FIRST BUSINESS FINANCIAL SERVICES, INC. 10-Q

Item 1. Financial Statements First Business Financial Services, Inc. Consolidated Balance Sheets June 30, 2024 December 31, 2023 (Unaudited) (In Thousands, Except Share Data) Assets Cash and due from banks $ 26,400 $ 32,348 Short-term investments 54,680 107,162 Cash and cash equivalents 81,080 139,510 Securities available-for-sale, at fair value 308,852 297,006 Securities held-to-maturity, at amortized cost 7,082 8,503 Loans held for sale 6,507 4,589 Loans and leases receivable, net of allowance for credit losses of $ 33,088 and $ 31,275 , respectively 2,952,326 2,818,986 Premises and equipment, net 6,381 6,190 Repossessed assets 54 247 Right-of-use assets, net 6,041 6,559 Bank-owned life insurance 56,351 55,536 Federal Home Loan Bank stock, at cost 11,901 12,042 Goodwill and other intangible assets 11,841 12,023 Derivatives 70,773 55,597 Accrued interest receivable and other assets 97,872 91,058 Total assets $ 3,617,061 $ 3,507,846 Liabilities and Stockholders’ Equity Deposits $ 2,885,183 $ 2,796,779 Federal Home Loan Bank advances and other borrowings 327,855 330,916 Lease liabilities 8,361 8,954 Derivatives 61,821 51,949 Accrued interest payable and other liabilities 28,671 29,660 Total liabilities 3,311,891 3,218,258 Stockholders’ equity: Preferred stock, $ 0.01 par value, 2,500,000 shares authorized, 12,500 shares of 7 % non-cumulative perpetual preferred stock, Series A, outstanding at June 30, 2024 and December 31, 2023 11,992 11,992 Common stock, $ 0.01 par value, 25,000,000 shares authorized, 9,433,759 and 9,418,463 shares issued, 8,294,589 and 8,314,778 shares outstanding at June 30, 2024 and December 31, 2023, respectively 95 95 Additional paid-in capital 91,967 90,616 Retained earnings 245,431 230,728 Accumulated other comprehensive loss ( 12,944 ) ( 13,717 ) Treasury stock, 1,139,170 and 1,103,685 shares at June 30, 2024 and December 31, 2023, respectively, at cost ( 31,371 ) ( 30,126 ) Total stockholders’ equity 305,170 289,588 Total liabilities and stockholders’ equity $ 3,617,061 $ 3,507,846 See accompanying Notes to Unaudited Consolidated Financial Statements. 1 Table of Contents First Business Financial Services, Inc. Consolidated Statements of Income (Unaudited) For the Three Months Ended June 30, For the Six Months Ended June 30, 2024 2023 2024 2023 (In Thousands, Except Per Share Data) Interest income Loans and leases $ 53,892 $ 44,279 $ 105,441 $ 84,094 Securities 3,053 1,813 5,847 3,403 Short-term investments 965 1,069 2,405 1,729 Total interest income 57,910 47,161 113,693 89,226 Interest expense Deposits 24,676 16,541 48,512 28,971 Federal Home Loan Bank advances and other borrowings 2,694 2,873 5,130 5,802 Total interest expense 27,370 19,414 53,642 34,773 Net interest income 30,540 27,747 60,051 54,453 Provision for credit losses 1,713 2,231 4,039 3,793 Net interest income after provision for credit losses 28,827 25,516 56,012 50,660 Non-interest income Private wealth management service fees 3,461 2,893 6,571 5,547 Gain on sale of Small Business Administration loans 349 444 544 920 Service charges on deposits 951 766 1,890 1,448 Loan fees 826 905 1,674 1,708 Increase in cash surrender value of bank-owned life insurance 403 363 815 729 Net loss on sale of securities — ( 45 ) ( 8 ) ( 45 ) Swap fees 157 977 355 1,534 Other non-interest income 1,278 1,071 2,341 3,943 Total non-interest income 7,425 7,374 14,182 15,784 Non-interest expense Compensation 16,215 15,129 32,372 31,037 Occupancy 593 603 1,200 1,234 Professional fees 1,472 1,240 3,043 2,583 Data processing 1,182 1,061 2,200 1,936 Marketing 850 779 1,669 1,407 Equipment 335 355 680 650 Computer software 1,555 1,197 2,973 2,379 FDIC insurance 612 580 1,222 974 Other non-interest expense 1,065 1,087 1,863 1,598 Total non-interest expense 23,879 22,031 47,222 43,798 Income before income tax expense 12,373 10,859 22,972 22,646 Income tax expense 1,917 2,522 3,668 5,330 Net income 10,456 8,337 19,304 17,316 Preferred stock dividend 219 219 438 438 Net income available to common shareholders $ 10,237 $ 8,118 $ 18,866 $ 16,878 Earnings per common share Basic $ 1.23 $ 0.98 $ 2.26 $ 2.02 Diluted 1.23 0.98 2.26 2.02 Dividends declared per share 0.25 0.2275 0.50 0.4550 See accompanying Notes to Unaudited Consolidated Financial Statements. 2 Table of Contents First Business Financial Services, Inc. Consolidated Statements of Comp rehensive Income (Unaudited) For the Three Months Ended June 30, For the Six Months Ended June 30, 2024 2023 2024 2023 (In Thousands) Net income $ 10,456 $ 8,337 $ 19,304 $ 17,316 Other comprehensive (loss) income Securities available-for-sale: Unrealized securities losses arising during the period ( 644 ) ( 4,015 ) ( 3,505 ) ( 252 ) Reclassification adjustment for net loss realized in net income — 45 8 45 Securities held-to-maturity: Amortization of net unrealized losses transferred from available-for-sale — 1 1 3 Interest rate swaps: Unrealized gains on interest rate swaps arising during the period 382 3,693 5,304 2,131 Income tax (expense) benefit ( 506 ) 70 ( 1,035 ) ( 494 ) Total other comprehensive (loss) income ( 768 ) ( 206 ) 773 1,433 Comprehensive income $ 9,688 $ 8,131 $ 20,077 $ 18,749 See accompanying Notes to Unaudited Consolidated Financial Statements. 3 Table of Contents First Business Financial Services, Inc. Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) Common Shares Outstanding Preferred Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total (In Thousands, Except Share Data) Balance at December 31, 2022 8,362,085 $ 11,992 $ 94 $ 87,512 $ 203,507 $ ( 15,310 ) $ ( 27,155 ) $ 260,640 Cumulative change in accounting principle — — — — ( 1,353 ) — — ( 1,353 ) Balance at January 1, 2023 8,362,085 11,992 94 87,512 202,154 ( 15,310 ) ( 27,155 ) 259,287 Net income — — — — 8,979 — — 8,979 Other comprehensive income — — — — — 1,639 — 1,639 Share-based compensation - restricted shares and employee stock purchase plan ( 426 ) — — 634 — — — 634 Issuance of common stock under the employee stock purchase plan 1,005 — — 27 — — — 27 Preferred stock dividends — — — — ( 219 ) — — ( 219 ) Cash dividends ($ 0.2275 per share) — — — — ( 1,906 ) — — ( 1,906 ) Treasury stock purchased ( 56,394 ) — — — — — ( 1,860 ) ( 1,860 ) Balance at March 31, 2023 8,306,270 $ 11,992 $ 94 $ 88,173 $ 209,008 $ ( 13,671 ) $ ( 29,015 ) $ 266,581 Net income — — — — 8,337 — — 8,337 Other comprehensive loss — — — — — ( 206 ) — ( 206 ) Share-based compensation - restricted shares and employee stock purchase plan 45,280 — 1 1,071 — — — 1,072 Issuance of common stock under the employee stock purchase plan 1,044 — — 28 — — — 28 Preferred stock dividends — — — — ( 219 ) — — ( 219 ) Cash dividends ($ 0.2275 per share) — — — — ( 1,889 ) — — ( 1,889 ) Treasury stock purchased ( 37,129 ) — — — — — ( 1,072 ) ( 1,072 ) Balance at June 30, 2023 8,315,465 $ 11,992 $ 95 $ 89,272 $ 215,237 $ ( 13,877 ) $ ( 30,087 ) $ 272,632 Common Shares Outstanding Preferred Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total (In Thousands, Except Share Data) Balance at December 31, 2023 8,314,778 $ 11,992 $ 95 $ 90,616 $ 230,728 $ ( 13,717 ) $ ( 30,126 ) $ 289,588 Net income — — — — 8,848 — — 8,848 Other comprehensive income — — — — — 1,541 — 1,541 Share-based compensation - restricted shares and employee stock purchase plan 6,940 — — 665 — — — 665 Issuance of common stock under the employee stock purchase plan 913 — — 31 — — — 31 Preferred stock dividends — — — — ( 219 ) — — ( 219 ) Cash dividends ($ 0.25 per share) — — — — ( 2,087 ) — — ( 2,087 ) Treasury stock purchased ( 16,058 ) — — — — — ( 579 ) ( 579 ) Balance at March 31, 2024 8,306,573 $ 11,992 $ 95 $ 91,312 $ 237,270 $ ( 12,176 ) $ ( 30,705 ) $ 297,788 Net income — — — — 10,456 — — 10,456 Other comprehensive loss — — — — — ( 768 ) — ( 768 ) Share-based compensation - restricted shares and employee stock purchase plan 6,494 — — 624 — — — 624 Issuance of common stock under the employee stock purchase plan 949 — — 31 — — — 31 Preferred stock dividends — — — — ( 219 ) — — ( 219 ) Cash dividends ($ 0.25 per share) — — — — ( 2,076 ) — — ( 2,076 ) Treasury stock purchased ( 19,427 ) — — — — — ( 666 ) ( 666 ) Balance at June 30, 2024 8,294,589 $ 11,992 $ 95 $ 91,967 $ 245,431 $ ( 12,944 ) $ ( 31,371 ) $ 305,170 See accompanying Notes to Unaudited Consolidated Financial Statements. 4 Table of Contents First Business Financial Services, Inc. Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 2024 2023 (In Thousands) Operating activities Net income $ 19,304 $ 17,316 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes, net 565 510 Provision for credit losses 4,039 3,793 Depreciation, amortization and accretion, net 1,770 1,872 Share-based compensation 1,289 1,706 Net loss on disposal of fixed assets 10 73 Net loss on sale of securities 8 45 Amortization of tax credit investments 2,592 870 Bank-owned life insurance policy income ( 815 ) ( 729 ) Origination of loans for sale ( 66,160 ) ( 64,032 ) Sale of loans originated for sale 64,786 65,393 Gain on sale of loans originated for sale ( 544 ) ( 920 ) Net loss on repossessed assets 151 4 Return on investment in limited partnerships 1,386 3,392 Excess tax benefit expense from share-based compensation 167 128 Net payments on operating lease liabilities ( 771 ) ( 709 ) Net increase (decrease) in accrued interest receivable and other assets 761 ( 9,558 ) Net (decrease) increase in accrued interest payable and other liabilities ( 6,805 ) 3,307 Net cash provided by operating activities 21,733 22,461 Investing activities Proceeds from maturities, redemptions, and paydowns of available-for-sale securities 35,410 10,047 Proceeds from maturities, redemptions, and paydowns of held-to-maturity securities 1,415 2,797 Proceeds from sale of available-for-sale securities 7,533 5,084 Purchases of available-for-sale securities ( 58,344 ) ( 57,281 ) Proceeds from sale of repossessed assets 18 25 Net increase in loans and leases ( 137,217 ) ( 231,661 ) Investments in limited partnerships ( 8,773 ) ( 700 ) Returns of investments in limited partnerships — 4 Investment in tax credit investments — ( 9,598 ) Distribution from tax credit investments 130 33 Proceeds from sale of tax credit 731 — Investment in Federal Home Loan Bank stock ( 8,529 ) ( 24,375 ) Proceeds from the sale of Federal Home Loan Bank stock 8,670 27,705 Purchases of leasehold improvements and equipment, net ( 796 ) ( 1,255 ) Proceeds from sale of leasehold improvements and equipment 30 — Net cash used in investing activities ( 159,722 ) ( 279,175 ) Financing activities Net increase in deposits 88,404 360,646 Repayment of Federal Home Loan Bank advances ( 483,250 ) ( 1,228,050 ) Proceeds from Federal Home Loan Bank advances 480,100 1,147,375 Net increase (decrease) in long-term borrowed funds 89 ( 6,020 ) Cash dividends paid ( 4,163 ) ( 3,795 ) Preferred stock dividends paid ( 438 ) ( 438 ) Proceeds from issuance of common stock under ESPP 62 55 Purchase of treasury stock ( 1,245 ) ( 2,932 ) Net cash provided by financing activities 79,559 266,841 Net (decrease) increase in cash and cash equivalents ( 58,430 ) 10,127 Cash and cash equivalents at the beginning of the period 139,510 102,682 Cash and cash equivalents at the end of the period $ 81,080 $ 112,809 Supplementary cash flow information Cash paid during the period for: Interest paid on deposits and borrowings $ 53,213 $ 30,478 Net income taxes paid 396 1,192 Non-cash investing and financing activities: Transfer of repossessed assets to loans 23 — See accompany Notes to Unaudited Consolidated Financial Statements 5 Table of Contents Notes to Unaudited Consolidated Financial Statements Note 1 — Nature of Operations and Summary of Significant Accounting Policies Nature of Operations The accounting and reporting practices of First Business Financial Services, Inc. (“FBFS” or the “Corporation”), through our wholly-owned subsidiary, First Business Bank (“FBB” or the “Bank”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). FBB operates as a commercial banking institution primarily in Wisconsin and the greater Kansas City metropolitan area. The Bank provides a full range of financial services to businesses, business owners, executives, professionals, and high net worth individuals. FBB also offers bank consulting services to community financial institutions. The Bank is subject to competition from other financial institutions and service providers and is also subject to state and federal regulations. As of June 30, 2024, FBB had the following wholly-owned subsidiaries: First Business Specialty Finance, LLC (“FBSF”), First Madison Investment Corp. (“FMIC”), ABKC Real Estate, LLC (“ABKC”), FBB Real Estate 2, LLC (“FBB RE 2”), Mitchell Street Apartments Investment, LLC (“Mitchell Street”), and FBB Tax Credit Investment, LLC (“FBB Tax Credit”). Basis of Presentation The accompanying unaudited Consolidated Financial Statements were prepared in accordance with GAAP and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Corporation’s Consolidated Financial Statements and footnotes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2023. The unaudited Consolidated Financial Statements include the accounts of the Corporation and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Management of the Corporation is required to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that could significantly change in the near-term include the value of securities and interest rate swaps, level of the allowance for credit losses, lease residuals, property under operating leases, goodwill, and income taxes . The results of operations for the three and six months ended June 30, 2024, are not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, 2024 . Certain amounts in prior periods may have been reclassified to conform to the current presentation. Subsequent events have been evaluated through the date of the issuance of the unaudited Consolidated Financial Statements. No significant subsequent events have occurred through this date requiring adjustment to the financial statements or disclosures. The Corporation has not changed its significant accounting and reporting policies from those disclosed in the Corporation’s Form 10-K for the year ended December 31, 2023. 6 Table of Contents Recent Accounting Pronouncements In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 820): Improvements to Reportable Segment Disclosures.” This update is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2024. The Corporation is one operating segment; therefore, we do not anticipate any impact to the financial statements. In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” This update enhances the transparency and decision usefulness of income tax disclosures by providing better information regarding exposure to potential changes in jurisdictional tax legislation and related forecasting and cash flow opportunities. This update is effective for fiscal years beginning after December 15, 2024. The Corporation is assessing the impact of the standard. Note 2 — Earnings per Common Share Earnings per common share are computed using the two-class method. Basic earnings per common share are computed by dividing net income allocated to common shares by the weighted-average number of shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include unvested restricted shares. Unvested restricted shares are considered participating securities because holders of these securities receive non-forfeitable dividends, or dividend equivalents, at the same rate as holders of the Corporation’s common stock. Diluted earnings per share are computed by dividing net income allocated to common shares adjusted for reallocation of undistributed earnings of unvested restricted shares by the weighted average number of shares determined for the basic earnings per common share computation plus the dilutive effect of common stock equivalents using the treasury stock method. For the Three Months Ended June 30, For the Six Months Ended June 30, 2024 2023 2024 2023 (Dollars in Thousands, Except Share Data) Basic earnings per common share Net income $ 10,456 $ 8,337 $ 19,304 $ 17,316 Less: preferred stock dividends 219 219 438 438 Less: earnings allocated to participating securities 234 216 422 440 Basic earnings allocated to common shareholders $ 10,003 $ 7,902 $ 18,444 $ 16,438 Weighted-average common shares outstanding, excluding participating securities 8,113,246 8,061,841 8,154,445 8,140,831 Basic earnings per common share $ 1.23 $ 0.98 $ 2.26 $ 2.02 Diluted earnings per common share Earnings allocated to common shareholders, diluted $ 10,003 $ 7,902 $ 18,444 $ 16,438 Weighted-average diluted common shares outstanding, excluding participating securities 8,113,246 8,061,841 8,154,445 8,140,831 Diluted earnings per common share $ 1.23 $ 0.98 $ 2.26 $ 2.02 Note 3 — Share-Based Compensation The Corporation initially adopted the 2019 Equity Incentive Plan (the “Plan”) during the quarter ended June 30, 2019. The Plan is administered by the Compensation Committee of the Board of Directors (the “Board”) of the Corporation and provides for the grant of equity ownership opportunities through incentive stock options and nonqualified stock options, restricted stock, restricted stock units, dividend equivalent units, and any other type of award permitted by the Plan. As of June 30, 2024, 267,882 shares were available for future grants under the Plan, as amended. Shares covered by awards that expire, terminate, or lapse will again be available for the grant of awards under the Plan. Restricted Stock Under the Plan, the Corporation may grant restricted stock awards (“RSA”), restricted stock units (“RSU”), and other stock-based awards to plan participants, subject to forfeiture upon the occurrence of certain events until the dates specified in the participant’s award agreement. While restricted stock is subject to forfeiture, RSA participants may exercise full voting rights and will receive all 7 Table of Contents dividends and other distributions paid with respect to the restricted shares. RSUs do not have voting rights. RSUs granted prior to 2023 are provided dividend equivalents concurrent with dividends paid to shareholders while RSUs granted in 2023 and after will accrue dividend equivalents payable upon vesting. The restricted stock granted under the Plan is typically subject to a vesting period. Compensation expense for restricted stock is recognized over the requisite service period of generally three or four years for the entire award on a straight-line basis. Upon vesting of restricted stock, the benefit of tax deductions in excess of recognized compensation expense is reflected as an income tax benefit in the unaudited Consolidated Statements of Income. The Corporation may also issue performance-based restricted stock units (“PRSU”). Vesting of the PRSU will be measured on the relative Total Shareholder Return (“TSR”) and relative Return on Average Equity (“ROAE”) for issuances prior to 2023 or Return on Average Common Equity (“ROACE”) for issuances after 2022, and will cliff-vest after a three-year measurement period based on the Corporation’s TSR performance and ROAE or ROACE performance compared to a broad peer group of over 100 banks. At the end of the performance period, the number of actual shares to be awarded varies between 0 % and 200 % of target amounts. The restricted stock awards and units issued to executive officers will vest ratably over a three-year period. Compensation expense is recognized for PRSU over the requisite service and performance period of generally three years for the entire expected award on a straight-line basis. The compensation expense for the awards expected to vest for the percentage of performance-based restricted stock units subject to the ROAE or ROACE metric will be adjusted if there is a change in the expectation of ROAE or ROACE. The compensation expense for the awards expected to vest for the percentage of PRSU subject to the TSR metric are never adjusted and are amortized utilizing the accounting fair value provided using a Monte Carlo pricing model. Restricted stock activity for the year ended December 31, 2023 and the six months ended June 30, 2024 was as follows: RSA Weighted Average Grant Price PRSU Weighted Average Grant Price RSU Weighted Average Grant Price Total Weighted Average Grant Price Nonvested balance as of December 31, 2022 133,317 $ 27.95 57,435 $ 32.89 6,105 $ 25.92 196,857 $ 29.32 Granted (1) — — 34,840 35.79 54,955 34.43 89,795 34.96 Vested ( 56,931 ) 27.03 ( 36,120 ) 31.31 ( 3,253 ) 26.06 ( 96,304 ) 28.60 Forfeited ( 4,435 ) 30.20 — — ( 820 ) 36.42 ( 5,255 ) 31.17 Nonvested balance as of December 31, 2023 71,951 28.53 56,155 35.70 56,987 33.97 185,093 32.38 Granted (1) — — 27,614 34.76 63,577 29.90 91,191 31.37 Vested ( 33,369 ) 26.87 ( 34,139 ) 25.43 ( 31,859 ) 20.76 ( 99,367 ) 24.42 Forfeited ( 5,285 ) 30.26 — — ( 4,275 ) 36.29 ( 9,560 ) 32.96 Nonvested balance as of June 30, 2024 33,297 $ 29.92 49,630 $ 42.24 84,430 $ 35.77 167,357 $ 36.52 Unrecognized compensation cost (in thousands) $ 744 $ 1,343 $ 2,670 $ 4,757 Weighted average remaining recognition period (in years) 1.39 1.96 2.89 2.39 (1) The number of restricted shares/units shown includes the shares that would be granted if the target level of performance is achieved related to the PRSU. The number of shares actually issued may vary. During the six months ended June 30, 2024, an additional 10,589 were issued related to actual performance results of previously granted awards. Employee Stock Purchase Plan The Corporation is authorized to issue up to 250,000 shares of common stock under the employee stock purchase plan ("ESPP"). The plan qualifies as an employee stock purchase plan under section 423 of the Internal Revenue Code of 1986. Under the ESPP, eligible employees may enroll in a three month offer period that begins January, April, July, and October of each year. Employees may elect to purchase a limited number of shares of the Corporation's common stock at 90 % of the fair market value on the last day of the offering period. The ESPP is treated as a compensatory item for purposes of share-based compensation expense. During the six months ended June 30, 2024 , the Corporation issued 1,862 shares of common stock under the ESPP. As of June 30, 2024, 228,776 shares remained available for issuance under the ESPP. Share-based compensation expense related to restricted stock and ESPP included in the unaudited Consolidated Statements of Income was as follows: For the Three Months Ended June 30, For the Six Months Ended June 30, 2024 2023 2024 2023 (In Thousands) Share-based compensation expense $ 624 $ 1,072 $ 1,289 $ 1,706 8 Table of Contents Note 4 — Securities The amortized cost and fair value of securities available-for-sale and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows: As of June 30, 2024 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In Thousands) Available-for-sale: U.S. treasuries $ 9,971 $ — $ ( 388 ) 9,583 U.S. government agency securities - government-sponsored enterprises 8,500 — ( 432 ) 8,068 Municipal securities 40,202 — ( 5,340 ) 34,862 Residential mortgage-backed securities - government issued 104,595 213 ( 3,065 ) 101,743 Residential mortgage-backed securities - government-sponsored enterprises 135,939 193 ( 11,836 ) 124,296 Commercial mortgage-backed securities - government issued 2,770 — ( 469 ) 2,301 Commercial mortgage-backed securities - government-sponsored enterprises 32,447 37 ( 4,485 ) 27,999 $ 334,424 $ 443 $ ( 26,015 ) $ 308,852 As of December 31, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In Thousands) Available-for-sale: U.S. treasuries $ 14,158 $ 7 $ ( 389 ) $ 13,776 U.S. government agency securities - government-sponsored enterprises 27,986 35 ( 455 ) 27,566 Municipal securities 40,407 — ( 4,526 ) 35,881 Residential mortgage-backed securities - government issued 69,441 1,000 ( 2,385 ) 68,056 Residential mortgage-backed securities - government-sponsored enterprises 131,321 281 ( 10,769 ) 120,833 Commercial mortgage-backed securities - government issued 2,995 — ( 470 ) 2,525 Commercial mortgage-backed securities - government-sponsored enterprises 32,774 65 ( 4,470 ) 28,369 $ 319,082 $ 1,388 $ ( 23,464 ) $ 297,006 The amortized cost and fair value of securities held-to-maturity and the corresponding amounts of gross unrecognized gains and losses were as follows: As of June 30, 2024 Amortized Cost Gross Unrecognized Gains Gross Unrecognized Losses Fair Value (In Thousands) Held-to-maturity: Municipal securities $ 3,143 $ — $ ( 71 ) $ 3,072 Residential mortgage-backed securities - government issued 1,024 — ( 68 ) 956 Residential mortgage-backed securities - government-sponsored enterprises 911 — ( 53 ) 858 Commercial mortgage-backed securities - government-sponsored enterprises 2,004 — ( 104 ) 1,900 $ 7,082 $ — $ ( 296 ) $ 6,786 9 Table of Contents As of December 31, 2023 Amortized Cost Gross Unrecognized Gains Gross Unrecognized Losses Fair Value (In Thousands) Held-to-maturity: Municipal securities $ 4,210 $ 4 $ ( 41 ) $ 4,173 Residential mortgage-backed securities - government issued 1,211 — ( 76 ) 1,135 Residential mortgage-backed securities - government-sponsored enterprises 1,078 — ( 53 ) 1,025 Commercial mortgage-backed securities - government-sponsored enterprises 2,004 — ( 82 ) 1,922 $ 8,503 $ 4 $ ( 252 ) $ 8,255 U.S. Treasuries contain treasury bonds issued by the United States Treasury. U.S. government agency securities - government-sponsored enterprises represent securities issued by Federal National Mortgage Association (“FNMA”) and the SBA. Municipal securities include securities issued by various municipalities located primarily within Wisconsin and are primarily general obligation bonds that are tax-exempt in nature. Residential and commercial mortgage-backed securities - government issued represent securities guaranteed by the Government National Mortgage Association. Residential and commercial mortgage-backed securities - government-sponsored enterprises include securities guaranteed by the Federal Home Loan Mortgage Corporation, FNMA, and the FHLB. The Corporation sold no available-for-sale securities during the three months ended June 30, 2024 and 5 available-for-sale securities during the six months ended June 30, 2024. The Corporation sold 16 available-for-sale securities during the three and six months ended June 30, 2023. At June 30, 2024 and December 31, 2023, securities with a fair value of $ 31.6 million and $ 45.4 million , respectively, were pledged to secure various obligations, including interest rate swap contracts and municipal deposits. The amortized cost and fair value of securities by contractual maturity at June 30, 2024 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations with or without call or prepayment penalties. Available-for-Sale Held-to-Maturity Amortized Cost Fair Value Amortized Cost Fair Value (In Thousands) Due in one year or less $ 7,486 $ 7,466 $ 739 $ 732 Due in one year through five years 20,859 19,404 2,404 2,340 Due in five through ten years 8,812 7,912 — — Due in over ten years 21,516 17,731 — — 58,673 52,513 3,143 3,072 Residential mortgage-backed securities 240,534 226,039 1,935 1,814 Commercial mortgage-backed securities 35,217 30,300 2,004 1,900 $ 334,424 $ 308,852 $ 7,082 $ 6,786 The tables below show the Corporation’s gross unrealized losses and fair value of available-for-sale investments aggregated by investment category and length of time that individual investments were in a continuous loss position at June 30, 2024 and December 31, 2023. At June 30, 2024, the Corporation held 184 available-for-sale securities that were in an unrealized loss position, 164 of which have been in a continuous unrealized loss position for twelve months or greater. The Corporation has not specifically identified available-for-sale securities in a loss position that it intends to sell in the near term and does not believe that it will be required to sell any such securities. The Corporation reviews its securities on a quarterly basis to assess declines in fair value for credit losses. Consideration is given to such factors as the credit rating of the borrower, market conditions such as current interest rates, any adverse conditions specific to the security, and delinquency status on contractual payments. For the three and six months ended June 30, 2024 and 2023, management concluded that in all instances securities with fair value less than carrying value was due to market factors; thus, no credit loss provision was required. 10 Table of Contents A summary of unrealized loss information for securities available-for-sale, categorized by security type and length of time for which the security has been in a continuous unrealized loss position, follows: As of June 30, 2024 Less than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (In Thousands) Available-for-sale: U.S. treasuries $ 4,981 $ 4 $ 4,602 $ 384 $ 9,583 $ 388 U.S. government agency securities - government- sponsored enterprises — — 8,068 432 8,068 432 Municipal securities — — 34,862 5,340 34,862 5,340 Residential mortgage-backed securities - government issued 44,033 305 24,824 2,760 68,857 3,065 Residential mortgage-backed securities - government-sponsored enterprises 14,151 163 91,211 11,673 105,362 11,836 Commercial mortgage-backed securities - government issued — — 2,301 469 2,301 469 Commercial mortgage-backed securities - government-sponsored enterprises — — 27,011 4,485 27,011 4,485 $ 63,165 $ 472 $ 192,879 $ 25,543 $ 256,044 $ 26,015 As of December 31, 2023 Less than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (In Thousands) Available-for-sale: U.S. treasuries $ — $ — $ 4,595 $ 389 $ 4,595 $ 389 U.S. government agency securities - government- sponsored enterprises 13,370 30 3,076 425 16,446 455 Municipal securities — — 35,881 4,526 35,881 4,526 Residential mortgage-backed securities - government issued 13,178 160 13,819 2,225 26,997 2,385 Residential mortgage-backed securities - government-sponsored enterprises 19,925 285 78,086 10,484 98,011 10,769 Commercial mortgage-backed securities - government issued — — 2,525 470 2,525 470 Commercial mortgage-backed securities - government-sponsored enterprises 893 20 26,465 4,450 27,358 4,470 $ 47,366 $ 495 $ 164,447 $ 22,969 $ 211,813 $ 23,464 The tables below show the Corporation’s gross unrealized losses and fair value of held-to-maturity investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at June 30, 2024 and December 31, 2023. At June 30, 2024, the Corporation held 23 held-to-maturity securities that were in an unrealized loss position, 22 of which have been in a continuous loss position for twelve months or greater. Management assesses held-to-maturity securities for credit losses on a quarterly basis. The assessment includes review of credit ratings, identification of delinquency and evaluation of market factors. Based on this analysis, management concludes the decline in fair value is due to market factors, specifically changes in interest rates. Accordingly, no credit loss provision was recorded in the unaudited Consolidated Statements of Income for the three and six months ended June 30, 2024 and 2023. 11 Table of Contents A summary of unrecognized loss information for securities held-to-maturity, categorized by security type and length of time for which the security has been in a continuous unrealized loss position, follows: As of June 30, 2024 Less than 12 Months 12 Months or Longer Total Fair Value Unrecognized Losses Fair Value Unrecognized Losses Fair Value Unrecognized Losses (In Thousands) Held-to-maturity: Municipal securities $ 505 $ 3 $ 2,567 $ 68 $ 3,072 $ 71 Residential mortgage-backed securities - government issued — — 956 68 956 68 Residential mortgage-backed securities - government-sponsored enterprises — — 858 53 858 53 Commercial mortgage-backed securities - government-sponsored enterprises — — 1,900 104 1,900 104 $ 505 $ 3 $ 6,281 $ 293 $ 6,786 $ 296 As of December 31, 2023 Less than 12 Months 12 Months or Longer Total Fair Value Unrecognized Losses Fair Value Unrecognized Losses Fair Value Unrecognized Losses (In Thousands) Held-to-maturity: Municipal securities $ 1,424 $ 4 $ 2,234 $ 37 $ 3,658 $ 41 Residential mortgage-backed securities - government issued — — 1,135 76 1,135 76 Residential mortgage-backed securities - government-sponsored enterprises — — 1,025 53 1,025 53 Commercial mortgage-backed securities - government-sponsored enterprises — — 1,922 82 1,922 82 $ 1,424 $ 4 $ 6,316 $ 248 $ 7,740 $ 252 Note 5 — Loans, Lease Receivables, and Allowance for Credit Losses Loan and lease receivables consist of the following: June 30, 2024 December 31, 2023 (In Thousands) Commercial real estate: Commercial real estate — owner occupied $ 258,636 $ 256,479 Commercial real estate — non-owner occupied 777,704 773,494 Construction 229,181 193,080 Multi-family 470,176 450,529 1-4 family 39,680 26,289 Total commercial real estate 1,775,377 1,699,871 Commercial and industrial 1,161,711 1,105,835 Consumer and other 48,145 44,312 Total gross loans and leases receivable 2,985,233 2,850,018 Less: Allowance for credit losses 33,088 31,275 Deferred loan fees and costs, net ( 181 ) ( 243 ) Loans and leases receivable, net $ 2,952,326 $ 2,818,986 12 Table of Contents Loans transferred to third parties consist of the guaranteed portions of SBA loans which the Corporation sold in the secondary market and participation interests in other, non-SBA originated loans. The total principal amount of the guaranteed portions of SBA loans sold during the three months ended June 30, 2024 and 2023, was $ 3.5 million and $ 4.9 million , respectively. The total principal amount of the guaranteed portions of SBA loans sold during the six months ended June 30, 2024 and 2023, was $ 5.7 million and $ 9.8 million , respectively. Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the three and six months ended June 30, 2024 and 2023, have been derecognized in the unaudited Consolidated Financial Statements. The guaranteed portions of SBA loans were transferred at their fair value and the related gain was recognized upon the transfer as non-interest income in the unaudited Consolidated Financial Statements. The total outstanding balance of sold SBA loans serviced by the Corporation at June 30, 2024, and December 31, 2023, was $ 74.1 million and $ 84.2 million , respectively. The total principal amount of transferred participation interests in other, non-SBA originated loans during the three months ended June 30, 2024 and 2023, was $ 23.8 million and $ 32.0 million , respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer. The total principal amount of transferred participation interests in other, non-SBA originated loans during the six months ended June 30, 2024 and 2023, was $ 58.6 million and $ 54.7 million , respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer. No gain or loss was recognized on participation interests in other, non-SBA originated loans as they were transferred at or near the date of loan origination and the payments received for servicing the portion of the loans participated represents adequate compensation. The total outstanding balance of these transferred loans serviced by the Corporation at June 30, 2024, and December 31, 2023, was $ 312.4 million and $ 279.5 million , respectively. As of June 30, 2024, and December 31, 2023, the total amount of the Corporation’s retained ownership of these transferred loans was $ 375.2 million and $ 367.4 million , respectively. As of June 30, 2024 and December 31, 2023 , the non-SBA originated participation portfolio contained no non-accrual loans. The Corporation does not share in the participant’s portion of any potential charge-offs. 13 Table of Contents The following table illustrates ending balances of the Corporation’s loan and lease portfolio, including non-accrual loans by class of receivable, and considering certain credit quality indicators: June 30, 2024 Term Loans Amortized Cost Basis by Origination Year (In Thousands) 2024 2023 2022 2021 2020 Prior Revolving Loans Amortized Cost Basis Total Commercial real estate — owner occupied Category I $ 4,462 $ 38,855 $ 45,831 $ 37,625 $ 43,147 $ 85,762 $ 1,601 $ 257,283 II — — — — — 627 — 627 III — — — — — 726 — 726 IV — — — — — — — — Total $ 4,462 $ 38,855 $ 45,831 $ 37,625 $ 43,147 $ 87,115 $ 1,601 $ 258,636 Commercial real estate — non-owner occupied Category I $ 20,745 $ 69,397 $ 76,022 $ 71,520 $ 86,670 $ 355,584 $ 38,587 $ 718,525 II — — — 2,273 2,202 38,409 — 42,884 III — 664 — — — 15,631 — 16,295 IV — — — — — — — — Total $ 20,745 $ 70,061 $ 76,022 $ 73,793 $ 88,872 $ 409,624 $ 38,587 $ 777,704 Construction Category I $ 34,511 $ 107,512 $ 48,498 $ 7,418 $ 734 $ 6,108 $ 9,813 $ 214,594 II — — — — — — — — III — — 454 8,155 5,713 265 — 14,587 IV — — — — — — — — Total $ 34,511 $ 107,512 $ 48,952 $ 15,573 $ 6,447 $ 6,373 $ 9,813 $ 229,181 Multi-family Category I $ 26,146 $ 71,764 $ 60,429 $ 69,456 $ 102,624 $ 136,857 $ 2,900 $ 470,176 II — — — — — — — — III — — — — — — — — IV — — — — — — — — Total $ 26,146 $ 71,764 $ 60,429 $ 69,456 $ 102,624 $ 136,857 $ 2,900 $ 470,176 1-4 family Category I $ 10,330 $ 4,221 $ 7,275 $ 2,624 $ 2,322 $ 2,670 $ 10,220 $ 39,662 II — — — — — — — — III — — — — — — — — IV — — — — — 18 — 18 Total $ 10,330 $ 4,221 $ 7,275 $ 2,624 $ 2,322 $ 2,688 $ 10,220 $ 39,680 Commercial and industrial Category I $ 139,782 $ 259,683 $ 119,737 $ 65,817 $ 30,702 $ 35,736 $ 442,498 $ 1,093,955 II — 6,502 3,675 377 623 69 13,790 25,036 III 4,087 693 5,121 1,463 2,837 4,918 4,620 23,739 IV — 3,224 5,840 959 468 2,033 6,457 18,981 Total $ 143,869 $ 270,102 $ 134,373 $ 68,616 $ 34,630 $ 42,756 $ 467,365 $ 1,161,711 Consumer and other Category I $ 6,701 $ 5,530 $ 7,929 $ 2,967 $ 11,798 $ 6,408 $ 6,812 $ 48,145 II — — — — — — — — III — — — — — — — — IV — — — — — — — — Total $ 6,701 $ 5,530 $ 7,929 $ 2,967 $ 11,798 $ 6,408 $ 6,812 $ 48,145 Total Loans Category I $ 242,677 $ 556,962 $ 365,721 $ 257,427 $ 277,997 $ 629,125 $ 512,431 $ 2,842,340 II — 6,502 3,675 2,650 2,825 39,105 13,790 68,547 III 4,087 1,357 5,575 9,618 8,550 21,540 4,620 55,347 IV — 3,224 5,840 959 468 2,051 6,457 18,999 Total $ 246,764 $ 568,045 $ 380,811 $ 270,654 $ 289,840 $ 691,821 $ 537,298 $ 2,985,233 14 Table of Contents December 31, 2023 Term Loans Amortized Cost Basis by Origination Year (In Thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total Commercial real estate — owner occupied Category I $ 31,637 $ 43,156 $ 38,803 $ 44,704 $ 22,078 $ 72,774 $ 451 $ 253,603 II — — — 260 — — — 260 III — — — — — 2,616 — 2,616 IV — — — — — — — — Total $ 31,637 $ 43,156 $ 38,803 $ 44,964 $ 22,078 $ 75,390 $ 451 $ 256,479 Commercial real estate — non-owner occupied Category I $ 71,857 $ 76,689 $ 72,660 $ 78,212 $ 66,262 $ 314,970 $ 32,478 $ 713,128 II — — 2,302 2,252 19,838 16,274 — 40,666 III — — — — — 19,700 — 19,700 IV — — — — — — — — Total $ 71,857 $ 76,689 $ 74,962 $ 80,464 $ 86,100 $ 350,944 $ 32,478 $ 773,494 Construction Category I $ 63,660 $ 83,161 $ 8,542 $ 744 $ 433 $ 6,528 $ 15,011 $ 178,079 II — — 9,289 5,712 — — — 15,001 III — — — — — — — — IV — — — — — — — — Total $ 63,660 $ 83,161 $ 17,831 $ 6,456 $ 433 $ 6,528 $ 15,011 $ 193,080 Multi-family Category I $ 84,932 $ 41,068 $ 70,054 $ 113,294 $ 22,925 $ 115,243 $ 3,013 $ 450,529 II — — — — — — — — III — — — — — — — — IV — — — — — — — — Total $ 84,932 $ 41,068 $ 70,054 $ 113,294 $ 22,925 $ 115,243 $ 3,013 $ 450,529 1-4 family Category I $ 4,242 $ 7,684 $ 2,672 $ 2,359 $ 443 $ 2,805 $ 6,062 $ 26,267 II — — — — — — — — III — — — — — — — — IV — — — — — 22 — 22 Total $ 4,242 $ 7,684 $ 2,672 $ 2,359 $ 443 $ 2,827 $ 6,062 $ 26,289 Commercial and industrial Category I $ 302,612 $ 144,167 $ 85,504 $ 38,164 $ 20,151 $ 26,490 $ 415,301 $ 1,032,389 II 1,496 5,280 785 353 94 219 5,706 13,933 III 1,093 7,168 1,882 5,919 3,861 3,957 15,058 38,938 IV 1,482 6,519 1,319 321 133 1,644 9,157 20,575 Total $ 306,683 $ 163,134 $ 89,490 $ 44,757 $ 24,239 $ 32,310 $ 445,222 $ 1,105,835 Consumer and other Category I $ 5,920 $ 8,786 $ 3,167 $ 12,193 $ 2,049 $ 3,485 $ 8,712 $ 44,312 II — — — — — — — — III — — — — — — — — IV — — — — — — — — Total $ 5,920 $ 8,786 $ 3,167 $ 12,193 $ 2,049 $ 3,485 $ 8,712 $ 44,312 Total Loans Category I $ 564,860 $ 404,711 $ 281,402 $ 289,670 $ 134,341 $ 542,295 $ 481,028 $ 2,698,307 II 1,496 5,280 12,376 8,577 19,932 16,493 5,706 69,860 III 1,093 7,168 1,882 5,919 3,861 26,273 15,058 61,254 IV 1,482 6,519 1,319 321 133 1,666 9,157 20,597 Total $ 568,931 $ 423,678 $ 296,979 $ 304,487 $ 158,267 $ 586,727 $ 510,949 $ 2,850,018 15 Table of Contents Each credit is evaluated for proper risk rating upon origination, at the time of each subsequent renewal, upon receipt and evaluation of updated financial information from the Corporation’s borrowers, or as other circumstances dictate. The Corporation primarily uses a nine grade risk rating system to monitor the ongoing credit quality of its loans and leases. The risk rating grades follow a consistent definition and are then applied to specific loan types based on the nature of the loan. Each risk rating is determined based on various quantitative and qualitative factors and is subject to various levels of review and concurrence on the stated risk rating. In addition to its nine grade risk rating system, the Corporation groups loans into four loan and related risk categories which determine the level and nature of review by management. Category I — Loans and leases in this category are performing in accordance with the terms of the contract and generally exhibit no immediate concerns regarding the security and viability of the underlying collateral, financial stability of the borrower, integrity or strength of the borrowers’ management team, or the industry in which the borrower operates. The Corporation monitors Category I loans and leases through payment performance, continued maintenance of its personal relationships with such borrowers, and continued review of such borrowers’ compliance with the terms of their respective agreements. Category II — Loans and leases in this category are beginning to show signs of deterioration in one or more of the Corporation’s core underwriting criteria such as financial stability, management strength, industry trends, or collateral values. Management will place credits in this category to allow for proactive monitoring and resolution with the borrower to possibly mitigate the area of concern and prevent further deterioration or risk of loss to the Corporation. Category II loans are considered performing but are monitored frequently by the assigned business development officer and by asset quality review committees. Category III — Loans and leases in this category are identified by management as warranting special attention. However, the balance in this category is not intended to represent the amount of adversely classified assets held by the Bank. Category III loans and leases generally exhibit undesirable characteristics, such as evidence of adverse financial trends and conditions, managerial problems, deteriorating economic conditions within the related industry, or evidence of adverse public filings and may exhibit collateral shortfall positions. Management continues to believe that it will collect all contractual principal and interest in accordance with the original terms of the contracts relating to the loans and leases in this category, and therefore Category III loans are considered performing with no specific reserves established for this category. Category III loans are monitored by management and asset quality review committees on a monthly basis. Category IV — Loans and leases in this category are non-accrual loans. Management has determined that it is unlikely that the Bank will receive the contractual principal and interest in accordance with the original terms of the agreement. Non-accrual loans are individually evaluated to assess the need for the establishment of specific reserves or charge-offs. When analyzing the adequacy of collateral, the Corporation obtains external appraisals at least annually. External appraisals are obtained from the Corporation’s approved appraiser listing and are independently reviewed to monitor the quality of such appraisals. To the extent a collateral shortfall position is present, a specific reserve or charge-off will be recorded. Loans and leases in this category are monitored by management and asset quality review committees on a monthly basis. The delinquency aging of the loan and lease portfolio by class of receivable was as follows: June 30, 2024 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Past Due Total Past Due Current Total Loans and Leases (Dollars in Thousands) Total loans and leases Commercial real estate: Owner occupied $ — $ — $ — $ — $ 258,636 $ 258,636 Non-owner occupied — — — — 777,704 777,704 Construction — — — — 229,181 229,181 Multi-family — — — — 470,176 470,176 1-4 family 18 — — 18 39,662 39,680 Commercial and industrial 4,539 1,163 8,483 14,185 1,147,526 1,161,711 Consumer and other — — — — 48,145 48,145 Total $ 4,557 $ 1,163 $ 8,483 $ 14,203 $ 2,971,030 $ 2,985,233 Percent of portfolio 0.15 % 0.04 % 0.28 % 0.47 % 99.53 % 100.00 % 16 Table of Contents December 31, 2023 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Past Due Total Past Due Current Total Loans and Leases (Dollars in Thousands) Total loans and leases Commercial real estate: Owner occupied $ — $ — $ — $ — $ 256,479 $ 256,479 Non-owner occupied — — — — 773,494 773,494 Construction — — — — 193,080 193,080 Multi-family — — — — 450,529 450,529 1-4 family — — — — 26,289 26,289 Commercial and industrial 3,430 1,041 18,347 22,818 1,083,017 1,105,835 Consumer and other — — — — 44,312 44,312 Total $ 3,430 $ 1,041 $ 18,347 $ 22,818 $ 2,827,200 $ 2,850,018 Percent of portfolio 0.12 % 0.04 % 0.64 % 0.80 % 99.20 % 100.00 % The following tables present the amortized cost basis of loans on non-accrual status and loans past due over 89 days still accruing as of: June 30, 2024 Non-accrual With No Allowance for Credit Loss Non-accrual With Allowance for Credit Loss Loans Past Due Over 89 Days Still Accruing (In Thousands) Commercial real estate: Commercial real estate — owner occupied $ — $ — $ — Commercial real estate — non-owner occupied — — — Construction — — — Multi-family — — — 1-4 family 18 — — Total commercial real estate 18 — — Commercial and industrial 9,546 9,435 — Consumer and other — — — Total non-accrual loans and leases $ 9,564 $ 9,435 $ — December 31, 2023 Non-accrual With No Allowance for Credit Loss Non-accrual With Allowance for Credit Loss Loans Past Due Over 89 Days Still Accruing (In Thousands) Commercial real estate: Commercial real estate — owner occupied $ — $ — $ — Commercial real estate — non-owner occupied — — — Construction — — — Multi-family — — — 1-4 family — 22 — Total commercial real estate — 22 — Commercial and industrial 9,690 10,885 — Consumer and other — — — Total non-accrual loans and leases $ 9,690 $ 10,907 $ — June 30, 2024 December 31, 2023 Total non-accrual loans and leases to gross loans and leases 0.64 % 0.72 % Allowance for credit losses to gross loans and leases 1.17 1.16 Allowance for credit losses to non-accrual loans and leases 183.96 160.21 17 Table of Contents The following table presents the amortized cost basis of the non-accrual, collateral-dependent commercial and industrial loans as of: June 30, 2024 December 31, 2023 (In Thousands) Inventory $ 436 $ 8,879 Equipment 9,506 8,903 Real Estate 136 46 Accounts Receivable 6,021 278 Other 1,147 1,348 Total $ 17,246 $ 19,454 Occasionally, the Corporation modifies loans to borrowers in financial distress. There were seven commercial and industrial loans for a total of $ 1.6 million and two commercial real estate non-owner occupied loans for a total of $ 5.9 million modified during the six months ended June 30, 2024 . The modifications consisted of payment deferrals and modified loan repayment schedules. Of these modified loans, four are included in total non-performing loans and are currently between zero and 117 days past due as of June 30, 2024. There was one commercial and industrial loan for a total of $ 382,000 modified during the six months ended June 30, 2023. This modification consisted of a payment deferral. There was one commercial and industrial loan to borrowers experiencing financial distress in the amount of $ 238,000 that was modified during the 12 months ended June 30, 2024 which subsequently defaulted . There were no loans to borrowers experiencing financial distress that were modified during the 12 months ended June 30, 2023 which subsequently defaulted . There were no unfunded commitments associated with loans modified for borrowers experiencing financial distress as of June 30, 2024. Allowance for Credit Losses The ACL is an estimate of the expected credit losses on financial assets measured at amortized cost, which is measured using relevant information about past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. A provision for credit losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors as discussed within Note 1 – Nature of Operations and Summary of Significant Accounting Policies included in the Corporation’s Form 10-K for the year ended December 31, 2023. Quantitative Considerations The ACL is primarily calculated utilizing a discounted cash flow (“DCF”) model. Key inputs and assumptions used in this model are discussed below: • Forecast model - For each portfolio segment, a loss driver analysis (“LDA”) was performed in order to identify appropriate loss drivers and create a regression model for use in forecasting cash flows. The LDA analysis utilized peer FFIEC Call Report data for all pools. The Corporation plans to update the LDA annually. • Probability of default ("PD") – PD is the probability that an asset will be in default within a given time frame. The Corporation has defined default as when a charge-off has occurred, a loan goes to non-accrual status, or a loan is greater than 90 days past due. The forecast model is utilized to estimate PDs. • Loss given default ("LGD") – LGD is the percentage of the asset not expected to be collected due to default. The LGD is derived from using a method referred to as Frye Jacobs which uses industry data. • Prepayments and curtailments – Prepayments and curtailments are calculated based on the Corporation’s own data. This analysis is updated semi-annually. • Forecast and reversion – The Corporation has established a one-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average. • Economic forecast – The Corporation utilizes a third party to provide economic forecasts under various scenarios, which are assessed against economic indicators and management’s observations in the market. As of December 31, 2023, the Corporation selected a forecast which estimates unemployment between 3.89% and 4.04% and GDP growth change between 1.29% and 2.32% over the next four quarters. As of June 30, 2024, the Corporation selected a forecast which estimates unemployment between 4.06% and 4.08% and GDP growth change between 1.76% and 2.21% over the next four quarters. 18 Table of Contents Following the forecast period, the model reverts to long-term averages over four quarters. Management believes that the resulting quantitative reserve appropriately balances economic indicators with identified risks. Qualitative Considerations In addition to the quantitative model, management considers the need for qualitative adjustment for risks not considered in the DCF. Factors that are considered by management in determining loan collectability and the appropriate level of the ACL are listed below: • The Corporation’s lending policies and procedures, including changes in lending strategies, underwriting standards and practices for collections, write-offs, and recoveries; • Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the Corporation operates that affect the collectability of financial assets; • The experience, ability, and depth of the Corporation’s lending, investment, collection, and other relevant management and staff; • The volume of past due financial assets, the volume of non-accrual loans and leases, and the volume and severity of adversely classified or graded assets; • The existence and effect of industry concentrations of credit; • The nature and volume of the portfolio segment or class; • The quality of the Corporation’s credit function; and • The effect of other external factors such as the regulatory, legal and technological environments, competition, and events such as natural disasters or pandemics. ACL Activity A summary of the activity in the allowance for credit losses by portfolio segment is as follows: As of and for the Three Months Ended June 30, 2024 Owner Occupied Non-Owner Occupied Construction Multi- Family 1-4 Family Commercial and Industrial Consumer and Other Total (In Thousands) Beginning balance $ 1,576 $ 6,202 $ 2,537 $ 3,599 $ 312 $ 19,914 $ 489 $ 34,629 Charge-offs — — — — — ( 1,583 ) — ( 1,583 ) Recoveries — — — — 5 165 21 191 Net recoveries (charge-offs) — — — — 5 ( 1,418 ) 21 ( 1,392 ) Provision for credit losses ( 45 ) 213 508 153 144 784 ( 44 ) 1,713 Ending balance $ 1,531 $ 6,415 $ 3,045 $ 3,752 $ 461 $ 19,280 $ 466 $ 34,950 Components: Allowance for credit losses on loans $ 1,519 $ 6,374 $ 1,963 $ 3,723 $ 425 $ 18,671 $ 413 $ 33,088 Allowance for credit losses on unfunded credit commitments 12 41 1,082 29 36 609 53 1,862 Total ACL $ 1,531 $ 6,415 $ 3,045 $ 3,752 $ 461 $ 19,280 $ 466 $ 34,950 As of and for the Three Months Ended June 30, 2023 Owner Occupied Non-Owner Occupied Construction Multi- Family 1-4 Family Commercial and Industrial Consumer and Other Total (In Thousands) Beginning balance $ 1,656 $ 4,966 $ 2,287 $ 2,901 $ 221 $ 14,905 $ 614 $ 27,550 Charge-offs — — — — — ( 329 ) — ( 329 ) Recoveries 2 — — — 21 220 2 245 Net recoveries (charge-offs) 2 — — — 21 ( 109 ) 2 ( 84 ) Provision for credit losses 63 275 6 525 7 1,427 ( 72 ) 2,231 Ending balance $ 1,721 $ 5,241 $ 2,293 $ 3,426 $ 249 $ 16,223 $ 544 $ 29,697 Components: Allowance for credit losses on loans $ 1,703 $ 5,182 $ 1,483 $ 3,414 $ 228 $ 15,624 $ 481 $ 28,115 Allowance for credit losses on unfunded credit commitments 18 59 810 12 21 599 63 1,582 Total ACL $ 1,721 $ 5,241 $ 2,293 $ 3,426 $ 249 $ 16,223 $ 544 $ 29,697 19 Table of Contents As of and for the Six Months Ended June 30, 2024 Owner Occupied Non-Owner Occupied Construction Multi- Family 1-4 Family Commercial and Industrial Consumer and Other Total (In Thousands) Beginning balance $ 1,540 $ 5,636 $ 2,125 $ 3,571 $ 266 $ 19,408 $ 451 $ 32,997 Charge-offs — — — — — ( 2,482 ) ( 22 ) ( 2,504 ) Recoveries 1 — — — 115 281 21 418 Net recoveries (charge-offs) 1 — — — 115 ( 2,201 ) ( 1 ) ( 2,086 ) Provision for credit losses ( 10 ) 779 920 181 80 2,073 16 4,039 Ending balance $ 1,531 $ 6,415 $ 3,045 $ 3,752 $ 461 $ 19,280 $ 466 $ 34,950 Components: Allowance for credit losses on loans $ 1,519 $ 6,374 $ 1,963 $ 3,723 $ 425 $ 18,671 $ 413 $ 33,088 Allowance for credit losses on unfunded credit commitments 12 41 1,082 29 36 609 53 1,862 Total ACL $ 1,531 $ 6,415 $ 3,045 $ 3,752 $ 461 $ 19,280 $ 466 $ 34,950 As of and for the Six Months Ended June 30, 2023 Owner Occupied Non-Owner Occupied Construction Multi- Family 1-4 Family Commercial and Industrial Consumer and Other Total (In Thousands) Beginning balance $ 1,766 $ 5,108 $ 1,646 $ 2,634 $ 207 $ 12,403 $ 466 $ 24,230 Impact of adopting ASC 326 ( 204 ) ( 242 ) 796 ( 386 ) ( 45 ) 1,873 26 1,818 Charge-offs — — — — — ( 495 ) — ( 495 ) Recoveries 2 1 — — 21 314 13 351 Net recoveries (charge-offs) 2 1 — — 21 ( 181 ) 13 ( 144 ) Provision for credit losses 157 374 ( 149 ) 1,178 66 2,128 39 3,793 Ending balance $ 1,721 $ 5,241 $ 2,293 $ 3,426 $ 249 $ 16,223 $ 544 $ 29,697 Components: Allowance for credit losses on loans $ 1,703 $ 5,182 $ 1,483 $ 3,414 $ 228 $ 15,624 $ 481 $ 28,115 Allowance for credit losses on unfunded credit commitments 18 59 810 12 21 599 63 1,582 Total ACL $ 1,721 $ 5,241 $ 2,293 $ 3,426 $ 249 $ 16,223 $ 544 $ 29,697 ACL Summary Loans collectively evaluated for credit losses in the following tables include all performing loans at June 30, 2024 and December 31, 2023. Loans individually evaluated for credit losses include all non-accrual loans. The following tables provide information regarding the allowance for credit losses and balances by type of allowance methodology. As of June 30, 2024 Owner Occupied Non-Owner Occupied Construction Multi- Family 1-4 Family Commercial and Industrial Consumer and Other Total (In Thousands) Allowance for credit losses: Collectively evaluated for credit losses $ 1,519 $ 6,374 $ 1,963 $ 3,723 $ 425 $ 13,090 $ 413 $ 27,507 Individually evaluated for credit loss — — — — — 5,581 — 5,581 Total $ 1,519 $ 6,374 $ 1,963 $ 3,723 $ 425 $ 18,671 $ 413 $ 33,088 Loans and lease receivables: Collectively evaluated for credit losses $ 258,636 $ 777,704 $ 229,181 $ 470,176 $ 39,662 $ 1,142,730 $ 48,145 $ 2,966,234 Individually evaluated for credit loss — — — — 18 18,981 — 18,999 Total $ 258,636 $ 777,704 $ 229,181 $ 470,176 $ 39,680 $ 1,161,711 $ 48,145 $ 2,985,233 20 Table of Contents As of December 31, 2023 Owner Occupied Non-Owner Occupied Construction Multi- Family 1-4 Family Commercial and Industrial Consumer and Other Total (In Thousands) Allowance for credit losses: Collectively evaluated for credit losses $ 1,525 $ 5,596 $ 1,244 $ 3,562 $ 221 $ 12,743 $ 395 $ 25,286 Individually evaluated for credit loss — — — — 22 5,967 — 5,989 Total $ 1,525 $ 5,596 $ 1,244 $ 3,562 $ 243 $ 18,710 $ 395 $ 31,275 Loans and lease receivables: Collectively evaluated for credit losses $ 256,479 $ 773,494 $ 193,080 $ 450,529 $ 26,267 $ 1,085,260 $ 44,312 $ 2,829,421 Individually evaluated for credit loss — — — — 22 20,575 — 20,597 Total $ 256,479 $ 773,494 $ 193,080 $ 450,529 $ 26,289 $ 1,105,835 $ 44,312 $ 2,850,018 Note 6 — Leases The Corporation leases various office spaces and specialized lending production offices under non-cancellable operating leases which expire on various dates through 2033. The Corporation also leases office equipment. The Corporation recognizes a right-of-use asset and an operating lease liability for all leases, with the exception of short-term leases. Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term. The components of total lease expense were as follows: For the Three Months Ended June 30, For the Six Months Ended June 30, 2024 2023 2024 2023 (In Thousands) Operating lease cost $ 338 $ 367 $ 695 $ 750 Short-term lease cost 38 46 75 108 Variable lease cost 146 147 287 297 Less: sublease income — ( 30 ) — ( 75 ) Total lease cost, net $ 522 $ 530 $ 1,057 $ 1,080 Quantitative information regarding the Corporation’s operating leases was as follows: June 30, 2024 December 31, 2023 Weighted-average remaining lease term (in years) 7.37 7.70 Weighted-average discount rate 3.73 % 3.61 % The following maturity analysis shows the undiscounted cash flows due on the Corporation’s operating lease liabilities: (In Thousands) 2024 $ 754 2025 1,408 2026 1,400 2027 1,427 2028 1,113 Thereafter 3,600 Total undiscounted cash flows 9,702 Discount on cash flows ( 1,341 ) Total lease liability $ 8,361 21 Table of Contents Note 7 — Other Assets A summary of accrued interest receivable and other assets was as follows: June 30, 2024 December 31, 2023 (In Thousands) Accrued interest receivable $ 13,639 $ 13,275 Net deferred tax asset 8,910 9,508 Investment in historic development entities 4,866 2,393 Investment in low-income housing development entities 35,554 33,303 Investment in limited partnerships 15,890 15,027 Prepaid expenses 5,567 4,269 Other assets 13,446 13,283 Total accrued interest receivable and other assets $ 97,872 $ 91,058 For the six months ended June 30, 2024 and 2023, the Corporation amortized tax credit investments of $ 2.6 million and $ 870,000 respectively, and recognized tax credits and other benefits for the six months ended June 30, 2024 and 2023 of $ 3.3 million and $ 1.2 million , respectively, within the income tax expense line on the unaudited Consolidated Statements of Income. Note 8 — Deposits The composition of deposits is shown below. Average balances represent year-to-date averages. June 30, 2024 December 31, 2023 Balance Average Balance Average Rate Balance Average Balance Average Rate (Dollars in Thousands) Non-interest-bearing transaction accounts $ 406,804 $ 440,192 — % $ 445,376 $ 453,930 — % Interest-bearing transaction accounts 841,146 871,824 3.94 895,319 689,500 3.44 Money market accounts 837,569 788,869 4.01 711,245 681,336 3.25 Certificates of deposit 224,116 259,891 4.63 287,131 273,387 4.10 Wholesale deposits 575,548 466,843 4.06 457,708 346,285 4.14 Total deposits $ 2,885,183 $ 2,827,619 3.43 $ 2,796,779 $ 2,444,438 2.92 A summary of annual maturities of core and wholesale certificates of deposit at June 30, 2024 is as follows: (In Thousands) Maturities during the year ended December 31, 2024 $ 462,762 2025 42,937 2026 50,561 2027 73,511 2028 12,821 Thereafter 2,072 $ 644,664 Wholesale deposits include $ 420.5 million and $ 155.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at June 30, 2024, compared to $ 407.7 million and $ 50.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at December 31, 2023. The Corporation has entered into derivative contracts hedging a portion of the certificates of deposit included in the 2024 maturities above. As of June 30, 2024, the notional amount of derivatives designated as cash flow hedges totaled $ 359.3 million with a weighted average remaining maturity of 3.83 years and a weighted average rate of 3.97 % . Certificates of deposit and wholesale deposits denominated in amounts greater than $250,000 were $ 87.0 million at June 30, 2024 and $ 120.2 million at December 31, 2023 . 22 Table of Contents Note 9 — FHLB Advances, Other Borrowings and Subordinated Notes and Debentures The composition of borrowed funds is shown below. Average balances represent year-to-date averages. June 30, 2024 December 31, 2023 Balance Weighted Average Balance Weighted Average Rate Balance Weighted Average Balance Weighted Average Rate (Dollars in Thousands) Federal funds purchased $ — $ — — % $ — $ 3 5.37 % FHLB advances 278,350 290,675 2.54 281,500 351,990 2.52 Line of credit — — — — 38 7.26 Other borrowings 10 15 — 20 600 8.33 Subordinated notes and debentures 49,495 49,455 5.79 49,396 38,250 5.16 $ 327,855 $ 340,145 3.02 $ 330,916 $ 390,881 2.79 A summary of annual maturities of borrowings at June 30, 2024 is as follows: (In Thousands) Maturities during the year ended December 31, 2024 $ 96,910 2025 48,000 2026 65,000 2027 28,000 2028 10,450 Thereafter 79,495 $ 327,855 As of June 30, 2024 and December 31, 2023, the Corporation had other borrowings of $ 10,000 and $ 20,000 , respectively, which consisted of sold tax credit investments accounted for as secured borrowings because they did not qualify for true sale accounting. The Corporation has entered into derivative contracts hedging a portion of the borrowings included in the 2024 maturities above. As of June 30, 2024, the notional amount of derivatives designated as cash flow hedges totaled $ 78.4 million with a weighted average remaining maturity of 2.50 years and a weighted average rate of 1.80 % . As of June 30, 2024 and December 31, 2023 , the Corporation was in compliance with its debt covenants under its third-party secured senior line of credit. On February 20, 2024, the credit line was renewed for one additional year with pricing terms of 1-month term SOFR + 2.36% and a maturity date of February 19, 2025 . During the third quarter 2024, the Corporation intends to redeem $ 15.0 million of 5.50 % fixed to floating rate subordinated notes payable originally issued August 15th, 2019 and reissue up to $ 20.0 million in subordinated notes payable. Note 10 — Preferred Stock On March 4, 2022, the Corporation issued 12,500 shares, or $ 12.5 million in aggregate liquidation preference, of 7.0 % Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A, par value $ 0.01 per share, with a liquidation preference of $ 1,000 per share (the “Series A Preferred Stock”) in a private placement to institutional investors. The net proceeds received from the issuance of the Series A Preferred Stock were $ 12.0 million. The Corporation expects to pay dividends on the Series A Preferred Stock when and if declared by the Board, at a fixed rate of 7.0 % per annum, payable quarterly, in arrears, on March 15, June 15, September 15 and December 15 of each year up to, but excluding, March 15, 2027. For each dividend period from and including March 15, 2027, dividends will be paid at a floating rate of Three-Month Term SOFR plus a spread of 539 basis points per annum. During the three and six months ended June 30, 2024, the Board of Directors declared an aggregate preferred stock dividend of $ 219,000 and $ 438,000 , respectively. The Series A Preferred Stock is perpetual and has no stated maturity. The Corporation may redeem the Series A Preferred Stock at its option at a redemption price equal to $ 1,000 per share, plus any declared and unpaid dividends (without regard to any undeclared dividends), subject to regulatory approval, on or after March 15, 2027 or within 90 days following a regulatory capital treatment event, in accordance with the terms of the Series A Preferred Stock. 23 Table of Contents Note 11 — Commitments and Contingencies In the normal course of business, various legal proceedings involving the Corporation are pending. Management, based upon advice from legal counsel, does not anticipate any significant losses as a result of these actions. Management believes that any liability arising from any such proceedings currently existing or threatened will not have a material adverse effect on the Corporation’s financial position, results of operations, and cash flows. The Corporation sells the guaranteed portions of SBA 7(a) and 504 loans, as well as participation interests in other, non-SBA originated, loans to third parties. The Corporation has a continuing involvement in each of the transferred lending arrangements by way of relationship management and servicing the loans, as well as being subject to normal and customary requirements of the SBA loan program and standard representations and warranties related to sold amounts. In the event of a loss resulting from default and a determination by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Corporation, the SBA may require the Corporation to repurchase the loan, deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of the principal loss related to the deficiency from the Corporation. The Corporation must comply with applicable SBA regulations in order to maintain the guaranty. In addition, the Corporation retains the option to repurchase the sold guaranteed portion of an SBA loan if the loan defaults. Management has assessed estimated losses inherent in the outstanding guaranteed portions of SBA loans sold in accordance with ASC 450, Contingencies , and determined a recourse reserve based on the probability of future losses for these loans to be $ 906,000 at June 30, 2024, which is reported in accrued interest payable and other liabilities on the unaudited Consolidated Balance Sheets. The summary of the activity in the SBA recourse reserve is as follows: As of and for the Three Months Ended June 30, As of and for the Six Months Ended June 30, 2024 2023 2024 2023 (In Thousands) Balance at the beginning of the period $ 1,081 $ 423 $ 955 $ 441 SBA (benefit) recourse ( 9 ) 341 117 323 Charge-offs, net ( 166 ) ( 12 ) ( 166 ) ( 12 ) Balance at the end of the period $ 906 $ 752 $ 906 $ 752 Note 12 — Fair Value Disclosures The Corporation determines the fair values of its financial instruments based on the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is defined as the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date and is based on exit prices. Fair value includes assumptions about risk, such as nonperformance risk in liability fair values, and is a market-based measurement, not an entity-specific measurement. The standard describes three levels of inputs that may be used to measure fair value. Level 1 — Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date. Level 2 — Level 2 inputs are inputs, other than quoted prices included with Level 1, that are observable for the asset or liability either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 — Level 3 inputs are supported by little or no market activity and are significant to the fair value of the assets or liabilities. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Corporation’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. 24 Table of Contents Assets and liabilities measured at fair value on a recurring basis, segregated by fair value hierarchy level, are summarized below: June 30, 2024 Fair Value Measurements Using Level 1 Level 2 Level 3 Total (In Thousands) Assets: Securities available-for-sale: U.S. treasuries $ — $ 9,583 $ — $ 9,583 U.S. government agency securities - government-sponsored enterprises — 8,068 — 8,068 Municipal securities — 34,862 — 34,862 Residential mortgage-backed securities - government issued — 101,743 — 101,743 Residential mortgage-backed securities - government- sponsored enterprises — 124,296 — 124,296 Commercial mortgage-backed securities - government issued — 2,301 — 2,301 Commercial mortgage-backed securities - government- sponsored enterprises — 27,999 — 27,999 Interest rate swaps — 70,773 — 70,773 Liabilities: Interest rate swaps — 61,821 — 61,821 December 31, 2023 Fair Value Measurements Using Level 1 Level 2 Level 3 Total (In Thousands) Assets: Securities available-for-sale: U.S. treasuries $ — $ 13,776 $ — $ 13,776 U.S. government agency securities - government-sponsored enterprises — 27,566 — 27,566 Municipal securities — 35,881 — 35,881 Residential mortgage-backed securities - government issued — 68,056 — 68,056 Residential mortgage-backed securities - government- sponsored enterprises — 120,833 — 120,833 Commercial mortgage-backed securities - government issued — 2,525 — 2,525 Commercial mortgage-backed securities - government- sponsored enterprises — 28,369 — 28,369 Interest rate swaps — 55,597 — 55,597 Liabilities: Interest rate swaps — 51,949 — 51,949 For assets and liabilities measured at fair value on a recurring basis, there were no transfers between the levels during the three and six months ended June 30, 2024 or the year ended December 31, 2023 related to the above measurements. Assets and liabilities measured at fair value on a no n-recurring basis, segregated by fair value hierarchy are summarized below: June 30, 2024 Fair Value Measurements Using Level 1 Level 2 Level 3 Total (In Thousands) Collateral-dependent loans $ — $ — $ 5,055 $ 5,055 Repossessed assets — — 54 54 Loan servicing rights — — 1,173 1,173 December 31, 2023 Fair Value Measurements Using Level 1 Level 2 Level 3 Total (In Thousands) Collateral-dependent loans $ — $ — $ 4,917 $ 4,917 Repossessed assets — — 247 247 Loan servicing rights — — 1,356 1,356 25 Table of Contents Collateral-dependent loans were written down to the fair value of their underlying collateral less costs to sell of $ 5.1 million and $ 4.9 million at June 30, 2024 and December 31, 2023 , respectively, through the establishment of specific reserves or by recording charge-offs when the carrying value exceeded the fair value of the underlying collateral of individually evaluated loans. Valuation techniques consistent with the market approach, income approach, or cost approach were used to measure fair value. These techniques included observable inputs for the collateral dependent loans being evaluated, such as current appraisals, recent sales of similar assets, or other observable market data, and u no bservable inputs, typically when discounts are applied to appraisal values to adjust such values to current market conditions or to reflect net realizable values. The quantification of unobservable inputs for Level 3 individually evaluated loan values range from 10 % - 100 % as of the measurement date of June 30, 2024. The weighted average of those unobservable inputs was 42 % . The majority of the individually evaluated loans are considered collateral dependent loans or are supported by an SBA guaranty. Repossessed assets are measured and reported at fair value through a charge-off to the allowance for credit losses, if deemed necessary. The fair value of a repossessed asset, upon initial recognition, is estimated using a market approach or based on observable market data, such as a current appraisal, recent sale price of similar assets, or based upon assumptions specific to the individual property or equipment, such as management applied discounts used to further reduce values to a net realizable value when observable inputs become stale. Loan servicing rights represent the asset retained upon sale of the guaranteed portion of certain SBA loans. When SBA loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. The servicing rights are subsequently measured using the amortization method, which requires amortization into interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. The Corporation periodically reviews this portfolio for impairment and engages a third-party valuation firm to assess the fair value of the overall servicing rights portfolio. Loan servicing rights do not trade in an active, open market with readily observable prices. While sales of loan servicing rights do occur, the precise terms and conditions typically are not readily available to allow for a “quoted price for similar assets” comparison. Accordingly, the Corporation utilizes an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of its loan servicing rights. The valuation model incorporates prepayment assumptions to project loan servicing rights cash flows based on the current interest rate scenario, which is then discounted to estimate an expected fair value of the loan servicing rights. The valuation model considers portfolio characteristics of the underlying serviced portion of the SBA loans and uses the following significant unobservable inputs: (1) constant prepayment rate (“CPR”) assumptions based on the SBA sold pools historical CPR as quoted in Bloomberg and (2) a discount rate. Due to the nature of the valuation inputs, loan servicing rights are classified in Level 3 of the fair value hierarchy. 26 Table of Contents Fair Value of Financial Instruments The Corporation is required to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions, consistent with exit price concepts for fair value measurements, are set forth below: June 30, 2024 Carrying Amount Fair Value Total Level 1 Level 2 Level 3 (In Thousands) Financial assets: Cash and cash equivalents $ 81,080 $ 81,080 $ 81,080 $ — $ — Securities available-for-sale 308,852 308,852 — 308,852 — Securities held-to-maturity 7,082 6,786 — 6,786 — Loans held for sale 6,507 7,027 — 7,027 — Loans and lease receivables, net 2,952,326 2,934,670 — — 2,934,670 Federal Home Loan Bank stock 11,901 N/A N/A N/A N/A Accrued interest receivable 13,639 13,639 13,639 — — Interest rate swaps 70,773 70,773 — 70,773 — Financial liabilities: — Deposits 2,885,183 2,882,318 2,240,520 641,798 — Federal Home Loan Bank advances and other borrowings 327,855 321,688 — 321,688 — Accrued interest payable 11,290 11,290 11,290 — — Interest rate swaps 61,821 61,821 — 61,821 — Off-balance sheet items: Standby letters of credit 141 141 — — 141 N/A = The fair value is not applicable due to restrictions placed on transferability December 31, 2023 Carrying Amount Fair Value Total Level 1 Level 2 Level 3 (In Thousands) Financial assets: Cash and cash equivalents $ 139,510 $ 139,510 $ 139,510 $ — $ — Securities available-for-sale 297,006 297,006 — 297,006 — Securities held-to-maturity 8,503 8,255 — 8,255 — Loans held for sale 4,589 4,956 — 4,956 — Loans and lease receivables, net 2,818,986 2,789,731 — — 2,789,731 Federal Home Loan Bank stock 12,042 N/A N/A N/A N/A Accrued interest receivable 13,275 13,275 13,275 — — Interest rate swaps 55,597 55,597 — 55,597 — Financial liabilities: Deposits 2,796,779 2,795,463 2,101,939 693,524 — Federal Home Loan Bank advances and other borrowings 330,916 320,287 — 320,287 — Accrued interest payable 10,860 10,860 10,860 — — Interest rate swaps 51,949 51,949 — 51,949 — Off-balance sheet items: Standby letters of credit 190 190 — — 190 N/A = The fair value is not applicable due to restrictions placed on transferability Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the unaudited Consolidated Balance Sheets. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Corporation. 27 Table of Contents Securities: The fair value measurements of investment securities are determined by a third-party pricing service which considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, credit information, and the securities’ terms and conditions, among other things. The fair value measurements are subject to independent verification by another pricing source on a quarterly basis to review for reasonableness. Any significant differences in pricing are reviewed with appropriate members of management who have the relevant technical expertise to assess the results. The Corporation has determined that these valuations are classified in Level 2 of the fair value hierarchy. When the independent pricing service does not provide a fair value measurement for a particular security, the Corporation will estimate the fair value based on specific information about each security. Fair values derived in this manner are classified in Level 3 of the fair value hierarchy. Loans Held for Sale: Loans held for sale, which consist of the guaranteed portions of SBA 7(a) loans, are carried at the lower of cost or estimated fair value. The estimated fair value is based on what secondary markets are currently offering for portfolios with similar characteristics. Derivatives: The carrying amount and fair value of existing derivative financial instruments are based upon independent valuation models, which use widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative contract. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The Corporation incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Corporation considers the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. Limitations: Fair value estimates are made at a discrete point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holding of a particular financial instrument. Because no market exists for a significant portion of the Corporation’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and are not considered in the estimates. Note 13 — Derivative Financial Instruments The Corporation offers interest rate swap products directly to qualified commercial borrowers. The Corporation economically hedges client derivative transactions by entering into offsetting interest rate swap contracts executed with a third party. Derivative transactions executed as part of this program are not considered hedging instruments and are marked-to-market through earnings each period. The derivative contracts have mirror-image terms, which results in the positions’ changes in fair value offsetting through earnings each period. The credit risk and risk of non-performance embedded in the fair value calculations is different between the dealer counterparties and the commercial borrowers which may result in a difference in the changes in the fair value of the mirror-image swaps. The Corporation incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the counterparty’s risk in the fair value measurements. When evaluating the fair value of its derivative contracts for the effects of non-performance and credit risk, the Corporation considered the impact of netting and any applicable credit enhancements such as collateral postings, thresholds, and guarantees. As of June 30, 2024 and December 31, 2023, the credit valuation allowance was $ 38,000 and $ 117,000 , respectively. 28 Table of Contents The Corporation receives fixed rates and pays floating rates based upon designated benchmark interest rates used on the swaps with commercial borrowers. Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements. The Corporation pays fixed rates and receives floating rates based upon designated benchmark interest rates used on the swaps with dealer counterparties. Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and are reported on the unaudited Consolidated Balance Sheet. The gross amount of dealer counterparty swaps, without regard to the enforceable master netting agreement, was a gross derivative asset of $ 61.8 million and gross derivative liability of $ 2.1 million as of June 30, 2024. All changes in fair value of these instruments are recorded in other non-interest income. Given the mirror-image terms of the outstanding derivative portfolio, the change in fair value for the three and six months ended June 30, 2024 and 2023 had an insignificant impact on the unaudited Consolidated Statements of Income. The Corporation also enters into interest rate swaps to manage interest rate risk and reduce the cost of match-funding certain long-term fixed rate loans. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. The instruments are designated as cash flow hedges as the receipt of floating rate interest from the counterparty is used to manage interest rate risk related to cash outflows attributable to future wholesale deposit or short-term FHLB advance borrowings. The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affect earnings. A pre-tax unrealized gain of $ 300,000 and $ 5.1 million was recognized in other comprehensive income for the three and six months ended June 30, 2024 , respectively, and there were no ineffective portions of the hedges. A pre-tax unrealized gain of $ 3.6 million and $ 2.2 million was recognized in other comprehensive income for the three and six months ended June 30, 2023 , respectively, and there were no ineffective portions of the hedges. The Corporation also enters into interest rate swaps to mitigate market value volatility on certain long-term fixed securities. The objective of the hedge is to protect the Corporation against changes in fair value due to changes in benchmark interest rates. The instruments are designated as fair value hedges as the changes in the fair value of the interest rate swap are expected to offset changes in the fair value of the hedged item attributable to changes in the SOFR swap rate, the designated benchmark interest rate. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affect earnings. A pre-tax unrealized gain of $ 82,000 and $ 223,000 was recognized in other comprehensive income for the three and six months ended June 30, 2024 , respectively, and there was no ineffective portion of these hedges. A pre-tax unrealized gain of $ 107,000 and a pre-tax unrealized loss of $ 68,000 was recognized in other comprehensive income for the three and six months ended June 30, 2023 , respectively, and there was no ineffective portion of these hedges. As of June 30, 2024 Number of Instruments Notional Amount Weighted Average Maturity (In Years) Fair Value (Dollars in Thousands) Included in Derivative assets Derivatives not designated as hedging instruments Interest rate swap agreements on loans with commercial loan clients 15 $ 148,971 5.56 $ 2,146 Interest rate swap agreements on loans with third-party counterparties 104 962,598 5.57 59,628 Derivatives designated as hedging instruments Interest rate swap related to AFS securities 11 $ 12,500 7.78 $ 847 Interest rate swap related to wholesale funding 32 337,655 4.04 8,152 Included in Derivative liabilities Derivatives not designated as hedging instruments Interest rate swap agreements on loans with commercial loan clients 89 $ 813,628 5.58 $ 61,775 Derivatives designated as hedging instruments Interest rate swap related to wholesale funding 10 $ 100,000 2.09 $ 46 29 Table of Contents As of December 31, 2023 Number of Instruments Notional Amount Weighted Average Maturity (In Years) Fair Value (Dollars in Thousands) Included in Derivative assets Derivatives not designated as hedging instruments Interest rate swap agreements on loans with commercial loan clients 25 $ 249,454 6.33 $ 7,904 Interest rate swap agreements on loans with third-party counter parties 106 939,156 6.06 43,234 Derivatives designated as hedging instruments Interest rate swap related to AFS securities 11 $ 12,500 8.28 $ 624 Interest rate swap related to wholesale funding 9 96,400 2.47 3,835 Included in Derivative liabilities Derivatives not designated as hedging instruments Interest rate swap agreements on loans with commercial loan clients 81 $ 689,702 5.96 $ 51,138 Derivatives designated as hedging instruments Interest rate swap related to wholesale funding 29 $ 306,255 3.89 $ 811 Note 14 — Regulatory Capital The Corporation and the Bank are subject to various regulatory capital requirements administered by Federal and Wisconsin banking agencies. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions on the part of regulators, that if undertaken, could have a direct material effect on the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory practices. The Corporation’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The Corporation regularly reviews and updates, when appropriate, its Capital and Liquidity Action Plans, which is designed to help ensure appropriate capital adequacy, to plan for future capital needs, and to ensure that the Corporation serves as a source of financial strength to the Bank. The Corporation’s and the Bank’s Board and management teams adhere to the appropriate regulatory guidelines on decisions which affect their respective capital positions, including but not limited to, decisions relating to the payment of dividends and increasing indebtedness. As a bank holding company, the Corporation’s ability to pay dividends is affected by the policies and enforcement powers of the Board of Governors of the Federal Reserve system (the “Federal Reserve”). Federal Reserve guidance urges financial institutions to strongly consider eliminating, deferring, or significantly reducing dividends if: (i) net income available to common shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividend; (ii) the prospective rate of earnings retention is not consistent with the bank holding company’s capital needs and overall current and prospective financial condition; or (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital ratios. Management intends, when appropriate under regulatory guidelines, to consult with the Federal Reserve Bank (“FRB”) of Chicago and provide it with information on the Corporation’s then-current and prospective earnings and capital position in advance of declaring any cash dividends. As a Wisconsin corporation, the Corporation is subject to the limitations of the Wisconsin Business Corporation Law, which prohibit the Corporation from paying dividends if such payment would: (i) render the Corporation unable to pay its debts as they become due in the usual course of business, or (ii) result in the Corporation’s assets being less than the sum of its total liabilities plus the amount needed to satisfy the preferential rights upon dissolution of any shareholders with preferential rights superior to those shareholders receiving the dividend. The Bank is also subject to certain legal, regulatory, and other restrictions on their ability to pay dividends to the Corporation. As a bank holding company, the payment of dividends by the Bank to the Corporation is one of the sources of funds the Corporation could use to pay dividends, if any, in the future and to make other payments. Future dividend decisions by the Bank and the Corporation will continue to be subject to compliance with various legal, regulatory, and other restrictions as defined from time to time. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of Total Common Equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to 30 Table of Contents adjusted total assets. These risk-based capital requirements presently address credit risk related to both recorded and off-balance sheet commitments and obligations. As of June 30, 2024 , the Corporation’s capital levels exceeded the regulatory minimums and the Bank’s capital levels remained characterized as well capitalized under the regulatory framework. The following tables summarize both the Corporation’s and the Bank’s capital ratios and the ratios required by their federal regulators: As of June 30, 2024 Actual (1) Minimum Required for Capital Adequacy Purposes For Capital Adequacy Purposes Plus Capital Conservation Buffer Minimum Required to Be Well Capitalized Under Prompt Corrective Action Requirements Amount Ratio Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) Total capital (to risk-weighted assets) Consolidated $ 392,359 11.45 % $ 274,074 8.00 % $ 359,722 10.50 % N/A N/A First Business Bank 392,709 11.46 274,045 8.00 359,684 10.50 $ 342,556 10.00 % Tier 1 capital (to risk-weighted assets) Consolidated $ 307,878 8.99 % $ 205,556 6.00 % $ 291,204 8.50 % N/A N/A First Business Bank 357,723 10.44 205,534 6.00 291,173 8.50 $ 274,045 8.00 % Common equity tier 1 capital (to risk-weighted assets) Consolidated $ 295,886 8.64 % $ 154,167 4.50 % $ 239,815 7.00 % N/A N/A First Business Bank 357,723 10.44 154,150 4.50 239,789 7.00 $ 222,662 6.50 % Tier 1 leverage capital (to adjusted assets) Consolidated $ 307,878 8.51 % $ 144,664 4.00 % $ 144,664 4.00 % N/A N/A First Business Bank 357,723 9.89 144,682 4.00 144,682 4.00 $ 180,852 5.00 % As of December 31, 2023 Actual (1) Minimum Required for Capital Adequacy Purposes For Capital Adequacy Purposes Plus Capital Conservation Buffer Minimum Required to Be Well Capitalized Under Prompt Corrective Action Requirements Amount Ratio Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) Total capital (to risk-weighted assets) Consolidated $ 375,440 11.19 % $ 268,500 8.00 % $ 352,406 10.50 % N/A N/A First Business Bank 376,310 11.21 268,595 8.00 352,531 10.50 $ 335,744 10.00 % Tier 1 capital (to risk-weighted assets) Consolidated $ 293,338 8.74 % $ 201,375 6.00 % $ 285,281 8.50 % N/A N/A First Business Bank 343,604 10.23 201,446 6.00 285,382 8.50 $ 268,595 8.00 % Common equity tier 1 capital (to risk-weighted assets) Consolidated $ 281,346 8.38 % $ 151,031 4.50 % $ 234,937 7.00 % N/A N/A First Business Bank 343,604 10.23 151,085 4.50 235,021 7.00 $ 218,233 6.50 % Tier 1 leverage capital (to adjusted assets) Consolidated $ 293,338 8.43 % $ 139,145 4.00 % $ 139,145 4.00 % N/A N/A First Business Bank 343,604 9.87 139,262 4.00 139,262 4.00 $ 174,077 5.00 % (1) 2024 and 2023 capital amounts include $677,000 and $1.0 million, respectively, of additional stockholders’ equity as elected by the Corporation and permitted by federal banking regulatory agencies related to the adoption of ASC 326. Risk-weighted assets were also adjusted accordingly. 31 Table of Contents