What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-24 compared with 2020-02-27 · 579 added, 234 removed, 707 unchanged (53% of the section changed)

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When used in this report the words or phrases “may,” “could,” “should,” “hope,” “might,” “believe,” “expect,” “plan,” “assume,” “intend,” “estimate,” “anticipate,” “project,” “likely,” or similar expressions are intended to identify “forward-looking statements.” Such statements are subject to risks and uncertainties, including among other things:

• Adverse changes in the economy or business conditions, either nationally or in our markets, including, without limitation, the adverse effects of the COVID-19 pandemic on the global, national, and local economy, which may effect the Corporation’s credit quality, revenue, and business operations.

• Competitive pressures among depository and other financial institutions nationally and in our markets.

Adverse changes in the economy or business conditions, either nationally or in our markets.

• Increases in defaults by borrowers and other delinquencies.

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We are a registered bank holding company incorporated under the laws of the State of Wisconsin and are engaged in the commercial banking business through our wholly-owned banking subsidiary, FBB.

All of our operations are conducted through the Bank and certain subsidiaries of FBB.

All of our operations are conducted through FBB and First Business Specialty Finance, LLC (“FBSF”), a wholly-owned subsidiary of FBB.

We operate as a business bank focusing on delivering a full line of commercial banking products and services tailored to meet the specific needs of small and medium-sized businesses, business owners, executives, professionals, and high net worth individuals.

Our products and services include those for business banking, private wealth, and bank consulting.

Within business banking, we offer commercial lending, consumer and other lending, asset-based lending, accounts receivable financing, equipment financing, vendor financing, SBA lending and servicing, treasury management services, and company retirement plans.

Within business banking, we offer commercial lending, consumer and other lending, asset-based lending, accounts receivable financing, equipment financing, floorplan financing, vendor financing, SBA lending and servicing, treasury management services, and company retirement plans.

Our private wealth services for executives and individuals include trust and estate administration, financial planning, investment management, and private banking.

For other banks, our bank consulting experts provide investment portfolio administrative services, asset liability management services, and asset liability management process validation.

For other financial institutions, our bank consulting experts provide investment portfolio administrative services, asset liability management services, and asset liability management process validation.

We do not utilize a branch network to attract retail clients.

Our operating philosophy is predicated on deep client relationships fostered by local banking partners and specialized business lines where we provide skilled expertise, combined with the efficiency of centralized administrative functions such as information technology, loan and deposit operations, finance and accounting, credit administration, compliance, marketing, and human resources.

Our operating philosophy is predicated on deep client relationships within our commercial bank markets and skilled expertise within our nationwide specialty finance business lines, combined with the efficiency of centralized administrative functions, such as information technology, loan and deposit operations, finance and accounting, credit administration, compliance, marketing, and human resources.

Our focused model allows experienced staff to provide the level of financial expertise needed to develop and maintain long-term relationships with our clients.

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These four strategies are described below:

We will identify, attract, develop, and retain high performing talent to positively impact the overall performance and efficiency of the Corporation.

• We will identify, attract, develop, and retain a diverse, high performing team to positively impact the overall performance and efficiency of the Corporation.

• We will increase internal efficiencies, deliver a differentiated client experience, and drive client experience utilizing technology where possible.

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• We will optimize our business lines for diversification and performance.

We made considerable progress towards advancing each of these four strategies in the first year of plan execution.

Most apparent was the focus on growing our deposit base, as in-market deposits as of December 31, 2019 increased $199.5 million , or 16.9% , to $1.379 billion from $1.179 billion as of December 31, 2018 , surpassing loan growth for the year and enabling the Corporation to lower its reliance on wholesale funding alternatives.

We will remain focused on employee development, creating efficiencies, growing deposits, and optimizing business line performance.

Our drive to improve operating efficiency will remain intact;

however, we believe timely investments in technology and people are imperative as we continue to scale the Corporation to keep pace with our strategic growth trajectory.

On March 11, 2020, the World Health Organization declared COVID-19, the disease caused by the novel coronavirus, a pandemic as a result of the global spread of the coronavirus illness.

In response to the outbreak, federal and state authorities in the U.S.

introduced various measures to try to limit or slow the spread of the virus, including travel restrictions, nonessential business closures, stay-at-home orders, and strict social distancing.

The Corporation activated its Pandemic Preparedness Plan to protect the health of employees and clients, which includes temporarily limiting lobby hours and transitioning the vast majority of the Corporation’s workforce to remote work.

The Corporation has not incurred any significant disruptions to its business activities.

The full impact of COVID-19 remains uncertain.

It has caused substantial disruption in international and U.S.

economies, markets, and employment.

The outbreak is having a significant adverse impact on certain industries the Corporation serves, including retail, restaurants and food services, hospitality, and entertainment.

Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its effects on clients and prospects, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect the Corporation’s financial performance.

Despite these tremendous headwinds, in 2020 we remained focused on building and developing our diverse team, creating efficiencies, growing deposits, and optimizing business line performance.

These efforts resulted in strong operating performance, highlighted by record top line revenue growth and record loan and deposit growth, excluding Paycheck Protection Program (“PPP”) loans.

Our key profitability metrics of return on average equity and return on average assets were negatively impacted by elevated provision for loan and lease losses primarily due to the uncertainty surrounding the COVID-19 pandemic.

However, we remain steadfast in the pursuit of our long-term goals and firmly believe our 2020 performance positions the Corporation well for strong and sustainable earnings growth in 2021 and beyond.

The following table below shows the Corporation’s performance for the years ended December 31, 2020 and 2019 in comparison to the key performance indicators included in the Corporation’s long-term strategic plan.

Key Performance Indicators FYE 2019 FYE 2020 2023 Goal

Return on average equity (“ROAE”) 12.55% 8.64% 13.50%

Return on average assets (“ROAA”) 1.14% 0.70% 1.15%

Top line revenue growth (%) 9.1% 11.5% ≥ 10% per year

In-market deposits to total bank funding (%) 75.5% 74.8% ≥ 70%

Employee engagement (1)

82% 91% ≥ 80%

Client satisfaction (1)

93% 96% ≥ 90%

(1) Anonymous surveys conducted annually

Financial Performance Summary

Results as of and for the year ended December 31, 2020 include:

Total assets at December 31, 2019 increased $130.3 million , or 6.6% , to $2.097 billion from $1.966 billion at December 31, 2018 .

Net income for the year ended December 31, 2019 was $23.3 million , increasing 43.1% compared to $16.3 million for the year ended December 31, 2018 .

Diluted earnings per common share were $2.68 for the year ended December 31, 2019 , increasing 44.1% compared to $1.86 in the prior year.

• Net income for the year ended December 31, 2020 was $17.0 million, decreasing 27.2% compared to $23.3 million for the year ended December 31, 2019.

• Diluted earnings per common share were $1.97 for the year ended December 31, 2020, decreasing 26.5% compared to $2.68 in the prior year.

• Return on average assets and return on average equity for the year ended December 31, 2020 were 0.70% and 8.64% respectively, compared to 1.14% and 12.55%, respectively, for 2019.

• Pre-tax, pre-provision adjusted earnings, which excludes certain one-time and discrete items, for the year ended December 31, 2020 was $38.4 million, increasing 23.2% compared to $31.2 million for the year ended December 31, 2019.

Pre-tax, pre-provision adjusted return on average assets for the year ended December 31, 2020 was 1.59%, compared to 1.52% for the year ended December 31, 2019.

• Net interest margin was 3.40% for the year ended December 31, 2020, declining 21 basis points from 3.61% for the year ended December 31, 2019.

Adjusted net interest margin, which excludes certain one-time and discrete items, was 3.28% for the year ended December 31, 2020, declining five basis points from 3.33% for the year ended December 31, 2019.

• Fees in lieu of interest, defined as prepayment fees, asset-based loan fees, non-accrual interest, and loan fee amortization, totaled $9.3 million for the year ended December 31, 2020, increasing 43.8% compared to $6.5 million for the year ended December 31, 2019.

Loan fee amortization for the year ended December 31, 2020 includes PPP processing fee income of $5.3 million.

• Top line revenue, which consists of net interest income and non-interest income, grew 11.5% to $104.0 million for the year ended December 31, 2020, compared to $93.3 million for the same period in 2019.

Return on average assets and return on average equity for the year ended December 31, 2019 were 1.14% and 12.55% respectively, compared to 0.86% and 9.41% , respectively, for 2018 .

• Provision for loan and lease losses was $16.8 million for the year ended December 31, 2020, compared to $2.1 million for the year ended December 31, 2019.

Net charge-offs as a percentage of average loans and leases decreased to 0.18% for the year ended December 31, 2019 , compared to 0.24% for the year ended December 31, 2018 .

SBA recourse provision was $188,000 for the year ended December 31, 2019 , compared to $1.9 million for the year ended December 31, 2018 .

Net charge-offs as a percentage of average loans and leases increased to 0.39% for the year ended December 31, 2020, compared to 0.18% for the year ended December 31, 2019.

• In January 2021, the Corporation received a recovery of approximately $2.0 million on a loan charged off in a prior year.

While this recovery will have a positive impact on the Company’s provision for loan and lease losses in the first quarter of 2021, it is not necessarily indicative of a trend or a reflection of the Company’s ultimate provision for the first quarter.

• Non-interest income for the year ended December 31, 2020 totaled $26.9 million, or 25.9% of total revenue, compared to $23.4 million, or 25.1% of total revenue for the year ended December 31, 2019.

• Non-interest expense for the year ended December 31, 2020 was $68.9 million, increasing 3.3% compared to $66.7 million for the year ended December 31, 2019.

Operating expense, which excludes certain one-time and discrete items, totaled $65.6 million for the year ended December 31, 2020, increasing 5.6% compared to $62.1 million for the year ended December 31, 2019.

• The efficiency ratio, which excludes certain one-time and discrete items, improved to 63.09% for the year ended December 31, 2020, down from 66.59% for the year ended December 31, 2019.

• Total assets at December 31, 2020 increased $471.1 million, or 22.5%, to $2.568 billion from $2.097 billion at December 31, 2019.

• Period-end gross loans and leases receivable at December 31, 2020 increased $431.3 million, or 25.2%, to $2.146 billion from $1.715 billion as of December 31, 2019.

Average gross loans and leases of $1.704 billion increased $120.4 million , or 7.6% for the year ended December 31, 2019 , compared to $1.584 billion for the same period in 2018 .

Average gross loans and leases of $2.011

billion increased $307.4 million, or 18.0% for the year ended December 31, 2020, compared to $1.704 billion for the same period in 2019.

• Period-end gross loans and leases receivable, excluding net PPP loans, at December 31, 2020 increased $206.0 million, or 12.01%, to $1.921 billion from $1.715 billion as of December 31, 2019.

Average gross loans and leases, excluding net PPP loans, of $1.796 billion increased $92.3 million, or 5.4% for the year ended December 31, 2020, compared to $1.704 billion for the same period in 2019.

• PPP loans and PPP deferred processing fees were $228.9 million and $3.5 million, respectively, at December 31, 2020.

Average PPP loans, net of deferred processing fees, were $215.0 million for the year ended December 31, 2020.

• Non-performing assets were $26.7 million and 1.04% of total assets as of December 31, 2020, compared to $23.5 million and 1.12% of total assets as of December 31, 2019.

Non-performing assets to total assets, excluding net PPP loans was 1.14% as of December 31, 2020.

• The allowance for loan and lease losses as of December 31, 2020 increased $9.0 million, or 46.1%, to $28.5 million, compared to $19.5 million as of December 31, 2019.

The allowance for loan and lease losses was 1.33% of total loans as of December 31, 2020, compared to 1.14% as of December 31, 2019.

Excluding net PPP loans, the allowance for loan and lease losses increased to 1.48% of total loans as of December 31, 2020.

• Period-end in-market deposits at December 31, 2020 increased $304.1 million, or 22.1%, to $1.683 billion from $1.379 billion as of December 31, 2019.

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• Trust assets under management and administration increased by $356.8 million, or 18.9%, to $2.249 billion at December 31, 2020 compared to $1.892 billion at December 31, 2019.

Private wealth management service fee income increased by $453,000 , or 5.8% , to $8.2 million for the year ended December 31, 2019 compared to $7.7 million for the year ended December 31, 2018 .

• On January 28, 2021, the Board of Directors of the Company adopted a new share repurchase program that authorizes the Company to repurchase up to $5 million of the Company’s common stock over a period of approximately twelve months, ending on January 31, 2022.

The Company suspended its prior share repurchase program in March 2020 due to the uncertainty surrounding the COVID-19 pandemic.

Under the previous plan, which was initiated in September 2019 and expired September 30, 2020, the Company had repurchased $3.5 million of the $5 million authorized in the Company’s common stock.

COVID-19 Update

As of December 31, 2020, the Corporation had $228.9 million in PPP loans outstanding and $3.5 million in deferred processing fees outstanding.

The processing fees are deferred and recognized over the contractual life of the loan, or accelerated when forgiven and repaid, as an adjustment of yield using the interest method.

For the year ended December 31, 2020, the Corporation recognized $5.3 million in PPP fees, recording 60% of the $8.8 million in deferred Small Business Administration (“SBA”) processing fees for loans originated in 2020.

The SBA provides a guaranty to the lender of 100% of principal and interest, unless the lender violated an obligation under the agreement.

As loan losses are expected to be immaterial, if any at all, due to the guaranty, management excluded the gross PPP loans from the allowance for loan and lease losses calculation.

In January 2021, the Corporation began accepting applications for the SBA’s most recent phase of the PPP program, with an emphasis on supporting in-market businesses and non-profit organizations.

As of February 1, 2021, the Corporation had processed and approved over 300 applications for the most recent phase of the PPP program for approximately $85.0 million.

Liquidity Sources

Management has reviewed all primary and secondary sources of liquidity in preparation for any unforeseen funding needs due to the COVID-19 pandemic and prioritized based on available capacity, term flexibility, and cost.

As of December 31, 2020, the Corporation had the following sources of liquidity, including the Corporation’s ability to participate in the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”):

(in thousands) December 31, 2020 December 31, 2019

Short-term investments $ 27,371 $ 50,995

PPPLF availability 225,323 —

Collateral value of unencumbered loans (FHLB borrowing availability) 250,127 212,516

Market value of unencumbered securities (Fed Discount Window and FHLB borrowing availability) 137,357 174,661

Total sources of liquidity $ 640,178 $ 438,172

In addition to the above primary sources of liquidity, as of December 31, 2020, the Corporation also had access to $53.5 million in federal funds lines with various correspondent banks and significant experience accessing the highly liquid brokered deposit market.

Capital Strength

The Corporation’s capital ratios continued to exceed the highest required regulatory benchmark levels.

• Total capital to risk-weighted assets at December 31, 2020 was 11.25%, tier 1 capital to risk-weighted assets was 8.96%, tier 1 leverage capital to adjusted average assets was 7.99%, and common equity tier 1 capital to risk-weighted assets was 8.53%.

Tangible common equity to tangible assets was 7.60%.

Excluding net PPP loans, tier 1 leverage capital to adjusted average assets and tangible common equity to tangible assets were 8.97% and 8.33%, respectively.

• As previously announced, during the fourth quarter of 2020, the Corporation’s Board of Directors declared a regular quarterly dividend of $0.165 per share.

The dividend was paid on November 12, 2020 to shareholders of record at the close of business on November 2, 2020.

Measured against fourth quarter 2020 diluted earnings per share of $0.71, the dividend represents a 23.2% payout ratio.

The Board of Directors routinely considers dividend declarations as part of its normal course of business.

• On January 29, 2021, the Corporation’s Board of Directors declared a quarterly cash dividend on its common stock of $0.18 per share.

The quarterly dividend represents a 9% increase over the quarterly dividend declared in October 2020, and, based on fourth quarter 2020 earnings per share, a dividend payout ratio of 25.4%.

Deferral Requests

The Corporation provided loan modifications deferring payments up to six months to certain borrowers impacted by COVID-19 who were current in their payments at the inception of the Corporation’s loan modification program.

As of December 31, 2020, the Corporation had deferred loans outstanding of $27.0 million, or 1.4% of gross loans and leases, excluding gross PPP loans, compared to $131.5 million, or 7.1% as of September 30, 2020 and $323.2 million, or 18.6% as of June 30, 2020.

The following tables represent a breakdown of the deferred loan balances by industry segment and collateral type:

(Dollars in thousands) December 31, 2020

Collateral Type

Industries Description Balance Real Estate Non Real Estate

Accommodation and Food Services $ 12,229 $ 12,229 $ —

Real Estate and Rental and Leasing 5,975 5,975 —

Manufacturing 3,398 — 3,398

Arts, Entertainment, and Recreation 3,095 1,051 2,044

Transportation and Warehousing 573 — 573

Construction 447 447 —

Professional, Scientific, and Technical Services 383 383

Other Services (except Public Administration) 367 212 155

Health Care and Social Assistance 205 — 205

Educational Services 195 195 —

Administrative and Support and Waste Management and Remediation Services 143 143

Total deferred loan balances $ 27,010 $ 20,109 $ 6,901

The following table is a further breakdown of the deferred loan balances by certain credit quality indicators.

Please refer to Note 5 — Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses for the risk category definitions.

December 31, 2020

(Dollars in thousands) I II III IV Total

Total deferred loan balances $ 13,466 $ 13,448 $ 58 $ 38 $ 27,010

% of Total 49.9 % 49.8 % 0.2 % 0.1 % 100.0 %

September 30, 2020

(Dollars in thousands) I II III IV Total

Total deferred loan balances $ 69,984 $ 40,371 $ 20,045 $ 1,069 $ 131,469

% of Total 53.2 % 30.7 % 15.2 % 0.8 % 100.0 %

Exposure to Stressed Industries

Certain industries have been and are expected to be particularly impacted by social distancing, quarantines, and the economic impact of the COVID-19 pandemic, such as the following:

(Dollars in thousands) December 31, 2020 September 30, 2020 June 30, 2020

Balance % Gross Loans and Leases (1)

$ 62,719 3.3 % $ 66,696 3.6 % $ 70,028 4.0 %

Hospitality 80,832 4.2 % 78,786 4.3 % 73,502 4.2 %

Entertainment 14,208 0.7 % 16,323 0.9 % 16,675 1.0 %

Restaurants & Food Service 24,854 1.3 % 26,728 1.4 % 24,884 1.4 %

Total outstanding exposure $ 182,613 9.5 % $ 188,533 10.2 % $ 185,089 10.6 %

(1) Excluding net PPP loans.

(2) Includes $48.9 million, $52.0 million, and $51.7 million in loans secured by commercial real estate as of December 31, 2020, September 30, 2020, and June 30, 2020, respectively.

As of December 31, 2020, the Corporation had no meaningful direct exposure to the energy sector, airline industry, or retail consumer, and does not participate in shared national credits.

Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its effects on our clients and prospects, and on the national and local economy as a whole, there can be no assurances as to how the pandemic may ultimately affect the Corporation’s loan portfolio.

Results of Operations

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Top line revenue, comprised of net interest income and non-interest income, increased 11.5% for the year ended December 31, 2020 compared to the year ended December 31, 2019 primarily due to a $7.2 million, or 10.3%, increase in net interest income and a $3.5 million, or 15.0%, increase in non-interest income.

The increase in net interest income was driven by an increase in average loans and leases outstanding, average loan and lease yields, and loan fees collected in lieu of interest, while the increase in non-interest income was primarily a result of a $2.5 million increase in swap fees and a $2.3 million increase in other non-interest income.

The increase in net interest income was driven by an increase in average loans and leases outstanding, and loan fees collected in lieu of interest, while the increase in non-interest income was primarily a result of a $2.7 million increase in swap fees and a $1.4 million increase in gains on the sale of SBA loans.

These favorable variances in top line revenue were partially offset by a reduction in net interest margin which decreased 21 basis points to 3.40% for the year ended December 31, 2020 compared to 3.61% in the prior year.

The components of top line revenue were as follows:

For the Year Ended December 31,

Change From Prior Year

For the Year Ended December 31, Change From Prior Year

2020 2019 $ Change % Change

(Dollars in Thousands)

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Return on average assets (“ROAA”) was 0.70% for the year ended December 31, 2020 compared to 1.14% for the year ended December 31, 2019.

The increase in ROAA can be attributed principally to an increase in earnings as net income increased 43.1% during the same time period.

The increase in net income for the year ended December 31, 2019 was primarily due to an increase in net interest income, an increase in commercial swap fee income, and a decrease in the provision for loan and lease losses.

These benefits were partially offset by an increase in operating expenses.

The decrease in ROAA can be attributed principally to a $14.7 million increase in provision for loan and lease losses during the same time period.

The increase in the provision for loan and lease losses for the year ended December 31, 2020 was primarily driven by $7.8 million of net charge-offs, a $6.4 million increase in general reserve related to the uncertainty of the economic conditions resulting from the COVID-19 pandemic, and a $2.3 million increase in the general reserve due to loan growth.

Please refer to the Components of the Provision for Loan and Lease Losses included in the Provision for Loan and Lease Losses discussion below.

The COVID-19 related credit headwind in 2020 was partially offset by record top line revenue.

We consider ROAA a critical metric to measure the profitability of our organization and how efficiently our assets are deployed.

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Return on average equity (“ROAE”) for the year ended December 31, 2020 was 8.64% compared to 12.55% for the year ended December 31, 2019.

The primary reasons for the increase in ROAE are consistent with the net income variance explanations discussed above.

The primary reasons for the increase in ROAE are consistent with the net income variance explanations as discussed under Return on Average Assets above.

We view ROAE as an important measurement for monitoring profitability and continue to focus on improving our return to our shareholders by enhancing the overall profitability of our client relationships, controlling our expenses, and minimizing our costs of credit.

Efficiency Ratio

Efficiency ratio is a non-GAAP measure representing non-interest expense excluding the effects of the SBA recourse provision, impairment of tax credit investments, losses on foreclosed properties, amortization of other intangible assets, and other discrete items, if any, divided by operating revenue, which is equal to net interest income plus non-interest income less realized gains or losses on securities, if any.

Efficiency Ratio and Pre-Tax, Pre-Provision Adjusted Earnings

Efficiency ratio is a non-GAAP measure representing non-interest expense excluding the effects of the SBA recourse benefit or provision, impairment of tax credit investments, net gains or losses on foreclosed properties, amortization of other intangible assets, losses on early extinguishment of debt, and other discrete items, if any, divided by operating revenue, which is equal to net interest income plus non-interest income less realized net gains or losses on securities, if any.

Pre-tax, pre-provision adjusted earnings is defined as operating revenue less operating expense.

In the judgment of the Corporation’s management, the adjustments made to non-interest expense and non-interest income allow investors and analysts to better assess the Corporation’s operating expenses in relation to its core operating revenue by removing the volatility that is associated with certain one-time items and other discrete items.

The efficiency ratio improved to 63.09% for the year ended December 31, 2020, compared to 66.59% for the year ended December 31, 2019.

This improvement was the result of exceptional 2019 operating revenue attributable to above average fee income generated by the Corporation’s commercial loan interest rate swap program, as well as an increase in net interest income driven by a 7.6% increase in average loans and leases receivable.

The increase in operating revenue was partially offset by an increase in compensation expense reflecting in part the Corporation’s continued investment in its long-term growth strategy.

FTEs were 288 at December 31, 2019 , increasing by 14 , or 5.1% , from 274 at December 31, 2018 .

The year-over-year increase in FTEs consisted of eight new production positions and six new support positions across multiple business lines.

This improvement was the result of exceptional 2020 operating revenue attributable to above average fee income generated by the Corporation’s commercial loan interest rate swap program and SBA loan sales, as well as an increase in net interest income driven by an 18.0% increase in average loans and leases receivable and $2.8 million, or 43.8%, increase in fees in lieu of interest.

The increase in fees in lieu of interest included $5.3 million in PPP fees.

The increase in operating revenue was partially offset by a $3.8 million, or 9.1%, increase in compensation expense reflecting in part the Corporation’s continued investment in its growth strategy.

Full-time equivalent employees (“FTE”) were 301 as of December 31, 2020, increasing by 13, or 4.5%, from 288 as of December 31, 2019.

The period-end increase in FTEs as of

December 31, 2020 consisted of six net new production positions and seven net new support positions across multiple business lines.

We believe we will continue to generate modest positive operating leverage and progress towards enhancing our long-term efficiency ratio at a measured pace as we focus on strategic initiatives directed toward revenue growth.

These initiatives include efforts to expand our specialty finance lines of business, increase our commercial banking market share, and scale our private wealth management business in less mature markets.

We believe the efficiency ratio allows investors and analysts to better assess the Corporation’s operating expenses in relation to its top line revenue by removing the volatility that is associated with certain non-recurring and other discrete items.

The efficiency ratio also allows management to benchmark performance of our model to our peers without the influence of the loan loss provision and tax considerations, which will ultimately influence other traditional financial measurements, including ROAA and ROAE.

We believe the efficiency ratio and pre-tax, pre-provision adjusted earnings allow investors and analysts to better assess the Corporation’s operating expenses in relation to its top line revenue by removing the volatility that is associated with certain non-recurring and other discrete items.

The efficiency ratio and pre-tax, pre-provision adjusted earnings also allow management to benchmark performance of our model to our peers without the influence of the loan loss provision and tax considerations, which will ultimately influence other traditional financial measurements, including ROAA and ROAE.

The information provided below reconciles the efficiency ratio to its most comparable GAAP measure.

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

For the Year Ended December 31,

Change From Prior Year

For the Year Ended December 31, Change From Prior Year

2020 2019 $ Change % Change

(Dollars in Thousands)

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Net loss on foreclosed properties

383 224 159 71.0

Amortization of other intangible assets

SBA recourse provision

35 40 (5) (12.5)

SBA recourse (benefit) provision (278) 188 (466) NM

Impairment of tax credit investments

2,395 4,094 (1,699) (41.5)

Loss on early extinguishment of debt 744 — 744 NM

Total operating expense $ 65,619 $ 62,149 $ 3,470 5.6

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Net loss on sale of securities

(4) (46) 42 (91.3)

Adjusted non-interest income 26,944 23,469 3,475 14.8

Total operating revenue $ 104,015 $ 93,325 $ 10,690 11.5

Efficiency ratio

63.09 % 66.59 %

Pre-tax, pre-provision adjusted earnings $ 38,396 $ 31,176 $ 7,220 23.2

Average total assets 2,419,616 2,049,035 370,581 18.1

Pre-tax, pre-provision adjusted return on average assets 1.59 % 1.52 %

NM = Not meaningful

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For the Year Ended December 31,

Balance Interest Average

(Dollars in Thousands)

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Commercial real estate and other mortgage loans (1)

$ 1,245,886 $ 51,188 4.11 % $ 1,142,201 $ 58,330 5.11 %

Commercial and industrial loans (1)

701,328 35,487 5.06 % 500,058 35,251 7.05 %

Direct financing leases (1)

26,564 1,039 3.91 % 30,462 1,276 4.19 %

Consumer and other loans (1)

37,544 1,446 3.85 % 31,250 1,372 4.39 %

Total loans and leases receivable (1)

2,011,322 89,160 4.43 % 1,703,971 96,229 5.65 %

Mortgage-related securities (2)

173,084 3,548 2.05 % 161,969 4,069 2.51 %

Other investment securities (3)

31,809 639 2.01 % 26,661 568 2.13 %

FHLB stock 11,576 671 5.80 % 7,398 357 4.83 %

Short-term investments 37,314 161 0.43 % 35,344 817 2.31 %

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Non-interest-earning assets 154,511 113,692

Total assets $ 2,419,616 $ 2,049,035

Interest-bearing liabilities

Transaction accounts

$ 392,577 1,448 0.37 % $ 222,244 3,408 1.53 %

Money market 651,402 2,842 0.44 % 617,341 10,576 1.71 %

Certificates of deposit 111,698 2,198 1.97 % 156,048 3,852 2.47 %

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FHLB advances

379,891 5,507 1.45 % 286,464 6,219 2.17 %

Federal reserve PPPLF 15,207 54 0.36 % — — — %

Other borrowings 24,472 1,509 6.17 % 25,236 1,895 7.51 %

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Non-interest-bearing demand deposit accounts

412,825 275,495

Other non-interest-bearing liabilities

82,337 45,047

Total liabilities 2,223,054 1,863,217

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Total liabilities and stockholders’ equity

$ 2,419,616 $ 2,049,035

Net interest income $ 77,071 $ 69,856

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Average interest-earning assets to average interest-bearing liabilities

131.09 % 125.45 %

Return on average assets 0.70 % 1.14 %

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Non-interest expense to average assets

2.85 % 3.25 %

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

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2020 Compared to 2019

Rate Volume Net

(In Thousands)

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Commercial real estate and other mortgage loans (1)

$ (12,109) $ 4,967 $ (7,142)

Commercial and industrial loans (1)

(11,598) 11,834 236

Direct financing leases (1)

(81) (156) (237)

Consumer and other loans (1)

Total loans and leases receivable (1)

(23,969) 16,900 (7,069)

Mortgage-related securities (2)

(786) 265 (521)

Other investment securities (34) 105 71

FHLB Stock 83 231 314

Short-term investments (700) 44 (656)

2 unchanged sentences

Transaction accounts (3,575) 1,615 (1,960)

Money market (8,288) 554 (7,734)

Certificates of deposit (689) (965) (1,654)

2 unchanged sentences

FHLB advances (2,406) 1,694 (712)

Federal reserve PPPLF — 54 54

Other borrowings (330) (56) (386)

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Net interest income increased by $7.2 million, or 10.3%, for the year ended December 31, 2020, compared to the year ended December 31, 2019.

The increase compared to the prior year was principally due to an increase in average loans and leases outstanding, average loan and lease yields, and loan fees collected in lieu of interest.

The increase compared to the prior year was principally due to an increase in average loans and leases outstanding and loan fees collected in lieu of interest.

Average gross loans and leases of $2.011 billion increased by $307.4 million, or 18.0% for the year ended December 31, 2020, compared to $1.704 billion for the same period in 2019, while loan fees collected in lieu of interest increased 43.8% to $9.3 million, compared to $6.5 million during the same period of comparison.

These favorable variances were partially offset by an increase in interest expense resulting from an increase in rate and volume across various interest-bearing products, specifically money market accounts and certificates of deposit, as well as one-time interest expense items related to exercising the call options on subordinated debt and brokered deposits.

The yield on average earning assets for the year ended December 31, 2019 was 5.27% , an increase of 23 basis points compared to 5.04% for the year ended December 31, 2018 .

This increase was principally due to an increase in higher-yielding specialty finance loans combined with the increase in recurring loan fees collected in lieu of interest.

Excluding the impact of

loan fees in lieu of interest in both 2019 and 2018 , the yield on average earning assets for the year ended December 31, 2019 was 4.95% , an increase of 20 basis points compared to 4.75% for the year ended December 31, 2018 .

The yield on average loans and leases receivable for the year ended December 31, 2019 was 5.65% , an increase of 20 basis points compared to 5.45% for the year ended December 31, 2018 .

The primary reasons for this increase are consistent with the average interest-earning asset yield variance explanations discussed above.

Excluding the impact of loan fees collected in lieu of interest in both 2019 and 2018 , the yield on average loans and leases receivable for the year ended December 31, 2019 was 5.28% , an increase of 16 basis points compared to 5.12% for the year ended December 31, 2018 .

The average rate paid on interest-bearing liabilities was 2.09% for the year ended December 31, 2019 , an increase of 46 basis points from 1.63% for the year ended December 31, 2018 .

The increase in average rate paid was principally due to a $125.6 million , or 25.5% increase in average money market accounts for the year ended December 31, 2019 at an average rate paid of 1.71% , compared to an average rate paid of 1.09% for the year ended December 31, 2018 .

This increase in interest-bearing deposits was partially offset by a $77.1 million , or 25.5% reduction in average wholesale deposits, which are typically longer duration and a higher cost funding source than in-market deposits.

These favorable variances were partially offset by net interest margin compression as the decline in rate across all interest-earning assets, in particular total loans and leases receivable, was greater than the decline in rate across all interest-bearing liabilities.

Excluding fees in lieu of interest and interest income from PPP loans, net interest income increased $2.2 million, or 3.5%.

Excluding net PPP loans, average gross loans and leases for the year ended December 31, 2020 increased $92.3 million, or 5.4%, compared to the year ended December 31, 2019.

The yield on average earning assets for the year ended December 31, 2020 was 4.16%, a decrease of 111 basis points compared to 5.27% for the year ended December 31, 2019.

This decrease was principally due to the decrease in LIBOR and Prime rates and related impact on variable-rate loans, in addition to the renewal of fixed-rate loans and reinvestment of security

cash flows at historically low interest rates.

This decrease was partially offset by the increase in recurring loan fees collected in lieu of interest.

Excluding the impact of loan fees in lieu of interest in both 2020 and 2019, the yield on average earning assets for the year ended December 31, 2020 was 3.75%, a decrease of 119 basis points compared to 4.94% for the year ended December 31, 2019.

The yield on average loans and leases receivable for the year ended December 31, 2020 was 4.43%, a decrease of 122 basis points compared to 5.65% for the year ended December 31, 2019.

The primary reasons for this decrease are consistent with the average interest-earning asset yield variance explanations discussed above.

Excluding the impact of loan fees collected in lieu of interest in both 2020 and 2019, the yield on average loans and leases receivable for the year ended December 31, 2020 was 3.97%, a decrease of 130 basis points compared to 5.27% for the year ended December 31, 2019.

The average rate paid on interest-bearing liabilities was 0.99% for the year ended December 31, 2020, a decrease of 110 basis points from 2.09% for the year ended December 31, 2019.

The average rate paid declined as the Corporation decreased deposit rates in response to the Federal Open Market Committee’s (“FOMC”) decision to lower the target federal funds rate 225 basis points from July 2019 to March 2020.

For the year ended December 31, 2020 compared to the year ended December 31, 2019, the average target federal funds rate decreased 174 basis points.

In addition to the reduction in deposit rates, average wholesale deposits, which are typically longer duration and therefore a higher cost funding source than in-market deposits, decreased $82.7 million, or 36.7%.

Consistent with the Corporation’s longstanding funding strategy to manage interest rate risk and use the most efficient and cost effective source of wholesale funds, a combination of fixed rate wholesale deposits and fixed rate FHLB advances are used at various maturity terms to meet the Corporation’s funding needs.

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Net interest margin decreased 21 basis points to 3.40% for the year ended December 31, 2020, compared to 3.61% for the year ended December 31, 2019.

Excluding fees collected in lieu of interest and one-time interest expense items related to exercising the call options on subordinated debt and brokered deposits, adjusted net interest margin measured 3.31% for the year ended December 31, 2019 , compared to 3.43% for the year ended December 31, 2018 .

The 12 basis point decrease in adjusted net interest margin was primarily due to the increase in rate paid on average in-market deposits, partially offset by an increase in the yield on average loans and leases receivable, combined with a reduction in average wholesale deposits as the growth in average in-market deposits exceeded the growth in average loans and leases receivable.

Management believes the successful efforts to manage funding costs and profitably expand loan balances will allow the Corporation to continue to maintain a net interest margin of 3.50% or better.

However, the collection of loan fees in lieu of interest is an expected source of volatility to net interest income and net interest margin.

Excluding fees collected in lieu of interest, PPP loan interest income, Federal Reserve interest income, and FHLB dividends net interest margin measured 3.28% for the year ended December 31, 2020, compared to 3.33% for the year ended December 31, 2019.

The decrease was primarily due to the decrease in average yield on loans and leases receivable partially offset by a decrease in the average rate paid on in-market deposits and wholesale funding.

Management believes its success in growing in-market deposits, disciplined loan pricing, and increased production in existing higher-yielding specialty finance lines of business will allow the Corporation to achieve a net interest margin of at least 3.50%, on average, over the long-term.

However, the collection of loan fees in lieu of interest is an expected source of volatility to quarterly net interest income and net interest margin, particularly given the nature of the Corporation’s asset-based lending business and the Corporation’s participation in the PPP.

Net interest margin may also experience volatility due to events such as the collection of interest on loans previously in non-accrual status or the accumulation of significant short-term deposit inflows.

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Further, we expect to attract new in-market deposit relationships which we believe will contribute to our ability to maintain an appropriate cost of funds.

Period end in-market deposits - comprised of all transaction accounts, money market accounts, and non-wholesale deposits - were $1.379 billion at December 31, 2019 , compared to $1.179 billion at December 31, 2018 .

Average in-market deposits were $1.271 billion for the year ended December 31, 2019 , compared to $1.097 billion for the year ended December 31, 2018 .

Period end in-market deposits - comprised of all transaction accounts, money market accounts, and non-wholesale deposits - increased $304.1 million, or 22.1%, to $1.683 billion at December 31, 2020, compared to $1.379 billion at December 31, 2019.

Average in-market deposits increased $297.4 million, or 23.4%, to $1.569 billion for the year ended December 31, 2020, compared to $1.271 billion for the year ended December 31, 2019.

This significant increase in deposits was due to successful business development efforts combined with excess liquidity resulting from our clients participation in the PPP.

Provision for Loan and Lease Losses

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Refer to Allowance for Loan and Lease Losses , below, for further information regarding our allowance for loan and lease loss methodology.

We recorded a provision for loan and lease losses of $2.1 million for the year ended December 31, 2019 as compared to $5.5 million for the year ended December 31, 2018 .

The decrease in provision for loan and lease losses was primarily due to a decrease in specific reserves in our legacy SBA portfolio, defined as SBA 7(a) and Express loans originated in 2016 and prior.

The current year provision also reflected a modest increase to the general reserve commensurate with an increase in loan and lease receivables.

The full impact of COVID-19 remains uncertain.

It has caused substantial disruption in international and U.S.

economies, markets, and employment.

The outbreak is having a significant adverse impact on certain industries the Corporation serves, including retail, hospitality, entertainment, and restaurants and food services.

Due to COVID-19 and the economic impact it could have on the Corporation’s loan portfolio, additional detail about certain exposure to stressed industries is included in the section titled COVID-19 Update , above.

Provision for loan and lease losses increased to $16.8 million for the year ended December 31, 2020 compared to $2.1 million for the year ended December 31, 2019.

The increase in provision for loan and lease losses included $8.1 million in charge-offs, partially offset by the release of $5.2 million in related specific reserves.

The 2020 charge-off activity was principally driven by a $3.3 million charge-off for a previously reserved legacy SBA loan in the restaurant industry and a $2.8 million charge-off for a previously reserved conventional loan in the hospitality industry.

In addition, changes in the general reserve increased the provision for loan and lease losses $949,000 due to historical loss rate updates from net charge-off activity, $5.5 million due to qualitative factor changes related to the uncertainty of the economic conditions during the COVID-19 pandemic, and $2.3 million commensurate with an increase in loan and lease receivables.

The following table shows the components of the provision for loan and lease losses for the year ended December 31, 2020 compared to the year ended December 31, 2019.

For the Year Ended December 31,

(Dollars in thousands) 2020 2019

Change in general reserve due to subjective factor changes $ 5,460 $ (378)

Change in general reserve due to historical loss factor changes 949 (391)

Charge-offs 8,139 3,356

Recoveries (332) (366)

Change in specific reserves on impaired loans, net 316 (1,032)

Change due to loan growth, net 2,276 896

Total provision for loan and lease losses $ 16,808 $ 2,085

The legacy on-balance sheet SBA portfolio, defined as SBA 7(a) and Express loans originated in 2016 and prior, has been a source of elevated non-performing assets.

Additional information on our legacy SBA portfolio is as follows:

2020 December 31,

(In Thousands)

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Off-balance sheet loans

$ 23,354 $ 35,029

On-balance sheet loans

11,117 19,697

34,471 54,726

Non-performing loans:

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Off-balance sheet loans

25,285 42,319

On-balance sheet loans

18,552 31,734

$ 43,837 $ 74,053

The addition of specific reserves on impaired loans represents new specific reserves established when collateral shortfalls or government guaranty deficiencies are present, while conversely the release of specific reserves represents the reduction of previously established reserves that are no longer required.

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This amount is net of the release of any specific reserve that may have already been provided.

Change in the inherent risk of the portfolio is primarily influenced by the overall growth in gross loans and leases and an analysis of loans previously charged off, as well as movement of existing loans and leases in and out of an impaired loan classification where a specific evaluation of a particular credit may be required rather than the application of a general reserve loss rate.

particular credit may be required rather than the application of a general reserve loss rate.

Refer to Asset Quality , below, for further information regarding the overall credit quality of our loan and lease portfolio.

Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its potential effects on clients and prospects, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect the Corporation’s loan portfolio.

Non-Interest Income

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Management continues to focus on revenue growth from multiple non-interest income sources in order to maintain a diversified revenue stream through greater contribution from fee-based revenues.

Total non-interest income accounted for 25.1% of our total revenues in 2019 , exceeding our long-term goal of 25%, compared to 21.2% in 2018 .

The increase in total non-interest income for the year ended December 31, 2019 primarily reflected record private wealth management services fee income, record commercial loan interest rate swap fee income, and an increase in other non-interest income.

Total non-interest income accounted for 25.9% of our total revenues in 2020 compared to 25.1% in 2019, exceeding our long-term goal of 25% for the second consecutive year.

The increase in total non-interest income for the year ended December 31, 2020 primarily reflected record commercial loan interest rate swap fee income and a significant increase in gains on the sale of SBA loans, partially offset by a decrease in other non-interest income.

The components of non-interest income were as follows:

For the Year Ended December 31,

Change From Prior Year

For the Year Ended December 31, Change From Prior Year

2020 2019 $ Change % Change

(Dollars in Thousands)

Private wealth management services fee income

$ 8,611 $ 8,197 $ 414 5.1 %

Gain on sale of SBA loans 2,899 1,459 1,440 98.7

Service charges on deposits 3,415 3,104 311 10.0

Loan fees 1,826 1,767 59 3.3

Increase in cash surrender value of bank-owned life insurance

1,402 1,198 204 17.0

Net loss on sale of securities (4) (46) 42 (91.3)

Swap fees 6,860 4,165 2,695 64.7

Other non-interest income 1,931 3,579 (1,648) (46.0)

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Fee income ratio (1)

25.9 % 25.1 %

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

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At December 31, 2020, our trust assets under management and administration were a record $2.249 billion, or 18.9% more than trust assets under management and administration of $1.892 billion at December 31, 2019.

We expect to continue to increase our revenue from assets under management and administration as we deepen existing and grow new client relationships in our primary Wisconsin and Kansas City markets, but market volatility may also affect the actual change in revenue.

We expect to continue to increase our revenue from assets under management and administration as we deepen existing and grow new client relationships in our less mature commercial bank markets, but market volatility may also affect the actual change in revenue.

Commercial loan swap fees increased by $2.7 million to $6.9 million for the year ended December 31, 2020 from $4.2 million for the year ended December 31, 2019.

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The execution of these transactions generates swap fee income.

The above average swap fee income in 2019 was primarily due to three large commercial real estate transactions which generated $2.1 million of fees.

The aggregate amortizing notional value of interest rate swaps with various borrowers was $629.1 million as of December 31, 2020, compared to $326.9 million as of December 31, 2019.

Interest rate swaps continue to be an attractive product for our commercial borrowers, although associated fee income can be variable from period to period based on client demand and the interest rate environment in any given quarter.

Other non-interest income increased by $2.3 million to $3.6 million for the year ended December 31, 2019 , compared to $1.3 million for the year ended December 31, 2018 .

This favorable variance was primarily due to a $900,000 increase in fee income associated with above average returns on our investments in mezzanine funds, a $561,000 increase in gains recognized on end-of-term buyout agreements in equipment financing, and a $413,000 increase in gains related to the sale of state historic tax credits.

Gain on sale of SBA loans for the year ended December 31, 2019 totaled $1.5 million , an increase of $8,000 , or 0.6% , from the same period in 2018 .

Gain on sale of SBA loans for the year ended December 31, 2020 totaled $2.9 million, an increase of $1.4 million, or 98.7%, from the same period in 2019.

Gross SBA loan commitments closed for the year ended December 31, 2020 totaled $42.5 million, compared to $24.4 million for the same period in 2019.

Of the $24.4 million commitments closed in 2019, $11.6 million were closed in the fourth quarter, which we believe is a fair indication of production activity expected to continue throughout 2020.

Based on this recent activity, an enhanced business development team, and a growing pipeline of new business, management believes the gain on sale of SBA loans will continue to increase at a measured pace moving forward.

Based on this recent activity, an enhanced business development team, and a growing pipeline of new business, management believes the annual gain on sale of SBA loans will continue to increase at a measured pace moving forward.

Other non-interest income decreased by $1.6 million to $1.9 million for the year ended December 31, 2020, compared to $3.6 million for the year ended December 31, 2019.

The prior year period included above average returns from the Corporation’s investments in mezzanine funds and gains recognized on end-of-term buyout agreements related to the Corporation’s equipment finance business line.

Non-Interest Expense

Non-interest expense increased by $2.2 million, or 3.3%, to $68.9 million for the year ended December 31, 2020 from $66.7 million for the year ended December 31, 2019.

The increase in non-interest expense was primarily due to an increase in compensation, computer software expense, impairment on tax credit investments, and other non-interest expense.

These increases were partially offset by a decrease in FDIC insurance, collateral liquidation costs, and SBA recourse provision.

Operating expense, which excludes certain one-time and discrete items as defined in the Efficiency Ratio table above, increased $3.5 million, or 5.6%, to $65.6 million for the year ended December 31, 2020 compared to $62.1 million for the year ended December 31, 2019.

The increase in operating expense was primarily due to an increase in compensation, computer software expense, FDIC insurance, and collateral liquidation costs.

These increases were partially offset by a decrease in marketing and other non-interest expense.

The components of non-interest expense were as follows:

For the Year Ended December 31,

Change From Prior Year

For the Year Ended December 31, Change From Prior Year

2020 2019 $ Change % Change

(Dollars in Thousands)

Compensation $ 45,850 $ 42,021 $ 3,829 9.1 %

Occupancy 2,252 2,293 (41) (1.8)

Professional fees 3,530 3,703 (173) (4.7)

Data processing 2,734 2,562 172 6.7

Marketing 1,580 2,221 (641) (28.9)

Equipment 1,199 1,230 (31) (2.5)

Computer software 3,900 3,414 486 14.2

FDIC insurance 1,238 641 597 93.1

Collateral liquidation costs

Collateral liquidation costs 328 119 209 NM

Net loss on foreclosed properties 383 224 159 71.0

Impairment on tax credit investments 2,395 4,094 (1,699) (41.5)

SBA recourse provision

SBA recourse (benefit) provision (278) 188 (466) NM

Loss on early extinguishment of debt 744 — 744 NM

Other non-interest expense 3,043 3,985 (942) (23.6)

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Total operating expense (1)

$ 65,619 $ 62,149 $ 3,470 5.6

Full-time equivalent employees 301 288 13 4.5

NM = Not meaningful

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

Compensation expense increased by $3.8 million, or 9.1%, to $45.9 million for the year ended December 31, 2020 from $42.0 million for the year ended December 31, 2019.

The increase reflects new hires, annual merit increases, growth in employee benefit costs, and an increase in performance-based incentive compensation.

FTEs as of December 31, 2019 were 288 , up 14 , or 5.1% , from 274 at December 31, 2018 .

The increase in FTEs is a reflection of our opportunistic approach to talent acquisition as we added eight new producers and six new support positions across multiple business lines, including commercial lending, SBA lending, private wealth management, and equipment financing.

The increase reflects new hires, annual merit increases, growth in employee benefit costs, and an increase in individual incentive compensation.

Average full-time equivalent employees (“FTE”) were 301 for the three months ended December 31, 2020, increasing by 16, or 5.6%, from 285 for the three months ended December 31, 2019.

We expect to continue investing in talent, both in the form of additional business development and operational staff, to support our long-term strategic plan.

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The increase was principally due to investments in technology platforms to improve the client experience and continuing our strategic focus on scaling the Corporation to efficiently execute our growth strategy.

Impairment on tax credit investments increased $2.0 million , or 96.5% , to $4.1 million for the year ended December 31, 2019 , compared to $2.1 million for the year ended December 31, 2018 .

The impairment on tax credit investments is related to historic rehabilitation tax credits and new market tax credits that are more than offset by a reduction to income tax expense, which, including the aforementioned gain on state tax credits, results in a net benefit to earnings.

The increase in 2019 primarily reflects $3.6 million of impairment associated with the recognition of $5.2 million in federal historic tax credits in 2019 , compared to $1.4 million of impairment associated with the recognition of a $2.3 million federal historic tax credit in 2018 .

Other non-interest expense increased by $555,000 , or 16.2% , to $4.0 million for the year ended December 31, 2019 from $3.4 million for the year ended December 31, 2018 .

The increase was principally due to a one-time right-of-use impairment of $299,000 from vacating and subleasing unused office space in our Kansas City market.

We also experienced an increase in business travel and training costs consistent with the increase in FTEs referenced above.

FDIC expense for the year ended December 31, 2019 benefited from a reduction in FDIC insurance expense as the DIF reached 1.38%, exceeding the statutorily required minimum ratio of 1.35% and requiring the FDIC to distribute assessment credits to small banks for their portion of their assessments that contributed to the growth in the reserve ratio.

Corporation received a credit of $458,000 during the year ended December 31, 2019 .

Management expects FDIC insurance expense to return to normalized levels in 2020 and increase thereafter commensurate with asset growth.

FDIC insurance expense increased $597,000, or 93.1%, to $1.2 million for the year ended December 31, 2020 from $641,000 for the year ended December 31, 2019.

FDIC insurance expense for the year ended December 31, 2019 benefited from a reduction in FDIC insurance expense as the Deposit Insurance Fund (“DIF”) reached 1.38%, exceeding the statutorily required minimum ratio of 1.35% and requiring the FDIC to distribute assessment credits to small banks for their portion of their assessments that contributed to the growth in the reserve ratio.

The Corporation received a credit of $458,000 during the year ended December 31, 2019.

Management expects FDIC insurance expense to increase commensurate with asset growth going forward.

Collateral liquidation costs for the year ended December 31, 2020 were $328,000 compared to $119,000 for the year ended December 31, 2019.

The decrease primarily reflects the improvement in our overall credit quality, as well as the recovery of previously expensed liquidation costs.

SBA recourse provision for the year ended December 31, 2019 was $188,000 compared to $1.9 million for the year ended December 31, 2018 .

The total recourse reserve balance was $1.3 million, or 1.8% of total sold SBA loans outstanding, at December 31, 2019 , compared to $3.0 million, or 3.6% of total sold SBA loans outstanding, at December 31, 2018 .

The increase primarily reflects our special assets team’s continued efforts to exit impaired legacy SBA loans.

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

Management believes this strategy will help stabilize net interest margin with the expectation of a low interest rate environment for an extended period of time.

Marketing expense decreased by $641,000, or 28.9%, to $1.6 million for the year ended December 31, 2020 from $2.2 million for the year ended December 31, 2019.

During 2020, the Corporation’s adherence to COVID-19 restrictions resulted in a reduction in marketing expenses, such as meals and entertainment, and advertisement expense.

Other non-interest expense decreased by $942,000, or 23.6%, to $3.0 million for the year ended December 31, 2020 from $4.0 million for the year ended December 31, 2019.

The decrease was principally due to a decrease in general business-related expenses due to the Corporation’s adherence to COVID-19 restrictions.

In addition, the prior year included a one-time right-of-use impairment of $299,000 from vacating and subleasing unused office space in our Kansas City market.

The decline in other non-interest expense was partially offset by a $461,000 credit valuation adjustment (“CVA”) related to the commercial loan interest rate swap program.

The CVA represents a change in the market value of the Company’s commercial loan interest rate swaps to estimate potential borrower credit risk within the portfolio.

The CVA can vary from period to period based on the size of the portfolio, credit metrics, and the interest rate environment in any given quarter.

There was no CVA for the year ended December 31, 2019.

Impairment on tax credit investments decreased $1.7 million, or 41.5%, to $2.4 million for the year ended December 31, 2020, compared to $4.1 million for the year ended December 31, 2019.

The Corporation recognized $1.9 million of impairment associated with the recognition of $2.8 million in federal historic tax credits in 2020, compared to $3.6 million of impairment associated with the recognition of $5.2 million in federal historic tax credits in 2019.

SBA recourse provision for the year ended December 31, 2020 was a benefit of $278,000 compared to expense of $188,000 for the year ended December 31, 2019.

The total recourse reserve balance was $723,000, or 0.9% of total sold SBA loans outstanding, at December 31, 2020, compared to $1.3 million, or 1.8% of total sold SBA loans outstanding, at December 31, 2019.

Changes to SBA recourse reserves may be a source of non-interest expense volatility in future quarters, though the magnitude of this volatility should continue to diminish over time as the outstanding balance of sold legacy SBA loans continues to decline.

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The effective tax rate for the year ended December 31, 2020 was 7.2% compared to 4.8% for the year ended December 31, 2019.

The effective tax rate, excluding tax credits and other discrete items, for the year ended December 31, 2020 was 19.5% compared to 22.1% for the year ended December 31, 2019.

FINANCIAL CONDITION

At December 31, 2020 total assets were $2.568 billion, representing an increase of $471.1 million, or 22.5%, from $2.097 billion at December 31, 2019.

The increase in total assets was primarily driven by an increase in loans and leases receivable and securities available-for-sale.

The increase in total assets was primarily driven by an increase in loans and leases receivable, other assets, and securities available-for-sale, partially offset by a decrease in short-term investments.

The increase in loans and leases receivable was principally due to the Corporation’s participation in the PPP program and an increase in commercial real estate loans.

As of December 31, 2020, the Corporation had $228.9 million in PPP loans outstanding and $3.5 million in deferred processing fees outstanding.

Short-term investments

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Although the majority of short-term investments consist of deposits with the FRB, we also make investments in commercial paper.

As of December 31, 2019 , our total investment in commercial paper was $5.9 million compared to $19.3 million at December 31, 2018 .

As of December 31, 2020, we did not hold any commercial paper, compared to a total of $5.9 million as of December 31, 2019.

Due to current economic conditions, we decided to temporarily exit this short-term investment.

We approach our decisions to purchase commercial paper with similar rigor and underwriting standards as applied to our loan and lease portfolio.

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We use a third-party pricing service as our primary source of market prices for the securities portfolio.

On a quarterly basis, we validate the reasonableness of prices received from this source through independent verification of the portfolio, data integrity validation through comparison of current price to prior period prices, and an expectation-based analysis of movement in prices based upon the changes in the related yield curves and other market factors.

On a quarterly basis, we validate the reasonableness of prices received from this source through independent verification of the

portfolio, data integrity validation through comparison of current price to prior period prices, and an expectation-based analysis of movement in prices based upon the changes in the related yield curves and other market factors.

On a periodic basis, we review the third-party pricing vendor’s methodology for pricing relevant securities and the results of its internal control assessments.

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No securities within our portfolio were deemed to be other-than-temporarily impaired as of December 31, 2020.

We sold approximately $22.5 million of securities during the year ended December 31, 2019 to proactively manage our securities portfolio and meet our long-term investment objectives.

We sold approximately $839,000 of securities during the year ended December 31, 2020 to proactively manage our securities portfolio and meet our long-term investment objectives.

As of December 31, 2020 no securities were classified as trading securities.

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As of December 31,

Amortized Cost

Amortized Cost Fair Value Amortized Cost Fair Value

(In Thousands)

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government agency securities - government-sponsored enterprises

$ 22,699 $ 22,629 $ 23,616 $ 23,758

Municipal securities 24,067 24,779 160 160

Residential mortgage-backed securities - government issued

9,894 10,403 16,119 16,348

Residential mortgage-backed securities - government-sponsored enterprises

102,843 105,006 111,561 112,002

Commercial mortgage-backed securities - government issued

5,289 5,464 6,705 6,663

Commercial mortgage-backed securities - government-sponsored enterprises

12,584 13,365 11,953 11,967

Other securities

2,205 2,279 2,205 2,235

$ 179,581 $ 183,925 $ 172,319 $ 173,133

As of December 31,

Amortized Cost

Amortized Cost Fair Value Amortized Cost Fair Value

(In Thousands)

1 unchanged sentence

Municipal securities

$ 17,106 $ 17,508 $ 19,727 $ 20,054

Residential mortgage-backed securities - government issued 3,564 3,676 5,776 5,786

Residential mortgage-backed securities - government-sponsored issued

3,693 3,856 5,183 5,211

Commercial mortgage-backed securities - government-sponsored enterprises

2,011 2,293 2,014 2,137

$ 26,374 $ 27,333 $ 32,700 $ 33,188

government agency securities - government-sponsored enterprises represent securities issued by 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 GNMA.

Residential and commercial mortgage-backed securities -

government issued represent securities guaranteed by GNMA.

Residential and commercial mortgage-backed securities - government-sponsored enterprises include securities guaranteed by FHLMC, FNMA, and the FHLB.

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Yields on tax-exempt securities have not been computed on a tax equivalent basis.

Less than One Year

One to Five Years

Five to Ten Years

Over Ten Years

Less than One Year One to Five Years Five to Ten Years Over Ten Years

Fair Value Weighted

Yield Fair Value Weighted

(Dollars in Thousands)

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government agency securities - government-sponsored enterprises

$ — — % $ 995 0.56 % $ 5,592 0.93 % $ 16,042 0.81 % $ 22,629

Municipal securities — — 2,214 1.05 7,083 1.43 15,482 1.81 24,779

Residential mortgage-backed securities - government issued

— — — — 2,920 2.97 7,483 2.84 10,403

Residential mortgage-backed securities - government-sponsored enterprises

— — 1,547 2.35 17,092 2.60 86,367 1.88 105,006

Commercial mortgage-backed securities - government issued

— — — — — — 5,464 2.31 5,464

Commercial mortgage-backed securities - government-sponsored enterprises

— — 2,093 2.40 6,955 2.28 4,317 1.78 13,365

Other securities — — 2,279 2.38 — — — — 2,279

Less than One Year

One to Five Years

Five to Ten Years

Over Ten Years

Amortized Cost

$ — $ 9,128 $ 39,642 $ 135,155 $ 183,925

Less than One Year One to Five Years Five to Ten Years Over Ten Years

Amortized Cost Weighted

Yield Amortized Cost Weighted

(Dollars in Thousands)

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Residential mortgage-backed securities - government issued

— — — — 2,086 1.97 1,478 2.21 3,564

Residential mortgage-backed securities - government-sponsored enterprises

— — — — 2,629 1.67 1,064 3.26 3,693

Commercial mortgage-backed securities - government-sponsored enterprises

— — — — 2,011 3.25 — — 2,011

$ 2,299 $ 12,110 $ 9,423 $ 2,542 $ 26,374

Derivative Activities

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As of December 31, 2020 and 2019, the Bank did not hold any derivative instruments that were designated as fair value hedges.

The derivative portfolio includes interest rate swaps offered directly to qualified commercial borrowers, which allow the Bank to provide a fixed rate alternative to their clients while mitigating interest rate risk by keeping a variable rate loan in their portfolios.

The Bank economically hedges client derivative transactions by entering into equal and offsetting interest rate swap contracts executed with dealer counterparties.

The economic hedge with the dealer counterparties allows the Bank to primarily offset the fixed rate interest rate risk.

Derivative transactions executed through this program are not designated as accounting hedge relationships and are marked to market through earnings each period.

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 (“CVA”) 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 December 31, 2020, the CVA reflecting the non-performance risk of the borrower was $461,000.

There was no CVA as of December 31, 2019.

As of December 31, 2020, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was approximately $629.1 million.

We receive fixed rates and pay floating rates based upon LIBOR on the swaps with commercial borrowers.

These swaps mature between March 2021 and October 2036 .

These swaps mature between March 2021 and December 2037.

Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements.

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On the offsetting swap contracts with dealer counterparties, we pay fixed rates and receive floating rates based upon LIBOR.

These interest rate swaps also have maturity dates between March 2021 and October 2036 .

These interest rate swaps also have maturity dates between March 2021 and December 2037.

Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and are reported on the Consolidated Balance Sheet as a net derivative liability of $49.3 million, included in accrued interest payable and other liabilities.

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These interest rate swaps mature between December 2021 and December 2027.

A pre-tax unrealized loss of $2.4 million was recognized in other comprehensive income for the year ended December 31, 2019 and there was no ineffective portion of these hedges information about the balance sheet location and fair value of the Corporation’s derivative instruments to qualified commercial borrowers as of December 31, 2019 and 2018 .

A pre-tax unrealized loss of $3.0 million was recognized in other comprehensive income for the year ended December 31, 2020 and there was no ineffective portion of these hedges.

Loans and Leases Receivable

Loans and leases receivable, net of allowance for loan and lease losses, increased by $422.3 million, or 24.9%, to $2.117 billion at December 31, 2020 from $1.695 billion at December 31, 2019.

Multi-family and commercial and industrial loans (“C&I”) were the largest contributor to loan growth in 2019, increasing $49.5 million and $41.1 million , respectively.

In general, our composition of total loans and leases has remained relatively consistent due to balanced growth across our product offerings.

Commercial real estate (“CRE”) loans represented 67.3% and 67.6% of our total loans and leases as of December 31, 2019 and December 31, 2018 , respectively.

Excluding net PPP loans, loans and leases receivable, net of allowance for loan and lease losses, increased by $197.0 million, or 11.62%, to $1.892 billion at December 31, 2020 from $1.695 billion at December 31, 2019.

Multifamily, commercial real estate non-owner occupied, and construction loans were the largest contributors to CRE loan growth as of December 31, 2020, increasing $94.2 million, $47.9 million, and $32.0 million, respectively, from December 31, 2019.

There continues to be a concentration in CRE loans which represented 70.6% and 67.3% of our total loans, excluding net PPP loans, as of December 31, 2020 and December 31, 2019, respectively.

As of December 31, 2020, approximately 18.7% of the CRE loans were owner-occupied CRE, compared to 19.6% as of December 31, 2019.

We consider owner-occupied CRE more characteristic of the Corporation’s C&I portfolio as, in general, the client’s primary source of repayment is the cash flow from the operating entity occupying the commercial real estate property.

Our C&I portfolio increased $41.1 million , or 8.9% , to $503.4 million at December 31, 2019 from $462.3 million at December 31, 2018 reflecting growth in both conventional lending and specialty finance.

C&I loans represented 29.3% and 28.6% of our total loans and leases as of December 31, 2019 and December 31, 2018 , respectively.

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

Underwriting of new credit is primarily through a committee process and is a key component of our operating philosophy.

Business development officers have relatively low individual lending authority limits, and thus, a significant portion of our new credit extensions require approval from a loan approval committee regardless of the type of loan or lease, amount of the credit, or the related complexities of each proposal.

In addition, we make every reasonable effort to ensure that there is appropriate collateral or a government guarantee at the time of origination to protect our interest in the related loan or lease.

Management has elevated its underwriting standards during the COVID-19 pandemic to ensure business owners and guarantors have robust liquidity, operating performance, and collateral positions.

Even with these higher standards, the Corporation has been able to grow loans and deepen banking relationships.

Our C&I portfolio increased $228.9 million, or 45.5%, to $732.3 million at December 31, 2020 from $503.4 million at December 31, 2019.

Excluding net PPP loans, C&I loans increased $3.6 million to $507.0 million from $503.4 million at December 31, 2019.

C&I growth in 2020 was impacted by the COVID-19 pandemic and related government stimulus, which reduced the line of credit usage we typically see from our existing C&I clients, specifically our asset-based and accounts receivable clients.

C&I lines of credit usage decreased $41.7 million, or 14.7%, to $241.2 million at December 31, 2020 from $282.9 million at December 31, 2019.

Some of our specialty finance products have historically experienced counter cyclical growth, growing during times of economic stress and uncertainty.

While the Corporation did not experience asset-based loan growth in 2020, management expects asset-based loans and accounts receivable financing volume to increase in 2021.

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

Underwriting of new credit is primarily through approval from a serial sign-off or committee process and is a key component of our operating philosophy.

Business development officers have no individual lending authority limits, and thus, a significant portion of our new credit extensions require approval from a loan approval committee regardless of the type of loan or lease, amount of the credit, or the related complexities of each proposal.

In addition, we make every reasonable effort to ensure that there is appropriate collateral or a government guarantee at the time of origination to protect our interest in the

related loan or lease.

To monitor the ongoing credit quality of our loans and leases, each credit is evaluated for proper risk rating using a nine grade risk rating system at the time of origination, subsequent renewal, evaluation of updated financial information from our borrowers, or as other circumstances dictate.

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As of December 31,

Amount Outstanding

% of Total Loans and Leases

Amount Outstanding

% of Total Loans and Leases

Amount Outstanding % of Total Loans and Leases Amount Outstanding % of Total Loans and Leases

(Dollars in Thousands)

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Commercial real estate — owner occupied

$ 253,882 11.8 % $ 226,614 13.2 %

Commercial real estate — non-owner occupied

564,532 26.3 516,652 30.1

Land development

49,839 2.3 51,097 3.0

141,043 6.6 109,057 6.4

311,556 14.5 217,322 12.7

38,284 1.8 33,359 1.9

Total commercial real estate

1,359,136 63.2 1,154,101 67.3

Commercial and industrial

732,318 34.0 503,402 29.4

Direct financing leases, net

22,331 1.1 28,092 1.6

Consumer and other:

Home equity and second mortgage

7,833 0.4 7,006 0.4

28,897 1.3 22,664 1.3

Total consumer and other

36,730 1.7 29,670 1.7

Total gross loans and leases receivable

2,150,515 100.0 % 1,715,265 100.0 %

Allowance for loan and lease losses

28,521 19,520

Deferred loan fees

Loans and leases receivable, net

$ 2,117,449 $ 1,695,115

The following table shows the scheduled contractual maturities of the Bank’s consolidated gross loans and leases receivable, as well as the dollar amount of such loans and leases which are scheduled to mature after one year and have fixed or adjustable interest rates, as of December 31, 2020.

Interest Terms On Amounts Due after One Year

Amounts Due Interest Terms On Amounts Due after One Year

or Less After One

Five Years After Five

Years Total Fixed Rate Variable

(In Thousands)

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Land development 24,190 23,748 1,901 49,839 10,489 15,160

Construction 17,898 3,862 119,283 141,043 28,620 94,525

Multi-family 16,131 96,283 199,142 311,556 84,731 210,694

1-4 family 7,433 29,080 1,771 38,284 30,421 430

Commercial and industrial 176,156 489,455 66,707 732,318 430,810 125,352

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Consumer and other 7,577 25,994 3,159 36,730 22,693 6,460

$ 346,039 $ 1,101,222 $ 703,254 $ 2,150,515 $ 1,072,370 $ 732,106

Commercial Real Estate.

The Bank originates owner-occupied and non-owner-occupied commercial real estate loans which have fixed or adjustable rates and generally terms of up to five years and amortizations of up to 30 years on existing commercial real estate.

The Bank originates owner-occupied and non-owner-occupied commercial real estate loans which have fixed or adjustable rates and generally terms of three to 10 years and amortizations of up to 30 years on existing commercial real estate.

The Bank also originates loans to construct commercial properties and complete land development projects.

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The majority of such loans are secured and typically backed by personal guarantees of the owners of the borrowing business.

Of the $503.4 million of commercial and industrial loans outstanding as of December 31, 2019 , $116.9 million were originated by our asset-based lending subsidiary, $25.3 million were originated by our accounts receivable financing business line, and $51.9 million were originated by our equipment finance and leasing subsidiary.

Of the $732.3 million of C&I loans outstanding as of December 31, 2020, $290.3 million were conventional C&I loans, $228.9 million were PPP loans, $85.8 million were asset-based loans, $73.1 million were equipment finance loans, $37.2 million were purchased accounts receivable, and $17.1 million were floorplan loans.

The asset-based loans, including accounts receivable purchased on a full recourse basis, are typically secured by the borrower’s accounts receivable and inventory.

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Significant adverse changes in various industries could cause rapid declines in values and collectability associated with those business assets resulting in inadequate collateral coverage that may expose us to future losses.

SBA loans are are made through programs designed by the federal government to assist the small business community in obtaining financing.

As an SBA Preferred Lender, our loans fall into three categories:

SBA loans are made through programs designed by the federal government to assist the small business community in obtaining financing.

As an SBA Preferred Lender, our loans (excluding PPP loans) fall into three categories:

loans originated under the SBA’s 7(a) term loan program;

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The success of our SBA lending program is dependent upon the continued availability of SBA loan programs, our status as a Preferred Lender, our ability to effectively compete and originate new SBA loans, and our ability to comply with applicable SBA lending requirements.

As of December 31, 2019 , the on-balance sheet portion of SBA loans that were included in the commercial and industrial loan portfolio was $32.5 million , commercial real estate loan portfolio was $30.1 million , and consumer and other was $142,000 .

As of December 31, 2020, the on-balance sheet portion of SBA loans, excluding PPP loans, that were included in the commercial and industrial loan portfolio was $33.2 million, commercial real estate loan portfolio was $12.6 million, and consumer and other was $451,000.

Direct Financing Leases.

Direct financing leases initiated through FBEF are originated with a fixed rate and typically a term of seven years or less.

Direct financing leases initiated through FBSF are originated with a fixed rate and typically a term of seven years or less.

It is customary in the leasing industry to provide 100% financing;

however, FBEF will, from time-to-time, require a down payment or lease deposit to provide a credit enhancement.

however, FBSF will, from time-to-time, require a down payment or lease deposit to provide a credit enhancement.

As of December 31, 2020, the Bank had $22.3 million in net direct financing receivables outstanding.

FBEF leases machinery and equipment to clients under leases which qualify as direct financing leases for financial reporting and as operating leases for income tax purposes.

FBSF leases machinery and equipment to clients under leases which qualify as direct financing leases for financial reporting and as operating leases for income tax purposes.

Under the direct financing method of accounting, the minimum lease payments to be received under the lease contract, together with the estimated unguaranteed residual value (approximating 3% to 20% of the cost of the related equipment), are recorded as lease receivables when the lease is signed and the lease property is delivered to the client.

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Lease payments are recorded when due under the lease contract.

Residual value is the estimated fair market value of the equipment on lease at lease termination.

In estimating the equipment’s

fair value, FBEF relies on historical experience by equipment type and manufacturer, published sources of used equipment pricing, internal evaluations and, when available, valuations by independent appraisers, adjusted for known trends.

Residual value is the estimated fair market value of the equipment on lease at lease termination and was estimated to be $5.4 million as of December 31, 2020.

In estimating the equipment’s fair value, FBSF relies on historical experience by equipment type and manufacturer, published sources of used equipment pricing, internal evaluations and, when available, valuations by independent appraisers, adjusted for known trends.

Consumer and Other.

The Bank originates a small amount of consumer loans consisting of home equity, first and second mortgages, credit card, and other personal loans for professional and executive clients of the Bank.

The Bank originates a small amount of consumer loans consisting of home equity, first and second mortgages, and other personal loans for professional and executive clients of the Bank.

Asset Quality

Non-performing loans decreased $4.7 million , or 18.5% , to $20.6 million at December 31, 2019 compared to $25.3 million at December 31, 2018 .

Non-accrual loans and leases increased $6.0 million, or 29.1%, to $26.6 million at December 31, 2020 compared to $20.6 million at December 31, 2019.

Our total impaired assets consisted of the following:

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Land development 890 1,526

Construction — —

Multi-family — —

1-4 family 250 333

Total non-accrual commercial real estate 10,352 5,891

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

1.24 % 1.37 %

Total non-performing assets to total assets 1.04 % 1.12 %

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

107.15 % 94.70 %

As of December 31, 2020 and 2019, $6.5 million and $15.6 million of the non-accrual loans were considered troubled debt restructurings, respectively.

As noted in the table above, non-performing assets consisted of non-accrual loans and leases and foreclosed properties totaling $23.5 million , or 1.12% of total assets, as of December 31, 2019 , a decrease in non-performing assets of $4.3 million , or 15.5% , from December 31, 2018 .

As noted in the table above, non-performing assets consisted of non-accrual loans and leases and foreclosed properties totaling $26.7 million, or 1.04% of total assets, as of December 31, 2020, an increase in non-performing assets of $3.1 million, or 13.3%, from December 31, 2019.

Impaired loans and leases as of December 31, 2020 and 2019 also included $46,000 and $140,000, respectively, of loans that are performing troubled debt restructurings, which are considered impaired due to the concession in terms, but are meeting the restructured payment terms and therefore are not on non-accrual status.

The following asset quality ratios exclude net PPP loans as they are fully guaranteed by the SBA:

As of December 31,

(In Thousands)

Total non-accrual loans and leases to gross loans and leases 1.38 % 1.20 %

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

Total non-performing assets to total assets 1.14 1.12

Allowance for loan and lease losses to gross loans and leases 1.48 1.14

We use a wide variety of available metrics to assess the overall asset quality of the portfolio and no one metric is used independently to make a final conclusion as to the asset quality of the portfolio.

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As of December 31, 2020, the payment performance of our loans and leases did not point to any new areas of concern, as approximately 99.0% of the total portfolio was in a current payment status, compared to 99.1% as of December 31, 2019.

We also monitor asset quality through our established categories as defined in Note 4 of the Consolidated Financial Statements.

We also monitor asset quality through our established categories as defined in Note 5 – Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses of the Consolidated Financial Statements.

As we continue to actively monitor the credit quality of our loan and lease portfolios, we may identify additional loans and leases for which the borrowers or lessees are having difficulties making the required principal and interest payments based upon factors including, but not limited to, the inability to sell the underlying collateral, inadequate cash flow from the operations of the underlying businesses, liquidation events, or bankruptcy filings.

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After foreclosure, valuation allowances or future write-downs to net realizable value are charged directly to non-interest expense.

Foreclosed properties were $2.9 million as of December 31, 2019 , compared to $2.5 million as of December 31, 2018 .

Foreclosed properties of $34,000 were outstanding as of December 31, 2020, compared to $2.9 million as of December 31, 2019.

We recorded impairment losses of approximately $363,000 and $224,000 for the years ended December 31, 2020 and 2019, respectively.

There were no sales of existing foreclosed properties for the year ended December 31, 2019 , compared to a net

loss on the sale of existing foreclosed property of $28,000 for the year ended December 31, 2018 .

We recorded a net loss of $20,000 on the sale of existing foreclosed properties for the year ended December 31, 2020, compared to no sales of existing foreclosed property for the year ended December 31, 2019.

We continue to evaluate possible exit strategies on our impaired loans when foreclosure action may be probable and our level of foreclosed assets may increase in the future.

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Allowance for Loan and Lease Losses

The allowance for loan and lease losses as a percentage of gross loans and leases was 1.14% as of December 31, 2019 and 1.26% as of December 31, 2018 .

The decrease in allowance for loan and lease losses as a percent of gross loans and leases was principally driven by a net reduction in specific reserves and historic loss rates, partially offset by an increase in allowance related to the loan growth.

Non-accrual loans and leases as a percentage of gross loans and leases decreased to 1.20% at December 31, 2019 compared to 1.56% at December 31, 2018 .

The allowance for loan and lease losses increased $9.0 million, or 46.1%, to $28.5 million as of December 31, 2020 from $19.5 million as of December 31, 2019.

The allowance for loan and lease losses as a percentage of gross loans and leases also increased to 1.33% as of December 31, 2020 from 1.14% as of December 31, 2019.

The allowance for loan and lease losses as a percentage of gross loans and leases, excluding net PPP loans, was 1.48% as of December 31, 2020.

The increase in allowance for loan and lease losses as a percent of gross loans and leases was principally driven by COVID-19 and the economic impact it is having on the Corporation’s loan portfolio.

For year ended December 31, 2020, the increase in the allowance for loan and lease losses was in large part due to an increase in several qualitative factors after careful evaluation by management.

Most notably, a $5.5 million increase was due to the economic conditions caused by the pandemic, including the increase in the unemployment rate, management’s ongoing review and grading of the loan and lease portfolios, consideration of delinquency experience, and the level of loans and leases subject to more frequent review by management.

Additionally, the general reserve increased $2.3 million commensurate with loan growth, and $949,000 due to historical loss rate updates to include current year net charge-off activity.

During the year ended December 31, 2020, we recorded net charge-offs on impaired loans and leases of approximately $7.8 million, which included $8.1 million of charge-offs and $332,000 of recoveries.

During the year ended December 31, 2018 , we recorded net charge-offs on impaired loans and leases of approximately $3.8 million , which included $6.1 million of charge-offs and $2.3 million of recoveries.

The current and prior year charge-offs were primarily related to legacy SBA loan relationships.

During the year ended December 31, 2019, we recorded net charge-offs on impaired loans and leases of approximately $3.0 million, which included $3.4 million of charge-offs and $366,000 of recoveries.

As of December 31, 2020 and 2019, our allowance for loan and lease losses to total non-accrual loans and leases was 107.15% and 94.70%, respectively.

This ratio increased primarily due to a reduction in non-accrual loans and leases outstanding during 2019.

This ratio increased primarily due to the increase in allowance for loan and lease losses discussed above.

Impaired loans and leases exhibit weaknesses that inhibit repayment in compliance with the original terms of the note or lease.

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As part of the underwriting process, as well as our ongoing monitoring efforts, we try to ensure that we have sufficient collateral to protect our interest in the related loan or lease.

As a result of this practice, a significant portion of our outstanding balance of non-performing loans or leases either does not require additional specific reserves or requires only a minimal amount of required specific reserve, as we believe the loans and leases are adequately collateralized as of the measurement period.

As a result of this practice, a significant portion of our outstanding balance of non-performing loans or leases either does not require additional

specific reserves or requires only a minimal amount of required specific reserve, as we believe the loans and leases are adequately collateralized as of the measurement period.

In addition, management is proactive in recording charge-offs to bring loans to their net realizable value in situations where it is determined with certainty that we will not recover the entire amount of our principal.

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Foreclosure actions may have been initiated on certain of these commercial real estate and other mortgage loans.

As a result of our review process, we have concluded that an appropriate allowance for loan and lease losses for the existing loan and lease portfolio was $19.5 million , or 1.14% of gross loans and leases, at December 31, 2019 .

As a result of our review process, we have concluded an appropriate allowance for loan and lease losses for the existing loan and lease portfolio was $28.5 million, or 1.33% of gross loans and leases, at December 31, 2020.

However, given ongoing complexities with current workout situations and the uncertainty surrounding future economic conditions, further charge-offs, and increased provisions for loan and lease losses may be recorded if additional facts and circumstances lead us to a different conclusion.

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Construction and land development — —

Multi-family — —

1-4 family — —

Commercial and industrial (1,951) (3,347)

2 unchanged sentences

Home equity and second mortgage — (2)

Other (13) (7)

Total charge-offs (8,139) (3,356)

3 unchanged sentences

Construction and land development — —

Multi-family — —

1-4 family — —

Commercial and industrial 325 262

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As of December 31,

Balance (a) Balance (a)

(Dollars in Thousands)

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Commercial and industrial

10,593 1.40 8,078 1.52

Consumer and other 771 2.10 590 1.99

Total allowance for loan and lease losses $ 28,521 1.33 % $ 19,520 1.14 %

Allowance for loan losses category as a percentage of total loans by category.

(a) Allowance for loan losses category as a percentage of total loans by category.

Although we believe the allowance for loan and lease losses was appropriate based on the current level of loan and lease delinquencies, non-accrual loans and leases, trends in charge-offs, economic conditions, and other factors as of December 31, 2020, there can be no assurance that future adjustments to the allowance will not be necessary.

The following tables illustrate ending balances of the Corporation’s gross loan and lease receivable portfolio, segregated by Commercial Real Estate and All Other Loans, and considering certain credit quality indicators.

Refer to Note 5 – Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses for risk category definitions.

December 31, 2020

I II III IV Total

(Dollars in Thousands)

Total commercial real estate $ 1,083,054 $ 177,296 $ 88,388 $ 10,398 $ 1,359,136

All other loans 674,850 28,602 71,662 16,265 791,379

Total gross loans and leases receivable $ 1,757,904 $ 205,898 $ 160,050 $ 26,663 $ 2,150,515

Category as a % of total portfolio 81.75 % 9.57 % 7.44 % 1.24 % 100.00 %

December 31, 2019

I II III IV Total

(Dollars in Thousands)

Total commercial real estate $ 1,040,674 $ 87,833 $ 19,563 $ 6,031 $ 1,154,101

All other loans 448,445 35,665 62,332 14,722 561,164

Total gross loans and leases receivable $ 1,489,119 $ 123,498 $ 81,895 $ 20,753 $ 1,715,265

Category as a % of total portfolio 86.82 % 7.20 % 4.77 % 1.21 % 100.00 %

Management’s ongoing review and grading of the loan and lease portfolio during the COVID-19 pandemic resulted in an increase of $82.4 million in Category II and $78.2 million increase in Category III loans from December 31, 2019, primarily due to migration of our commercial real estate portfolio.

The commercial real estate loans are to borrowers operating within certain industries which have been and are expected to be particularly impacted by social distancing, quarantines, and the economic impact of the COVID-19 pandemic, such as retail, hospitality, entertainment, and restaurants and food service.

In general, our commercial real estate loans within these stressed industries are well-collateralized and include strong project sponsors.

As a result of this process, we have concluded an appropriate allowance for loan and lease losses for the commercial real estate loan segment was $17.2 million, or 1.26% of total commercial real estate loans, at December 31, 2020, up from $10.9 million, or 0.94% of total commercial real estate loans, at December 31, 2019.

Although we believe the allowance for loan and lease losses related to the commercial real estate portfolio was appropriate based on the current level of loan and lease

delinquencies, non-accrual loans and leases, trends in charge-offs, economic conditions, and other factors as of December 31, 2020, there can be no assurance that future adjustments to the allowance will not be necessary.

As of December 31, 2020, deposits increased by $325.1 million to $1.856 billion from $1.530 billion at December 31, 2019.

The increase in deposits was primarily due to an increase in transaction accounts and money market accounts.

Transaction accounts increased by $57.1 million to $567.5 million at December 31, 2019 from $510.4 million at December 31, 2018 .

Money market accounts increased by $158.4 million to $674.4 million at December 31, 2019 from $516.0 million at December 31, 2018 .

This increase was partially offset by a $124.4 million decline in wholesale deposits.

Excluding the decrease in wholesale deposits, total deposits increased by $199.5 million to $1.379 billion from $1.179 billion at December 31, 2018 .

The increase in deposits was primarily due to an increase in transaction accounts, partially offset by a decrease in money market accounts and certificates of deposit.

Transaction accounts increased $409.3 million to $976.8 million at December 31, 2020 from $567.5 million at December 31, 2019.

Money market accounts decreased $32.9 million to $641.5 million at December 31, 2020 from $674.4 million at December 31, 2019.

Transaction account balances increased primarily due to the influx of PPP loan proceeds and successful business development efforts.

Management attributes the transition from money market accounts to reciprocal transaction accounts with full FDIC insurance to our clients’ preferences for liquidity and safety and soundness amid the economic uncertainty created by the COVID-19 pandemic.

Certificates of deposit decreased $72.3 million to $64.7 million at December 31, 2020 from $137.0 million at December 31, 2019 as client preferences shifted away from term deposits due to the low interest rate environment.

The decrease in certificates of deposit was partially offset by a $21.0 million increase in wholesale deposits, mainly due to adding non-maturity reciprocal deposits at a favorable rate compared to alternative funding sources.

Excluding these deposits, wholesale deposits decreased as the existing portfolio runoff was replaced by in-market deposits and lower cost FHLB advances to match-fund long-term fixed rate loans and fund loan growth.

Our strategic efforts remain focused on adding in-market deposit relationships.

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As of December 31,

% of Total Deposits

Balance % of Total Deposits Balance % of Total Deposits

(Dollars in Thousands)

Non-interest-bearing transaction accounts

$ 472,818 25.4 % $ 293,573 19.2 %

Interest-bearing transaction accounts

503,992 27.2 273,909 17.9

Money market accounts

641,504 34.6 674,409 44.1

Certificates of deposit

64,694 3.5 137,012 8.9

Wholesale deposits 172,508 9.3 151,476 9.9

Total deposits

1,855,516 100.0 % 1,530,379 100.0 %

Deposit balances associated with in-market relationships will fluctuate based upon maturity of time deposits, client demands for the use of their cash, and our ability to service and maintain existing and new client relationships.

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A variety of accounts are designed to attract both short- and long-term deposits.

These accounts include non-interest-bearing transaction accounts, interest-bearing transaction accounts, money market accounts, and time deposits.

These accounts include non-interest-bearing transaction accounts, interest-bearing transaction accounts, money market accounts, and certificates of deposit.

Deposit terms offered by the Bank vary according to the minimum balance required, the time period the funds must remain on deposit, the rates and products offered by competitors, and the interest rates charged on other sources of funds, among other factors.

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Average in-market deposits for the year ended December 31, 2020 were approximately $1.569 billion, or 74.47% of total bank funding.

Total bank funding is defined as total deposits plus FHLB advances.

Total bank funding is defined as total deposits plus FHLB advances, Federal Reserve Discount Window advances, and Federal Reserve PPPLF advances.

This compares to average in-market deposits of $1.271 billion, or 71.30% of total bank funding, for 2019.

Refer to Note 10 - Deposits in the Consolidated Financial Statements for additional information regarding our deposit composition.

The following table sets forth the amount and maturities of the Bank’s certificates of deposit and wholesale deposits at December 31, 2019 .

Interest Rate

Three Months and Less

Over Three Months Through Six Months

Over Six Months Through Twelve Months

Over Twelve Months

The following table sets forth the amount and maturities of the Bank’s certificates of deposit and term wholesale deposits at December 31, 2020.

Interest Rate Three Months and Less Over Three Months Through Six Months Over Six Months Through Twelve Months Over Twelve Months Total

(In Thousands)

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3.00% to 3.99% 7,513 — 19,686 551 27,750

$ 37,438 $ 26,290 $ 37,994 $ 10,480 $ 112,202

At December 31, 2020, time deposits included $28.7 million of certificates of deposit and wholesale deposits in denominations greater than or equal to $250,000.

Of these certificates, $17.2 million are scheduled to mature in three months or less, $2.8 million in greater than three through six months, $6.8 million in greater than six through twelve months and $1.9 million in greater than twelve months.

Of the total time deposits outstanding as of December 31, 2019 , $195.9 million are scheduled to mature in 2020 , $56.7 million in 2021 , $24.4 million in 2022 , $867,000 in 2023 , $269,000 in 2024 and $10.3 million thereafter.

As of December 31, 2019 , we have $16.9 million of wholesale certificates of deposit which the Bank has the right to call prior to the scheduled maturity.

These certificates have original maturities ranging from 9-18.5 years with options to call after the first six to twelve months of issuing the certificates with monthly, quarterly, or semi-annually call options thereafter.

Of the total time deposits outstanding as of December 31, 2020, $101.7 million are scheduled to mature in 2021, $6.2 million in 2022, $1.2 million in 2023, $263,000 in 2024, $1.7 million in 2025 and $1.0 million thereafter.

As of December 31, 2020, we have no wholesale certificates of deposit which the Bank has the right to call prior to the scheduled maturity.

We had total borrowings of $429.2 million as of December 31, 2020, an increase of $99.8 million, or 30.3%, from $329.4 million at December 31, 2019.

The primary reason for the increase in borrowings was due to an increase in FHLB advances.

While total wholesale funds, consisting of brokered certificates of deposit, deposits gathered from internet listing services, and FHLB advances, have decreased meaningfully overall due to significant in-market deposit growth, we continue to replace some of our maturing brokered certificates of deposit with FHLB advances at lower rates.

While total wholesale funding as a percentage of total bank funding has decreased meaningfully overall due to significant in-market deposit growth, we continue to replace the majority of our maturing brokered certificates of deposit with FHLB advances at lower rates, as needed, to match-fund fixed rate loans and mitigate interest rate risk.

Total bank funding is defined as total deposits plus FHLB advances, Federal Reserve Discount Window advances, and Federal Reserve PPPLF advances.

During the second quarter of 2020, management tested the availability of the Federal Reserve PPPLF due to the uncertainty of when PPP loans would be required to close and fund and obtained a $29.6 million PPPLF advance.

As of December 31, 2020, the Corporation had no PPPLF advances outstanding.

Management believes this strategy will help stabilize net interest margin with the expectation of a low interest rate environment for an extended period of time.

Consistent with our funding philosophy to manage interest rate risk, we will use the most efficient and cost effective source of wholesale funds.

We will utilize FHLB advances to the extent we maintain an adequate level of excess borrowing capacity for liquidity and contingency funding purposes and pricing remains favorable in comparison to the wholesale deposit alternative.

Total bank funding is defined as total deposits plus FHLB advances.

At December 31, 2019 , the ratio of wholesale funds to total bank funding was 24.5% .

We will use FHLB advances and/or brokered certificates of deposit in specific maturity periods needed, typically three to five years, to match-fund fixed rate loans and effectively mitigate the interest rate risk measured through our asset/liability management process and to support asset growth initiatives while taking into consideration our operating goals and desired level of usage of wholesale funds.

Please refer to the section titled Liquidity and Capital Resources , below, for further information regarding our use and monitoring of wholesale funds.

The following table sets forth the outstanding balances, weighted average balances, and weighted average interest rates for our borrowings (short-term and long-term) as indicated.

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Balance Weighted

Rate Balance Weighted

Balance Weighted

(Dollars in Thousands)

Federal funds purchased $ — $ 71 0.69 % $ — $ 59 2.45 %

Federal Reserve PPPLF — 15,207 0.35 — — —

FHLB advances

Line of credit

394,500 379,891 1.45 295,000 286,464 2.17

Other borrowings 920 676 12.60 675 675 8.11

Subordinated notes payable (1)

23,747 23,725 5.95 23,707 24,502 7.45

Junior subordinated notes

Short-term borrowings

Long-term borrowings

10,062 10,054 11.09 10,047 10,040 11.08

$ 429,229 $ 429,624 1.91 $ 329,429 $ 321,740 2.87

(1) Weighted average rate of subordinated notes payable reflects the accelerated amortization of subordinated debt issuance costs as a result of the early redemption of a subordinated note during the third quarter of 2019.

On August 15, 2019, we entered into a Subordinated Note Purchase Agreement pursuant to which the Corporation issued an aggregate principal amount of $15,000,000 of subordinated notes to three qualified institutional buyers in a private placement.

A summary of annual maturities of borrowings at December 31, 2020 is as follows:

(In Thousands)

Maturities during the year ended December 31,

2021 $ 210,000

Thereafter 144,729

On August 15, 2019, we issued an aggregate principal amount of $15,000,000 of subordinated notes to three qualified institutional buyers in a private placement.

The subordinated notes, which were structured to qualify as Tier 2 capital, have a maturity date of August 15, 2029 and will bear interest at a fixed rate of 5.50% up to, but not including, August 15, 2024.

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As of December 31, 2020, stockholders’ equity was $206.2 million, or 8.0% of total assets, compared to stockholders’ equity of $194.2 million, or 9.3% of total assets, as of December 31, 2019.

Excluding PPP loans, stockholders’ equity was 8.8% of total assets.

Stockholders’ equity increased by $12.0 million during the year ended December 31, 2020 attributable to net income of $17.0 million for the year ended December 31, 2020, partially offset by dividend declarations of $5.7 million and stock repurchases of $1.7 million.

In August 2019, the Corporation completed a $5 million share repurchase program initiated in December 2018, repurchasing 223,149 shares at an average price of $22.36 per share.

In September 2019, the Corporation’s Board approved a new share repurchase program authorizing the repurchase of up to $5 million in aggregate value of additional outstanding shares of common stock over a period of approximately 12 months, ending on September 30, 2020.

As of February 19, 2020, the Corporation had repurchased 118,825 shares of its common stock under the new program at a weighted average price of $24.99 per share, for a total value of $3.0 million.

The Corporation has $2.0 million of buyback authority remaining as of February 19, 2020.

In August 2019, the Corporation completed a $5 million share repurchase program which was initiated in December 2018 and had a termination date of December 31, 2019.

The Corporation repurchased 223,149 shares under the repurchase program at an average price of $22.36 per share.

On September 20, 2019, the Corporation announced its Board approved a new share repurchase program.

The program authorized the repurchase by the Corporation of up to $5 million in aggregate value of its outstanding shares of common stock over a period of approximately twelve months, ending on September 30, 2020.

The Corporation suspended this share repurchase program in March 2020 due to the uncertainty surrounding the COVID-19 pandemic.

Prior to suspending the program, the Corporation had repurchased $3.5 million of the $5 million authorized in the Company’s common stock.

On January 28, 2021, the Board of Directors of the Corporation approved a new share repurchase program.

The program authorizes the repurchase by the Corporation of up to $5.0 million of its total outstanding shares of common stock over a period of approximately twelve months, ending January 31, 2022.

Under the new share repurchase program, shares may be repurchased from time to time in the open market or negotiated transactions at prevailing market rates, or by other means in accordance with federal securities laws.

In connection with the share repurchase program, the Corporation implemented a 10b5-1 trading plan.

The trading plan allows the Corporation to repurchase shares of its common stock at times when it otherwise might be prevented from doing so under insider trading laws by requiring that an agent selected by the Corporation repurchase shares of common stock on the Corporation’s behalf on pre-determined terms.

Non-bank Consolidated Subsidiaries

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This compares to a total investment of $161.0 million, $5.2 million short-term investments, $112.6 million securities, $41.3 million gross loans, and net income of $3.4 million at and for the year ended December 31, 2019.

Effective January 13, 2021, First Business Capital Corp.

(“FBCC”) was merged with and into First Business Equipment Finance, LLC (“FBEF”), after which time FBEF’s name was changed to First Business Specialty Finance, LLC (“FBSF”).

First Business Equipment Finance, LLC .

FBEF was a wholly-owned subsidiary of FBB as of December 31, 2020, formed in 1998 and headquartered in Madison, Wisconsin.

FBB’s total investment in FBEF at December 31, 2020 was $11.0 million, gross loans and leases outstanding were $113.7 million and net income was $751,000 for the year ended December 31, 2020.

This compares to a total investment of $10.3 million, gross loans and leases outstanding of $79.3 million and net income of $103,000 at and for the year ended December 31, 2019.

First Business Capital Corp.

FBCC is a wholly-owned subsidiary of FBB formed in 1995 and headquartered in Madison, Wisconsin.

FBCC is an asset-based financing company established to meet the financing needs of companies that are generally unable to obtain traditional commercial lending products.

FBCC underwrites its loans with additional emphasis placed on collateral coverage as the companies it finances are growing rapidly, highly leveraged, or undergoing a turn-around period.

Through its FBGF division, FBCC purchases accounts receivable on a full recourse basis as an alternative to meet the financing needs of its client base.

FBCC was a wholly-owned subsidiary of FBB as of December 31, 2020, formed in 1995 and headquartered in Madison, Wisconsin.

FBB’s investment in FBCC at December 31, 2020 was $50.0 million, gross loans outstanding were $151.8 million and net income for the year ended December 31, 2020 was $1.7 million.

This compares to a total investment of $48.2 million, gross loans of $167.8 million and net income of $4.8 million at and for the year ended December 31, 2019.

First Business Equipment Finance, LLC.

FBEF, headquartered in Madison, Wisconsin, was formed in 1998 for the purpose of originating leases and extending credit in the form of loans to small- and medium-sized companies nationwide and is a wholly-owned subsidiary of FBB.

FBB’s total investment in FBEF at December 31, 2019 was $10.3 million , gross loans and leases outstanding were $79.3 million and net income of $103,000 for the year ended December 31, 2019 .

This compares to a total investment of $10.1 million , gross loans and leases outstanding of $57.8 million and net income of $3.1 million at and for the year ended December 31, 2018 .

First Business Specialty Finance, LLC (“FBSF”).

FBSF, formerly known as First Business Equipment Finance, LLC, headquartered in Madison, Wisconsin, was formed in 1998 for the purpose of originating leases and extending credit in the form of loans to small- and medium-sized companies nationwide and is a wholly-owned subsidiary of FBB.

Effective January 13, 2021, FBSF’s purpose and name were changed to reflect the origination and servicing of asset-based loans, purchasing accounts receivable, financing auto dealership floorplans, and originating equipment leases and extending credit in the form of loans to small- and medium-sized companies nationwide.

FBB’s pro-forma total investment in FBSF at December 31, 2020 was $61.1 million, gross loans and leases outstanding were $265.5 million and net income was $2.4 million for the year ended December 31, 2020.

This compares to a pro-forma total investment of $58.5 million, gross loans and leases outstanding of $247.1 million and net income of $4.9 million at and for the year ended December 31, 2019.

Rimrock Road Investment Fund, LLC (“Rimrock”).

Rimrock, formerly known as FBB Real Estate, LLC, is a wholly-owned subsidiary of FBB and was originally formed in 2009 for the purpose of holding and liquidating real estate and other assets acquired through foreclosure or other legal proceedings.

In 2014, Rimrock’s purpose was changed to reflect its qualified equity investment in a Madison, Wisconsin community development project, including the financing and ownership of a property that generates federal new market tax credits.

FBB’s total investment in Rimrock at December 31, 2019 was $2.8 million and Rimrock had a net income of $24,000 for the year ended December 31, 2019 .

This compares to a total investment of $2.7 million and net loss of $103,000 at and for the year ended December 31, 2018 .

Rimrock is a wholly-owned subsidiary of FBB and was formed in 2009 for the purpose of holding and liquidating real estate and other assets acquired through foreclosure or other legal proceedings.

In 2014, Rimrock’s purpose was changed to reflect its equity investment in an urban revitalization fund.

The investment provided federal new market tax credits over a seven year period.

FBB’s total investment in Rimrock at December 31, 2020 was $2.8 million and Rimrock had a net loss of $2,000 for the year ended December 31, 2020.

This compares to a total investment of $2.8 million and net income of $24,000 at and for the year ended December 31, 2019.

BOC Investment, LLC (“BOC”).

BOC is a wholly-owned subsidiary of FBB and was formed in 2015 for the purpose of holding its equity investment in a Madison, Wisconsin historic development project.

The investment provided

federal historic tax credits upon the completion of the restoration project.

The investment provided federal historic tax credits upon the completion of the restoration project.

FBB’s total investment in BOC at December 31, 2020 was $4.0 million.

This compares to a total investment of $4.0 million and a net income of $24,000 at and for the year ended December 31, 2018 .

This compares to a total investment of $4.0 million and no income or loss at and for the year ended December 31, 2019.

Mitchell Street Apartments Investment, LLC (“Mitchell”).

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FBB’s total investment in Mitchell was $1.4 million at December 31, 2020.

This compares to a total investment of $1.4 million and net loss of $188,000 at and for the year ended December 31, 2018 .

This compares to a total investment of $1.4 million and no income or loss at and for the year ended December 31, 2019.

ABKC Real Estate, LLC (“ABKCRE”).

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In 2017, FBB Tax Credit’s purpose was changed to facilitate investments in federal and state tax credits.

FBB’s total investment in FBB Tax Credit at December 31, 2019 was $8.9 million and FBB Tax Credit had a net income of $1.7 million for the year ended December 31, 2019 .

This compares to a total investment of $3.2 million and a $761,000 net income at and for the year ended December 31, 2018 .

FBB’s total investment in FBB Tax Credit at December 31, 2020 was $11.7 million and FBB Tax Credit had a net income of $923,000 for the year ended December 31, 2020.

This compares to a total investment of $8.9 million and net income of $1.7 million at and for the year ended December 31, 2019.

FBB Real Estate 2, LLC (“FBB RE 2”).

FBB RE 2 is a wholly-owned subsidiary of FBB and was formed for the purpose of holding and liquidating real estate and other assets acquired by FBB through foreclosure or other legal proceedings.

FBB’s total investment in FBB RE 2 at December 31, 2019 and 2018 was $1.1 million .

FBB’s total investment in FBB RE 2 at December 31, 2020 was $1.1 million and FBB RE 2 had net income $12,000.

This compares to a total investment of $1.1 million and no income or loss at and for the year ended December 31, 2019.

LIQUIDITY AND CAPITAL RESOURCES

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The capital ratios of the Bank met all applicable regulatory capital adequacy requirements in effect on December 31, 2020, and continue to meet the heightened requirements imposed by Basel III, including the capital conservation buffer that was fully phased-in as of January 1, 2019.

The Corporation’s and the Bank’s respective Boards and management teams adhere to the appropriate regulatory guidelines on decisions which affect their capital positions, including but not limited to, decisions relating to the payment of dividends and increasing indebtedness.

The Corporation’s Board and management teams adhere to the appropriate regulatory guidelines on decisions which affect their capital positions, including but not limited to, decisions relating to the payment of dividends and increasing indebtedness.

The Bank maintains liquidity by obtaining funds from several sources.

The Bank’s primary source of funds are principal and interest payments on loans receivable and mortgage-related securities, deposits, and other borrowings, such as federal funds and FHLB advances.

The Bank’s primary source of funds are principal and interest payments on loans receivable and mortgage-related securities, deposits, and other borrowings, such as federal funds, FHLB advances, Federal Reserve Discount Window advances, and Federal Reserve PPPLF advances.

The scheduled payments of loans and mortgage-related securities are generally a predictable source of funds.

Deposit flows and loan prepayments, however, are greatly influenced by general interest rates, economic conditions, and competition.

Please refer to the section titled COVID-19 Update for additional information on the Bank’s primary and secondary sources of available liquidity the during the COVID-19 pandemic.

We view on-balance sheet liquidity as a critical element to maintaining adequate liquidity to meet our cash and collateral obligations.

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As of December 31, 2020 and 2019, our immediate on-balance sheet liquidity was $640.2 million and $438.2 million, respectively.

The significant increase as of December 31, 2020 compared to December 31, 2019 is principally due to the Banks ability to pledge PPP loans and borrow from the Federal Reserve PPPLF.

Excluding Federal Reserve PPPLF availability, immediate on-balance sheet liquidity as of December 31, 2020 was $414.9 million.

This decline in on-balance sheet liquidity compared to 2019 is primarily due to the Banks increased use of FHLB advances to replace maturing brokered certificates of deposit.

At December 31, 2020 and 2019, the Bank had $26.7 million and $44.4 million on deposit with the FRB recorded in short-term investments, respectively.

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We had $567.0 million of outstanding wholesale funds at December 31, 2020, compared to $446.5 million of wholesale funds as of December 31, 2019, which represented 25.2% and 24.5%, respectively, of ending balance total bank funding.

Wholesale funds include FHLB advances, brokered certificates of deposit, and deposits gathered from internet listing

Total bank funding is defined as total deposits plus FHLB advances.

Wholesale funds include FHLB advances, Federal Reserve PPPLF advances, brokered certificates of deposit, and deposits gathered from internet listing services.

Total bank funding is defined as total deposits plus FHLB advances and Federal Reserve PPPLF advances.

We are committed to raising in-market deposits while utilizing wholesale funds to mitigate interest rate risk.

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The short-term FHLB advances will typically have terms of one week to one month to cover the overall expected funding demands.

Period-end in-market deposits increased $304.1 million, or 22.1%, to $1.683 billion at December 31, 2020 from $1.379 billion at December 31, 2019 as in-market deposit balances increased due to PPP loan proceeds and successful business development efforts.

Our in-market relationships remain stable;

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We expect to establish new client relationships and continue marketing efforts aimed at increasing the balances in existing clients’ deposit accounts.

Nonetheless, we will continue to use wholesale funds in specific maturity periods, typically three to five years, needed to effectively mitigate the interest rate risk measured through our asset/liability management process or in shorter time periods if in-market deposit balances decline.

or in shorter time periods if in-market deposit balances decline.

In order to provide for ongoing liquidity and funding, all of our wholesale funds are certificates of deposit which do not allow for withdrawal at the option of the depositor before the stated maturity (with the exception of deposits accumulated through the internet listing service which have the same early withdrawal privileges and fees as do our other in-market deposits) and FHLB advances with contractual maturity terms and no call provisions.

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These potential funding sources include deposits maintained at the FRB or Federal Reserve Discount Window utilizing currently unencumbered securities and acceptable loans as collateral.

As of December 31, 2019 , the available liquidity was in excess of the stated policy minimum and was equal to approximately 91 months of maturities.

As of December 31, 2020, the available liquidity was in excess of the stated policy minimum.

We believe the Bank will also have access to the unused federal funds lines, cash flows from borrower repayments, and cash flows from security maturities.

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During the year ended December 31, 2020, operating activities resulted in a net cash inflow of $26.6 million.

Operating cash flows included net income of $23.3 million and a provision for loan and leases losses of $2.1 million .

Net cash used in investing activities for the year ended December 31, 2019 was $131.5 million which consisted of cash outflows to fund net loan growth and reinvestment of cash flows within purchases of additional securities, partially offset by cash inflows from maturities, redemptions and paydowns of available-for-sale and held-to-maturity securities.

Operating cash flows included net income of $17.0 million and a provision for loan and leases losses of $16.8 million, partially offset by a net increase in loans originated for sale and sold.

Net cash used in investing activities for the year ended December 31, 2020 was $454.5 million which consisted of cash outflows to fund net loan growth and the purchase of $8.0 million in additional bank-owned life insurance and the increase of $5.6 million in FHLB stock.

Net cash provided by financing activities for the year ended December 31, 2020 was $417.7 million.

Financing cash flows included a $75.1 million net increase in deposits and a $20.5 million net increase in FHLB advances used predominantly to fund net loan growth.

Refer to Note 10 - Stockholders’ Equity and Regulatory Capital for additional information regarding the Corporation’s and the Bank’s capital ratios and the ratios required by their federal regulators at December 31, 2019 and 2018 .

Financing cash flows included a $325.1 million net increase in deposits and a $98.8 million net increase in FHLB advances used predominantly to fund net loan growth, partially offset by cash dividends paid and share repurchases of $5.7 million and $1.7 million, respectively.

Refer to Note 12 - Regulatory Capital for additional information regarding the Corporation’s and the Bank’s capital ratios and the ratios required by their federal regulators at December 31, 2020 and 2019.

OFF-BALANCE SHEET ARRANGEMENTS

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The Bank also utilizes interest rate swaps for the purposes of interest rate risk management, as described further in Note 17 – Derivative Financial Instruments in the Consolidated Financial Statements.

Additionally the Corporation has remaining commitments of $1.5 million to Aldine Capital Fund II, LP (“Aldine II”), and $4.8 million to Aldine Capital Fund III, LP (“Aldine III”), which are private equity mezzanine funding limited partnerships in which we have invested.

Additionally the Corporation has remaining commitments of $1.3 million to Aldine Capital Fund II, LP (“Aldine II”), $2.1 million to Aldine Capital Fund III, LP (“Aldine III”), and $725,000 to Dane Workforce Housing Fund, LLC (“Workforce Fund”).

Aldine II and Aldine III are private equity mezzanine funding limited partnerships in which we have invested.

Aldine II began its operations in March 2013 and Aldine III began its operations in October 2018.

The Workforce Fund was organized in 2020 to originate and administer investments for the purpose of alleviating the shortage of Affordable Workforce Housing Units in Dane County, Wisconsin.

We believe adequate capital and liquidity are available from various sources to fund projected commitments.

In the ordinary course of business, the Corporation sells the guaranteed portions of SBA loans to third parties.

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.

In the event of a loss resulting from default and a determination by the SBA that there is a compliance 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.

Management has assessed the 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 $1.3 million at December 31, 2019 .

The recourse reserve is reported in accrued interest payable and other liabilities on the Consolidated Balance Sheets.

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Although we believe that the allowance for loan and lease losses was appropriate as of December 31, 2020 based upon the evaluation of loan and lease delinquencies, non-performing assets, charge-off trends, economic conditions, and other factors, there can be no assurance that future adjustments to the allowance will not be necessary.

If the quality of loans or leases deteriorates, then the allowance for loan and lease losses would generally be expected to increase relative to total loans and

If the quality of loans or leases deteriorates, then the allowance for loan and lease losses would generally be expected to increase relative to total loans and leases.

If loan or lease quality improves, then the allowance would generally be expected to decrease relative to total loans and leases.

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Goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis, and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill.

The Corporation conducted its annual impairment test on July 1, 2019, utilizing a qualitative assessment, and concluded that it is more likely than not the estimated fair value of the reporting unit exceeded its carrying value.

As part of the Corporation’s qualitative assessment of goodwill impairment, management considered the triggering event of the COVID-19 pandemic and determined that the significant change in the general economic environment and financial markets, including the Corporation’s market capitalization, represents an interim impairment indicator requiring continued evaluation.

The Corporation performed Step 1,

quantitative goodwill impairment testing, as of August 1, 2020.

Based on the analysis performed, management concluded the Corporation’s goodwill was not impaired as of August 1, 2020.

The Corporation conducted a subsequent impairment test as of December 31, 2020, utilizing a qualitative assessment, and concluded that it was more likely than not the estimated fair value of the reporting unit exceeded its carrying value, resulting in no impairment.

Although no goodwill impairment was noted, there can be no assurances that future goodwill impairment will not occur.

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Tax liabilities could differ significantly from the estimates and interpretations used in determining the current and deferred income tax liabilities based on the completion of examinations by taxing authorities.

SBA Recourse Reserve .

The SBA recourse reserve represents management’s estimate of losses associated with the guaranteed portions of sold SBA loans.

The Corporation must comply with applicable SBA regulations in order to maintain the guaranty.

We estimate the SBA recourse reserve balance and the related SBA recourse provision by individually analyzing the eligibility of the guaranty for impaired loans that present a collateral shortfall, as well as by evaluating several factors to estimate probable losses within the remaining performing portion of the sold portfolio.

Although we believe that the SBA recourse reserve was appropriate as of December 31, 2019 , future adjustments may be necessary based on changes to impaired loans, the fair value estimate of the underlying collateral, and the Corporation’s ability to originate, fund, or service sold SBA loans in accordance with SBA regulations.

In addition, the SBA’s ultimate conclusion on the eligibility of a guaranty may be inconsistent with management’s best estimate.

See Note 1 - Nature of Operations and Summary of Significant Accounting Policies and Note 17 – Commitments and Contingencies in the Consolidated Financial Statements for further discussion of the SBA recourse reserve.

Quantitative and Qualitative Disclosures about Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis