What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-02-24 compared with 2020-02-27 · 584 added, 239 removed, 1399 unchanged (37% of the section changed)

1 unchanged sentence

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF FIRST BUSINESS FINANCIAL SERVICES

Consolidated Financial Statements

Consolidated Financial Statements Page No.

Consolidated Balance Sheets as of December 31, 2020 and 2019

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Consolidated Balance Sheets

2020 December 31,

(In Thousands, Except Share Data)

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Cash and cash equivalents

56,909 67,102

Securities available-for-sale, at fair value 183,925 173,133

Securities held-to-maturity, at amortized cost

26,374 32,700

Loans held for sale

Loans and leases receivable, net of allowance for loan and lease losses of $ 28,521 and $ 19,520 , respectively

2,117,449 1,695,115

Premises and equipment, net 1,998 2,557

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Goodwill and other intangible assets 12,018 11,922

Derivatives 49,377 18,346

Accrued interest receivable and other assets 39,478 30,160

$ 2,567,837 $ 2,096,779

Liabilities and Stockholders’ Equity

Deposits $ 1,855,516 $ 1,530,379

Federal Home Loan Bank advances and other borrowings 419,167 319,382

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Lease liabilities 6,386 7,541

Derivatives 54,927 20,885

Accrued interest payable and other liabilities 15,617 14,389

Total liabilities

2,361,675 1,902,623

Stockholders’ equity:

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Treasury stock, 667,500 and 596,676 shares at December 31, 2020 and 2019, respectively, at cost

( 16,553 ) ( 14,881 )

Total stockholders’ equity

206,162 194,156

Total liabilities and stockholders’ equity

$ 2,567,837 $ 2,096,779

See accompanying Notes to Consolidated Financial Statements.

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Loans and leases $ 89,160 $ 96,229

Securities 4,187 4,637

Short-term investments 832 1,174

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Interest expense

Deposits 8,922 22,958

Federal Home Loan Bank advances and other borrowings 7,070 8,114

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Service charges on deposits 3,415 3,104

Loan fees 1,826 1,767

Increase in cash surrender value of bank-owned life insurance 1,402 1,198

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

Swap fees 6,860 4,165

Other non-interest income 1,931 3,579

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Non-interest expense

Compensation 45,850 42,021

Occupancy 2,252 2,293

Professional fees 3,530 3,703

Data processing 2,734 2,562

Marketing 1,580 2,221

Equipment 1,199 1,230

Computer software 3,900 3,414

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Impairment of tax credit investments 2,395 4,094

SBA recourse provision

SBA recourse (benefit) provision ( 278 ) 188

Loss on early extinguishment of debt 744 —

Other non-interest expense 3,043 3,985

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Income tax expense 1,327 1,175

Net income $ 16,978 $ 23,324

Earnings per common share:

Basic $ 1.97 $ 2.68

Diluted 1.97 2.68

Dividends declared per share 0.66 0.60

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(In Thousands)

Other comprehensive loss, before tax

Net income $ 16,978 $ 23,324

Other comprehensive income, before tax

Securities available-for-sale:

Unrealized securities gains (losses) arising during the period

Unrealized securities gains arising during the period 3,526 2,747

Reclassification adjustment for net loss realized in net income 4 46

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Unrealized losses on interest rate swaps arising during the period ( 3,011 ) ( 2,396 )

Income tax (expense) benefit

Total other comprehensive gain (loss)

Income tax expense ( 143 ) ( 115 )

Total other comprehensive gain 415 336

Comprehensive income

$ 17,393 $ 23,660

See accompanying Notes to Consolidated Financial Statements.

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Consolidated Statements of Changes in Stockholders’ Equity

Common Shares Outstanding

Common Shares Outstanding Common

Stock Additional

Capital Retained

Earnings Accumulated

Comprehensive

(Loss) Income

(Loss) Income Treasury

(In Thousands, Except Share Data)

Balance at January 1, 2019 8,785,480 $ 91 $ 79,623 $ 110,310 $ ( 1,684 ) $ ( 7,633 ) $ 180,707

Other comprehensive loss

Cumulative effect of adoption of ASC Topic 842

— — — 687 — — 687

Net income — — — 23,324 — — 23,324

Other comprehensive income — — — — 336 — 336

Share-based compensation - restricted shares

93,521 1 1,565 — — — 1,566

Cash dividends ($ 0.60 per share)

— — — ( 5,216 ) — — ( 5,216 )

Treasury stock purchased ( 312,957 ) — — — — ( 7,248 ) ( 7,248 )

Deferred tax revaluation adjustment

Balance at December 31, 2019 8,566,044 92 81,188 129,105 ( 1,348 ) ( 14,881 ) 194,156

Cumulative effect of adoption of ASC Topic 842

Net income — — — 16,978 — — 16,978

Other comprehensive income — — — — 415 — 415

Share-based compensation - restricted shares

Share-based compensation - restricted shares and employee stock purchase plan 67,773 — 1,871 — — — 1,871

Issuance of common stock under the employee stock purchase plan 3,967 — 66 — — — 66

Cash dividends ($ 0.66 per share)

— — — ( 5,652 ) — — ( 5,652 )

Treasury stock purchased ( 70,824 ) — — — — ( 1,672 ) ( 1,672 )

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Operating activities

Net income $ 16,978 $ 23,324

Adjustments to reconcile net income to net cash provided by operating activities:

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Provision for loan and lease losses 16,808 2,085

SBA recourse provision

SBA recourse (benefit) provision ( 278 ) 188

Derivative credit valuation adjustment 461 —

Depreciation, amortization and accretion, net 3,465 3,049

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Origination of loans for sale ( 81,609 ) ( 61,348 )

Sale of loans originated for sale

Sale of SBA loans originated for sale 81,018 62,889

Gain on sale of loans originated for sale ( 2,899 ) ( 1,459 )

Net loss on foreclosed properties, including impairment valuation 383 224

Loan servicing right impairment valuation

Loan servicing right (recovery) impairment valuation ( 16 ) 25

Right-of-use asset impairment — 299

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Purchases of available-for-sale securities ( 66,879 ) ( 84,740 )

Purchases of held-to-maturity securities

Proceeds from sale of foreclosed properties 2,582 —

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Purchases of leasehold improvements and equipment, net ( 264 ) ( 225 )

Purchases of bank owned life insurance policies ( 8,000 ) —

Premium payment on bank owned life insurance policies ( 25 ) ( 25 )

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Proceeds from Federal Home Loan Bank advances 1,318,700 557,000

Loss on early extinguishment of debt 744 —

Proceeds from issuance of subordinated notes payable — 15,000

Repayment of subordinated notes payable

First Business Financial Services, Inc.

Consolidated Statements of Cash Flows

For the Year Ended December 31,

(In Thousands)

Net (decrease) increase in long-term borrowed funds

Repayment of subordinated notes payable — ( 15,000 )

Repayment of the Federal Reserve Paycheck Protection Program Lending Facility ( 29,605 ) —

Proceeds from the Federal Reserve Paycheck Protection Program Lending Facility 29,605 —

Net increase (decrease) in long-term borrowed funds 300 ( 48 )

Cash dividends paid ( 5,652 ) ( 5,216 )

Proceeds from issuance of common stock under ESPP 66 —

Purchase of treasury stock ( 1,672 ) ( 7,248 )

Net cash provided by financing activities 417,679 83,068

Net (decrease) increase in cash and cash equivalents

Net decrease in cash and cash equivalents ( 10,193 ) ( 19,444 )

Cash and cash equivalents at the beginning of the period 67,102 86,546

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Income taxes paid 3,451 1,294

Increase right-of-use in exchange for operating lease liability 190 —

Non-cash investing and financing activities:

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FBB operates as a commercial banking institution primarily in Wisconsin and the greater Kansas City Metro.

FBB also offers private wealth management services through First Business Trust & Investments (“FBTI”) and bank consulting services through First Business Consulting Services (“FBCS”), both divisions of FBB.

FBB also offers private wealth management services and bank consulting services.

The Bank provides a full range of financial services to businesses, business owners, executives, professionals, and high net worth individuals.

The Bank is subject to competition from other financial institutions and service providers, and is also subject to state and federal regulations.

FBB has the following wholly-owned subsidiaries:

As of December 31 2020, FBB had the following wholly-owned subsidiaries:

First Business Capital Corp.

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FMIC is located in and was formed under the laws of the state of Nevada.

Effective January 13, 2021, FBCC was merged with and into FBEF, after which time FBEF’s name was changed to First Business Specialty Finance, LLC (“FBSF”).

Basis of Presentation.

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If the Corporation intends to sell a security or if it is more likely than not that the Corporation will be required to sell the security before recovery, an other-than-temporary impairment write-down is recognized in earnings equal to the difference between the security’s amortized cost basis and its fair value.

If the Corporation does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the other-

than-temporary impairment write-down is separated into an amount representing credit loss, which is recognized in earnings, and an amount related to all other factors, which is recognized in other comprehensive income.

If the Corporation does not

intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the other-than-temporary impairment write-down is separated into an amount representing credit loss, which is recognized in earnings, and an amount related to all other factors, which is recognized in other comprehensive income.

Loans Held for Sale.

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If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains on non-accrual.

The CARES Act (as modified by the Consolidated Appropriations Act, 2021) permits banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs if the loan was not more than 30 days delinquent as of December 31, 2019 and the modification is made before the earliest of (i) January 1, 2022, or (ii) the date that is 60 days after the date on which the national emergency concerning COVID-19 terminates.

Interagency guidance from the federal bank regulatory agencies regarding TDRs has also been issued in response to COVID-19 and is generally consistent with the relief granted under the CARES Act.

The Corporation is applying this statutory and regulatory guidance to qualifying loan modifications.

Interest on non-impaired loans and leases is accrued and credited to income on a daily basis based on the unpaid principal balance and is calculated using the effective interest method.

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Loan and lease origination fees as well as certain direct origination costs are deferred and amortized as an adjustment to loan yields over the stated term of the loan or lease.

Loans or leases that result from a refinance or restructuring, other than a troubled debt restructuring, where terms are at least as favorable to the Corporation as the terms for comparable loans to other borrowers with similar collection risks and result in an essentially new loan or lease, are accounted for as a new loan or lease.

Loans or leases that result from a refinance or restructuring, other than a

troubled debt restructuring, where terms are at least as favorable to the Corporation as the terms for comparable loans to other borrowers with similar collection risks and result in an essentially new loan or lease, are accounted for as a new loan or lease.

Any unamortized net fees, costs, or penalties are recognized when the new loan or lease is originated.

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Lease payments are recorded when due under the lease contract.

Residual values are established at lease inception equal to the estimated value to be received from the equipment following termination of the

initial lease and such estimated value considers all relevant information and circumstances regarding the equipment.

Residual values are established at lease inception equal to the estimated value to be received from the equipment following termination of the initial lease and such estimated value considers all relevant information and circumstances regarding the equipment.

In estimating the equipment’s fair value at lease termination, the Corporation relies on internally or externally prepared appraisals, published sources of used equipment prices, and historical experience adjusted for known current industry and economic trends.

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Costs relating to the development and improvement of the property are capitalized while holding period costs are charged to other non-interest expense.

At contract inception, the Company determines whether the arrangement is or contains a lease and determines the lease classificatio n.

The lease term is determined based on the non-cancellable term of the lease adjusted to the extent optional renewal terms and termination rights are reasonably certain.

Lease expense is recognized evenly over the lease term.

Variable lease payments are recognized as period costs.

The present value of remaining lease payments is recognized as a liability on the balance sheet with a corresponding right-of-use asset adjusted for prepaid or accrued lease payments.

The Company uses t he Federal Home Loan Bank fixed advance rate as of the lease inception date that most closely resembles the remaining term of the lease as the incremental borrowing rate, unless the interest rate implicit in the lease contract is readily determinable.

The Company has elected to exclude short-term leases as well as all non-lease items, such as common area maintenance, from being included in the lease liability on the Consolidated Balance Sheets.

Bank-Owned Life Insurance.

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An initial qualitative evaluation is made to assess the likelihood of impairment and determine whether further quantitative testing to calculate the fair value is necessary.

When the qualitative evaluation indicates that impairment is more likely than not, quantitative testing is required whereby the fair value of each reporting unit is calculated and compared to the recorded book value, Step 1.

If the calculated fair value of the reporting unit exceeds its carrying value, goodwill is not considered impaired and Step 2 is not considered necessary.

If the carrying value of a reporting unit exceeds its calculated fair value, the impairment test continues (Step 2) by comparing the carrying value of the reporting unit’s goodwill to the implied fair value of goodwill.

The implied fair value is computed by adjusting all assets and liabilities of the reporting unit to current fair value with the offset adjustment to goodwill.

The adjusted goodwill balance is the implied fair value of the goodwill.

An impairment charge is recognized if the carrying value of goodwill exceeds the implied fair value of goodwill.

If the calculated fair value of the reporting unit exceeds its carrying value, goodwill is not considered impaired.

If the carrying value of a reporting unit exceeds its calculated fair value, an impairment charge is recognized in earnings in an amount equal to the difference.

Other Investments.

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Investments in corporations representing at least a 20 % interest are generally accounted for using the equity method and investments in corporations representing less than 20 % interest are generally accounted for at cost.

Investments in limited

partnerships representing from at least a 3% up to a 50% interest in the entity are generally accounted for using the equity method and investments in limited partnerships representing less than 3% are generally accounted for at cost.

Investments in limited partnerships representing from at least a 3 % up to a 50 % interest in the entity are generally accounted for using the equity method and investments in limited partnerships representing less than 3 % are generally accounted for at cost.

All of these investments are periodically evaluated for impairment.

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The effects of netting arrangements are disclosed within the Notes of the Consolidated Financial Statements.

The Corporation offers interest rate swap products directly to qualified commercial borrowers.

The Corporation economically hedges client derivative transactions by entering into offsetting interest rate swap contracts executed with a third party.

Derivative transactions executed as part of this program are not considered hedging instruments and are marked-to-market through earnings each period.

The derivative contracts have mirror-image terms, which results in the positions’ changes in fair value offsetting through earnings each period.

The credit risk and risk of non-performance embedded in the fair value calculations is different between the dealer counterparties and the commercial borrowers which may result in a difference in the changes in the fair value of the mirror-image swaps.

The Corporation incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the counterparty’s risk in the fair value measurements.

When evaluating the fair value of its derivative contracts for the effects of non-performance and credit risk, the Corporation considers the impact of netting and any applicable credit enhancements such as collateral postings, thresholds and guarantees.

The Corporation also enters into interest rate swaps to manage interest rate risk and reduce the cost of match-funding certain long-term fixed rate loans.

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The recourse reserve is reported in accrued interest payable and other liabilities on the Consolidated Balance Sheets and consists of two components:

(1) specific reserves for individually evaluated impaired loans that present a collateral shortfall where the guaranty associated with the sold portion of the SBA loan is determined to most likely be ineligible;

(1) specific reserves for individually evaluated impaired loans that present a collateral shortfall

where the guaranty associated with the sold portion of the SBA loan is determined to most likely be ineligible;

and (2) general reserves for estimated probable losses on the remaining sold portfolio.

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Comprehensive income or loss, shown as a separate financial statement, includes net income or loss, changes in unrealized gains and losses on available-for-sale securities, changes in deferred gains and losses on investment securities transferred from available-for-sale to held-to-maturity, if any, changes in unrealized gains and losses associated with cash flow hedging instruments, if any, and the amortization of deferred gains and losses associated with terminated cash flow hedges, if any.

For the years ended December 31, 2019 , and 2018 , realized securities losses of $46,000 and $4,000 were reclassified out of accumulated other comprehensive income, respectively.

For the years ended December 31, 2020, and 2019, realized securities losses of $ 4,000 and $ 46,000 were reclassified out of accumulated other comprehensive loss, respectively.

Earnings Per Common Share.

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While the Corporation’s chief decision-maker monitors the revenue streams of the various products, services, and locations, operations are managed and financial performance is evaluated on a corporate-wide basis.

The Corporation’s business units have similar basic characteristics in the nature of the products, production processes and type or class of client for products or services;

Corporation’s business units have similar basic characteristics in the nature of the products, production processes and type or class of client for products or services;

therefore, these business units are considered one operating segment.

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Restricted stock units do not have voting rights and are provided dividend equivalents.

The restricted stock granted under the 2019 Equity Incentive Plan (the “Plan”) is typically subject to a vesting period.

The restricted stock granted under the 2019 Equity Incentive Plan (the “Plan”) is typically subject to a three or four-year vesting period.

Compensation expense for restricted stock is recognized over the requisite service period of generally four years for the entire award on a straight-line basis.

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The compensation expense for the awards expected to vest for the percentage of performance based restricted stock units subject to the TSR metric are never adjusted, and are amortized utilizing the accounting fair value provided using a Monte Carlo pricing model.

During 2020, an Employee Stock Purchase Plan (“ESPP”) was approved by the Corporation’s shareholders and is offered to all qualifying employees.

The plan qualifies as an ESPP under section 423 of the Internal Revenue Code of 1986.

Under the ESPP, eligible employees may enroll in a three month offer period that begins January, April, July, and October of each year.

Employees may purchase a limited number of shares on the Corporation’s common stock at 90% of the fair market value on the last day of the offering period.

The ESPP is treated as a compensatory plan for purposes of share-based compensation expense.

Adoption of New Accounting Standards .

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2016-02, “Leases (Topic 842).” The ASU intends to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities and disclosing key information about leasing arrangements.

The ASU requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date:

(1) a lease liability, which is a lessees’ obligation to make lease payments arising from a lease, measured on a discounted basis;

and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

Under the new guidance, lessor accounting is largely unchanged.

Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers .

The new lease guidance simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities.

Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) may apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.

The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented.

Lessees and lessors may also elect to apply the amendments in the ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.

The ASU was effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted.

The Corporation adopted the accounting standard during the first quarter of 2019 retrospectively through a cumulative-effect adjustment to retained earnings as of January 1, 2019.

The Corporation leases office space, loan production offices, and specialty financing production offices under noncancelable operating leases which expire on various dates through 2028.

The Corporation also leases office equipment.

As part of the adoption of the accounting standard, we elected to not recognize short-term leases on the Consolidated Balance Sheets.

As such, the Corporation applied the accounting standard to six office spaces.

All non-lease components, such as common area maintenance, were excluded.

When calculating the lease liability on a discounted bases, the Corporation utilized the incremental borrowing rate as the rate implicit in the leases was not readily determinable.

The Federal Home Loan Bank fixed advance rate as of January 2, 2019 that most closely resembled the remaining term was used as the incremental borrowing rate.

While several leases contained options to extend and terminate, it is not reasonably certain that either option will be utilized and therefore, only the payments in the initial term of the leases were included in the lease liability and right-of-use asset.

The impact of adoption was an $8.8 million lease liability with an offsetting $8.5 million right-of-use asset, which is net of $312,000 of lease incentives, and a $687,000 cumulative-effect adjustment to increase retained earnings on the Consolidated Balance Sheets as of January 1, 2019.

In June 2018, the FASB issued ASU No.

2018-07, “Compensation- Stock Compensation (Topic 718).” The ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees.

In January 2017, the FASB issued ASU No.

2017-04, “Intangibles - Goodwill and Other (Topic 350).” The ASU amended existing guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test.

The amendments require an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit.

Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.

The amendments also eliminate the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.

The Corporation adopted the accounting standard during the first quarter of 2020.

The adoption of the standard did not have a material impact on the Corporation’s results of operations, financial position, and liquidity.

In August 2018, the FASB issued ASU No.

2018-15, “Intangibles-Goodwill and Other Internal-Use Software (Subtopic 350-40).” The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).

Implementation costs incurred in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post implementation stages are expensed as the activities are performed.

The amendment also requires entities to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement and in the same income statement line item as the fees associated with the hosting element.

The Corporation adopted the accounting standard during the first quarter of 2020.

The adoption of the standard did not have a material impact on the Corporation’s results of operations, financial position, and liquidity.

Recent Accounting Pronouncements.

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The ASU also requires consideration of a broader range of information to inform credit loss estimates, including such factors as past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, and any other financial asset not excluded from the scope under which the Corporation has the contractual right to receive cash.

The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, and any other financial asset not

excluded from the scope under which the Corporation has the contractual right to receive cash.

Entities will apply the amendments in the ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.

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Management will continue to progress on its implementation project plan and improve the Corporation’s approach throughout the deferral period.

In January 2017, the FASB issued ASU No.

2017-04, “ Intangibles - Goodwill and Other (Topic 350).

” The ASU amended existing guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test.

Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.

The ASU is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019.

Early adoption is permitted.

The amendment should be applied prospectively.

The Corporation is in the process of evaluating the impact of this standard but does not expect this standard to have a material impact on its results of operations, financial position, and liquidity.

In August 2018, the FASB issued ASU No.

The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

Early adoption is permitted.

In March 2020, the FASB issued ASU 2020-04 "Reference Rate Reform (Topic 848)," which provides temporary, optional practical expedients and exceptions to ease the potential burden of transitioning to the new reference rates which will replace LIBOR and other reference rates expected to be discontinued.

Adoption of the provisions of ASU 2020-04 is optional.

The amendments are effective for all entities from the beginning of the interim period that includes the issuance date of the ASU.

An entity may elect to apply the amendments prospectively through December 31, 2022.

The Corporation is currently evaluating the impact of ASU 2020-04 on its financial position, results of operations and liquidity.

The adoption of this standard is not expected to have a material affect on the Corporation's operating results or financial condition.

Note 2 - Other Events

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.

As of December 31, 2020, the Corporation’s aggregate outstanding exposure in these segments was $ 182.6 million, or 9.5 % of the Corporation’s gross loans and leases.

Based on management’s current assessment of the increased inherent risk in the loan portfolio, the allowance for loan and leases losses increased $ 9.0 million, or 46.1 %, compared to December 31, 2019.

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 from current year net charge-off activity.

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 loan portfolio.

The Corporation provided loan payment deferrals of 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 38 deferrals outstanding, representing $ 27.0 million in total loans, or 1.4 % of gross loans and leases, excluding gross PPP loans, compared to $ 131.5 million, or 7.1 % of gross loans and leases, excluding gross PPP loans as of September 30, 2020.

For loans subject to the program, each borrower is required to resume making regularly scheduled loan payment at the end of the modification period and the deferred amounts will be moved to the end of the loan term.

The loan will not be reported as past due during the deferral period.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law.

The CARES Act is a $2 trillion stimulus package to provide relief to U.S.

businesses and consumers struggling as a result of the pandemic.

A provision in the CARES Act includes a $349 billion fund for the creation of the Paycheck Protection Program (“PPP”) through the Small Business Administration (“SBA”) and Treasury Department.

On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act was signed into law, adding an additional $320 billion of funding to the

The PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest, and utilities.

The loans may be forgiven conditioned upon the client providing payroll documentation evidencing their compliant use of funds and otherwise complying with the terms of the program.

The Corporation began accepting and processing applications for loans under the PPP on April 3, 2020.

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

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

During the year ended December 31, 2020, $ 5.3 million was recognized in loans and leases interest income in the unaudited Consolidated Statements of Income, respectively.

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

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

Management funded these short-term loans primarily through a combination of excess cash held at the Federal Reserve and from an increase in in-market deposits.

On December 27, 2020, the Consolidated Appropriations Act, 2021 (“CAA”) was signed into law.

The CAA is a $2.3 trillion spending bill that combines $900 billion in stimulus relief for the COVID-19 pandemic in the United States with a $1.4 trillion omnibus spending bill for the 2021 federal fiscal year and prevents a government shutdown.

The CAA allows for a second draw for certain businesses under the PPP.

Like the original program, loan proceeds are available to help fund payroll and group health benefit costs, as well as certain mortgage interest, rent and utilities.

In addition, authorized costs now also include COVID-19 related worker protection costs, uninsured property damage costs due to looting or vandalism during 2020 and certain supplier costs and expenses for operations.

The CAA also expands benefit costs to include group dental, vision, life and disability benefits.

All of these changes are generally retroactive to the original CARES Act, meaning that the changes may be taken into account in processing loan forgiveness with respect to an original PPP loan.

The Corporation began accepting and processing applications for second draw PPP loans on January 13, 2021.

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 million.

Note 3 – Cash and Cash Equivalents

Cash and due from banks was approximately $ 29.5 million and $ 16.1 million at December 31, 2020 and 2019, respectively.

Required reserves in the form of either vault cash or deposits held at the Federal Reserve Bank (“FRB”) were $9.2 million and $9.9 million at December 31, 2019 and 2018 , respectively.

As of March 26, 2020, the Federal Reserve Bank (“FRB”) reduced reserve requirement ratios to zero percent for all depository institutions.

As of December 31, 2019, the required reserve in the form of either vault cash or deposits help was $ 9.2 million.

FRB balances were $ 26.7 million and $ 44.4 million at December 31, 2020 and 2019, respectively, and are included in short-term investments on the Consolidated Balance Sheets.

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As of December 31, 2020

Amortized Cost

Amortized Cost Gross

Losses Fair Value

(In Thousands)

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government agency securities - government-sponsored enterprises

$ 22,699 $ 9 $ ( 79 ) $ 22,629

Municipal securities 24,067 716 ( 4 ) 24,779

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Residential mortgage-backed securities - government-sponsored enterprises

102,843 2,212 ( 49 ) 105,006

Commercial mortgage-backed securities - government issued 5,289 175 — 5,464

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Other securities

2,205 74 — 2,279

$ 179,581 $ 4,476 $ ( 132 ) $ 183,925

As of December 31, 2019

Amortized Cost

Amortized Cost Gross

Losses Fair Value

(In Thousands)

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government agency securities - government-sponsored enterprises

$ 23,616 $ 152 $ ( 10 ) $ 23,758

Municipal securities 160 — — 160

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Residential mortgage-backed securities - government-sponsored enterprises

111,561 847 ( 406 ) 112,002

Commercial mortgage-backed securities - government issued 6,705 45 ( 87 ) 6,663

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Other securities 2,205 30 — 2,235

$ 172,319 $ 1,331 $ ( 517 ) $ 173,133

The amortized cost and fair value of securities held-to-maturity and the corresponding amounts of gross unrealized gains and losses were as follows:

As of December 31, 2020

Amortized Cost

Amortized Cost Gross

Losses Fair Value

(In Thousands)

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Residential mortgage-backed securities - government-sponsored enterprises

3,693 163 — 3,856

Commercial mortgage-backed securities - government-sponsored enterprises

2,011 282 — 2,293

$ 26,374 $ 974 $ ( 15 ) $ 27,333

As of December 31, 2019

Amortized Cost

Amortized Cost Gross

Losses Fair Value

(In Thousands)

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Residential mortgage-backed securities - government-sponsored enterprises

5,183 51 ( 23 ) 5,211

Commercial mortgage-backed securities - government-sponsored enterprises

$ 2,014 $ 123 $ — 2,137

$ 32,700 $ 528 $ ( 40 ) $ 33,188

government agency securities - government-sponsored enterprises represent securities issued by Federal National Mortgage Association (“FNMA”) and the SBA.

Municipal securities include securities issued by various municipalities located primarily within Wisconsin and are primarily general obligation bonds that are tax-exempt in nature.

Residential and commercial mortgage-backed securities - government issued represent securities guaranteed by the Government National

Mortgage Association.

Residential and commercial mortgage-backed securities - government-sponsored enterprises include securities guaranteed by the Federal Home Loan Mortgage Corporation, FNMA, and the FHLB.

Residential and commercial mortgage-backed securities - government issued represent securities guaranteed by the Government National Mortgage Association.

Residential and commercial mortgage-backed securities - government-sponsored enterprises include

securities guaranteed by the Federal Home Loan Mortgage Corporation, FNMA, and the FHLB.

Other securities represent certificates of deposit of insured banks and savings institutions with an original maturity greater than three months.

There were 69 and 45 sales of available-for-sale securities that occurred during the year ended December 31, 2019 and 2018 , respectively.

There were one and 69 sales of available-for-sale securities that occurred during the year ended December 31, 2020 and 2019, respectively.

Total proceeds and gross realized gains and losses from sales of securities available-for-sale were as follows:

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(In Thousands)

Gross gains $ — $ 58

Gross losses ( 4 ) ( 104 )

Net losses on sale of available-for-sale securities $ ( 4 ) $ ( 46 )

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Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations with or without call or prepayment penalties.

Available-for-Sale

Held-to-Maturity

Amortized Cost

Available-for-Sale Held-to-Maturity

Amortized Cost Fair Value Amortized Cost Fair Value

(In Thousands)

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Due in over ten years 132,598 135,155 2,542 2,664

$ 179,581 $ 183,925 $ 26,374 $ 27,333

The tables below show the Corporation’s gross unrealized losses and fair value of available-for-sale investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at December 31, 2020 and 2019.

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however, they have primarily declined in value due to the current interest rate environment.

At December 31, 2019 , the Corporation held 19 available-for-sale securities that had been in a continuous unrealized loss position for twelve months or greater.

At December 31, 2020, the Corporation held one available-for-sale security that had been in a continuous unrealized loss position for twelve months or greater.

The Corporation also has not specifically identified available-for-sale securities in a loss position that it intends to sell in the near term and does not believe that it will be required to sell any such securities.

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December 31, 2020

Less than 12 Months

12 Months or Longer

Less than 12 Months 12 Months or Longer Total

Fair Value Unrealized

Losses Fair Value Unrealized

(In Thousands)

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Government agency securities - government-sponsored enterprises

Residential mortgage-backed securities - government issued

$ 11,602 $ 45 $ 4,031 $ 34 $ 15,633 $ 79

Municipal securities

2,863 4 — — 2,863 4

Residential mortgage-backed securities - government-sponsored enterprises

Commercial mortgage-backed securities - government issued

Commercial mortgage-backed securities - government-sponsored enterprises

19,078 49 — — 19,078 49

$ 33,543 $ 98 $ 4,031 $ 34 $ 37,574 $ 132

December 31, 2019

Less than 12 Months

12 Months or Longer

Less than 12 Months 12 Months or Longer Total

Fair Value Unrealized

Losses Fair Value Unrealized

(In Thousands)

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government agency obligations - government-sponsored enterprises

Municipal securities

$ 4,363 $ 10 $ — $ — $ 4,363 $ 10

Residential mortgage-backed securities - government issued 4,619 5 — — 4,619 5

Residential mortgage-backed securities - government-sponsored enterprises

36,972 253 11,304 153 48,276 406

Commercial mortgage-backed securities - government issued — — 4,727 87 4,727 87

Commercial mortgage-backed securities - government-sponsored enterprises 2,245 4 1,047 5 3,292 9

Other securities

$ 48,199 $ 272 $ 17,078 $ 245 $ 65,277 $ 517

The tables below show the Corporation’s gross unrealized losses and fair value of held-to-maturity investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at December 31, 2020 and 2019.

At December 31, 2019 , the Corporation held 12 held-to-maturity securities that were in an unrealized loss position.

At December 31, 2020, the Corporation held two held-to-maturity securities that were in an unrealized loss position.

Such securities have not experienced credit rating downgrades;

however, they have primarily declined in value due to the current interest rate environment.

There were eight held-to-maturity securities that had been in a continuous loss position for twelve months or greater as of December 31, 2019 .

At December 31, 2020, the Corporation held one held-to-maturity security that had been in a continuous loss position for twelve months or greater.

It is expected that the Corporation will recover the entire amortized cost basis of each held-to-maturity security based upon an evaluation of aforementioned factors.

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December 31, 2020

Less than 12 Months

12 Months or Longer

Less than 12 Months 12 Months or Longer Total

Fair Value Unrealized

Losses Fair Value Unrealized

(In Thousands)

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Municipal securities

Residential mortgage-backed securities - government issued

Residential mortgage-backed securities - government-sponsored enterprises

$ 276 $ 13 $ 213 $ 2 $ 489 $ 15

December 31, 2019

Less than 12 Months

12 Months or Longer

Less than 12 Months 12 Months or Longer Total

Fair Value Unrealized

Losses Fair Value Unrealized

(In Thousands)

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Municipal securities

$ 499 $ 8 $ — $ — $ 499 $ 8

Residential mortgage-backed securities - government issued

— — 1,887 9 1,887 9

Residential mortgage-backed securities - government-sponsored enterprises

Commercial mortgage-backed securities - government-sponsored enterprises

1,364 5 2,144 18 3,508 23

$ 1,863 $ 13 $ 4,031 $ 27 $ 5,894 $ 40

Note 5 – Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses

Loan and lease receivables consist of the following:

2020 December 31,

(In Thousands)

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Commercial real estate — owner occupied

$ 253,882 $ 226,614

Commercial real estate — non-owner occupied

564,532 516,652

Land development

49,839 51,097

141,043 109,057

311,556 217,322

38,284 33,359

Total commercial real estate 1,359,136 1,154,101

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Home equity and second mortgages 7,833 7,006

Other 28,897 22,664

Total consumer and other

36,730 29,670

Total gross loans and leases receivable

2,150,515 1,715,265

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 total amount of the Corporation’s ownership of SBA loans is comprised of the following:

As of December 31, 2020, the Corporation had $ 228.9 million in gross PPP loans outstanding included in the commercial and industrial loan category and deferred processing fees outstanding of $ 3.5 million included in deferred loan fees.

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

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

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

Management funded these short-term loans primarily through a combination of excess cash held at the Federal Reserve and from an increase in in-market deposits.

The total amount of the Corporation’s ownership of SBA loans on-balance sheet is comprised of the following:

2020 December 31,

(In Thousands)

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SBA Express loans and lines of credit 1,251 1,781

SBA PPP loans $ 228,870 $ —

Total SBA loans $ 292,714 $ 62,775

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The total principal amount of transferred participation interests in other, non-SBA originated loans during the year ended December 31, 2020 and 2019 was $ 48.9 million and $ 45.4 million, respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer.

No gain or loss was recognized on participation interests in other, non-SBA originated loans as they were transferred at or near the date of loan origination and the payments

received for servicing the portion of the loans participated represents adequate compensation.

No gain or loss was recognized on participation interests in other, non-SBA originated loans as they were transferred at or near the date of loan origination and the payments received for servicing the portion of the loans participated represents adequate compensation.

The total outstanding balance of these transferred loans at December 31, 2020 and 2019 was $ 153.6 million and $ 142.8 million, respectively.

As of December 31, 2020 and 2019, the total amount of the Corporation’s partial ownership of these transferred loans on the Consolidated Balance Sheets was $ 276.5 million and $ 244.6 million, respectively.

No loans in this participation portfolio were considered impaired as of December 31, 2019 and 2018 .

As of December 31, 2020, the non-SBA originated participation portfolio contained an impaired loan totaling $ 3.0 million with a sold portion of $ 4.2 million.

There were no loans impaired as of December 31, 2019.

For the year ended December 31, 2020, the Corporation charged off $ 2.8 million of the non-SBA originated participation portfolio.

There were no charge-offs for the year ended December 31, 2019.

The Corporation does not share in the participant’s portion of any potential charge-offs.

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These loans to related parties are summarized below:

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

(In Thousands)

Balance at beginning of year $ 1,683 $ 1,855

Change due to status of executive officers and directors

New loans 325 412

Repayments ( 376 ) ( 584 )

Balance at end of year $ 1,632 $ 1,683

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December 31, 2020

I II III IV Total

(Dollars in Thousands)

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Land development 47,777 987 185 890 49,839

Construction 104,083 26,444 10,516 — 141,043

Multi-family 278,145 23,386 10,025 — 311,556

1-4 family 35,053 620 2,315 296 38,284

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

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Home equity and second mortgages 7,206 496 91 40 7,833

Other 28,701 175 — 21 28,897

Total consumer and other 35,907 671 91 61 36,730

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December 31, 2019

I II III IV Total

(Dollars in Thousands)

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Land development 49,132 439 — 1,526 51,097

Construction 108,959 — 98 — 109,057

Multi-family 205,750 11,572 — — 217,322

1-4 family 29,284 1,843 1,759 473 33,359

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

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Home equity and second mortgages 6,307 610 89 — 7,006

Other 22,517 — — 147 22,664

Total consumer and other 28,824 610 89 147 29,670

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The risk rating grades follow a consistent definition and are then applied to specific loan types based on the nature of the loan.

Each risk rating is subjective and, depending on the size and nature of the credit, subject to various levels of review and concurrence on the stated risk rating.

rating is subjective and, depending on the size and nature of the credit, subject to various levels of review and concurrence on the stated risk rating.

In addition to its nine grade risk rating system, the Corporation groups loans into four loan and related risk categories which determine the level and nature of review by management.

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Category IV — Loans and leases in this category are considered to be impaired.

Impaired loans and leases, with the exception of performing troubled debt restructurings, have been placed on non-accrual as management has determined that it is unlikely

that the Bank will receive the contractual principal and interest in accordance with the original terms of the agreement.

Impaired loans and leases, with the exception of performing troubled debt restructurings, have been placed on non-accrual as management has determined that it is unlikely that the Bank will receive the contractual principal and interest in accordance with the original terms of the agreement.

Impaired loans are individually evaluated to assess the need for the establishment of specific reserves or charge-offs.

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Days Past Due 60-89

Days Past Due

Total Past Due

Total Loans and Leases

Days Past Due Greater

Days Past Due Total Past Due Current Total Loans and Leases

(Dollars in Thousands)

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Land development 7,784 — — 7,784 41,165 48,949

Construction — — — — 141,043 141,043

Multi-family — — — — 311,556 311,556

1-4 family — 46 — 46 37,988 38,034

Commercial and industrial 663 111 — 774 715,389 716,163

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Home equity and second mortgages — — — — 7,793 7,793

Other — — — — 28,876 28,876

Total 8,447 157 — 8,604 2,115,294 2,123,898

Non-accruing loans and leases

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Land development 890 — — 890 — 890

Construction — — — — — —

Multi-family — — — — — —

1-4 family — — — — 250 250

Commercial and industrial 103 342 7,557 8,002 8,153 16,155

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Home equity and second mortgages — — — — 40 40

Other — — 21 21 — 21

Total 993 342 11,633 12,968 13,649 26,617

Total loans and leases

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Land development 8,674 — — 8,674 41,165 49,839

Construction — — — — 141,043 141,043

Multi-family — — — — 311,556 311,556

1-4 family — 46 — 46 38,238 38,284

Commercial and industrial 766 453 7,557 8,776 723,542 732,318

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Home equity and second mortgages — — — — 7,833 7,833

Other — — 21 21 28,876 28,897

Total $ 9,440 $ 499 $ 11,633 $ 21,572 $ 2,128,943 $ 2,150,515

Percent of portfolio 0.44 % 0.02 % 0.54 % 1.00 % 99.00 % 100.00 %

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Days Past Due 60-89

Days Past Due

Total Past Due

Total Loans and Leases

Days Past Due Greater

Days Past Due Total Past Due Current Total Loans and Leases

(Dollars in Thousands)

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Land development — 990 — 990 48,581 49,571

Construction 309 — — 309 108,748 109,057

Multi-family — — — — 217,322 217,322

1-4 family — — — — 33,026 33,026

Commercial and industrial 2,707 52 — 2,759 486,068 488,827

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Home equity and second mortgages — — — — 7,006 7,006

Other — — — — 22,517 22,517

Total 3,016 1,042 — 4,058 1,690,594 1,694,652

Non-accruing loans and leases

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Land development — — — — 1,526 1,526

Construction — — — — — —

Multi-family — — — — — —

1-4 family — 333 — 333 — 333

Commercial and industrial 4,368 2,717 3,123 10,208 4,367 14,575

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Home equity and second mortgages — — — — — —

Other — — 147 147 — 147

Total 4,368 3,050 3,612 11,030 9,583 20,613

Total loans and leases

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Land development — 990 — 990 50,107 51,097

Construction 309 — — 309 108,748 109,057

Multi-family — — — — 217,322 217,322

1-4 family — 333 — 333 33,026 33,359

Commercial and industrial 7,075 2,769 3,123 12,967 490,435 503,402

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Home equity and second mortgages — — — — 7,006 7,006

Other — — 147 147 22,517 22,664

Total $ 7,384 $ 4,092 $ 3,612 $ 15,088 $ 1,700,177 $ 1,715,265

Percent of portfolio 0.43 % 0.24 % 0.21 % 0.88 % 99.12 % 100.00 %

The Corporation’s total impaired assets consisted of the following:

2020 December 31,

(In Thousands)

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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 impaired assets $ 26,697 $ 23,672

2020 December 31,

Total non-accrual loans and leases to gross loans and leases 1.24 % 1.20 %

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

The Corporation has allocated $2.7 million and $1.5 million of specific reserves to troubled debt restructurings as of December 31, 2019 and 2018 , respectively.

The Corporation has allocated $ 760,000 and $ 2.7 million of specific reserves to troubled debt restructurings as of December 31, 2020 and 2019, respectively.

There were no unfunded commitments associated with troubled debt restructured loans and leases as of December 31, 2020.

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For the Year Ended December 31,

Number of Loans

Pre-Modification

Post-Modification

Number of Loans Pre-Modification

Investment Post-Modification

Investment Number of Loans Pre-Modification

Investment Post-Modification

(Dollars in Thousands)

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Commercial real estate — owner occupied

2 $ 299 $ 272 2 $ 3,774 $ 3,614

Commercial and industrial 3 6,007 617 15 13,372 9,845

Total 5 $ 6,306 $ 889 17 $ 17,146 $ 13,459

Restructured loan modifications may include payment schedule modifications, interest rate concessions, maturity date extensions, principal reduction, or some combination of these concessions.

For the year ended December 31, 2020, the modification of terms primarily consisted of payment schedule modifications or principal reductions.

During the year ended December 31, 2018 , no loans were modified to a troubled debt restructuring.

There were two commercial and industrial loans for a total of $ 617,000 and two owner-occupied commercial real estate loans for a total of $ 272,000 modified in a troubled debt restructuring during the previous 12 months which subsequently defaulted during the year ended December 31, 2020.

There were two commercial and industrial loans for $ 2.1 million modified in a troubled debt restructuring during the previous 12 months which subsequently defaulted during the year ended December 31, 2019.

There were no loans and leases modified in a troubled debt restructuring during the previous 12 months which subsequently defaulted during the year ended December 31, 2018 .

The following represents additional information regarding the Corporation’s impaired loans and leases, including performing troubled debt restructurings, by class:

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Investment (1)

Balance Impairment

Reserve Average

Investment (2)

Income Interest

Recognized Net Foregone

(In Thousands)

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Land development 890 5,187 — 1,192 14 — 14

Construction — — — — — — —

Multi-family — — — — — — —

1-4 family 46 51 — 307 31 141 ( 110 )

Commercial and industrial 9,888 12,337 — 13,951 1,219 423 796

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Home equity and second mortgages

— — — 1 — — —

Other 21 688 — 85 41 — 41

Total 18,966 29,191 — 21,709 2,082 636 1,446

With impairment reserve recorded:

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Land development — — — — — — —

Construction — — — — — — —

Multi-family — — — — — — —

1-4 family 250 250 29 21 — — —

Commercial and industrial 6,267 6,972 3,125 3,585 324 — 324

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Home equity and second mortgages

40 40 7 — 1 — 1

Other — — — — — — —

Total 7,697 12,103 3,681 5,994 712 — 712

Commercial real estate:

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Land development 890 5,187 — 1,192 14 — 14

Construction — — — — — — —

Multi-family — — — — — — —

1-4 family 296 301 29 328 31 141 ( 110 )

Commercial and industrial 16,155 19,309 3,125 17,536 1,543 423 1,120

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Home equity and second mortgages

40 40 7 1 1 — 1

Other 21 688 — 85 41 — 41

Grand total $ 26,663 $ 41,294 $ 3,681 $ 27,703 $ 2,794 $ 636 $ 2,158

(1) The recorded investment represents the unpaid principal balance net of any partial charge-offs.

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Investment (1)

Balance Impairment

Reserve Average

Investment (2)

Income Interest

Recognized Net Foregone

(In Thousands)

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Land development 1,526 5,823 — 1,843 52 6 46

Construction — — — — — — — — — — —

Multi-family — — — — — — —

1-4 family 473 478 — 356 19 46 ( 27 )

Commercial and industrial 4,779 6,549 — 14,479 1,073 379 694

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Home equity and second mortgages

— — — — — 7 ( 7 )

Other 147 813 — 191 48 — 48

Total 7,312 14,050 — 20,212 1,257 793 464

With impairment reserve recorded:

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Land development — — — — — — — — — — —

Construction — — — — — — — — — — —

Multi-family — — — — — — —

1-4 family — — — — — — —

Commercial and industrial 9,796 11,179 2,283 2,367 1,022 — 1,022

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Home equity and second mortgages

— — — — — — —

Other — — — — — — —

Total 13,441 16,183 3,365 3,878 1,436 — 1,436

Commercial real estate:

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Land development 1,526 5,823 — 1,843 52 6 46

Construction — — — — — — —

Multi-family — — — — — — —

1-4 family 473 478 — 356 19 46 ( 27 )

Commercial and industrial 14,575 17,728 2,283 16,846 2,095 379 1,716

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Home equity and second mortgages — — — — — 7 ( 7 )

Other 147 813 — 191 48 — 48

Grand total $ 20,753 $ 30,233 $ 3,365 $ 24,090 $ 2,693 $ 793 $ 1,900

(1) The recorded investment represents the unpaid principal balance net of any partial charge-offs.

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The difference between the recorded investment of loans and leases and the unpaid principal balance of $ 14.6 million and $ 9.5 million as of December 31, 2020 and 2019, respectively, represents partial charge-offs of loans and leases resulting from losses due to the appraised value of the collateral securing the loans and leases being below the carrying values of the loans and leases.

Impaired loans and leases also included $140,000 and $180,000 of loans as of December 31, 2019 and 2018 ,

respectively, that were performing troubled debt restructurings, and although not on non-accrual, were reported as impaired due to the concession in terms.

Impaired loans and leases also included $ 46,000 and $ 140,000 of loans as of December 31, 2020 and 2019, respectively, that were performing troubled debt restructurings, and although not on non-accrual, were reported as impaired due to the concession

When a loan is placed on non-accrual, interest accrual is discontinued and previously accrued but uncollected interest is deducted from interest income.

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The Corporation analyzes each loan and lease determined to be impaired on an individual basis to determine a specific reserve based upon the estimated value of the underlying collateral for collateral-dependent loans, or alternatively, the present value of expected cash flows.

The Corporation applies historical trends from established risk factors to each category of loans and leases that has not been individually evaluated for the purpose of establishing the general portion of the allowance.

Then, the Corporation applies historical trends from established risk factors to each category of loans and leases that has not been individually evaluated for the purpose of establishing the general portion of the allowance.

A summary of the activity in the allowance for loan and lease losses by portfolio segment is as follows:

As of and for the Year Ended December 31, 2020

Real Estate Commercial

Industrial Consumer

and Other Total

(In Thousands)

Beginning balance $ 10,852 $ 8,078 $ 590 $ 19,520

Charge-offs ( 6,119 ) ( 2,007 ) ( 13 ) ( 8,139 )

Recoveries 4 325 3 332

Net recoveries (charge-offs) ( 6,115 ) ( 1,682 ) ( 10 ) ( 7,807 )

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As of and for the Year Ended December 31, 2019

Real Estate Commercial

Industrial Consumer

and Other Total

(In Thousands)

Beginning balance $ 11,662 $ 8,079 $ 684 $ 20,425

Charge-offs — ( 3,347 ) ( 9 ) ( 3,356 )

Recoveries 75 262 29 366

Net (charge-offs) recoveries 75 ( 3,085 ) 20 ( 2,990 )

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December 31, 2020

Real Estate Commercial

Industrial Consumer

and Other Total

(In Thousands)

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Individually evaluated for impairment 500 3,174 7 3,681

Total $ 17,157 $ 10,593 $ 771 $ 28,521

Loans and lease receivables:

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Individually evaluated for impairment 10,398 16,204 61 26,663

Total $ 1,359,136 $ 754,649 $ 36,730 $ 2,150,515

December 31, 2019

Real Estate Commercial

Industrial Consumer

and Other Total

(In Thousands)

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Individually evaluated for impairment 1,082 2,283 — 3,365

Loans acquired with deteriorated credit quality

Total $ 10,852 $ 8,078 $ 590 $ 19,520

Loans and lease receivables:

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Individually evaluated for impairment 6,031 14,575 147 20,753

Loans acquired with deteriorated credit quality

Total $ 1,154,101 $ 531,494 $ 29,670 $ 1,715,265

The Corporation’s net investment in direct financing leases consists of the following:

2020 December 31,

(In Thousands)

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Estimated unguaranteed residual values in leased property 5,434 6,732

Initial direct costs

Unearned lease and residual income ( 2,209 ) ( 2,805 )

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Maturities during year ended December 31,

Thereafter 212

Note 6 – Premises and Equipment

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Note 7 – Leases

The Corporation leases various office spaces, loan production offices, and specialty financing production offices under non-cancelable operating leases which expire on various dates through 2028.

The Corporation leases various office spaces and specialty financing production offices under non-cancellable operating leases which expire on various dates through 2028.

The Corporation also leases office equipment.

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Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term.

In addition, the Corporation entered into a sublease for vacated office space which expires in 2023.

As a result, the Corporation recognized an impairment of the corresponding right-of-use asset of $299,000 during the year ended December 31, 2019.

During 2020, the Corporation extended the term of one of its office spaces by one year, resulting in a $ 190,000 increase in the right-of-use assets in exchange for a lease liability.

The Corporation entered into a sublease for vacated office space which expires in 2023.

The components of total lease expense were as follows:

2 unchanged sentences

Operating lease cost

$ 1,494 $ 1,551

Short-term lease cost

1 unchanged sentence

sublease income

( 113 ) ( 9 )

Total lease cost, net

$ 2,125 $ 2,292

Quantitative information regarding the Corporation’s operating leases was as follows:

December 31, 2019

December 31, 2020 December 31, 2019

Weighted-average remaining lease term (in years)

Weighted-average discount rate

3.03 % 3.09 %

The following maturity analysis shows the undiscounted cash flows due on the Corporation’s operating lease liabilities:

(In Thousands)

Thereafter 1,641

Total undiscounted cash flows 7,008

4 unchanged sentences

At December 31, 2020 and 2019, the Corporation had goodwill of $ 10.7 million, which was related to the acquisition of Alterra in 2014.

The Corporation conducted its annual impairment test on July 1, 2019, 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.

Management determined no changes to factors occurred through December 31, 2019 that would negatively impact the goodwill test.

The Corporation conducted its annual impairment test on August 1, 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.

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.

The initial basis for the valuation was a forecast prepared by management for the years ended 2020 through 2024.

The income approach as well as the market approach were utilized by an independent third party to determine the fair value of the Corporation’s goodwill.

The fair value of the Corporation’s equity based on the analysis performed was $ 289.0 million, which exceeded its book value by $ 89.4 million, or 44.8 %, as of August 1, 2020.

Based on the analysis performed, management concluded the Corporation’s goodwill is 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.

Management determined no changes to factors occurred from the August 1, 2020 through December 31, 2020 that would negatively impact the August 1, 2020 goodwill test.

Other Intangible Assets

6 unchanged sentences

The Corporation periodically reviews this portfolio for impairment and engages a third-party valuation firm to assess the fair value of the overall servicing rights portfolio.

During the years ended December 31, 2019 and 2018 , impairment expense of $25,000 and $69,000 , respectively, was recognized.

During the years ended December 31, 2020 and 2019, impairment recovery of $ 16,000 and an expense of $ 25,000 , respectively, was recognized.

The core deposit intangible has a finite life and is amortized over a period of seven years.

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During 2019, the Corporation contributed $ 9.4 million to these partnerships and recognized $ 5.2 million in federal historic tax credits, and $ 3.6 million in impairment related to these investments.

The state historic tax credits are sold to a third party resulting in a gain on sale of $413,000 during the year ended December 31, 2019.

None were sold during the year ended December 31, 2018.

The state historic tax credits received during the year ended December 31, 2020 and 2019 were $ 2.7 million and $ 4.7 million, respectively, were sold to a third party resulting in a gain on sale of $ 275,000 and $ 413,000 , respectively.

New Market Tax Credits

2 unchanged sentences

The investment provides federal new market tax credits over the seven year compliance period through 2020.

The remaining federal new market tax credit to be utilized was $450,000 as of December 31, 2019 .

The Corporation’s use of the federal new market tax credit during the years ended December 31, 2020 and 2019 was $ 450,000 .

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The Corporation’s equity investment in Aldine Capital Fund II, LP, also a mezzanine fund, totaled $ 3.5 million and $ 3.1 million as of December 31, 2020 and 2019, respectively.

The Corporation’s equity investment in Aldine Capital Fund III, LP, also a mezzanine fund, totaled $1.3 million and $188,000 as of December 31, 2019 and 2018 , respectively.

The Corporation’s share of these partnerships’ income included in other non-interest income in the Consolidated Statements of Income for the years ended December 31, 2019 and 2018 was $1.4 million and $459,000 , respectively.

The Corporation’s share of these partnerships’ losses included in other non-interest expense in the Consolidated Statements of Income for the year ended December 31, 2019 was $121,000 .

There were no losses included in other non-interest expense for the year ended December 31, 2018.

The Corporation’s equity investment in Aldine Capital Fund III, LP, also a mezzanine fund, totaled $ 2.8 million and $ 1.3 million as of December 31, 2020 and 2019, respectively.

The Corporation’s share of these partnerships’ income included in other non-interest income in the Consolidated Statements of Income for the years ended December 31, 2020 and 2019 was $ 520,000 and $ 1.4 million, respectively.

The Corporation’s share of these partnerships’ losses included in other non-interest expense in the Consolidated Statements of Income for the year ended December 31, 2020 and 2019 was $ 99,000 and $ 121,000 , respectively.

The Corporation entered into a new equity investment in Dane Workforce Housing Fund LLC, a Wisconsin limited liability company, focused on community development by providing affordable workforce housing units in Dane County, Wisconsin, for $ 275,000 as of December 31, 2020.

The Corporation’s share of the investment fund’s income will be included in other non-interest income in the Consolidated Statements of Income.

No income was recognized for the year ended December 31, 2020.

The Corporation is the sole owner of $ 315,000 of common securities issued by Trust II.

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A summary of accrued interest receivable and other assets was as follows:

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

(In Thousands)

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Investment in Trust II 315 315

Fair value of interest rate swaps

Prepaid expenses 2,165 2,285

Other assets 6,882 4,184

Total accrued interest receivable and other assets $ 39,478 $ 30,160

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The composition of deposits is shown below.

December 31, 2019

December 31, 2018

Average Balance

December 31, 2020 December 31, 2019

Balance Average Balance Average Rate Balance Average Balance Average Rate

(Dollars in Thousands)

Non-interest-bearing transaction accounts

$ 472,818 $ 412,825 — % $ 293,573 $ 275,495 — %

Interest-bearing transaction accounts

503,992 392,576 0.37 273,909 222,244 1.53

Money market accounts 641,504 651,402 0.44 674,409 617,341 1.71

2 unchanged sentences

Total deposits $ 1,855,516 $ 1,711,092 0.52 $ 1,530,379 $ 1,496,430 1.53

A summary of annual maturities of certificates of deposit outstanding and wholesale deposits at December 31, 2019 is as follows:

A summary of annual maturities of in-market and wholesale certificates of deposit at December 31, 2020 is as follows:

(In Thousands)

Maturities during the year ended December 31,

Deposits include approximately $63.7 million and $61.9 million of certificates of deposit and wholesale deposits which are denominated in amounts of $250,000 or more at December 31, 2019 and 2018 , respectively.

2021 $ 101,722

Thereafter 1,044

Wholesale deposits include $ 47.5 million and $ 125.0 million of wholesale certificates of deposit and reciprocal interest-bearing transaction accounts, respectively, at December 31, 2020, compared to $ 151.5 million of wholesale certificates of deposit at December 31, 2019.

Deposits include $ 28.7 million and $ 63.7 million of certificates of deposit and wholesale deposits which are denominated in amounts of $250,000 or more at December 31, 2020 and 2019, respectively.

Note 11 – FHLB Advances, Other Borrowings and Junior Subordinated Notes

The composition of borrowed funds is shown below.

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

Short-term borrowings

Long-term borrowings

$ 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.

The Corporation has a $507.6 million FHLB line of credit available for advances and open line borrowings which is collateralized as noted below.

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

The Corporation has a $ 644.6 million FHLB line of credit available for advances which is collateralized as noted below.

At December 31, 2020, $ 250.1 million of this line remained unused.

There were no advances outstanding on the Corporation’s open line at December 31, 2019 and 2018 .

There were $ 394.5 million of term FHLB advances outstanding at December 31, 2020 with stated fixed interest rates ranging from 0.00 % to 2.75 % compared to $ 295.0 million of term FHLB advances outstanding at December 31, 2019 with stated fixed interest rates ranging from 0.92 % to 2.75 %.

The term FHLB advances outstanding at December 31, 2019 are due at various dates through November 2029.

The term FHLB advances outstanding at December 31, 2020 are due at various dates through February 2030.

During the three months ended June 30, 2020, the Corporation prepaid $ 59.5 million of short-term FHLB advances that had a weighted average interest rate of 2.34 %.

The transaction was accounted for as an early debt extinguishment resulting in a pre-tax loss of $ 744,000 during the three months ended June 30, 2020.

The Corporation is required to maintain as collateral mortgage-related securities, unencumbered first mortgage loans and secured small business loans in its portfolio aggregating at least the amount of outstanding advances from the FHLB.

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The Corporation has subordinated notes payable.

At December 31, 2019 , the amount of subordinated notes payable outstanding was $23.7 million , which qualified for Tier 2 capital.

At December 31, 2020, the aggregate principal amount of subordinated notes payable outstanding was $ 23.7 million, which qualified for Tier 2 capital.

At December 31, 2020, $ 15.0 million bore a fixed interest rate of 5.50 % with a maturity date of August 15, 2029 and $ 9.1 million bore a fixed interest rate of 6.00 % with a maturity date of April 15, 2027.

The $15.0 million subordinated note payable has certain performance debt covenants of which the Corporation was in compliance.

The Corporation may, at its option, redeem the notes, in whole or part, at any time after the fifth anniversary of issuance.

The $15.0 million subordinated note payable has certain performance debt covenants of which

the Corporation was in compliance.

The Corporation may, at its option, redeem the notes, in whole or part, at any time after August 15, 2024.

As of December 31, 2020, $ 343,000 of debt issuance costs remain in the subordinated notes payable balance.

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and (3) a change in laws or regulations that would require Trust II to pay income tax with respect to interest received on the Notes or, prohibit the Corporation from deducting the interest payable by the Corporation on the Notes or result in greater than a de minimis amount of taxes for Trust II.

During the second quarter of 2020, the Corporation tested its ability to borrow from the Federal Reserve Paycheck Protection Program Liquidity Facility (“PPPLF”) in the event funding was required to support the Bank’s PPP lending efforts.

On April 28, 2020, the Corporation borrowed $ 29.6 million from the PPPLF at a rate of 0.35 %.

The borrowing was fully collateralized by a tranche of PPP loans originated by the Bank on April 15, 2020 and maturing on April 15, 2022, or when the tranche of PPP loans utilized to collateralize the PPPLF borrowing are forgiven, whichever comes first.

As of November 2, 2020, the borrowing was paid in full.

Note 12 – Regulatory Capital

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As a bank holding company, the Corporation’s ability to pay dividends is affected by the policies and enforcement powers of the Board of Governors of the Federal Reserve system (the “Federal Reserve”).

Federal Reserve guidance urges financial

institutions to strongly consider eliminating, deferring, or significantly reducing dividends if:

(i) net income available to common stockholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividend;

Federal Reserve guidance urges financial institutions to strongly consider eliminating, deferring, or significantly reducing dividends if:

(i) net income available to common shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividend;

(ii) the prospective rate of earnings retention is not consistent with the bank holding company’s capital needs and overall current and prospective financial condition;

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As a Wisconsin corporation, the Corporation is subject to the limitations of the Wisconsin Business Corporation Law, which prohibit the Corporation from paying dividends if such payment would:

(i) render the Corporation unable to pay its debts as they become due in the usual course of business, or (ii) result in the Corporation’s assets being less than the sum of its total liabilities plus the amount needed to satisfy the preferential rights upon dissolution of any stockholders with preferential rights superior to those stockholders receiving the dividend.

(i) render the Corporation unable to pay its debts as they become due in the usual course of business, or (ii) result in the Corporation’s assets being less than the sum of its total liabilities plus the amount needed to satisfy the preferential rights upon dissolution of any shareholders with preferential rights superior to those shareholders receiving the dividend.

The Bank is also subject to certain legal, regulatory, and other restrictions on their ability to pay dividends to the Corporation.

As a bank holding company, the payment of dividends by the Bank to the Corporation is one of the sources of funds the Corporation could use to pay dividends, if any, in the future and to make other payments.

Future dividend decisions by the Bank and the Corporation will continue to be subject to compliance with various legal, regulatory, and other restrictions as defined from time to time.

Future dividend decisions by the

Bank and the Corporation will continue to be subject to compliance with various legal, regulatory, and other restrictions as defined from time to time.

Qualitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of Total Common Equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to adjusted total assets.

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The Corporation elected to retain this treatment, which reduces the volatility of regulatory capital ratios.

A new capital conservation buffer, comprised of Common Equity Tier 1 capital, was also established above the regulatory minimum capital requirements.

This capital conservation buffer was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increased each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019.

The capital conservation buffer of 2.5% was fully phased-in as of January 1, 2019.

As of December 31, 2020, the Corporation’s capital levels exceeded the regulatory minimums and the Bank’s capital levels remained characterized as well capitalized under the regulatory framework.

1 unchanged sentence

As of December 31, 2020

Minimum Required for Capital Adequacy Purposes

For Capital Adequacy Purposes Plus Capital Conservation Buffer

Minimum Required to Be Well Capitalized Under Prompt Corrective Action

Actual Minimum Required for Capital Adequacy Purposes For Capital Adequacy Purposes Plus Capital Conservation Buffer Minimum Required to Be Well Capitalized Under Prompt Corrective Action

Amount Ratio Amount Ratio Amount Ratio Amount Ratio

(Dollars in Thousands)

1 unchanged sentence

(to risk-weighted assets)

Consolidated $ 258,607 11.25 % $ 183,965 8.00 % $ 241,454 10.50 % N/A N/A

First Business Bank $ 251,116 10.97 % $ 183,053 8.00 % $ 240,257 10.50 % $ 228,816 10.00 %

1 unchanged sentence

(to risk-weighted assets)

Consolidated $ 206,104 8.96 % $ 137,974 6.00 % $ 195,463 8.50 % N/A N/A

First Business Bank 222,500 9.72 137,290 6.00 194,494 8.50 183,053 8.00

1 unchanged sentence

(to risk-weighted assets)

Consolidated $ 196,042 8.53 % $ 103,480 4.50 % $ 160,970 7.00 % N/A N/A

First Business Bank 222,500 9.72 102,967 4.50 160,171 7.00 148,731 6.50

1 unchanged sentence

(to adjusted assets)

Consolidated $ 206,104 7.99 % $ 103,228 4.00 % $ 103,228 4.00 % N/A N/A

First Business Bank 222,500 8.67 102,635 4.00 102,635 4.00 128,294 5.00

As of December 31, 2019

Minimum Required for Capital Adequacy Purposes

For Capital Adequacy Purposes Plus Capital Conservation Buffer

Minimum Required to Be Well Capitalized Under Prompt Corrective Action

Actual Minimum Required for Capital Adequacy Purposes For Capital Adequacy Purposes Plus Capital Conservation Buffer Minimum Required to Be Well Capitalized Under Prompt Corrective Action

Amount Ratio Amount Ratio Amount Ratio Amount Ratio

(Dollars in Thousands)

1 unchanged sentence

(to risk-weighted assets)

Consolidated $ 239,029 12.01 % $ 159,185 8.00 % $ 208,930 10.50 % N/A N/A

First Business Bank 233,181 11.79 158,177 8.00 207,607 10.50 % $ 197,721 10.00 %

1 unchanged sentence

(to risk-weighted assets)

Consolidated $ 194,456 9.77 % $ 119,388 6.00 % $ 169,134 8.50 % N/A N/A

First Business Bank 212,315 10.74 118,633 6.00 168,063 8.50 % $ 158,177 8.00 %

1 unchanged sentence

(to risk-weighted assets)

Consolidated $ 184,409 9.27 % $ 89,541 4.50 % $ 139,286 7.00 % N/A N/A

First Business Bank 212,315 10.74 88,974 4.50 138,405 7.00 % $ 128,519 6.50 %

1 unchanged sentence

(to adjusted assets)

Consolidated $ 194,456 9.27 % $ 83,950 4.00 % $ 83,950 4.00 % N/A N/A

First Business Bank 212,315 10.18 83,414 4.00 83,414 4.00 $ 104,268 5.00 %

19 unchanged sentences

Basic earnings per common share

Net income $ 16,978 $ 23,324

earnings allocated to participating securities 423 502

Basic earnings allocated to common stockholders

Basic earnings allocated to common shareholders $ 16,555 $ 22,822

Weighted-average common shares outstanding, excluding participating securities

8,384,464 8,515,375

Basic earnings per common share $ 1.97 $ 2.68

Diluted earnings per common share

Earnings allocated to common stockholders, diluted

Earnings allocated to common shareholders, diluted $ 16,555 $ 22,822

Weighted-average diluted common shares outstanding, excluding participating securities

8,384,464 8,515,375

Diluted earnings per common share $ 1.97 $ 2.68

2 unchanged sentences

The Plan is administered by the Compensation Committee of the Board of Directors of the Corporation and provides for the grant of equity ownership opportunities through incentive stock options and nonqualified stock options (“Stock Options”), restricted stock, restricted stock units, dividend equivalent units, and any other type of award permitted by the Plan.

The Plan authorized 185,000 shares, plus all shares previously available for grant under the 2012 Equity Incentive Plan (the “2012 Plan”).

No new grants will be made under the 2012 Plan.

Up to 185,000 shares are authorized for issuance under the Plan, plus all shares previously available for grant under the 2012 Equity Incentive Plan (the “2012 Plan”).

As of December 31, 2020, 148,757 shares were available for future grants under the Plan.

6 unchanged sentences

The restricted stock granted under the Plan is typically subject to a vesting period.

Compensation expense for restricted stock is recognized over the requisite service period of generally four years for the entire award on a straight-line basis.

Compensation expense for restricted stock is recognized over the requisite service period of generally three or four years for the entire award on a straight-line basis.

Upon vesting of restricted stock, the benefit of tax deductions in excess of recognized compensation expense is reflected as an income tax benefit in the Consolidated Statements of Income.

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For the Year Ended December 31,

Number of Restricted Shares

Number of Restricted Shares Weighted

Fair Value Number of

Shares Weighted

Nonvested balance at beginning of year 176,935 $ 22.51 131,621 $ 21.02

78,775 25.82 95,265 23.64

Vested ( 56,904 ) 22.26 ( 48,207 ) 20.62

Forfeited ( 11,002 ) 22.86 ( 1,744 ) 23.67

Nonvested balance as of end of year 187,804 24.29 176,935 22.51

2 unchanged sentences

As of December 31, 2020, the Corporation had $ 3.2 million of unvested compensation expense, which the Corporation expects to recognize over a weighted-average period of approximately 2.14 years.

Share-based compensation expense related to restricted stock included in the Consolidated Statements of Income was as follows:

Employee Stock Purchase Plan

During 2020, an employee stock purchase plan ("ESPP") was approved by the Corporation’s shareholders and is offered to all qualifying employees, the ESPP is authorized to issue 250,000 shares.

The plan qualifies as an ESPP under section 423 of the Internal Revenue Code of 1986.

Under the ESPP, eligible employees may enroll in a three month offer period that begins January, April, July, and October of each year.

Employees may purchase a limited number of shares on the Corporation's common stock at 90% of the fair market value on the last day of the offering period.

The ESPP is treated as a compensatory item for purposes of share-based compensation expense.

During the year ended December 31, 2020, the Corporation issued 3,967 shares.

At December 31, 2020, 246,033 shares remained available for issuance under the ESPP.

Share-based compensation expense related to restricted stock and the ESPP included in the Consolidated Statements of Income was as follows:

For the Year Ended December 31,

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The Corporation matches 100% of amounts contributed by each participating employee, up to 3 % of the employee’s compensation.

The Corporation may also make discretionary contributions up to an additional 6% of salary.

The Corporation may also make discretionary profit sharing contributions up to an additional 6 % of salary.

Contributions are expensed in the period incurred and recorded in compensation expense in the Consolidated Statements of Income.

The Corporation made a matching contribution of 3 % to all eligible employees which totaled $ 896,000 and $ 783,000 , and for the years ended December 31, 2020 and 2019, respectively.

Discretionary contributions of 4.1% , or $808,000 , and 1.0% , or $180,000 , were made in 2019 and 2018 , respectively.

Discretionary profit sharing contributions for substantially all employees of 5.0 %, or $ 1.2 million, and 4.1 %, or $ 808,000 , were made in 2020 and 2019, respectively.

As of December 31, 2020 and 2019, the Corporation had a deferred compensation plan under which it provided contributions to supplement the retirement income of one executive.

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(In Thousands)

Federal $ 1,948 $ 1,483

State 1,386 1,988

Current tax expense 3,334 3,471

Federal ( 1,678 ) ( 1,979 )

State ( 329 ) ( 317 )

Deferred tax benefit ( 2,007 ) ( 2,296 )

2 unchanged sentences

Deferred tax assets and liabilities are measured using enacted tax rates to apply to taxable income in the period in which the temporary differences are expected to be recovered or settled.

Effective January 1, 2018, the enactment of the Tax Cuts and Jobs Act reduced the corporate federal income tax rate to 21% from 35%.

Net deferred tax assets are included in accrued interest receivable and other assets in the Consolidated Balance Sheets.

The significant components of the Corporation’s deferred tax assets and liabilities were as follows:

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

(In Thousands)

8 unchanged sentences

Unrealized losses on securities 319 464

Other 356 531

Total deferred tax assets before valuation allowance 12,864 12,079

4 unchanged sentences

Loan servicing asset 358 337

Other 926 548

Total deferred tax liabilities 5,647 6,726

2 unchanged sentences

A reconciliation of the change in net deferred tax assets to deferred tax expense is as follows:

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

(In Thousands)

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Tax expense at statutory federal rate of 21% applied to income before income tax expense

$ 3,844 $ 5,145

State income tax, net of federal effect 837 1,321

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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.

During the year ended December 31, 2020, a credit valuation adjustment was recognized resulting in a $ 461,000 allowance.

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

The Corporation receives fixed rates and pays floating rates based upon LIBOR on the swaps with commercial borrowers.

These interest rate swaps mature between March 2021 and October 2036 .

These interest rate 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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The Corporation pays fixed rates and receives floating rates based upon LIBOR on the swaps with dealer counterparties.

These interest rate swaps mature in March 2021 through October 2036 .

These interest rate swaps mature in March 2021 through 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.

4 unchanged sentences

The Corporation also enters into interest rate swaps to manage interest rate risk and reduce the cost of match-funding certain long-term fixed rate loans.

These derivative contracts involve the receipt of floating rate interest from a counterparty in

exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value.

These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value.

The instruments are designated as cash flow hedges as the receipt of floating rate interest from the counterparty is used to manage interest rate risk associated with forecasted issuances of short-term FHLB advances.

5 unchanged sentences

Interest Rate Swap Contracts

Asset Derivatives

Liability Derivatives

Balance Sheet Location

Asset Derivatives Liability Derivatives

Balance Sheet Location Fair Value Balance Sheet Location Fair Value

(In Thousands)

Derivatives not designated as hedging instruments

December 31, 2019

Accrued interest receivable and other assets

Accrued interest payable and other liabilities

December 31, 2018

Accrued interest receivable and other assets

Accrued interest payable and other liabilities

December 31, 2020 Accrued interest receivable and other assets $ 49,377 Accrued interest payable and other liabilities $ 49,377

December 31, 2019 Accrued interest receivable and other assets $ 18,346 Accrued interest payable and other liabilities $ 18,346

Derivatives designated as hedging instruments

December 31, 2019

Accumulated other comprehensive income (1)

December 31, 2020 Accumulated other comprehensive income (1)

$ 5,550 Accrued interest payable and other liabilities

December 31, 2018

Accumulated other comprehensive income (1)

December 31, 2019 Accumulated other comprehensive income (1)

$ 2,539 Accrued interest payable and other liabilities

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In addition, the Corporation retains the option to repurchase the sold guaranteed portion of an SBA loan if the loan defaults.

Management has assessed estimated losses inherent in the outstanding guaranteed portions of SBA loans sold in accordance with ASC 450, Contingencies , and determined a recourse reserve based on the probability of future losses for these loans to be $1.3 million and $3.0 million at December 31, 2019 and 2018 , respectively, which is reported in accrued interest payable and other liabilities on the Consolidated Balance Sheets.

Management has assessed estimated losses inherent in the outstanding guaranteed portions of SBA loans sold in accordance with ASC 450, Contingencies , and determined a recourse reserve based on the probability of future losses for these loans to be $ 723,000 and $ 1.3 million at December 31, 2020 and 2019, respectively, which is reported in accrued interest payable and other liabilities on the Consolidated Balance Sheets.

The summary of the activity in the SBA recourse reserve is as follows:

2 unchanged sentences

Balance at the beginning of the period $ 1,345 $ 2,956

SBA recourse provision

SBA recourse (benefit) provision ( 278 ) 188

Charge-offs, net ( 344 ) ( 1,799 )

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Fair Value Measurements Using

Level 1 Level 2 Level 3 Total

(In Thousands)

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Fair Value Measurements Using

Level 1 Level 2 Level 3 Total

(In Thousands)

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Fair Value Measurements Using

Level 1 Level 2 Level 3 Total

(In Thousands)

4 unchanged sentences

Fair Value Measurements Using

Level 1 Level 2 Level 3 Total

(In Thousands)

2 unchanged sentences

Loan servicing rights — — 1,195 1,195

Impaired loans were written down to the fair value of their underlying collateral less costs to sell of $15.7 million at December 31, 2019 and 2018 through the establishment of specific reserves or by recording charge-offs when the carrying value exceeded the fair value of the underlying collateral of impaired loans.

Impaired loans were written down to the fair value of their underlying collateral less costs to sell of $ 17.2 million and $ 15.7 million at December 31, 2020 and 2019, respectively, through the establishment of specific reserves or by recording charge-offs when the carrying value exceeded the fair value of the underlying collateral of impaired loans.

Valuation techniques consistent with the market approach, income approach, or cost approach were used to measure fair value.

20 unchanged sentences

December 31, 2020

Amount Fair Value

Total Level 1 Level 2 Level 3

(In Thousands)

5 unchanged sentences

Loans and lease receivables, net 2,117,449 2,121,107 — — 2,121,107

Federal Home Loan Bank stock

Federal Home Loan Bank stock 13,578 N/A N/A N/A N/A

Accrued interest receivable 8,564 8,564 8,564 — —

1 unchanged sentence

Financial liabilities:

Deposits 1,855,516 1,856,910 1,743,314 113,596 —

Federal Home Loan Bank advances and other borrowings 419,167 429,347 — 429,347 —

6 unchanged sentences

December 31, 2019

Amount Fair Value

Total Level 1 Level 2 Level 3

(In Thousands)

5 unchanged sentences

Loans and lease receivables, net 1,695,115 1,706,201 — — 1,706,201

Federal Home Loan Bank stock

Federal Home Loan Bank stock 7,953 N/A N/A N/A N/A

Accrued interest receivable 5,760 5,760 5,760 — —

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Financial liabilities:

Deposits 1,530,379 1,532,517 1,241,891 290,626 —

Federal Home Loan Bank advances and other borrowings 319,382 319,507 — 319,507 —

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Condensed Balance Sheets

2020 December 31,

(In Thousands)

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Right-of-use assets 3,797 4,234

Other assets 5,819 6,436

Total assets $ 247,144 $ 236,076

Liabilities and Stockholders’ Equity

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Equity in undistributed net income of consolidated subsidiaries 21,283 28,183

Net income $ 16,978 $ 23,324

Condensed Statements of Cash Flows

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Operating activities

Net income $ 16,978 $ 23,324

Adjustments to reconcile net income to net cash used in operating activities:

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Share-based compensation 1,871 1,566

Excess tax benefit from share-based compensation

Excess tax expense (benefit) from share-based compensation 8 ( 37 )

Payments on operating lease liabilities ( 560 ) ( 547 )

Net increase in other liabilities

Net (decreases) increases in other liabilities ( 574 ) 843

Other, net 560 ( 750 )

Net cash used in operating activities ( 3,000 ) ( 3,784 )

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Financing activities

Net (decrease) increase in long-term borrowed funds

Net increase (decrease) in long-term borrowed funds 55 ( 48 )

Proceeds from issuance of subordinated notes payable — 15,000

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Cash dividends paid ( 5,652 ) ( 5,216 )

Net proceeds from purchases of ESPP shares 66 —

Net cash used in financing activities ( 7,203 ) ( 12,512 )

Net (decrease) increase in cash and due from banks

Net increase (decrease) in cash and due from banks 1,831 ( 2,262 )

Cash and cash equivalents at the beginning of the period 1,437 3,699

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Note 21 – Condensed Quarterly Earnings (unaudited)

Quarter Third

Quarter Second

Quarter First

Quarter Fourth

Quarter Third

Quarter Second

Quarter First

(Dollars in Thousands, Except Per Share Data)

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Provision for loan and lease losses

4,322 3,835 5,469 3,182 1,472 1,349 ( 784 ) 49

Non-interest income 6,799 7,408 6,319 6,414 7,189 5,792 5,805 4,638

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Income before income tax expense

7,338 5,436 1,395 4,136 7,418 6,503 5,977 4,601

Income tax expense (benefit)

1,254 1,143 ( 1,928 ) 858 1,650 1,418 ( 595 ) ( 1,298 )

Net income $ 6,084 $ 4,293 $ 3,323 $ 3,278 $ 5,768 $ 5,085 $ 6,572 $ 5,899

Per common share:

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Diluted earnings

0.71 0.50 0.38 0.38 0.67 0.59 0.75 0.67

Dividends declared 0.165 0.165 0.165 0.165 0.15 0.15 0.15 0.15

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We have audited the accompanying consolidated balance sheets of First Business Financial Services, Inc.

(the "Company") as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements").

We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework:

(the "Corporation") as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements").

We also have audited the Corporation’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework:

(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework:

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Corporation as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework:

(2013) issued by COSO.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.

The Corporation management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Corporation’s financial statements and an opinion on the Corporation’s internal control over financial reporting based on our audits.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance and Provision for Loan and Lease Losses – Qualitative Factors

As described in Notes 1- Nature of Operations and Summary of Significant Accounting Policies, and 5- Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses to the consolidated financial statements, the Corporation’s allowance for loan and lease loss is a material accounting estimate that requires significant management judgment in the evaluation of credit quality and the application of qualitative factors.

The allowance for loan and lease loss is composed of loans collectively and individually evaluated for impairment.

The specific allowance on the loans individually evaluated for impairment include loans and leases which are defined as non-accrual and restructured loans.

The portion of the allowance for the collectively evaluated loans is reliant upon historical experience, as well as quantitatively and qualitative factors.

The calculation of the allowance for loan losses involves significant estimates and subjective assumptions, which require a high degree of judgment.

The methodology applied for determining inherent losses stems for current risk characteristics of the loan and lease portfolio, an assessment of individual impaired loans and leases, actual loss experience and adverse situations which may affect the borrower’s ability to repay.

The collectively evaluated component of the allowance for loan and lease losses utilizes a historical loss rate calculation for each loan and lease category with similar risk characteristics.

The average loss rates are adjusted for qualitative factors and applied to the end of period loan and lease portfolio balances to estimate probable incurred losses in the loan and lease portfolio.

The qualitative factors and measurements used to quantify the risks within each of these categories are subjectively selected by management, using certain objective measurements period over period.

The current period measurements are evaluated and assigned a factor commensurate with the current level of risk within each loan and lease category.

The qualitative factor is increased or decreased for each loan and lease category based on management’s

assessment of these qualitative factors:

management’s ongoing review and grading of the loan and lease portfolios, changes in the size of the loan and lease portfolios, existing economic conditions, level of loans and leases subject to more frequent review by management, and other qualitative factors that could affect credit losses.

The evaluation of these factors contributes significantly to the collectively evaluated for impairment component of the estimate for the allowance for loan and lease losses.

We identified auditing the estimate of the aggregate effect of the qualitative factors as a critical audit matter as it involved especially subjective auditor judgment.

Auditing management’s determination of qualitative factors involved especially subjective auditor judgment because management’s estimate relies on an inherently subjective analysis to determine the quantitative impact the factors have on the allowance.

Management’s analysis of these factors requires significant judgment.

The primary procedures we performed to address this critical audit matter included:

Testing the effectiveness of controls over the evaluation of the items used to estimate the qualitative factors, including controls addressing:

• The reliability of data used as the basis for the adjustments relating to qualitative factors;

• Management’s judgments related to the assessed level of risk and the qualitative factor assigned used adjust the average loss rates;

• The math accuracy of the dollar amount applied to the qualitative factor;

• Managements review of trends and the movement within each qualitative factor and the overall allowance balance.

Substantively testing management’s process, including evaluating their judgments and assumptions, for developing the qualitative factors which included:

• Evaluation of the reliability and relevancy of data used as a basis for the adjustments relating to qualitative factors;

• Evaluation of the reasonableness of management’s judgments related to the qualitative and quantitative assessment of the data used in the determination of qualitative factors and the resulting allocation to the allowance;

• Analytically evaluating the collectively evaluated for impairment component year over year;

• Verifying the mathematical accuracy of the adjustment factors for the qualitative component

• Evaluating the reasonableness of the qualitative factor allowance allocation derived by management;

• Recalculating the dollar amount of the reserve derived from the qualitative factor assessment;

• Tracing the allowance allocation from the qualitative factor analysis to the overall allowance calculation.

/s/ Crowe LLP

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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 8. Financial Statements and Supplementary Data