirmed, we record a charge against the allowance for
loan and lease loss reserve to bring the loan or lease to its net realizable
value. Many of the impaired loans as of June 30, 2022 are collateral dependent.
It is typically part of our process to obtain appraisals on impaired loans and
leases that are primarily secured by real estate or equipment at least annually,
or more frequently as circumstances warrant. As we have completed new appraisals
and/or market evaluations, in specific situations current fair values
collateralizing certain impaired loans were inadequate to support the entire
amount of the outstanding debt. Foreclosure actions may have been initiated on
certain of these commercial real estate and other mortgage loans.

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

                                       62

————————————————– ——————————

Contents

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

                                               As of and for the Three Months Ended         As of and for the Six Months Ended
                                                             June 30,                                    June 30,
                                                     2022                  2021                  2022                  2021
                                                                            (Dollars in Thousands)
Allowance at beginning of period               $     23,669            $   28,982          $     24,336            $   28,521

Dump :

Commercial real estate:
Commercial real estate - owner occupied                   -                    (4)                    -                    (4)
Commercial real estate - non-owner
occupied                                                  -                     -                     -                     -
Construction and land development                         -                     -                     -                     -
Multi-family                                              -                     -                     -                     -
1-4 family                                                -                  (245)                    -                  (245)
Commercial and industrial                               (85)               (2,621)                 (107)               (2,765)
Direct financing leases                                   -                     -                     -                     -
Consumer and other:
Home equity and second mortgages                          -                     -                     -                     -
Other                                                     -                   (24)                    -                   (24)
Total charge-offs                                       (85)               (2,894)                 (107)               (3,038)
Recoveries:
Commercial real estate:
Commercial real estate - owner occupied               4,121                    84                 4,236                   225
Commercial real estate - non-owner
occupied                                                  -                     -                     1                     -
Construction and land development                         -                     -                     -                 2,078
Multi-family                                              -                     -                     -                     -
1-4 family                                                -                     -                     -                     -
Commercial and industrial                               117                   460                   201                   913
Direct financing leases                                   -                     -                     -                     -
Consumer and other:
Home equity and second mortgages                          -                     -                     -                     1
Other                                                     9                     1                    19                     1
Total recoveries                                      4,247                   545                 4,457                 3,218
Net recoveries                                        4,162                (2,349)                4,350                   180
Provision for loan and lease losses                  (3,727)                 (958)               (4,582)               (3,026)
Allowance at end of period                     $     24,104            $   25,675          $     24,104            $   25,675
Annualized net (recoveries) charge-offs
as a percent of average gross loans and
leases                                                (0.73)   %             0.42  %              (0.39)   %            (0.02) %
Annualized net (recoveries) charge-offs
as a percent of average gross loans and
leases, excluding average net PPP loans               (0.74)   %             0.47  %              (0.39)   %            (0.02) %




                                       63

————————————————– ——————————

  Table of Contents

                        Liquidity and Capital Resources

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

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

We view on-balance sheet liquidity as a critical element to maintaining adequate
liquidity to meet our cash and collateral obligations. We define our on-balance
sheet liquidity as the total of our short-term investments, our unencumbered
securities available-for-sale, and our unencumbered pledged loans. As of
June 30, 2022 and December 31, 2021, our immediate on-balance sheet liquidity
was $413.0 million and $529.5 million, respectively. At June 30, 2022 and
December 31, 2021, the Bank had $55.5 million and $47.0 million on deposit with
the FRB recorded in short-term investments, respectively. Any excess funds not
used for loan funding or satisfying other cash obligations were maintained as
part of our on-balance sheet liquidity in our interest-bearing accounts with the
FRB, as we value the safety and soundness provided by the FRB. We plan to
utilize excess liquidity to fund loan and lease portfolio growth, pay down
maturing debt, allow run off of maturing wholesale certificates of deposit or
invest in securities to maintain adequate liquidity at an improved margin.

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

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

  The Bank was able to access the wholesale funding market as needed at rates
and terms comparable to market standards during the year ended June 30, 2022. In
the event that there is a disruption in the availability of wholesale funds at
maturity, the Bank has managed the maturity structure, in compliance with our
approved liquidity policy, so at least one year of maturities could be funded
through on-balance sheet liquidity. These potential funding sources include
deposits maintained at the FRB or Federal Reserve Discount Window utilizing
currently unencumbered securities and acceptable loans as collateral.
                                       64

————————————————– ——————————

Contents

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

The Corporation has filed a shelf registration with the Securities and Exchange
Commission that would allow the Corporation to offer and sell, from time to time
and in one or more offerings, up to $75.0 million in aggregate initial offering
price of common and preferred stock, debt securities, warrants, subscription
rights, units, or depository shares, or any combination thereof.

The Bank is required by federal regulations to maintain sufficient liquidity to ensure safe and sound operations. We believe the Bank has sufficient liquidity to balance the balance of net withdrawable deposits and short-term borrowings given current economic conditions and deposit flows.

  During the six months ended June 30, 2022, operating activities resulted in a
net cash inflow of $16.8 million, which included net income of $19.9 million,
partially offset by a $4.6 million provision for loan and lease loss benefit.
Net cash used by investing activities for the six months ended June 30, 2022 was
$79.4 million primarily due to investments made in securities available for
sale, net loan disbursements, and a net increase in FHLB stock. Net cash
provided by financing activities was $101.0 million for the six months ended
June 30, 2022 primarily due to a net increase in FHLB advances, partially offset
by a net decrease in deposits. Please refer to the Consolidated Statements of
Cash Flows included in PART I., Item 1 for further details regarding significant
sources of cash flow for the Corporation.


           Contractual Obligations and Off-Balance Sheet Arrangements

  As of June 30, 2022, there were no material changes to our contractual
obligations and off-balance sheet arrangements disclosed in our Annual Report on
Form 10-K for the year ended December 31, 2021. We continue to believe that we
have adequate capital and liquidity available from various sources to fund
projected contractual obligations and commitments.

© Edgar Online, source Previews

Share.

Comments are closed.