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MarketScreener Homepage  >  Equities  >  Nasdaq  >  First Business Financial Services, Inc.    FBIZ

FIRST BUSINESS FINANCIAL SERVICES, INC.

(FBIZ)
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FIRST BUSINESS FINANCIAL SERVICES : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

10/23/2020 | 04:09pm EST

General

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

                           Forward-Looking Statements
  This report may include forward-looking statements as defined in the Private
Securities Litigation Reform Act of 1995, which reflect our current views with
respect to future events and financial performance. Forward-looking statements
are not based on historical information, but rather are related to future
operations, strategies, financial results, or other developments.
Forward-looking statements are based on management's expectations as well as
certain assumptions and estimates made by, and information available to,
management at the time the statements are made. Such statements are subject to
risks and uncertainties, including among other things:
•Adverse changes in the economy or business conditions, either nationally or in
our markets, including, without limitation, the adverse effects of the COVID-19
pandemic on the global, national, and local economy.
•The effect of the COVID-19 pandemic on the Corporation's credit quality,
revenue, and business operations.
•Competitive pressures among depository and other financial institutions
nationally and in our markets.
•Increases in defaults by borrowers and other delinquencies.
•Our ability to manage growth effectively, including the successful expansion of
our client support, administrative infrastructure, and internal management
systems.
•Fluctuations in interest rates and market prices.
•The consequences of continued bank acquisitions and mergers in our markets,
resulting in fewer but much larger and financially stronger competitors.
•Changes in legislative or regulatory requirements applicable to us and our
subsidiaries.
•Changes in tax requirements, including tax rate changes, new tax laws, and
revised tax law interpretations.
•Fraud, including client and system failure or breaches of our network security,
including our internet banking activities.
•Failure to comply with the applicable SBA regulations in order to maintain the
eligibility of the guaranteed 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, 2019 and Part II, Item 1A - Risk Factors in our Quarterly Report on
Form 10-Q for the quarter ended March 31, 2020, for discussion relating to risk
factors impacting us. Investors should not place undue reliance on any such
forward-looking statements, which speak only as of the date made. The factors
described within this Form 10-Q could affect our financial performance and could
cause actual results for future periods to differ materially from any opinions
or statements expressed with respect to future periods.
  Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, we caution that,
while our management believes such assumptions or bases are reasonable and are
made in good faith, assumed facts or bases can vary from actual results, and the
differences between assumed facts or bases and actual results can be material,
depending on the circumstances. Where, in any forward-looking statement, an
expectation or belief is expressed as to future results, such expectation or
belief is expressed in good faith and believed to have a reasonable basis, but
there can be no assurance that the statement of expectation or belief will be
achieved or accomplished.

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

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

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                                    Overview
  We are a registered bank holding company incorporated under the laws of the
State of Wisconsin and are engaged in the commercial banking business through
our wholly-owned banking subsidiary, FBB. All of our operations are conducted
through the Bank and certain subsidiaries 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, vendor
financing, floorplan 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, private banking, and consumer and other
lending. For other financial institutions, our bank consulting experts provide
investment portfolio administrative services, asset liability management
services, and asset liability management process validation. We do not utilize a
branch network to attract retail clients. Our operating philosophy is predicated
on deep client relationships fostered by local banking partners and specialized
business lines where we provide skilled expertise, 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.
                              Operational Summary

Results as of and for the three and nine months ended September 30, 2020 include:


•Net income totaled $4.3 million, or diluted earnings per share of $0.50, for
the three months ended September 30, 2020, compared to $5.1 million, or diluted
earnings per share of $0.59, for the same period in 2019. Net income totaled
$10.9 million, or diluted earnings per share of $1.27, for the nine months ended
September 30, 2020, compared to $17.6 million, or diluted earnings per share of
$2.01, for the same period in 2019.
•Annualized return on average assets and annualized return on average equity for
the three months ended September 30, 2020 measured 0.68% and 8.58%,
respectively, compared to 0.97% and 10.68% for the same period in 2019.
Annualized return on average assets and annualized return on average equity for
the nine months ended September 30, 2020 measured 0.62% and 7.49%, respectively,
compared to 1.15% and 12.77% for the same period in 2019.
•As of September 30, 2020, the Corporation had $332.3 million in Paycheck
Protection Program ("PPP") loans outstanding and deferred processing fee income
from the Small Business Administration ("SBA") outstanding of $6.9 million. The
processing fee income is deferred and recognized over the contractual life of
the loan, or accelerated at forgiveness. For the three and nine months ended
September 30, 2020, the Corporation recognized $1.1 million and $2.0 million,
respectively, in processing fee income through interest income.
•Pre-tax, pre-provision adjusted earnings, which excludes certain one-time and
discrete items, totaled $9.3 million for the three months ended September 30,
2020, up 23.0% from the same period in 2019. Pre-tax, pre-provision adjusted
return on average assets was 1.47% for the three months ended September 30,
2020, compared to 1.45% for the same period in 2019. Pre-tax, pre-provision
adjusted earnings totaled $26.7 million for the nine months ended September 30,
2020, up 20.6% from the same period in 2019. Pre-tax, pre-provision adjusted
return on average assets was 1.51% for the nine months ended September 30, 2020,
compared to 1.45% for the same period in 2019.
•Period-end gross loans and leases receivable were $2.170 billion as of
September 30, 2020, up $455.7 million from December 31, 2019. Line of credit
utilization was significantly impacted by PPP loan proceeds and was $217.6
million as of September 30, 2020, down from $282.9 million at December 31, 2019.
Gross loans and leases receivable, excluding net PPP loans and lines of credit,
were $1.627 billion as of September 30, 2020, up 18.2% annualized, from
December 31, 2019.
•The allowance for loan and lease losses increased $11.3 million, or 57.9%,
compared to December 31, 2019 due to a $5.8 million increase in the general
reserve and a $5.5 million increase in specific reserves, primarily driven by
the COVID-19 pandemic. The allowance for loan and lease losses increased to
1.41% of total loans, compared to 1.14% at December 31, 2019. Excluding net PPP
loans, the allowance for loan and lease losses increased to 1.67% of total loans
as of September 30, 2020.
•Provision for loan and lease losses totaled $3.8 million for the three months
ended September 30, 2020, compared to $1.3 million for the same period in 2019.
Provision for loan and lease losses totaled $12.5 million for the nine months
ended September 30, 2020, compared to $613,000 for the same period in 2019.
•Robust liquidity position includes record in-market deposits of $1.667 billion,
total deposits of $1.821 billion, and on-balance sheet liquidity of $556.1
million, defined as total short-term investments, unencumbered securities, and
unencumbered pledged loans. In-market deposit balances were positively affected
by PPP loan proceeds.
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•Net interest margin was 3.14% and 3.30% for the three and nine months ended
September 30, 2020, respectively, compared to 3.40% and 3.57% for the three and
nine months ended September 30, 2019, respectively. Adjusted net interest
margin, which excludes certain one-time and discrete items, was 3.24% and 3.29%
for the three and nine months ended September 30, 2020, respectively, compared
to 3.24% and 3.30% for the three and nine months ended September 30, 2019,
respectively.
•Fees in lieu of interest, defined as prepayment fees, asset-based loan fees,
non-accrual interest, and loan fee amortization, totaled $1.5 million and $4.6
million for the three and nine months ended September 30, 2020, respectively,
compared to $1.1 million and $4.6 million for the three and nine months ended
September 30, 2019, respectively.
•Top line revenue, defined as net interest income plus non-interest income,
totaled $26.0 million for the three months ended September 30, 2020, up 15.3%
from the same period in 2019. Top line revenue totaled $74.7 million for the
nine months ended September 30, 2020, up 10.5% from the same period in 2019.
•Non-interest income totaled $7.4 million, or 28.5% of total revenue, for the
three months ended September 30, 2020, surpassing the Corporation's goal of 25%
for the sixth consecutive quarter. Non-interest income totaled $20.1 million,
or 27.0% of total revenue, for the nine months ended September 30, 2020.
•Non-interest expense was $16.8 million and $51.2 million for the three and nine
months ended September 30, 2020, respectively, compared to $14.7 million and
$49.9 million for the three and nine months ended September 30, 2019,
respectively. Operating expense, which excludes certain one-time and discrete
items, totaled $16.7 million and $48.0 million for the three and nine months
ended September 30, 2020, respectively, compared to $15.0 million and $45.5
million for the three and nine months ended September 30, 2019, respectively.
•The efficiency ratio improved to 64.16% and 64.29% for the three and nine
months ended September 30, 2020, respectively, down from 66.41% and 67.29% for
the three and nine months ended September 30, 2019, respectively.

                                COVID-19 Update
Paycheck Protection Program
As of September 30, 2020, the Corporation had $332.3 million in PPP loans
outstanding and deferred processing fees outstanding of $6.9 million. The
processing fees are deferred and recognized over the contractual life of the
loan, or accelerated at forgiveness, as an adjustment of yield using the
interest method. For the three and nine months ended September 30, 2020, $1.1
million and $2.0 million, respectively, was recognized in interest income
compared to no PPP loan processing fee income for the three and nine months
ended September 30, 2019. The SBA provides a guaranty to the lender of 100% of
principal and interest, unless the lender violated an obligation under the
agreement. As loan losses are expected to be immaterial, if any at all, due to
the guaranty, management excluded the PPP loans from the allowance for loan and
lease losses calculation. As of October 20, 2020, the Corporation had processed
and submitted $97.9 million, or 29% of total gross PPP loans, to the SBA for
forgiveness and clients have started to receive reimbursements.
Liquidity Sources
Management has reviewed all primary and secondary sources of liquidity in
preparation for any unforeseen funding needs due to the COVID-19 pandemic and
prioritized based on available capacity, term flexibility, and cost. As of
September 30, 2020, the Corporation had the following sources of liquidity,
including the Corporation's ability to participate in the Federal Reserve's
Paycheck Protection Program Liquidity Facility ("PPPLF"):
(Unaudited)                                                                               As of
                                                                          September 30,
(in thousands)                                                                2020              June 30, 2020
Short-term investments                                                    $   23,500$       27,839

PPPLF availability                                                           295,876                 298,327

Collateral value of unencumbered loans (FHLB borrowing availability)

                                                                107,456                 178,587

Market value of unencumbered securities (Fed Discount Window and FHLB borrowing availability)

                                                 129,246                 106,808
Total sources of liquidity                                                $ 

556,078 $ 611,561



  In addition to the above primary sources of liquidity, as of September 30,
2020, the Corporation also had access to $53.5 million in federal funds lines
with various correspondent banks and significant experience accessing the highly
liquid brokered certificate of deposit market.
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Capital Strength
  The Corporation's capital ratios continued to exceed the highest required
regulatory benchmark levels.
•Total capital to risk-weighted assets at September 30, 2020, was 11.42%, tier 1
capital to risk-weighted assets was 9.09%, tier 1 leverage capital to adjusted
average assets was 8.04%, and common equity tier 1 capital to risk-weighted
assets was 8.64%. Tangible common equity to tangible assets was 7.29%. Excluding
net PPP loans, tier 1 leverage capital to adjusted average assets and tangible
common equity to tangible assets were 9.24% and 8.34%, respectively.
•Management suspended the Corporation's stock repurchase program in March 2020
due to the uncertainty surrounding the COVID-19 pandemic. As of March 16, 2020,
the Corporation had repurchased 141,137 shares of its common stock under its
current authorization at a weighted average price of $24.62 per share, for a
total value of $3.5 million. The Corporation has $1.5 million of buyback
authority remaining.
•As previously announced, during the third quarter of 2020, the Corporation's
Board of Directors declared a regular quarterly dividend of $0.165 per share.
The dividend was paid on August 13, 2020 to stockholders of record at the close
of business on August 3, 2020. Measured against third quarter 2020 diluted
earnings per share of $0.50, the dividend represents a 33.0% payout ratio. The
Board of Directors routinely considers dividend declarations as part of its
normal course of business.
Deferral Requests
The Corporation provided loan modifications deferring payments up to six months
to certain borrowers impacted by COVID-19 who were current in their payments at
the inception of the Corporation's loan modification program. As of
September 30, 2020, the Corporation had deferred loans outstanding of $131.5
million, or 7.1% of gross loans and leases, excluding gross PPP loans, compared
to $323.2 million, or 18.6% of gross loans and leases, excluding gross PPP
loans, as of June 30, 2020. As of October 20, 2020, 95% of clients whose first
deferral concluded during the quarter resumed their scheduled payments.
Management anticipates the loan modifications will continue through 2020 due to
the remaining uncertainty surrounding the COVID-19 pandemic. The following
tables represent a breakdown of the deferred loan balances by industry segment
and collateral type:
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(Unaudited)                                                                                          As of
(Dollars in thousands)                                                     September 30, 2020                                                                                        June 30, 2020
                                                                                                   Collateral Type
                                                               % of Deferred                                                                          % of Deferred
                                                                  of Total                                        Non Real                               of Total
Industries Description                        Balance             Industry                  Real Estate            Estate            Balance            

Industry

Real Estate and Rental and Leasing          $  67,214                  7.7  %             $     67,214          $       -          $ 147,584                 18.8  %
Accommodation and Food Services                26,884                 25.3  %                   26,884                  -             52,468                 52.7  %
Manufacturing                                  17,807                  9.6  %                   10,506              7,301             34,214                 17.5  %
Health Care and Social Assistance               8,867                  6.9  %                    8,855                 12             19,552                 15.9  %
Transportation and Warehousing                    256                  1.9  %                        -                256             19,402                 21.3  %
Retail Trade                                    6,781                 14.7  %                    6,781                  -             14,851                 29.7  %
Information                                         -                    -  %                        -                  -             11,228                 64.1  %
Utilities                                           -                    -  %                        -                  -              7,129                 96.4  %
Construction                                      427                  0.7  %                      427                  -              6,448                  6.7  %
Wholesale Trade                                   711                  0.3  %                      450                261              5,695                  5.7  %
Other Services (except Public
Administration)                                   402                  0.8  %                      212                190              1,673                  3.0  %
Professional, Scientific, and
Technical Services                                364                  0.4  %                        -                364                933                  2.3  %
Administrative and Support and Waste
Management and Remediation Services               145                  1.6  %                        -                145                831                  9.9  %
Finance and Insurance                               -                    -  %                        -                  -                743                  1.8  %
Arts, Entertainment, and Recreation             1,350                  7.9  %                    1,350                  -                300                  1.7  %
Agriculture, Forestry, Fishing and
Hunting                                           261                  0.8  %                        -                261                165                  1.3  %
Total deferred loan balances                $ 131,469$    122,679$   8,790$ 323,216



  The following table is a further breakdown of the deferred loan balances by
certain credit quality indicators. Please refer to Note 6 - Loan and Lease
Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses
for the risk category definitions.
                                                                   As of
                                                            September 30, 2020
                                                         Category
(Dollars in thousands)                 I             II             III            IV           Total

Total deferred loan balances      $ 69,984$ 40,371$ 20,045$ 1,069$ 131,469
% of Total                            53.2  %        30.7  %        15.2  %        0.8  %        100.0  %


                                                                 As of
                                                             June 30, 2020
                                                        Category
(Dollars in thousands)                 I              II             III          IV         Total

Total deferred loan balances      $ 221,414$ 66,554$ 35,248       $ -       $ 323,216
% of Total                             68.5  %        20.6  %        10.9  %      -  %        100.0  %


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The following table is a further breakdown of the deferred loan balances and collateral type for the Real Estate and Rental and Leasing industry:

                                                                                                       As of
                                                                          September 30, 2020                                                                                            June 30, 2020
                                                                                                 Collateral Type
Real Estate and Rental and Leasing                            % Deferred of                                                                               % Deferred of
Detail:                                    Balance            Sub-Industry             Real Estate          Non Real Estate           Balance             Sub-Industry
                                                                                              (Dollars in Thousands)
Office - Class A                         $  7,922                       4.8  %       $      7,922          $             -          $  23,204                      15.3  %
Retail - Non-Credit Tenant -
Shopping Center                             9,326                      30.4  %              9,326                        -             22,657                      73.5  %
Office - Class B                            5,738                      10.2  %              5,738                        -             17,652                      32.1  %
1-4 Family                                    185                       0.7  %                185                        -             16,887                      64.5  %
Multi-Family - Market Rent                 26,888                      12.1  %             26,888                        -             16,174                       8.5  %
Retail - Non-Credit Tenant - Strip
Center                                      4,944                      26.3  %              4,944                        -             11,389                      59.7  %
Multi-Family - Student Housing              8,466                      20.3  %              8,466                        -              8,466                      20.2  %
Retail - Non-Credit Tenant -
Restaurant                                  1,004                       9.9  %              1,004                        -              6,621                      64.9  %
Retail - Other                                986                       7.1  %                986                        -              6,110                      13.9  %
Retail - Non-Credit-Tenant - Big
Box                                         1,755                      31.2  %              1,755                        -              5,629                     100.0  %
Other                                           -                         -  %                  -                        -             12,795                       5.6  %
Total Real Estate and Rental and
Leasing                                  $ 67,214$     67,214          $             -          $ 147,584

The following table is a further breakdown of the deferred loan balances and collateral type for the Accommodation and Food Services industry:

                                                                                                      As of
                                                                          September 30, 2020                                                                                           June 30, 2020
                                                                                                 Collateral Type
Accommodation and Food Services                               % Deferred of                                                                              % Deferred of
Detail:                                    Balance            Sub-Industry             Real Estate          Non Real Estate           Balance            Sub-Industry
                                                                                              (Dollars in Thousands)
Hotel - Flag                             $ 25,082                      34.1  %       $     25,082          $             -          $ 43,011                      63.1  %
Hotel - No Flag                                 -                         -  %                  -                        -             1,862                      46.0  %
Other                                       1,802                      14.5  %              1,802                        -             5,594                      22.7  %
Retail - Restaurant/Bar                         -                         -  %                  -                        -             2,001                      13.0  %
Total Accommodation and Food
Service                                  $ 26,884$     26,884          $             -          $ 52,468

Exposure to Stressed Industries

  Certain industries are widely expected to be particularly impacted by social
distancing, quarantines, and the economic impact of the COVID-19 pandemic, such
as the following:
                                                                                               As of
                                                                    September 30, 2020                                       June 30, 2020
                                                                                 % Gross Loans                            % Gross Loans
Industries:                                                    Balance          and Leases (1)          Balance          and Leases (1)
                                                                                       (Dollars in Thousands)
Retail (2)                                                  $   75,261                   4.1  %       $  70,028                   4.0  %
Hospitality                                                     78,786                   4.3  %          73,502                   4.2  %
Entertainment                                                    7,758                   0.4  %          16,675                   1.0  %
Restaurants & food service                                      26,728                   1.4  %          24,884                   1.4  %
Total outstanding exposure                                  $  188,533                  10.2  %       $ 185,089                  10.6  %


(1)Excluding net PPP loans.
(2)Includes $52.0 million and $51.7 million in loans secured by commercial real
estate as of September 30, 2020 and June 30, 2020, respectively.

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  As of September 30, 2020, the Corporation had no meaningful direct exposure to
the energy sector, airline industry or retail consumer, and does not participate
in shared national credits.
  Because of the significant uncertainties related to the ultimate duration of
the COVID-19 pandemic and its effects on our clients and prospects, and on the
national and local economy as a whole, there can be no assurances as to how the
crisis may ultimately affect the Corporation's loan portfolio.

                             Results of Operations

Top Line Revenue

  Top line revenue, comprised of net interest income and non-interest income,
increased 15.3% for the three months ended September 30, 2020 compared to the
same period in the prior year primarily due to an increase in average loans and
lease, increase in fees in lieu of interest, and increase in commercial loan
interest rate swap fee income, partially offset by net interest margin
compression. Top line revenue increased 10.5% for the nine months ended
September 30, 2020 compared to the same period in the prior year primarily due
to an increase in average loans and leases, increase in commercial loan interest
rate swap fee income, and increase in gains on the sale of SBA loans, partially
offset by net interest margin compression.
  The components of top line revenue were as follows:
                                                                                                                                                                              For the Nine Months Ended
                                                   For the Three Months Ended September 30,                                                                                         September 30,
                                        2020                 2019            $ Change            % Change              2020              2019            $ Change             % Change
                                                                                                   (Dollars in Thousands)
Net interest income               $       18,621$ 16,776$  1,845                  11.0  %       $ 54,558$ 51,382$  3,176                    6.2  %
Non-interest income                        7,408             5,792             1,616                  27.9            20,141            16,234             3,907                   24.1
Top line revenue                  $       26,029$ 22,568$  3,461                  15.3          $ 74,699$ 67,616$  7,083                   10.5

Annualized Return on Average Assets and Annualized Return on Average Equity

  ROAA for the three months ended September 30, 2020 decreased to 0.68% compared
to 0.97% for the three months ended September 30, 2019. ROAA for the nine months
ended September 30, 2020 decreased to 0.62% compared to 1.15% for the nine
months ended September 30, 2019. The decrease in ROAA in both periods of
comparison was primarily due to an increase in the provision for loan and lease
losses related to the COVID-19 pandemic. This reduction in profitability was
partially offset by an increase in commercial loan interest rate swap fee
income, increase in gains on the sale of SBA loans, and net interest income
improvement mainly due to an increase in average loans and leases. We consider
ROAA a critical metric to measure the profitability of our organization and how
efficiently our assets are deployed. ROAA also allows us to better benchmark our
profitability to our peers without the need to consider different degrees of
leverage which can ultimately influence return on equity measures.
  ROAE for the three months ended September 30, 2020 was 8.58% compared to
10.68% for the three months ended September 30, 2019. ROAE for the nine months
ended September 30, 2020 was 7.49% compared to 12.77% for the nine months ended
September 30, 2019. The reasons for the decrease in ROAE are consistent with the
explanations discussed above with respect to ROAA. We view ROAE as an important
measurement for monitoring profitability and continue to focus on improving our
return to our shareholders by enhancing the overall profitability of our client
relationships, controlling our expenses, and minimizing our costs of credit.
Efficiency Ratio and Pre-Tax, Pre-Provision Adjusted Earnings
  Efficiency ratio is a non-GAAP measure representing non-interest expense
excluding the effects of the SBA recourse provision or benefit, impairment of
tax credit investments, net gains or losses on foreclosed properties,
amortization of other intangible assets, losses on early extinguishment of debt,
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 that is associated with certain one-time items and other
discrete items.
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  The efficiency ratio was 64.16% and 64.29% for the three and nine months ended
September 30, 2020 compared to 66.41% and 67.29% for the three and nine months
ended September 30, 2019. Operating revenue growth outpaced the change in
operating expense for the three and nine months ended September 30, 2020,
resulting in positive operating leverage. Results for the three and nine months
ended September 30, 2020 have benefited from PPP interest income, PPP loan
processing fee recognition, and below average business development related
expenses due to the COVID-19 pandemic. For the three months ended September 30,
2020 compared to the three months ended September 30, 2019, operating revenue
increased 15.3% while operating expense increased 11.4%. Similarly, for the nine
months ended September 30, 2020 compared to the nine months ended September 30,
2019, operating revenue increased 10.5% while operating expense increased 5.6%.
We believe we will continue to generate modest positive operating leverage and
progress towards enhancing our long-term efficiency ratio at a measured pace as
we focus on strategic initiatives directed toward revenue growth, although this
growth may be muted somewhat by the current health crisis and its effect on the
economy. These initiatives include efforts to expand our specialty finance lines
of business, increase our commercial banking market share, and scale our private
wealth management business in less mature markets.
  We believe the efficiency ratio and pre-tax, pre-provision adjusted earnings
allow investors and analysts to better assess the Corporation's operating
expenses in relation to its top line revenue by removing the volatility that is
associated with certain non-recurring and other discrete items. The efficiency
ratio also 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
ROAA and ROAE. The information provided below reconciles the efficiency ratio to
its most comparable GAAP measure.

Please refer to the Non-Interest Income and Non-Interest Expense sections below for discussion on additional drivers of the year-over-year change in the efficiency ratio.

                                                                                                                                                                           For the Nine Months Ended
                                                 For the Three Months Ended September 30,                                                                                        September 30,
                                      2020                 2019            $ Change            % Change             2020              2019            $ Change            % Change
                                                                                                (Dollars in Thousands)
Total non-interest
expense                         $      16,758$ 14,716$  2,042                 13.9  %       $ 51,245$ 49,922$  1,323                   2.7  %

Less:

Net (gain) loss on
foreclosed properties                    (121)               262              (383)                     NM            329               241                88                  36.5
Amortization of other
intangible assets                           9                 11                (2)               (18.2)               27                33                (6)                (18.2)
SBA recourse provision
(benefit)                                  57               (427)              484                      NM             53               167              (114)                (68.3)
Tax credit investment
impairment (recovery)                     113               (120)              233                      NM          2,066             3,982            (1,916)                (48.1)
Loss on early
extinguishment of debt                      -                  -                 -                      NM            744                 -               744                       NM

Total operating expense         $      16,700$ 14,990$  1,710                 11.4          $ 48,026$ 45,499$  2,527                   5.6
Net interest income                    18,621             16,776             1,845                 11.0          $ 54,558$ 51,382$  3,176                   6.2
Total non-interest income               7,408              5,792             1,616                 27.9            20,141            16,234             3,907                  24.1
Less:
Net loss on sale of
securities                                  -                 (4)          
     4                      NM             (4)               (5)           
    1                 (20.0)
Total operating revenue         $      26,029$ 22,572$  3,457                 15.3          $ 74,703$ 67,621$  7,082                  10.5
Pre-tax, pre-provision
adjusted earnings               $       9,329$  7,582$  1,747                 23.0          $ 26,677$ 22,122$  4,555                  20.6
Efficiency ratio                        64.16   %          66.41  %                                                 64.29  %          67.29  %


NM = Not Meaningful

Net Interest Income

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  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 nine
months ended September 30, 2020 compared to the same period in 2019. 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
                                                  Increase (Decrease) for the Three Months                                                       Nine Months Ended September
                                                            Ended September 30,                                                                              30,
                                                           2020 Compared to 2019                                                                    2020 Compared to 2019
                                                       Rate              Volume                   Net              Rate             Volume                      Net
                                                                                        (In Thousands)
Interest-earning assets
Commercial real estate and other mortgage
loans(1)                                          $    (3,728)$ 1,500$ (2,228)$ (8,438)$  2,738$ (5,700)
Commercial and industrial loans(1)                     (4,148)           3,584                    (564)           (9,812)            8,138                    (1,674)
Direct financing leases(1)                                (23)             (35)                    (58)              (86)             (120)                     (206)
Consumer and other loans(1)                               (48)              81                      33              (132)              181                        49
Total loans and leases receivable                      (7,947)           5,130                  (2,817)          (18,468)           10,937           

(7,531)

Mortgage-related securities                              (228)               1                    (227)             (495)              279              

(216)

Other investment securities                               (11)              48                      37                (7)               21                        14
FHLB and FRB Stock                                         13               63                      76                87               143                       230
Short-term investments                                   (154)             (77)                   (231)             (569)               53             

(516)

Total net change in income on
interest-earning assets                                (8,327)           5,165                  (3,162)          (19,452)           11,433           

(8,019)

Interest-bearing liabilities
Transaction accounts                                   (1,167)             507                    (660)           (2,736)            1,154             

(1,582)

Money market accounts                                  (2,541)               2                  (2,539)           (6,342)              666              

(5,676)

Certificates of deposit                                  (232)            (238)                   (470)             (461)             (614)                   (1,075)
Wholesale deposits                                       (458)            (256)                   (714)             (353)           (1,711)                   (2,064)
Total deposits                                         (4,398)              15                  (4,383)           (9,892)             (505)                  (10,397)
FHLB advances                                          (2,067)           1,750                    (317)           (1,695)            1,264                      (431)
Federal reserve PPP lending facility                        -               26                      26                 -                44                        44
Other borrowings                                         (260)             (73)                   (333)             (356)              (58)                     (414)
Junior subordinated notes                                   -                -                       -                 2                 1                         3
Total net change in expense on
interest-bearing liabilities                           (6,725)           1,718                  (5,007)          (11,941)              746           

(11,195)

Net change in net interest income                 $    (1,602)$ 3,447$  1,845$ (7,511)$ 10,687

$ 3,176

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



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  The table below shows our average balances, interest, average yields/rates,
net interest margin, and the spread between the combined average yields earned
on interest-earning assets and average rates on interest-bearing liabilities for
the three and nine months ended September 30, 2020 and 2019. The average
balances are derived from average daily balances.
                                                                                                 For the Three Months Ended September 30,
                                                                                 2020                                                                                          2019
                                                        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)                                             $ 1,282,132$ 12,340                         3.85  %       $ 1,153,591$ 14,568                         5.05  %
Commercial and industrial loans(1)                       791,909             8,133                         4.11              517,043             8,697                         6.73
Direct financing leases(1)                                26,129               258                         3.95               29,600               316                         4.27
Consumer and other loans(1)                               39,269               374                         3.81               31,195               341                         4.37
Total loans and leases receivable(1)                   2,139,439            21,105                         3.95            1,731,429            23,922                         5.53
Mortgage-related securities(2)                           167,326               833                         1.99              167,113             1,060                         2.54
Other investment securities(3)                            34,004               171                         2.01               24,755               134                         2.17
FHLB and FRB stock                                        12,835               161                         5.02                7,692                85                         4.42
Short-term investments                                    21,287                 6                         0.11               40,707               237                         2.33
Total interest-earning assets                          2,374,891            22,276                         3.75            1,971,696            25,438                         5.16
Non-interest-earning assets                              165,844                                                             121,589
Total assets                                         $ 2,540,735$ 2,093,285
Interest-bearing liabilities
Transaction accounts                                 $   445,687               259                         0.23          $   217,870               919                         1.69
Money market accounts                                    642,881               318                         0.20              642,385             2,857                         1.78
Certificates of deposit                                  110,891               513                         1.85              154,095               983                         2.55
Wholesale deposits                                       160,067               533                         1.33              211,528             1,247                         2.36
Total interest-bearing deposits                        1,359,526             1,623                         0.48            1,225,878             6,006                         1.96
FHLB advances                                            379,915             1,356                         1.43              307,060             1,673                         2.18
Federal reserve PPPLF                                     29,605                26                         0.35                    -                 -                            -
Other borrowings                                          24,403               370                         6.06               27,545               703                        10.21
Junior subordinated notes                                 10,056               280                        11.14               10,041               280                        11.15
Total interest-bearing liabilities                     1,803,505             3,655                         0.81            1,570,524             8,662                         2.21
Non-interest-bearing demand deposit accounts             445,245                                                             283,675
Other non-interest-bearing liabilities                    91,810                                                              48,688
Total liabilities                                      2,340,560                                                           1,902,887
Stockholders' equity                                     200,175                                                             190,398
Total liabilities and stockholders' equity           $ 2,540,735$ 2,093,285
Net interest income                                                       $ 18,621$ 16,776
Interest rate spread                                                                                       2.94  %                                                             2.95  %
Net interest-earning assets                          $   571,386$   401,172
Net interest margin                                                                                        3.14  %                                                             3.40  %
Average interest-earning assets to average
interest-bearing liabilities                              131.68  %                                                           125.54  %
Return on average assets(4)                                 0.68                                                                0.97
Return on average equity(4)                                 8.58                                                               10.68
Average equity to average assets                            7.88                                                                9.10
Non-interest expense to average assets(4)                   2.64                                                                2.81


(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 collected
in lieu of interest.
(2)Includes amortized cost basis of assets available-for-sale and
held-to-maturity.
(3)Yields on tax-exempt municipal securities are not presented on a
tax-equivalent basis in this table.
(4)Represents annualized yields/rates.
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                                                                                                 For the Nine Months Ended September 30,
                                                                                2020                                                                                          2019
                                                       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)                                            $ 1,209,810$ 38,312                         4.22  %       $ 1,135,596$ 44,012                         5.17  %
Commercial and industrial loans(1)                      678,650            24,338                         4.78              492,247            26,012                         7.04
Direct financing leases(1)                               27,065               761                         3.75               31,143               967                         4.14
Consumer and other loans(1)                              37,260             1,091                         3.90               31,391             1,042                         4.43
Total loans and leases receivable(1)                  1,952,785            64,502                         4.40            1,690,377            72,033                         5.68
Mortgage-related securities(2)                          173,985             2,806                         2.15              158,407             3,022                         2.54
Other investment securities(3)                           29,177               456                         2.08               27,849               442                         2.12
FHLB and FRB stock                                       10,558               491                         6.20                7,210               261                         4.83
Short-term investments                                   39,293               153                         0.52               36,139               669                         2.47
Total interest-earning assets                         2,205,798            68,408                         4.13            1,919,982            76,427                         5.31
Non-interest-earning assets                             151,994                                                             109,395
Total assets                                        $ 2,357,792$ 2,029,377
Interest-bearing liabilities
Transaction accounts                                $   362,326             1,197                         0.44          $   222,513             2,779                         1.66
Money market accounts                                   649,999             2,555                         0.52              597,487             8,231                         1.84
Certificates of deposit                                 122,781             1,890                         2.05              159,390             2,965                         2.48
Wholesale deposits                                      132,811             2,021                         2.03              243,254             4,085                         2.24
Total interest-bearing deposits                       1,267,917             7,663                         0.81            1,222,644            18,060                         1.97
FHLB advances                                           371,738             4,198                         1.51              280,538             4,629                         2.20
Federal reserve PPPLF                                    16,855                44                         0.35                    -                 -                            -
Other borrowings                                         24,490             1,110                         6.04               25,497             1,524                         7.97
Junior subordinated notes                                10,052               835                        11.07               10,038               832                        11.05
Total interest-bearing liabilities                    1,691,052            13,850                         1.09            1,538,717            25,045                         2.17
Non-interest-bearing demand deposit accounts            392,455                                                             265,121
Other non-interest-bearing liabilities                   80,270                                                              42,276
Total liabilities                                     2,163,777                                                           1,846,114
Stockholders' equity                                    194,015                                                             183,263
Total liabilities and stockholders' equity          $ 2,357,792$ 2,029,377
Net interest income                                                      $ 54,558$ 51,382
Interest rate spread                                                                                      3.04  %                                                             3.14  %
Net interest-earning assets                         $   514,746$   381,265
Net interest margin                                                                                       3.30  %                                                             3.57  %
Average interest-earning assets to average
interest-bearing liabilities                             130.44  %                                                           124.78  %
Return on average assets(4)                                0.62                                                                1.15
Return on average equity(4)                                7.49                                                               12.77
Average equity to average assets                           8.23                                                                9.03
Non-interest expense to average assets                     2.90                                                                3.28



(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 collected
in lieu of interest.
(2)Includes amortized cost basis of assets available-for-sale and
held-to-maturity.
(3)Yields on tax-exempt municipal securities are not presented on a
tax-equivalent basis in this table.
(4)Represents annualized yields/rates.
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Comparison of Net Interest Income for the Three and Nine Months Ended September

                               30, 2020 and 2019

  Net interest income increased $1.8 million, or 11.0%, during the three months
ended September 30, 2020 compared to the three months ended September 30, 2019.
The increase in net interest income reflected an increase in average gross loans
and leases and an increase in fees collected in lieu of interest, partially
offset by adjusted net interest margin compression. Fees in lieu of interest,
which can vary from quarter to quarter, totaled $1.5 million for the three
months ended September 30, 2020, compared to $1.1 million for the same period in
2019. Excluding fees in lieu of interest, interest income from PPP loans, and
interest expense from Federal Reserve PPPLF advances, net interest income
increased $617,000, or 3.9%. Average gross loans and leases for the three months
ended September 30, 2020 increased $408.0 million, or 23.6%, compared to the
three months ended September 30, 2019. Excluding net PPP loans and lines of
credit, average gross loans and leases for the three months ended September 30,
2020 increased $179.2 million, or 12.6%, compared to the three months ended
September 30, 2019. Net interest income for the nine months ended September 30,
2020 increased $3.2 million, or 6.2%, compared to the nine months ended
September 30, 2019. The increase in net interest income for the nine months
ended September 30, 2020 was principally due to an increase in average gross
loans and leases, including interest income received from PPP loans, partially
offset by a reduction in fees collected in lieu of interest and net interest
margin compression. Fees in lieu of interest totaled $4.6 million for both the
nine months ended September 30, 2020 and September 30, 2019. Excluding fees in
lieu of interest, interest income from PPP loans and interest expense from
Federal Reserve PPPLF advances, net interest income for the nine months ended
September 30, 2020 increased $1.8 million, or 3.9%. Average gross loans and
leases for the nine months ended September 30, 2020 increased $262.4 million, or
15.5%, compared to the nine months ended September 30, 2019. Excluding net PPP
loans and lines of credit, average gross loans and leases for the nine months
ended September 30, 2020 increased $71.6 million, or 7.0% annualized, compared
to the nine months ended September 30, 2019.
  The yield on average loans and leases for the three and nine months ended
September 30, 2020 declined to 3.95% and 4.40%, respectively, compared to 5.53%
and 5.68% for the three and nine months ended September 30, 2019, respectively.
Excluding the impact of fees collected in lieu of interest and PPP loan interest
income, the yield on average loans and leases excluding net PPP loans for the
three and nine months ended September 30, 2020 was 4.13% and 4.43%,
respectively, compared to 5.27% and 5.31% for the three and nine months ended,
September 30, 2019, respectively. Similarly, the yield on average
interest-earning assets for the three and nine months ended September 30, 2020
measured 3.75% and 4.13%, respectively, compared to 5.16% and 5.31% for the
three and nine months ended September 30, 2019, respectively. Excluding fees
collected in lieu of interest and PPP loan interest income, the yield on average
interest-earning assets excluding net PPP loans for the three and nine months
ended September 30, 2020 was 3.89% and 4.13%, respectively, compared to 4.94%
and 4.98% for the three and nine months ended September 30, 2019. The decline in
yields for the three and nine months ended September 30, 2020 compared to the
three and nine months ended September 30, 2019 was primarily due to the decrease
in LIBOR and Prime and related impact on variable-rate loans, in addition to the
renewal of fixed-rate loans and reinvestment of security cash flows at
historically low interest rates.
  The average rate paid on total in-market deposits comprised of all transaction
accounts, money market accounts, and non-wholesale deposits for the three and
nine months ended September 30, 2020 decreased to 0.27% and 0.49%, respectively,
down from 1.47% and 1.50%, for the three and nine months ended September 30,
2019, respectively. The average rate paid on total in-market deposits declined
as the Corporation decreased deposit rates in response to the Federal Open
Market Committee's ("FOMC") decision to decrease the target federal funds rate
200 basis points from September 2019 to September 2020. For the three and nine
months ended September 30, 2020 compared to the three and nine months ended
September 30, 2019, the average target federal funds rate decreased 205 basis
points and 180 basis points, respectively. Similarly, the average rate paid on
total interest-bearing liabilities for the three and nine months ended
September 30, 2020 decreased to 0.81% and 1.09%, respectively, compared to 2.21%
and 2.17% for the three and nine months ended September 30, 2019, respectively.
Total interest-bearing liabilities include interest-bearing deposits, federal
funds purchased, FHLB advances, Federal Reserve PPPLF advances, subordinated and
junior subordinated notes payable, and other borrowings.
  Consistent with the Corporation's longstanding funding strategy to manage
interest rate risk and match fund long-term, fixed-rate loans, wholesale funds
are used at various maturity terms to meet the Corporation's funding needs.
Average FHLB advances for the three months ended September 30,
2020 increased $72.9 million to $379.9 million at an average rate paid of 1.43%,
compared to $307.1 million at an average rate paid of 2.18% for the three months
ended September 30, 2019. Average FHLB advances for the nine months ended
September 30, 2020 increased $91.2 million to $371.7 million at an average rate
paid of 1.51%, compared to $280.5 million at an average rate paid of 2.20% for
the nine months ended September 30, 2019. As of September 30, 2020, the weighted
average original maturity of our FHLB term advances was 5.1 years, compared to
5.2 years as of September 30, 2019. Average wholesale deposits, consisting
of brokered certificates of deposit and deposits gathered from internet listing
services, for the three months ended September 30, 2020 decreased $51.5
million to $160.1 million at an average rate paid of 1.33%, compared to $211.5
million at an average rate paid of 2.36%. Average wholesale deposits for the
nine months ended September 30, 2020 decreased $110.4 million to $132.8 million
at an
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average rate paid of 2.03%, compared to $243.3 million at an average rate paid
of 2.24% for the nine months ended September 30, 2019. As the existing wholesale
deposit portfolio matured lower cost FHLB advances were used, when needed, to
fund loan growth and manage interest rate risk by match funding long-term
fixed-rate loans. As of September 30, 2020, the weighted average original
maturity of our wholesale deposits was 4.3 years, compared to 5.5 years as of
September 30, 2019.
  The average rate paid on total bank funding for the three and nine months
ended September 30, 2020 decreased to 0.54% and 0.78%, respectively, compared to
1.69% and 1.71% for the three and nine months ended September 30, 2019. Total
bank funding is defined as total deposits plus FHLB advances and Federal Reserve
PPPLF advances.
         Net interest margin decreased 26 basis points to 3.14% for the three
months ended September 30, 2020 compared to 3.40% for the three months ended
September 30, 2019. The decrease was primarily due to the decrease in the
average yield on loans and leases receivable, partially offset by a decrease in
the average rate paid on in-market deposits and wholesale funding and increase
in fees collected in lieu of interest. Excluding fees collected in lieu of
interest, PPP loan interest income, Federal Reserve interest income, FHLB
dividends, and interest expense from Federal Reserve PPPLF advances, net
interest margin measured 3.24% for the third quarter of 2020, compared to 3.24%
in the third quarter of 2019. Net interest margin decreased 27 basis points to
3.30% for the nine months ended September 30, 2020 compared to 3.57% for the
nine months ended September 30, 2019. The decrease was primarily due to the
decrease in average yield on loans and leases receivable partially offset by a
decrease in the average rate paid on in-market deposits and wholesale funding.
Excluding fees collected in lieu of interest, PPP loan interest income, Federal
Reserve interest income, FHLB dividends, and interest expense from Federal
Reserve PPPLF advances, net interest margin measured 3.29% and 3.30% for the
nine months ended September 30, 2020 and September 30, 2019, respectively.
  Management believes its success in growing in-market deposits, disciplined
loan pricing, and increased production in existing higher-yielding specialty
finance lines of business will allow the Corporation to achieve 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, particularly given the
nature of the Corporation's asset-based lending business and the Corporation's
participation in the PPP. 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.
Provision for Loan and Lease Losses
  We determine our provision for loan and lease losses pursuant to our allowance
for loan and lease loss methodology, which is based on the magnitude of current
and historical net charge-offs recorded throughout the established look-back
period, the evaluation of several qualitative factors for each portfolio
category, and the amount of specific reserves established for impaired loans
that present collateral shortfall positions. Refer to Allowance for Loan and
Lease Losses, below, for further information regarding our allowance for loan
and lease loss methodology.
  The full impact of COVID-19 is unknown and rapidly evolving. It has caused
substantial disruption in international and U.S. economies, markets, and
employment. The outbreak is having a significant adverse impact on certain
industries the Corporation serves, including retail, hospitality, entertainment,
and restaurants and food services. Due to COVID-19 and the economic impact it
could have on the Corporation's loan portfolio, additional detail about certain
exposure to stressed industries is included in the section titled COVID-19
Update, above.
  Based on management's current assessment of the increased inherent risk in the
loan portfolio, the allowance for loan and lease losses increased $11.3 million,
or 57.9%, compared to December 31, 2019. The provision for loan and lease losses
totaled $3.8 million and $12.5 million for the three and nine months ended
September 30, 2020, respectively, compared to $1.3 million and $613,000 for the
three and nine months ended September 30, 2019, respectively. For the nine
months ended September 30, 2020, the increase in the allowance for loan and
lease losses was in large part due to an increase in specific reserves on
impaired loans, in addition to several qualitative factors after careful
evaluation by management. Most notably, an increase in specific reserves of $5.5
million was driven by deterioration of two existing legacy SBA impaired
relationships and one relationship in the hospitality industry. Additionally, a
$4.7 million increase was due to the economic conditions caused by the pandemic,
including the increase in the unemployment rate, management's ongoing review and
grading of the loan and lease portfolios, consideration of delinquency
experience, and the level of loans and leases subject to more frequent review by
management.
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  The legacy on-balance sheet SBA portfolio, defined as SBA 7(a) and Express
loans originated in 2016 and prior, has been a source of elevated non-performing
assets. Additional information on our legacy SBA portfolio is as follows:
                                          As of
                            September 30,       June 30,                  September 30,
                                 2020             2020                         2019
                                      (In Thousands)
Performing loans:
Off-balance sheet loans    $       26,017$ 28,843$       40,288
On-balance sheet loans             15,175        16,554                          21,814
Gross loans                        41,192        45,397                          62,102
Non-performing loans:
Off-balance sheet loans             2,574         1,640                           7,287
On-balance sheet loans              9,561         9,725                          14,663
Gross loans                        12,135        11,365                          21,950
Total loans:
Off-balance sheet loans            28,591        30,483                          47,575
On-balance sheet loans             24,736        26,279                          36,477
Gross loans                $       53,327$ 56,762$       84,052


  The addition of specific reserves on impaired loans represent new specific
reserves established when collateral shortfalls or government guaranty
deficiencies are present, while conversely the release of specific reserves
represent 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.

  Because of the significant uncertainties related to the ultimate duration of
the COVID-19 pandemic and its potential effects on clients and prospects, and on
the national and local economy as a whole, there can be no assurances as to how
the crisis may ultimately affect the Corporation's loan portfolio.
Comparison of Non-Interest Income for the Three and Nine Months Ended September
                               30, 2020 and 2019

Non-Interest Income

  Non-interest income primarily consists of fees earned for private wealth
management services, gains on sale of SBA loans, service charges on deposits,
loan fee income, and commercial loan interest rate swap fee income. For the
three months ended September 30, 2020 non-interest income increased by $1.6
million, or 27.9%, to $7.4 million from $5.8 million for the same period in
2019. For the nine months ended September 30, 2020 non-interest income increased
$3.9 million, or 24.1%, to $20.1 million from $16.2 million for the same period
in 2019. Management continues to focus on revenue growth from multiple
non-interest income sources in order to maintain a diversified revenue stream
through greater contribution from fee-based revenues. Total non-interest income
accounted for 28.5% and 27.0% of total revenues for the three and nine months
ended September 30, 2020, respectively, compared to 25.7% and 24.0% for the
three and nine months ended September 30, 2019, respectively. Management
believes the expected gradual expansion of its SBA lending program, fees from
commercial loan interest rate swap activity with commercial borrowers, and the
geographic expansion of its private wealth management division will allow the
Corporation to sustain a strategic target of 25% over the long-term.
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  The components of non-interest income were as follows:
                                                                                                                                                                         For the Nine Months Ended
                                                For the Three Months Ended September 30,                                                                                       September 30,
                                      2020                2019           $ Change            % Change             2020              2019            $ Change            % Change
                                                                                               (Dollars in Thousands)
Private wealth management
service fees                    $      2,167$ 2,060$    107                  5.2  %       $  6,402$  6,125$    277                   4.5  %
Gain on sale of SBA loans                760               454               306                 67.4             1,598               993               605                  60.9
Service charges on
deposits                                 881               795                86                 10.8             2,527             2,314               213                   9.2
Loan fees                                478               439                39                  8.9             1,414             1,316                98                   7.4
Increase in cash
surrender value of
bank-owned life insurance                365               305                60                 19.7             1,037               894               143                  16.0
Net loss on sale of
securities                                 -                (4)                4                      NM             (4)               (5)                1                 (20.0)
Commercial loan swap fees              2,446               374             2,072                      NM          5,782             1,898             3,884                       NM
Other non-interest income                311             1,369            (1,058)               (77.3)            1,385             2,699            (1,314)                (48.7)
Total non-interest income       $      7,408$ 5,792$  1,616                 27.9          $ 20,141$ 16,234$  3,907                  24.1
Fee income ratio(1)                     28.5   %          25.7  %                                                  27.0  %           24.0  %

(1) Fee income ratio is total non-interest income, per the above table, divided by top line revenue (defined as net interest income plus non-interest income).

  Private wealth management service fees increased $107,000, or 5.2%, and
$277,000, or 4.5% for the three and nine months ended September 30, 2020,
respectively, compared to the three and nine months ended September 30, 2019.
The increase for the three and nine month comparison periods was mainly driven
by an increase in equity market values and growth in assets under management
attributable to new client relationships. As of September 30, 2020, trust assets
under management and administration totaled $2.018 billion, increasing $125.3
million, or 6.6%, compared to $1.892 billion as of December 31, 2019 and $217.0
million, or 12.1%, compared to $1.801 billion as of September 30, 2019.
  Commercial loan interest rate swap fee income was $2.4 million and $5.8
million for the three and nine months ended September 30, 2020, respectively,
compared to $374,000 and $1.9 million for the three and nine months ended
September 30, 2019, respectively. Interest rate swaps continue to be an
attractive product for the Bank's commercial borrowers, although associated fee
income can vary period to period based on client demand and the interest rate
environment in any given quarter.
  Gains on sale of SBA loans increased $306,000, or 67.4%, and $605,000, or
60.9%, for the three and nine months ended September 30, 2020, respectively,
compared to the three and nine months ended September 30, 2019. The
Corporation's pipeline continues to grow period over period and management
believes the gain on sale of traditional SBA loans (i.e., SBA loans unrelated to
PPP loans) will increase at a measured pace over time. Loans held for sale,
consisting entirely of SBA loans closed but not fully funded, increased $12.0
million, or 390.20%, to $15.0 million compared to September 30, 2019.
  Other non-interest income for the three and nine months ended September 30,
2020 totaled $311,000 and $1.4 million, respectively, compared to $1.4 million
and $2.7 million, respectively, for three and nine months ended September 30,
2019. The decrease for both the three and nine month periods of comparison was
primarily due to above average returns from the Corporation's investments in
mezzanine funds and a gain on sale of a state tax credit in the prior year
periods. The decrease for the nine months ended was also impacted by gains
recognized on end-of-term buyout agreements related to the Company's equipment
finance business line.
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Table of Contents Comparison of Non-Interest Expense for the Three and Nine Months Ended September

                               30, 2020 and 2019

Non-Interest Expense

  The components of non-interest expense were as follows:
                                                                                                                                                                              For the Nine Months Ended
                                                 For the Three Months Ended September 30,                                                                                           September 30,
                                      2020                 2019            $ Change            % Change                2020              2019            $ Change            % Change
                                                                                         (Dollars in Thousands)
Compensation                    $       11,857$ 10,324$  1,533                 14.8  %          $ 33,705$ 30,991$  2,714                   8.8  %
Occupancy                                  570               580               (10)                (1.7)               1,696             1,730               (34)                 (2.0)
Professional fees                          943               751               192                 25.6                2,621             2,745              (124)                 (4.5)
Data processing                            679               654                25                  3.8                2,066             1,923               143                   7.4
Marketing                                  356               548              (192)               (35.0)               1,169             1,611              (442)                (27.4)
Equipment                                  310               277                33                 11.9                  905               938               (33)                 (3.5)
Computer software                        1,017               859               158                 18.4                2,873             2,485               388                  15.6
FDIC insurance                             312                 1               311                      NM               760               595               165                  27.7
Collateral liquidation
costs                                       45               110               (65)               (59.1)                 281               108               173                       NM
Net (gain) loss on
foreclosed properties                     (121)              262              (383)                     NM               329               241                88                  36.5
Tax credit investment
impairment (recovery)                      113              (120)              233                      NM             2,066             3,982            (1,916)                (48.1)
SBA recourse provision
(benefit)                                   57              (427)              484                      NM                53               167              (114)                (68.3)
Loss on early
extinguishment of debt                       -                 -                 -                      NM               744                 -               744                       NM
Other non-interest
expense                                    620               897              (277)               (30.9)               1,977             2,406              (429)                (17.8)
Total non-interest
expense                         $       16,758$ 14,716$  2,042                 13.9             $ 51,245$ 49,922$  1,323                   2.7
Total operating
expense(1)                      $       16,700$ 14,990$  1,710                 11.4             $ 48,026$ 45,499$  2,527                   5.6
Full-time equivalent
employees                                  300               281                                                         300               281



(1)Total operating expense represents total non-interest expense, adjusted to
exclude the impact of discrete items as previously defined in the non-GAAP
efficiency ratio calculation, above.
Non-interest expense for the three months ended September 30, 2020 increased by
$2.0 million, or 13.9%, to $16.8 million compared to $14.7 million for the same
period in 2019. Non-interest expense for the nine months ended September 30,
2020 increased by $1.3 million, or 2.7%, to $51.2 million compared to $49.9
million for the same period in 2019. Operating expense, which excludes certain
one-time and discrete items as defined in the Efficiency Ratio table above,
increased $1.7 million, or 11.4%, to $16.7 million for the three months ended
September 30, 2020 compared to $15.0 million for the same period in 2019.
Operating expense increased $2.5 million, or 5.6%, to $48.0 million compared to
$45.5 million for the same period in 2019. The increase in operating expense for
the three month period was primarily due to an increase in compensation,
professional fees, computer software, and FDIC insurance, partially offset by a
decrease in marketing. The increase in operating expense for the nine month
period was primarily due to an increase in compensation and computer software
expense, partially offset by a decrease in general business-related expenses due
to the Corporation's adherence to COVID-19 restrictions.
  Compensation expense for the three months ended September 30, 2020 was $11.9
million, an increase of $1.5 million, or 14.8%, compared to the three months
ended September 30, 2019. Compensation expense for the nine months ended
September 30, 2020 was $33.7 million, an increase of $2.7 million, or 8.8%,
compared to the nine months ended September 30, 2019. The increase in
compensation expense in both periods of comparison reflects an increase in
employees and annual merit increases. Average full-time equivalent employees
were 295 for the quarter ended September 30, 2020 compared to 274 for the
quarter ended September 30, 2019.
Professional fee expense for the three months ended September 30, 2020 increased
by $192,000, or 25.6%, to $943,000 compared to $751,000 for the same period in
2019. Professional fee expense for the nine months ended September 30, 2020
decreased by $124,000, or 4.5%, to $2.6 million compared to $2.7 million for the
same period in 2019. The
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increase in the three months ended was mainly due to additional consulting
expense related to annual loan review which had previously been sourced in-house
and reported as compensation expense. The decrease for the nine months ended
September 30, 2020 was primarily driven by a reduced need to utilize external
recruitment services.
  Computer software expense increased $158,000 to $1.0 million for the three
months September 30, 2020 compared to $859,000 for the three months ended
September 30, 2019, and increased $388,000 to $2.9 million for the nine months
ended September 30, 2020 compared to $2.5 million for the nine months ended
September 30, 2019. The increase in computer software expense in both periods of
comparison is mainly due to investments made in our small ticket vendor finance
and floorplan financing lines of business.
FDIC insurance expense for the three months ended September 30, 2020 was
$312,000, an increase of $311,000 compared to the three months ended
September 30, 2019. FDIC insurance expense for the nine months ended
September 30, 2020 was $760,000, an increase of $165,000, compared to the nine
months ended September 30, 2019. FDIC insurance expense for the three and nine
months ended September 30, 2019 benefited from an assessment credit because as
the Deposit Insurance Fund Ratio reached 1.40%, as of June 30, 2019 which
exceeded the required minimum ratio of 1.35%, the FDIC was required to
distribute assessment credits to small banks for their portion of their
assessments that contributed to the growth in the reserve ratio. The Corporation
received a credit of $315,000 in the third quarter of 2019.
  Marketing expense for the three months ended September 30, 2020 decreased by
$192,000, or 35.0%, to $356,000 compared to $548,000 in the same period in 2019.
Marketing expense for the nine months ended September 30, 2020 decreased by
$442,000 to $1.2 million compared to $1.6 million for the same period in 2019.
During 2020, the Corporation's adherence to COVID-19 restrictions resulted in a
reduction in marketing expenses, such as meals and entertainment, and
advertisement expense.
  No historic tax credits or related impairment were recognized for the three
months ended September 30, 2020 and September 30, 2019. Tax credit investment
impairment expense was $2.1 million for the nine months ended September 30,
2020, compared to $4.0 million for the nine months ended September 30, 2019.
During the second quarter of 2020, the Corporation recognized a total of $1.7
million in expense due to the impairment of in-market federal historic tax
credit investments, which corresponded with the recognition of $2.5 million in
tax credits during the quarter. During the nine months ended September 30, 2019,
the Corporation recognized $3.9 million in expense due to the impairment of
in-market federal historic tax credit investments, which corresponded with the
recognition of $5.3 million in tax credits. Management intends to continue
actively pursuing in-market tax credit opportunities throughout 2020 and beyond.
  SBA recourse provision was $57,000 and $53,000 for the three and nine months
ended September 30, 2020, respectively, compared to recourse benefit of $427,000
for the three months ended September 30, 2019 and a recourse provision of
$167,000 for the nine months ended September 30, 2019. Changes to SBA recourse
reserves may be a source of non-interest expense volatility in future quarters,
though the magnitude of this volatility should diminish over time as the
outstanding balance of sold legacy SBA loans continues to decline. The total
recourse reserve balance was $1.1 million, or 1.4% of total sold SBA loans
outstanding, at September 30, 2020, compared to $1.3 million, or 1.8%, at
December 31, 2019, and $1.6 million, or 2.2%, at September 30, 2019.
Income Taxes
  Income tax expense totaled $73,000 for the nine months ended September 30,
2020 compared to an income tax benefit of $475,000 for the nine months ended
September 30, 2019. The income tax expense for the nine months ended
September 30, 2020 reflects a benefit from the recognition of $2.5 million in
tax credits which correspond with the $1.7 million impairment of
relationship-based historic tax credit investments during the same period. The
income tax benefit for the nine months ended September 30, 2019 primarily
reflects the recognition of $5.3 million in federal historic tax credits, which
correspond with the $3.9 million impairment of relationship-based historic tax
credit investments during the same period. The effective tax rate for the nine
months ended September 30, 2020, excluding the discrete items, was 19.33%.
  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.

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                              Financial Condition

General

  Total assets increased by $505.1 million, or 24.1%, to $2.602 billion as of
September 30, 2020 compared to $2.097 billion at December 31, 2019. The increase
in total assets was primarily driven by PPP loan growth and commercial real
estate ("CRE") loan growth, partially offset by a decrease in short-term
investments.
Short-Term Investments
  Short-term investments decreased by $27.5 million, or 53.9%, to $23.5 million
at September 30, 2020 from $51.0 million at December 31, 2019. Our short-term
investments primarily consist of interest-bearing deposits held at the FRB and
commercial paper. We value the safety and soundness provided by the FRB and
therefore incorporate short-term investments in our on-balance sheet liquidity
program. As of September 30, 2020, we did not hold any commercial paper and as
of December 31, 2019, our total investment in commercial paper was $5.9 million.
Due to current economic conditions, we decided to temporarily exit this
short-term investment. We approach our decisions to purchase commercial paper
with similar rigor and underwriting standards as applied to our loan and lease
portfolio. The original maturities of the commercial paper are usually 60 days
or less often provide an attractive yield in comparison to other short-term
alternatives. In general, the level of our short-term investments will be
influenced by the timing of deposit gathering, scheduled maturities of wholesale
deposits, funding of loan and lease growth when opportunities are presented, and
the level of our securities portfolio. Please refer to the section titled
Liquidity and Capital Resources for further discussion.
Securities
  Total securities, including available-for-sale and held-to-maturity, increased
by $2.3 million, or 1.1%, to $208.2 million at September 30, 2020 compared to
$205.8 million at December 31, 2019. During the nine months ended September 30,
2020, due to declining interest rates, we recognized unrealized gains of $3.9
million before income taxes through other comprehensive income, compared to
gains of $3.3 million for the same period in 2019. As of September 30, 2020 and
December 31, 2019, our overall securities portfolio, including
available-for-sale securities and held-to-maturity securities, had an estimated
weighted-average expected maturity of 3.8 years and 4.4 years, respectively.
Generally, 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
September 30, 2020.
Loans and Leases Receivable
  Loans and leases receivable, net of allowance for loan and lease losses,
increased by $444.4 million to $2.139 billion at September 30, 2020 from $1.695
billion at December 31, 2019 which was driven by the aforementioned PPP loan and
CRE loan growth, partially offset by a reduction in commercial and industrial
("C&I") loans. Loans and leases receivable, net of allowance for loan and lease
losses and excluding net PPP loans, increased by $118.9 million, or 7.0%, to
$1.814 billion at September 30, 2020 from December 31, 2019.

Total CRE increased $172.4 million to $1.327 billion, up from $1.154 billion at
December 31, 2019. Multifamily, commercial real estate non-owner occupied, and
construction loans were the largest contributors to CRE loan growth as of
September 30, 2020, increasing $70.3 million, $49.1 million, and $33.7 million,
respectively, from December 31, 2019. Importantly, management has elevated its
underwriting standards during the pandemic to ensure business owners and
guarantors have robust liquidity, operating performance, and collateral
positions. Despite these higher standards, the Corporation has been able to grow
loans and deepen banking relationships.
C&I loans increased $286.9 million to $790.3 million from $503.4 million at
December 31, 2019. Excluding net PPP loans, C&I loans decreased $38.5 million to
$464.9 million from $503.4 million at December 31, 2019 primarily due to a $31.2
million decrease in asset-based loans and $4.0 million decrease in accounts
receivable financing. Specialty finance products have historically experienced
counter cyclical growth, growing during times of economic stress and
uncertainty. As such, management expects asset-based loans and accounts
receivable financing volume to increase during the remainder of 2020 and
throughout 2021.
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  There continues to be a concentration in CRE loans which represented 71.6% and
67.3% of our total loans, excluding net PPP loans, as of September 30, 2020 and
December 31, 2019, respectively. As of September 30, 2020, 18.1% of the CRE
loans were owner-occupied CRE, compared to 19.6% as of December 31, 2019. 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.
Management believes our ongoing investment in C&I loan production will allow C&I
loan growth to keep pace with CRE growth over the long-term, ultimately
stabilizing the concentration in CRE loans.
  As mentioned above, excluding net PPP loans, our C&I portfolio decreased $38.5
million, or 7.7%, to $464.9 million at September 30, 2020 from $503.4 million at
December 31, 2019. Line of credit usage was $217.6 million as of September 30,
2020, down from $282.9 million at December 31, 2019, as line of credit usage
significantly declined due to PPP loan proceeds. 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.

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 believe our new loan and lease activity
to be adequate to replace normal amortization, allowing us to continue growing
in future quarters, although this will temporarily be more challenging due to
the current economic conditions. The types of loans and leases we originate and
the various risks associated with these originations remain consistent with
information previously outlined in our most recent Annual Report on Form 10-K.

Non-accrual loans increased $15.4 million, or 74.9%, to $36.1 million at
September 30, 2020, compared to $20.6 million at December 31, 2019. The increase
in non-accrual loans was principally due to the impairment of three previously
identified relationships in the hospitality, wholesale food distributor, and
commercial industries during the nine months ended September 30, 2020 with
balances outstanding of $5.8 million, $4.3 million, and $5.0 million,
respectively. In addition, an impaired legacy SBA loan of $3.6 million was
repurchased. The Corporation's non-accrual loans as a percentage of total gross
loans and leases measured 1.66% and 1.20% at September 30, 2020 and December 31,
2019, respectively. Non-accrual loans as a percentage of total gross loans and
leases, excluding net PPP loans, was 1.95% at September 30, 2020. Please refer
to the sections titled COVID-19 Update and Asset Quality for additional
information on credit quality.
Deposits
  As of September 30, 2020, deposits increased by $291.0 million, or 19.0%, to
$1.821 billion from $1.530 billion at December 31, 2019 primarily due to a
$369.5 million increase in transaction accounts, partially offset by a $37.5
million decrease in money market accounts.
Transaction account balances increased primarily due to the influx of PPP loan
proceeds. Management attributes the transition from money market accounts to
reciprocal transaction accounts with full FDIC insurance to our clients'
preferences for safety and soundness amid the economic uncertainty created by
the COVID-19 pandemic. 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 approximately $1.528 billion
for the nine months ended September 30, 2020, compared to $1.271 billion for the
year ended December 31, 2019.
FHLB Advances and Other Borrowings
  As of September 30, 2020, FHLB advances and other borrowings increased by
$164.1 million, or 51.4%, to $483.5 million from $319.4 million at December 31,
2019. While total wholesale funding as a percentage of total bank funding has
decreased meaningfully overall due to significant in-market deposit growth, we
continue to replace the majority of our maturing brokered certificates of
deposit with FHLB advances at lower rates, as needed, to match-fund fixed rate
loans and mitigate interest rate risk. Total bank funding is defined as total
deposits plus FHLB advances, Federal Reserve Discount Window advances, and
Federal Reserve PPPLF advances.

The Corporation incurred a $744,000 loss, recognized through non-interest expense, on the early extinguishment of $59.5 million in FHLB term advances late in the second quarter of 2020, as the Corporation lowered wholesale funding costs

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and improved the Corporation's funding position. Management believes this
strategy will help stabilize net interest margin with the expectation of a low
interest rate environment for an extended period of time.
  During the second quarter of 2020, management tested the availability of the
Federal Reserve PPPLF due to the uncertainty of when PPP loans would be required
to close and fund. As of September 30, 2020, the Corporation had one $29.6
million PPPLF advance outstanding.
  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 titled Liquidity and Capital
Resources, below, for further information regarding our use and monitoring of
wholesale funds.

                                 Asset Quality
Impaired Assets

Total impaired assets consisted of the following at September 30, 2020 and December 31, 2019, respectively:

                                                                             September 30,          December 31,
                                                                                  2020                  2019
                                                                                    (Dollars in Thousands)
Non-accrual loans and leases
Commercial real estate:
Commercial real estate - owner occupied                                     $       7,941$      4,032
Commercial real estate - non-owner occupied                                         5,813                     -
Land development                                                                      890                 1,526
Construction                                                                            -                     -
Multi-family                                                                            -                     -
1-4 family                                                                            333                   333
Total non-accrual commercial real estate                                           14,977                 5,891
Commercial and industrial                                                          20,693                14,575
Direct financing leases, net                                                          351                     -
Consumer and other:
Home equity and second mortgages                                                        -                     -
Other                                                                                  29                   147
Total non-accrual consumer and other loans                                             29                   147
Total non-accrual loans and leases                                                 36,050                20,613
Foreclosed properties, net                                                            613                 2,919
Total non-performing assets                                                        36,663                23,532
Performing troubled debt restructurings                                                47                   140
Total impaired assets                                                       

$ 36,710$ 23,672


Total non-accrual loans and leases to gross loans and leases                         1.66  %               1.20  %

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

                                                                      1.68                  1.37
Total non-performing assets to total assets                                          1.41                  1.12
Allowance for loan and lease losses to gross loans and leases                        1.41                  1.14

Allowance for loan and lease losses to non-accrual loans and leases

         85.48                 94.70


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  Net PPP loans outstanding as of September 30, 2020, were $325.5 million. There
were no PPP loans outstanding as of December 31, 2019. The following asset
quality ratios exclude net PPP loans as they are fully guaranteed by the SBA:
                                                                           September 30,                 December 31,
                                                                               2020                          2019
Total non-accrual loans and leases to gross loans and leases                          1.95  %                      1.20  %

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

                                                            1.98                         1.37
Total non-performing assets to total assets                                           1.61                         1.12
Allowance for loan and lease losses to gross loans and leases                         1.67                         1.14


  As of September 30, 2020 and December 31, 2019, $15.4 million and $15.6
million of non-accrual loans and leases were considered troubled debt
restructurings, respectively. This increase is the result of ongoing workout
efforts on previously identified impaired loans and does not include any new
troubled debt restructurings related to the COVID-19 pandemic.
  We use a wide variety of available metrics to assess the overall asset quality
of the portfolio and no one metric is used independently to make a final
conclusion as to the asset quality of the portfolio. Non-performing assets
increased $13.1 million, or 55.8%, to $36.7 million at September 30, 2020 from
$23.5 million at December 31, 2019. The increase in non-accrual loans was
principally due to the impairment of three previously identified relationships
in the hospitality, wholesale food distributor, and commercial industries during
the nine months ended September 30, 2020 with balances outstanding of $5.8
million, $4.3 million, and $5.0 million, respectively. In addition, an impaired
legacy SBA loan of $3.6 million was repurchased.
  We also monitor early stage delinquencies to assist in the identification of
potential future problems. As of September 30, 2020, 99.90% of the loan and
lease portfolio, excluding non-accrual loans and leases, was in a current
payment status, compared to 99.76% at December 31, 2019. We also monitor asset
quality through our established credit quality indicator categories. 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 work
proactively with our impaired loan borrowers to find solutions to difficult
situations that are in the best interests of the Bank.
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  The following represents additional information regarding our impaired loans
and leases:
                                                      As of and for the Nine Months Ended                             As of and for the
                                                                 September 30,                                     Year Ended December 31,
                                                            2020                 2019                2019
                                                                           (In Thousands)
Impaired loans and leases with no impairment
reserves required                                     $      15,557$    9,320$    7,312
Impaired loans and leases with impairment
reserves required                                            20,540              13,615              13,441
Total impaired loans and leases                              36,097              22,935              20,753
Less: Impairment reserve (included in allowance
for loan and lease losses)                                    8,898               4,319               3,365
Net impaired loans and leases                         $      27,199$   18,616$   17,388
Average impaired loans and leases                     $      24,899$   24,835$   24,090
Foregone interest income attributable to
impaired loans and leases                             $       2,049$    2,113$    2,693
Less: Interest income recognized on impaired
loans and leases                                                467                 783                 793
Net foregone interest income on impaired loans
and leases                                            $       1,582

$ 1,330$ 1,900

Non-performing assets also include foreclosed properties. A summary of foreclosed properties activity is as follows:

                                                 As of and for the Nine Months Ended                             As of and for the
                                                            September 30,                                     Year Ended December 31,
                                                       2020                 2019                2019
                                                            (In Thousands)
Balance at the beginning of the period           $       2,919$    2,547$    2,547
Transfer of loans and leases to foreclosed
properties                                                  80                 596                 596

Proceeds from sale of foreclosed
properties                                              (2,057)                  -                   -
Net loss on sale of foreclosed properties                   34                   -                   -
Impairment adjustments                                    (363)               (241)               (224)
Balance at the end of the period                 $         613          $   

2,902 $ 2,919

Allowance for Loan and Lease Losses

  The allowance for loan and lease losses increased $11.3 million, or 57.9%,
from $19.5 million as of December 31, 2019 to $30.8 million as of September 30,
2020. The allowance for loan and lease losses as a percentage of gross loans and
leases also increased from 1.14% as of December 31, 2019 to 1.41% as of
September 30, 2020. The allowance for loan and lease losses as a percentage of
gross loans and leases, excluding net PPP loans, was 1.67% as of September 30,
2020. The increase in allowance for loan and lease losses as a percent of gross
loans and leases was principally driven by COVID-19 and the economic impact it
could have on the Corporation's loan portfolio. For the nine months ended
September 30, 2020, the increase in the allowance for loan and lease losses was
in large part due to an increase in several qualitative factors after careful
evaluation by management. Most notably, a $4.7 million increase was due to the
economic conditions caused by the pandemic, including the increase in the
unemployment rate, management's ongoing review and grading of the loan and lease
portfolios, consideration of delinquency experience, and the level of loans and
leases subject to more frequent review by management. Additionally, an increase
in specific reserves of $5.5 million was driven by deterioration of two existing
legacy SBA impaired relationships and one relationship in the hospitality
industry.
  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. Please refer
to the section titled COVID-19 Update for additional information.
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  During the nine months ended September 30, 2020, we recorded net charge-offs
on impaired loans and leases of $1.2 million, comprised of $1.5 million of
charge-offs and $264,000 of recoveries. During the nine months ended
September 30, 2019, we recorded net charge-offs on impaired loans and leases of
approximately $868,000, comprised of $1.2 million of charge-offs and $294,000 of
recoveries. We will continue to experience some level of periodic charge-offs in
the future as exit strategies are considered and executed, in particular as it
relates to our commercial clients impacted by the COVID-19 pandemic. Loans and
leases with previously established specific reserves may ultimately result in a
charge-off under a variety of scenarios.
  Based upon the application of our methodology for estimating the appropriate
level of allowance for loan and lease loss reserves, which includes actively
monitoring the asset quality and inherent risks within the loan and lease
portfolio, management concluded that an allowance for loan and lease losses of
$30.8 million, or 1.67% of total loans and leases excluding net PPP loans, was
appropriate as of September 30, 2020. Given ongoing complexities with current
workout situations, including those related to the COVID-19 pandemic, 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.
  As of September 30, 2020 and December 31, 2019, our allowance for loan and
lease losses to total non-accrual loans and leases was 85.48% and 94.70%,
respectively. 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 either does not require
additional specific reserves or requires only a minimal amount of required
specific reserve, as we believe the loans and leases are adequately
collateralized as of the measurement period. In addition, 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 losses 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 or leases, this ratio could
fall if the impaired loans are adequately collateralized and therefore require
no specific or general reserve. Given our business practices and evaluation of
our existing loan and lease portfolio, we believe this coverage ratio is
appropriate for the probable losses inherent in our loan and lease portfolio as
of September 30, 2020.

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  A summary of the activity in the allowance for loan and lease losses follows:
                                                As of and for the Three Months Ended                            As of and for the Nine Months
                                                            September 30,                                            Ended September 30,
                                                      2020                  2019                2020                     2019
                                                                                (Dollars in Thousands)
Allowance at beginning of period                $     27,464$   19,819$   19,520$        20,425
Charge-offs:
Commercial real estate:
Commercial real estate - owner occupied                    -                     -                 (27)                       -
Commercial real estate - non-owner
occupied                                                   -                     -                   -                        -
Construction and land development                          -                     -                   -                        -
Multi-family                                               -                     -                   -                        -
1-4 family                                                 -                     -                   -                        -
Commercial and industrial                               (505)               (1,097)             (1,358)                  (1,158)
Direct financing leases                                    -                     -                 (56)                       -
Consumer and other:
Home equity and second mortgages                           -                    (2)                  -                       (2)
Other                                                      -                     -                 (13)                      (2)
Total charge-offs                                       (505)               (1,099)             (1,454)                  (1,162)
Recoveries:
Commercial real estate:
Commercial real estate - owner occupied                    -                     -                   1                        1
Commercial real estate - non-owner
occupied                                                   -                     1                   2                       73
Construction and land development                          -                     -                   -                        -
Multi-family                                               -                     -                   -                        -
1-4 family                                                 -                     -                   -                        -
Commercial and industrial                                 21                    99                 259                      191
Direct financing leases                                    -                     -                   -                        -
Consumer and other:
Home equity and second mortgages                           -                     -                   -                       26
Other                                                      2                     1                   2                        3
Total recoveries                                          23                   101                 264                      294
Net (charge-offs) recoveries                            (482)                 (998)             (1,190)                    (868)
Provision for loan and lease losses                    3,835                 1,349              12,487                      613
Allowance at end of period                      $     30,817$   20,170$   30,817$        20,170
Annualized net charge-offs (recoveries)
as a percent of average gross loans and
leases                                                  0.09    %             0.23  %             0.08  %                  0.07       %
Annualized net charge-offs (recoveries)
as a percent of average gross loans and
leases, excluding average net PPP loans                 0.11    %             0.23  %             0.09  %                  0.07       %




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                        Liquidity and Capital Resources
  The Corporation expects to meet its liquidity needs through existing cash on
hand, established cash flow sources, its third party senior line of credit, and
dividends received from the Bank. While the Bank is subject to certain generally
applicable regulatory limitations regarding its ability to pay dividends to the
Corporation, we do not believe that the Corporation will be adversely affected
by these dividend limitations. The Corporation's principal liquidity
requirements at September 30, 2020 were the interest payments due on
subordinated and junior subordinated notes. On October 23, 2020, the Bank's
Board of Directors declared a dividend in the aggregate amount of $1.5
million bringing year-to-date dividend declarations to $12.0 million. The
capital ratios of the Corporation and its subsidiary continue to meet all
applicable regulatory capital adequacy requirements. The Corporation's and the
Bank's respective Boards of Directors 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, FHLB advances, Federal Reserve Discount Window advances, and
Federal Reserve PPPLF 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. Please refer to the section titled
COVID-19 Update for additional information on the Bank's primary and secondary
sources of available liquidity the during the COVID-19 pandemic.
  On-balance sheet liquidity is 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
September 30, 2020 and December 31, 2019, our immediate on-balance sheet
liquidity was $556.1 million and $438.2 million, respectively. At September 30,
2020 and December 31, 2019, the Bank had $22.8 million and $44.4 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 $613.2 million of outstanding wholesale funds at September 30, 2020,
compared to $446.5 million of wholesale funds as of December 31, 2019, which
represented 26.9% and 24.5%, respectively, of ending balance total bank funding.
Wholesale funds include FHLB advances, Federal Reserve PPPLF advances, brokered
certificates of deposit, and deposits gathered from internet listing services.
Total bank funding is defined as total deposits plus FHLB advances and Federal
Reserve PPPLF 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 increased $288.3 million to $1.667 billion at
September 30, 2020 from $1.379 billion at December 31, 2019 as in-market deposit
balances increased due to PPP loan proceeds. Our in-market relationships remain
stable; however, deposit balances associated with those relationships will
fluctuate. We expect to establish new client relationships and continue
marketing efforts aimed at increasing the balances in existing clients' deposit
accounts. Nonetheless, we will continue to use wholesale funds in specific
maturity periods, typically three to five years, needed to effectively mitigate
the interest rate risk measured through our asset/liability management process
or in shorter time periods if in-market deposit balances decline. In order to
provide for ongoing liquidity and funding, all of our wholesale funds are
certificates of deposit which do not allow for withdrawal at the option of the
depositor before the stated maturity (with the exception of deposits accumulated
through the internet listing service which have the same early withdrawal
privileges and fees as do our other in-market deposits) and FHLB advances with
contractual maturity terms and no call provisions. The Bank limits the
percentage of wholesale funds to total bank funds in accordance with liquidity
policies approved by its Board. The Bank was in compliance with its policy
limits as of September 30, 2020 and December 31, 2019.
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  The Bank was able to access the wholesale funding market as needed at rates
and terms comparable to market standards during the nine month period ended
September 30, 2020. 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. As of September 30, 2020, 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 Bank is required by federal regulation to maintain sufficient liquidity to ensure safe and sound operations. We believe that the Bank has sufficient liquidity to match the balance of net withdrawable deposits and short-term borrowings in light of present economic conditions and deposit flows.

  During the nine months ended September 30, 2020, operating activities resulted
in a net cash inflow of $5.4 million, which included net income and provision
for loan and lease losses of $10.9 million and $12.5 million, respectively,
partially offset by a net increase in loans originated for sale. Net cash used
in investing activities for the nine months ended September 30, 2020 was
approximately $470.1 million which consisted of cash outflows to fund net loan
growth and the purchase of $8.0 million in additional bank-owned life insurance
and $13.4 million of FHLB stock, partially offset by a net reduction in
securities. Net cash provided by financing activities resulted in a net cash
inflow of $449.3 million for the nine months ended September 30, 2020 primarily
due to a net increase in FHLB advances, an increase in Federal Reserve PPPLF
advances, and a net increase 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 September 30, 2020, 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, 2019. We continue to believe that we
have adequate capital and liquidity available from various sources to fund
projected contractual obligations and commitments.

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