What changed in this filing

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Item 1. Financial Statements

2021-04-30 compared with 2020-10-23 · 203 added, 293 removed, 1100 unchanged (31% of the section changed)

2 unchanged sentences

Consolidated Balance Sheets

September 30,

2021 December 31,

11 unchanged sentences

Foreclosed properties 31 34

Right-of-use assets 6,141 6,906

Right-of-use assets, net 5,486 5,814

Bank-owned life insurance 52,537 52,188

1 unchanged sentence

Goodwill and other intangible assets 12,055 12,018

Derivatives 26,104 49,377

Accrued interest receivable and other assets 38,017 39,478

5 unchanged sentences

Lease liabilities 6,040 6,386

Derivatives 29,565 54,927

Accrued interest payable and other liabilities 9,422 15,617

2 unchanged sentences

Preferred stock, $ 0.01 par value, 2,500,000 shares authorized, no ne issued or outstanding

Common stock, $ 0.01 par value, 25,000,000 shares authorized, 9,227,351 and 9,162,720 shares issued, 8,561,714 and 8,566,044 shares outstanding at September 30, 2020 and December 31, 2019, respectively

Common stock, $ 0.01 par value, 25,000,000 shares authorized, 9,320,490 and 9,234,460 shares issued, 8,638,195 and 8,566,960 shares outstanding at March 31, 2021 and December 31, 2020, respectively

Additional paid-in capital 83,694 83,125

1 unchanged sentence

Accumulated other comprehensive loss ( 1,038 ) ( 933 )

Treasury stock, 665,637 and 596,676 shares at September 30, 2020 and December 31, 2019, respectively, at cost

Treasury stock, 682,295 and 667,500 shares at March 31, 2021 and December 31, 2020, respectively, at cost

( 16,879 ) ( 16,553 )

4 unchanged sentences

Consolidated Statements of Income (Unaudited)

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2020 2019 2020 2019

For the Three Months Ended March 31,

(In Thousands, Except Per Share Data)

18 unchanged sentences

Increase in cash surrender value of bank-owned life insurance

365 305 1,037 894

Net loss on sale of securities — ( 4 )

Commercial loan swap fees 2,446 374 5,782 1,898

Swap fees 684 1,681

Other non-interest income 1,214 762

10 unchanged sentences

Collateral liquidation costs 94 121

Net (gain) loss on foreclosed properties ( 121 ) 262 329 241

Tax credit investment impairment (recovery) 113 ( 120 ) 2,066 3,982

SBA recourse provision (benefit) 57 ( 427 ) 53 167

Loss on early extinguishment of debt — — 744 —

Net loss on foreclosed properties 3 102

Impairment of tax credit investments — 113

SBA recourse (benefit) provision ( 130 ) 25

Other non-interest expense 404 816

Total non-interest expense 17,330 16,146

Income before income tax benefit 5,436 6,503 10,967 17,081

Income tax expense (benefit) 1,143 1,418 73 ( 475 )

Income before income tax expense 12,796 4,136

Income tax expense 3,065 858

Net income $ 9,731 $ 3,278

6 unchanged sentences

Consolidated Statements of Comprehensive Income (Unaudited)

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2020 2019 2020 2019

For the Three Months Ended March 31,

(In Thousands)

Net income $ 9,731 $ 3,278

Other comprehensive income (loss), before tax

Other comprehensive (loss) income, before tax

Securities available-for-sale:

4 unchanged sentences

Interest rate swaps:

Unrealized gain (losses) on interest rate swaps arising during the period 389 ( 846 ) ( 3,654 ) ( 3,310 )

Income tax (expense) benefit ( 6 ) 195 ( 62 ) ( 10 )

Total other comprehensive income (loss) 16 ( 569 ) 178 29

Unrealized gains (losses) on interest rate swaps arising during the period 2,089 ( 3,625 )

Income tax benefit (expense) 36 ( 227 )

Total other comprehensive (loss) gain ( 105 ) 663

Comprehensive income $ 9,626 $ 3,941

10 unchanged sentences

Balance at January 1, 2020 8,566,044 $ 92 $ 81,188 $ 129,105 $ ( 1,348 ) $ ( 14,881 ) $ 194,156

Cumulative effect of adoption of ASC Topic 842

— — — 687 — — 687

Net income — — — 3,278 — — 3,278

7 unchanged sentences

Balance at March 31, 2020 8,571,134 $ 92 $ 81,605 $ 130,973 $ ( 685 ) $ ( 16,328 ) $ 195,657

Net income — — — 6,572 — — 6,572

Other comprehensive income — — — — 319 — 319

Share-based compensation - restricted shares, net 31,151 — 410 — — — 410

Cash dividends ( $ 0.15 per share)

— — — ( 1,315 ) — — ( 1,315 )

Treasury stock purchased ( 96,831 ) — — — — ( 2,231 ) ( 2,231 )

Balance at June 30, 2019 8,699,456 $ 91 $ 80,351 $ 120,841 $ ( 1,086 ) $ ( 11,342 ) $ 188,855

Net income — — — 5,085 — — 5,085

Other comprehensive loss — — — — ( 569 ) — ( 569 )

Share-based compensation - restricted shares, net

6,930 1 389 — — — 390

Cash dividends ($ 0.15 per share)

— — — ( 1,298 ) — — ( 1,298 )

Treasury stock purchased ( 70,301 ) — — — — ( 1,671 ) ( 1,671 )

Balance at September 30, 2019 8,636,085 $ 92 $ 80,740 $ 124,628 $ ( 1,655 ) $ ( 13,013 ) $ 190,792

Common Shares Outstanding Common

7 unchanged sentences

Net income — — — 9,731 — — 9,731

Other comprehensive income — — — — 663 — 663

Share-based compensation - restricted shares, net

63,684 — 417 — — — 417

Cash dividends ($ 0.165 per share)

— — — ( 1,410 ) — — ( 1,410 )

Treasury stock purchased ( 58,594 ) — — — — ( 1,447 ) ( 1,447 )

Balance at March 31, 2020 8,571,134 92 81,605 130,973 ( 685 ) ( 16,328 ) 195,657

Net income — — — 3,323 — — 3,323

Other comprehensive loss — — — — ( 105 ) — ( 105 )

Share-based compensation - restricted shares, net

5,357 — 516 — — — 516

Cash dividends ($ 0.165 per share)

— — — ( 1,414 ) — — ( 1,414 )

Treasury stock purchased ( 1,357 ) — — — — ( 19 ) ( 19 )

Balance at June 30, 2020 8,575,134 $ 92 $ 82,121 $ 132,882 $ ( 1,186 ) $ ( 16,347 ) $ 197,562

Net income — — — 4,293 — — 4,293

Other comprehensive income — — — — 16 — 16

Share-based compensation - restricted shares, net

( 4,410 ) — 499 — — — 499

Share-based compensation - restricted shares and employee stock purchase plan 84,255 1 530 — — — 531

Issuance of common stock under the employee stock purchase plan 1,775 — 39 — — — 39

Cash dividends ($ 0.18 per share)

1 unchanged sentence

Treasury stock purchased ( 14,795 ) — — — — ( 326 ) ( 326 )

Balance at September 30, 2020 8,561,714 $ 92 $ 82,620 $ 135,760 $ ( 1,170 ) $ ( 16,517 ) $ 200,785

Balance at March 31, 2021 8,638,195 $ 93 $ 83,694 $ 148,621 $ ( 1,038 ) $ ( 16,879 ) $ 214,491

See accompanying Notes to Unaudited Consolidated Financial Statements.

1 unchanged sentence

Consolidated Statements of Cash Flows (Unaudited)

For the Nine Months Ended September 30,

For the Three Months Ended March 31,

(In Thousands)

5 unchanged sentences

Provision for loan and lease losses ( 2,068 ) 3,182

SBA recourse provision 53 167

SBA recourse (benefit) provision ( 130 ) 25

Derivative credit valuation adjustment ( 170 ) —

Depreciation, amortization and accretion, net 956 806

1 unchanged sentence

Net loss on sale of securities — 4

Gain on sale of a state tax credit — ( 206 )

Increase in bank-owned life insurance policies ( 350 ) ( 295 )

Origination of loans for sale ( 13,674 ) ( 15,709 )

Sale of loans originated for sale 48,676 43,009

Gain on sale of SBA loans ( 1,598 ) ( 993 )

Sale of SBA loans originated for sale 16,871 14,848

Gain on sale of loans originated for sale ( 1,078 ) ( 265 )

Net loss on foreclosed properties, including impairment valuation 3 102

Loan servicing right impairment valuation ( 3 ) 25

Excess tax benefit from share-based compensation ( 7 ) 18

Payments on operating leases ( 1,166 ) ( 1,143 )

Payments on operating lease liabilities ( 393 ) ( 387 )

Payments received on operating leases 39 28

9 unchanged sentences

Net increase in loans and leases ( 86,613 ) ( 28,719 )

Investments in limited partnerships ( 750 ) ( 1,250 )

Returns of investments in limited partnerships 60 —

Investment in historic development entities — ( 259 )

Distributions from historic development entities 30 —

Investment in Federal Home Loan Bank stock ( 13,422 ) ( 4,700 )

Distribution from historic development entities 49 30

Investment in low-income housing ( 1,307 ) —

Investment in Federal Home Loan Bank and Federal Reserve Bank stock ( 3,614 ) ( 2,040 )

Proceeds from the sale of Federal Home Loan Bank stock 2,250 260

3 unchanged sentences

Financing activities

Net increase in deposits 290,996 53,517

Net increase (decrease) in deposits 47,202 ( 30,253 )

Proceeds from Federal Home Loan Bank advances 290,300 260,000

Repayment of Federal Home Loan Bank advances ( 269,000 ) ( 166,500 )

Loss on early extinguishment of debt 744 —

Repayment of subordinated notes payable — ( 15,000 )

Proceeds from issuance of subordinated notes payable — 15,000

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

Net increase (decrease) in long-term borrowed funds 41 ( 36 )

Net increase in long-term borrowed funds 7,954 14

Cash dividends paid ( 1,541 ) ( 1,410 )

Proceeds from issuance of common stock under ESPP 39 —

Purchase of treasury stock ( 326 ) ( 1,447 )

7 unchanged sentences

Income taxes paid 32 ( 8 )

Non-cash investing and financing activities:

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

Transfer from loans and leases to foreclosed properties 80 596

See accompany Notes to Unaudited Consolidated Financial Statements

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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.

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

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

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:

First Business Capital Corp.

(“FBCC”), First Madison Investment Corp.

(“FMIC”), First Business Equipment Finance, LLC (“FBEF”), ABKC Real Estate, LLC (“ABKC”), FBB Real Estate 2, LLC (“FBB RE 2”), Rimrock Road Investment Fund, LLC (“Rimrock Road”), BOC Investment, LLC (“BOC”), Mitchell Street Apartments Investment, LLC (“Mitchell Street”), and FBB Tax Credit Investment LLC (“FBB Tax Credit”).

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

(“FMIC”), ABKC Real Estate, LLC (“ABKC”), FBB Real Estate 2, LLC (“FBB RE 2”), Rimrock Road Investment Fund, LLC (“Rimrock Road”), BOC Investment, LLC (“BOC”), Mitchell Street Apartments Investment, LLC (“Mitchell Street”), and FBB Tax Credit Investment, LLC (“FBB Tax Credit”).

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

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In accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 810, the Corporation’s ownership interest in FBFS Statutory Trust II (“Trust II”) has not been consolidated into the financial statements.

Management of the Corporation is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period.

Management of the Corporation is required to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period.

Actual results could differ significantly from those estimates.

Material estimates that could significantly change in the near-term include the value of securities and interest rate swaps, level of the allowance for loan and lease losses, lease residuals, property under operating leases, goodwill, level of the Small Business Administration (“SBA”) recourse reserve, and income taxes.

The results of operations for the three and nine months ended September 30, 2020, are not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, 2020.

The results of operations for the three months ended March 31, 2021, are not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, 2021.

Certain amounts in prior periods may have been reclassified to conform to the current presentation.

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As a smaller reporting company, the Corporation is eligible for the delay and will be deferring adoption.

The Corporation has established a cross-functional committee and has implemented a third-party software solution to assist with the adoption of the

The Corporation has established a cross-functional committee and has implemented a third-party software solution to assist with the adoption of the standard.

Management has gathered all necessary data and reviewed potential methods to calculate the expected credit losses.

Management is currently calculating sample expected loss computations and developing the allowance methodology and assumptions that will be used under the new standard.

Management is currently calculating sample expected loss computations and developing the allowance

methodology and assumptions that will be used under the new standard.

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

Note 2 — Significant Events

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 effect on the Corporation's operating results or financial condition.

In January, 2021, the FASB released ASU 2021-01, ‘Reference Rate Reform (Topic 848),’ which clarifies that certain optional expedients and exceptions in topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition related to reference rate reform.

The amendments in this update are effective immediately for all entities.

An entity may elect to apply the amendments in the update on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued.

The Corporation does not expect this amendment to have a material effect on its financial statements.

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.

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

The full impact of COVID-19 is unknown and rapidly evolving.

The full long-term impact of the COVID-19 pandemic is unknown and continues to evolve.

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 September 30, 2020, the Corporation’s aggregate outstanding exposure in these segments was $ 188.5 million, or 10.2 % 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 $ 11.3 million, or 57.9 %, compared to December 31, 2019.

The increase in the allowance for loan and lease losses was in large part due to an increase in specific reserves on impaired loans, in addition to several qualitative factors after careful evaluation by management.

Most notably, an increase in specific reserves of $ 5.5 million was driven by deterioration of two existing legacy SBA impaired relationships and one relationship in the hospitality industry.

Additionally, a $ 4.7 million increase was due to the economic conditions caused by the pandemic, including the increase in the unemployment rate, management’s ongoing review and grading of the loan and lease portfolios, consideration of delinquency experience, and the level of loans and leases subject to more frequent review by management.

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

As of March 31, 2021, the Corporation’s aggregate outstanding exposure in these segments was $ 194.5 million, or 9.9 % of the Corporation’s gross loans and leases.

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 September 30, 2020, the Corporation had 60 deferral requests outstanding, representing $ 131.5 million in total loans, or 7.1 % of gross loans and leases, excluding gross PPP loans, compared to $ 323.2 million, or 18.6 % of gross loans and leases, excluding gross PPP loans as of June 30, 2020.

The Corporation provided loan payment deferrals for certain borrowers impacted by COVID-19 who were current in their payments at the inception of the Corporation’s loan modification program.

As of March 31, 2021, the Corporation had seven deferral requests outstanding, representing $ 13.0 million in total loans, or 0.7 % of gross loans and leases, excluding gross PPP loans, compared to $ 27.0 million, or 1.4 % of gross loans and leases, excluding gross PPP loans as of December 31, 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 PPP.

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 September 30, 2020, the Corporation had $ 332.3 million in gross PPP loans outstanding and deferred processing fees outstanding of $ 6.9 million.

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 March 31, 2021, the Corporation had $ 272.7 million in gross PPP loans outstanding and deferred processing fees outstanding of $ 5.1 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 three and nine months ended September 30, 2020, $ 1.1 million and $ 2.0 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.

During the three months ended March 31, 2021, $ 2.2 million was recognized in loans and leases interest income in the unaudited Consolidated Statements of Income.

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, 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.

Goodwill Impairment Analysis

The Company completed an impairment analysis of goodwill as of August 1, 2020 and determined there was no impairment.

Goodwill impairment exists when a reporting unit’s carrying value exceeds its fair value.

A qualitative assessment is performed to determine whether it is more likely than not that the fair value of equity of the reporting unit exceeds the carrying value.

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

The Corporation performed Step 1, quantitative goodwill impairment testing, as of August 1, 2020.

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.

Note 3 — Earnings per Common Share

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Diluted earnings per share are computed by dividing net income allocated to common shares adjusted for reallocation of undistributed earnings of unvested restricted shares by the weighted average number of shares determined for the basic earnings per common share computation plus the dilutive effect of common stock equivalents using the treasury stock method.

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2020 2019 2020 2019

For the Three Months Ended March 31,

(Dollars in Thousands, Except Share Data)

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earnings allocated to participating securities 251 78

Basic earnings allocated to common stockholders $ 4,183 $ 4,974 $ 10,610 $ 17,216

Basic earnings allocated to common shareholders $ 9,480 $ 3,200

Weighted-average common shares outstanding, excluding participating securities

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Diluted earnings per common share

Earnings allocated to common stockholders, diluted $ 4,183 $ 4,974 $ 10,610 $ 17,216

Earnings allocated to common shareholders, diluted $ 9,480 $ 3,200

Weighted-average diluted common shares outstanding, excluding participating securities

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The Corporation adopted the 2019 Equity Incentive Plan (the “Plan”) during the quarter ended June 30, 2019.

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

As of September 30, 2020, 151,899 shares were available for future grants under the Plan.

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.

As of March 31, 2021, 40,953 shares were available for future grants under the Plan.

Shares covered by awards that expire, terminate, or lapse will again be available for the grant of awards under the Plan.

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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 unaudited Consolidated Statements of Income.

The Corporation also issues a combination of performance based restricted stock units and restricted stock awards to its executive officers.

Vesting of the performance based restricted stock units will be measured on Total Shareholder Return (“TSR”) and Return on Average Equity (“ROAE”) and will cliff-vest after a three-year measurement period based on the Corporation’s performance relative to a custom peer group.

The Corporation may issue a combination of performance-based restricted stock units and restricted stock awards to its executive officers.

Vesting of the performance based restricted stock units will be measured on Total Shareholder Return

(“TSR”) and Return on Average Equity (“ROAE”) and will cliff-vest after a three-year measurement period based on the Corporation’s performance relative to a custom peer group.

At the end of the performance period, the number of actual shares to be awarded varies between 0% and 200% of target amounts.

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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.

Restricted stock activity for the year ended December 31, 2019 and the nine months ended September 30, 2020 was as follows:

Restricted Shares/Units Weighted Average

Restricted stock activity for the year ended December 31, 2020 and the three months ended March 31, 2021 was as follows:

Restricted Shares Weighted Average

Nonvested balance as of January 1, 2020 176,935 $ 22.51

Granted 95,265 23.64

Vested ( 56,904 ) 22.26

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Forfeited ( 1,180 ) 23.12

Nonvested balance as of September 30, 2020 191,588 $ 24.30

Nonvested balance as of March 31, 2021 246,162 $ 23.94

(1) The number of restricted shares/units shown includes the shares that would be granted if the target level of performance is achieved related to the performance based restricted stock units.

The number of shares actually issued may vary.

As of September 30, 2020, the Corporation had $ 3.7 million of unvested compensation expense, which the Corporation expects to recognize over a weighted-average period of approximately 2.30 years.

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

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2020 2019 2020 2019

(In Thousands)

Share-based compensation expense $ 499 $ 390 $ 1,432 $ 1,118

As of March 31, 2021, the Corporation had $ 4.7 million of unvested compensation expense, which the Corporation expects to recognize over a weighted-average period of approximately 2.54 years.

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 Company is authorized to issue up to 250,000 shares under the ESPP.

The plan qualifies as an employee stock purchase plan under section 423 of the Internal Revenue Code of 1986.

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

Employees may elect to purchase a limited number of shares 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 three months ended March 31, 2021, the Corporation issued 1,775 shares of common stock under the ESPP.

As of March 31, 2021, 244,258 shares remained available for issuance under the ESPP.

For the three months ended March 31, 2021 and 2020, share-based compensation expense related to restricted stock and the ESPP included in the unaudited Consolidated Statements of Income was $ 531,000 and $ 417,000 , respectively.

Note 5 — Securities

The amortized cost and fair value of securities available-for-sale and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:

As of September 30, 2020

As of March 31, 2021

Amortized Cost Gross

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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 September 30, 2020

As of March 31, 2021

Amortized Cost Gross

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

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

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.

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

There were no sales of available-for-sale securities that occurred during the three months ended September 30, 2020 and one sale that occurred during the nine months ended September 30, 2020.

There were 37 and 46 sales of available-for-sale securities that occurred during the three and nine months ended September 30, 2019, respectively.

At September 30, 2020 and December 31, 2019, securities with a fair value of $ 79.8 million and $ 30.3 million, respectively, were pledged to secure various obligations, including interest rate swap contracts, outstanding FHLB advances, additional FHLB availability, the Federal Reserve Discount Window, and municipal deposits.

At September 30, 2020, pledged securities with a fair value of $ 129.3 million were available to secure various obligations.

No pledged securities were available to secure various obligations as of December 31, 2019.

The amortized cost and fair value of securities by contractual maturity at September 30, 2020 are shown below.

There were no sales of available-for-sale securities that occurred during the three months ended March 31, 2021 and one sale of available-for-sale securities that occurred during the three months ended March 31, 2020.

At March 31, 2021 and December 31, 2020, securities with a fair value of $ 29.7 million and $ 73.7 million, respectively, were pledged to secure various obligations, including interest rate swap contracts and municipal deposits.

The amortized cost and fair value of securities by contractual maturity at March 31, 2021 are shown below.

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

7 unchanged sentences

$ 171,155 $ 173,261 $ 24,783 $ 25,537

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 September 30, 2020 and December 31, 2019.

At September 30, 2020, the Corporation held 12 available-for-sale securities that were in an unrealized loss position.

At March 31, 2021, the Corporation held 26 available-for-sale securities that were in an unrealized loss position.

Such securities have not experienced credit rating downgrades;

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

At September 30, 2020, the Corporation held one available-for-sale security that had been in a continuous unrealized loss position for twelve months or greater.

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

At March 31, 2021, the Corporation held four available-for-sale securities 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.

2 unchanged sentences

Based on the Corporation’s evaluation, it is expected that the Corporation will recover the entire amortized cost basis of each security.

Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019.

Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the three months ended March 31, 2021 and 2020.

A summary of unrealized loss information for securities available-for-sale, categorized by security type and length of time for which the security has been in a continuous unrealized loss position, follows:

As of September 30, 2020

As of March 31, 2021

Less than 12 Months 12 Months or Longer Total

10 unchanged sentences

18,247 401 — — 18,247 401

Commercial mortgage-backed securities - government-sponsored enterprises

8,832 432 — — 8,832 432

$ 40,645 $ 1,089 $ 14,357 $ 77 $ 55,002 $ 1,166

As of December 31, 2020

7 unchanged sentences

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

Residential mortgage-backed securities - government issued

Municipal securities

2,863 4 — — 2,863 4

1 unchanged sentence

19,078 49 — — 19,078 49

Commercial mortgage-backed securities - government issued

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

Commercial mortgage-backed securities - government-sponsored enterprises

2,245 4 1,047 5 3,292 9

$ 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 September 30, 2020 and December 31, 2019.

At September 30, 2020, the Corporation held two held-to-maturity securities that were in an unrealized loss position.

At March 31, 2021, the Corporation held three held-to-maturity securities that were in an unrealized loss position.

Such securities have not experienced credit rating downgrades;

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

There was one held-to-maturity security that had been in a continuous loss position for twelve months or greater as of September 30, 2020.

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

There were two held-to-maturity securities that had been in a continuous loss position for twelve months or greater as of March 31, 2021.

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.

Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019.

Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the three months ended March 31, 2021 and 2020.

A summary of unrealized loss information for securities held-to-maturity, categorized by security type and length of time for which the security has been in a continuous unrealized loss position, follows:

As of September 30, 2020

As of March 31, 2021

Less than 12 Months 12 Months or Longer Total

6 unchanged sentences

$ — $ — $ 484 $ 19 $ 484 $ 19

Residential mortgage-backed securities - government issued

$ 5 $ — $ 484 $ 19 $ 489 $ 19

As of December 31, 2020

7 unchanged sentences

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

Residential mortgage-backed securities - government issued

— — 1,887 9 1,887 9

Residential 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 6 — Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses

Loan and lease receivables consist of the following:

September 30,

2021 December 31,

13 unchanged sentences

Commercial and industrial 784,305 732,318

Direct financing leases, net 24,743 28,203

Direct financing leases 19,616 22,331

Consumer and other:

9 unchanged sentences

$ 2,206,130 $ 2,117,449

As of March 31, 2021 and December 31, 2020, the Corporation had $ 272.7 million and $ 228.9 million, respectively, in gross PPP loans outstanding included in the commercial and industrial loan category and deferred processing fees outstanding of $ 5.1 million and $ 3.5 million, respectively, 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 comprised of the following:

September 30,

2021 December 31,

5 unchanged sentences

Total SBA loans $ 337,448 $ 292,714

As of September 30, 2020 and December 31, 2019, $ 9.6 million and $ 12.1 million of SBA loans were considered impaired, respectively.

Loans transferred to third parties consist of the guaranteed portions of SBA 7(a) loans which the Corporation sold in the secondary market and participation interests in other, non-SBA originated loans.

The total principal amount of the guaranteed portions of SBA 7(a) loans sold during the three months ended September 30, 2020, and 2019, was $ 7.9 million and $ 4.9 million, respectively.

The total principal amount of the guaranteed portions of SBA 7(a) loans sold during the nine months ended September 30, 2020, and 2019, was $ 17.2 million and $ 10.5 million, respectively.

Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the three and nine months ended September 30, 2020, and 2019, have been derecognized in the unaudited Consolidated Financial Statements.

The guaranteed portions of SBA loans were transferred at their fair value and the related gain was recognized upon the transfer as

non-interest income in the unaudited Consolidated Financial Statements.

The total outstanding balance of sold SBA loans at September 30, 2020, and December 31, 2019, was $ 75.1 million and $ 73.8 million, respectively.

The total principal amount of transferred participation interests in other, non-SBA originated loans during the three months ended September 30, 2020, and 2019, was $ 7.7 million and $ 7.5 million, respectively.

The total principal amount of transferred participation interests in other, non-SBA originated loans during the nine months ended September 30, 2020, and 2019, was $ 29.9 million and $ 31.5 million, respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer.

As of March 31, 2021 and December 31, 2020, $ 8.6 million and $ 9.3 million of SBA loans were considered impaired, respectively.

Loans transferred to third parties consist of the guaranteed portions of SBA loans which the Corporation sold in the secondary market and participation interests in other, non-SBA originated loans.

The total principal amount of the guaranteed portions of SBA loans sold during the three months ended March 31, 2021, and 2020, was $ 10.6 million and $ 2.7 million, respectively.

Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the three months ended March 31, 2021, and 2020, have been derecognized in the unaudited Consolidated Financial Statements.

The guaranteed portions of SBA loans were transferred at their fair value and the related gain was recognized upon the transfer as non-interest income in the unaudited Consolidated Financial Statements.

The total outstanding balance of sold SBA loans at March 31, 2021, and December 31, 2020, was $ 82.7 million and $ 79.5 million, respectively.

The total principal amount of transferred participation interests in other, non-SBA originated loans during the three months ended March 31, 2021, and 2020, was $ 5.2 million and $ 11.9 million, respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer.

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

The total outstanding balance of these transferred loans at September 30, 2020, and December 31, 2019, was $ 144.1 million and $ 142.8 million, respectively.

As of September 30, 2020, and December 31, 2019, the total amount of the Corporation’s partial ownership of these transferred loans on the unaudited Consolidated Balance Sheets was $ 266.7 million and $ 244.6 million, respectively.

As of September 30, 2020, the non-SBA originated participation portfolio contained an impaired loan totaling $ 5.8 million with a sold portion of $ 4.2 million.

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

The total outstanding balance of these transferred loans at March 31, 2021, and December 31, 2020, was $ 151.3 million and $ 153.6 million, respectively.

As of March 31, 2021, and December 31, 2020, the total amount of the Corporation’s partial ownership of these transferred loans on the unaudited Consolidated Balance Sheets was $ 259.9 million and $ 276.5 million, respectively.

As of March 31, 2021 and 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.

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

The total amount of loan participations purchased on the unaudited Consolidated Balance Sheets as of September 30, 2020, and December 31, 2019, was $ 424,000 and $ 492,000 , respectively.

There were no loan participations purchased on the unaudited Consolidated Balance Sheets as of March 31, 2021, and the total of loan participations purchased as of December 31, 2020 was $ 410,000 .

The following tables illustrate ending balances of the Corporation’s loan and lease portfolio, including impaired loans by class of receivable, and considering certain credit quality indicators:

September 30, 2020

March 31, 2021

I II III IV Total

58 unchanged sentences

The delinquency aging of the loan and lease portfolio by class of receivable was as follows:

September 30, 2020

March 31, 2021

Days Past Due 60-89

94 unchanged sentences

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

September 30,

2021 December 31,

19 unchanged sentences

Total impaired assets $ 19,082 $ 26,697

September 30,

2021 December 31,

4 unchanged sentences

Allowance for loan and lease losses to non-accrual loans and leases 152.60 107.15

As of September 30, 2020, and December 31, 2019, $ 15.4 million and $ 15.6 million of the non-accrual loans and leases were considered troubled debt restructurings, respectively.

The Corporation has allocated $ 4.4 million and $ 2.7 million of specific reserves to troubled debt restructurings as of September 30, 2020 and December 31, 2019, respectively.

There were no unfunded commitments associated with troubled debt restructured loans and leases as of September 30, 2020.

As of March 31, 2021, and December 31, 2020, $ 4.8 million and $ 6.5 million of the non-accrual loans and leases were considered troubled debt restructurings, respectively.

The Corporation has allocated $ 765,000 and $ 760,000 of specific reserves to troubled debt restructurings as of March 31, 2021 and December 31, 2020, respectively.

There were no unfunded commitments associated with troubled debt restructured loans and leases as of March 31, 2021.

All loans and leases modified as a troubled debt restructuring are measured for impairment.

1 unchanged sentence

The following table provides the number of loans modified in a troubled debt restructuring and the pre- and post-modification recorded investment by class of receivable:

For the Three Months Ended September 30, For the Nine Months Ended September 30,

For the Three Months Ended March 31,

Number of Loans Pre-Modification

Investment Post-Modification

Investment Number of Loans Pre-Modification

Investment Post-Modification

(Dollars in Thousands)

4 unchanged sentences

Total 6 $ 1,725 $ 1,712

For the Three Months Ended September 30, For the Nine Months Ended September 30,

Number of Loans Pre-Modification

Investment Post-Modification

Investment Number of Loans Pre-Modification

Investment Post-Modification

(Dollars in Thousands)

Commercial real estate:

Commercial real estate — owner occupied 2 $ 3,774 $ 3,741 2 $ 3,774 $ 3,741

Commercial and industrial 2 2,804 2,804 16 13,412 13,023

Total 4 $ 6,578 $ 6,545 18 $ 17,186 $ 16,764

During the three months ended March 31, 2021, no loans were modified to a troubled debt restructuring.

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

During the three and nine months ended September 30, 2020, and 2019, the modification of terms primarily consisted of payment schedule modifications or principal reductions.

There were two commercial and industrial loans for a total of $ 703,000 and two owner-occupied commercial real estate loans for a total of $ 272,000 modified in troubled debt restructurings during the previous 12 months which subsequently defaulted during the three and nine months ended September 30, 2020.

There were no loans modified in a troubled debt restructuring during the 12 months previous to September 30, 2019 which subsequently defaulted during the three and nine months ended September 30, 2019.

During the three months ended March 31, 2020, the modification of terms primarily consisted of payment schedule modifications or principal reductions.

There were no loans modified in troubled debt restructurings during the previous 12 months which subsequently defaulted during the three months ended March 31, 2021.

There was one commercial and industrial loan for $ 2.1 million and two owner-occupied commercial real estate loans for $ 3.6 million modified in a troubled debt restructuring during the previous 12 months which subsequently defaulted during the three months ended March 31, 2020.

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

As of and for the Nine Months Ended September 30, 2020

As of and for the Three Months Ended March 31, 2021

Investment (1)

107 unchanged sentences

(2) Average recorded investment is calculated primarily using daily average balances.

The difference between the recorded investment of loans and leases and the unpaid principal balance of $ 10.2 million and $ 9.5 million as of September 30, 2020, and December 31, 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 $ 47,000 and $ 140,000 of loans as of September 30, 2020, and December 31, 2019, respectively, that were performing troubled debt restructurings, and although not on non-accrual, were reported as impaired due to the concession in terms.

The difference between the recorded investment of loans and leases and the unpaid principal balance of $ 5.5 million and $ 14.6 million as of March 31, 2021, and December 31, 2020, respectively, represents partial charge-offs of loans and leases resulting from losses due to the valuation of the collateral securing the loans and leases being below the carrying values of the loans and leases.

Impaired loans and leases also included $ 59,000 and $ 46,000 of loans as of March 31, 2021, and December 31, 2020, respectively, that were performing troubled debt restructurings, and although not on non-accrual, were reported as impaired due to the concession in terms.

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

7 unchanged sentences

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

As of and for the Three Months Ended September 30, 2020

Real Estate Commercial

Industrial Consumer

and Other Total

(In Thousands)

Beginning balance $ 16,438 $ 10,179 $ 847 $ 27,464

Charge-offs — ( 505 ) — ( 505 )

Recoveries — 21 2 23

Net charge-offs — ( 484 ) 2 ( 482 )

Provision for loan and lease losses 3,742 127 ( 34 ) 3,835

Ending balance $ 20,180 $ 9,822 $ 815 $ 30,817

As of and for the Three Months Ended September 30, 2019

As of and for the Three Months Ended March 31, 2021

Real Estate Commercial

8 unchanged sentences

Ending balance $ 18,445 $ 9,544 $ 993 $ 28,982

As of and for the Nine Months Ended September 30, 2020

Real Estate Commercial

Industrial Consumer

and Other Total

(In Thousands)

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

Charge-offs ( 27 ) ( 1,414 ) ( 13 ) ( 1,454 )

Recoveries 3 259 2 264

Net charge-offs ( 24 ) ( 1,155 ) ( 11 ) ( 1,190 )

Provision for loan and lease losses 9,352 2,899 236 12,487

Ending balance $ 20,180 $ 9,822 $ 815 $ 30,817

As of and for the Nine Months Ended September 30, 2019

As of and for the Three Months Ended March 31, 2020

Real Estate Commercial

5 unchanged sentences

Recoveries 1 176 — 177

Net recoveries 74 ( 967 ) 25 ( 868 )

Net recoveries (charge-offs) 1 51 ( 6 ) 46

Provision for loan and lease losses 1,744 1,193 245 3,182

1 unchanged sentence

The following tables provide information regarding the allowance for loan and lease losses and balances by type of allowance methodology.

As of September 30, 2020

As of March 31, 2021

Real Estate Commercial

28 unchanged sentences

Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.

Lease expense for operating leases and short-term leases

is recognized on a straight-line basis over the lease term.

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.

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

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

The components of total lease expense were as follows:

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2020 2019 2020 2019

For the Three Months Ended March 31,

(In Thousands)

Operating lease cost

$ 373 $ 391 $ 1,116 $ 1,172

Short-term lease cost

52 56 174 197

Variable lease cost

141 129 394 366

sublease income

1 unchanged sentence

Total lease cost, net

$ 538 $ 576 $ 1,600 $ 1,735

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

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Weighted-average remaining lease term (in years)

1 unchanged sentence

3.06 % 3.03 %

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

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

(In Thousands)

5 unchanged sentences

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

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

(In Thousands)

2 unchanged sentences

Investment in historic development entities 2,307 2,356

Investment in low-income housing development entity 1,307 —

Investment in a community development entity 5,306 5,306

1 unchanged sentence

Investment in Trust II 315 315

Fair value of interest rate swaps 58,210 18,346

Prepaid expenses 2,947 2,165

4 unchanged sentences

Average balances represent year to date averages.

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Balance Average

10 unchanged sentences

Total deposits $ 1,902,718 $ 1,888,859 0.22 $ 1,855,516 $ 1,711,092 0.52

A summary of annual maturities of in-market and wholesale certificates of deposit at March 31, 2021 is as follows:

(In Thousands)

Maturities during the year ended December 31,

2021 $ 60,465

Wholesale deposits include $ 40.5 million and $ 125.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at March 31, 2021, compared to $ 47.5 million and $ 125.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at December 31, 2020.

Deposits include $ 12.9 million and $ 28.7 million of certificates of deposit and wholesale deposits which are denominated in amounts of $250,000 or more at March 31, 2021 and December 31, 2020, respectively.

Note 10 — FHLB Advances, Other Borrowings and Junior Subordinated Notes

1 unchanged sentence

Average balances represent year to date averages.

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Balance Weighted Average

10 unchanged sentences

Subordinated notes payable 23,757 23,751 5.94 23,747 23,725 5.95

23,737 23,720 5.95 23,707 24,502 7.45

Junior subordinated notes 10,065 10,063 10.91 10,062 10,054 11.09

$ 458,482 $ 404,029 1.91 $ 429,229 $ 429,624 1.91

Short-term borrowings $ 231,000 $ 118,500

Long-term borrowings 262,575 210,929

A summary of annual maturities of borrowings at March 31, 2021 is as follows:

(In Thousands)

Maturities during the year ended December 31,

2021 $ 171,260

(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.

During the nine months ended September 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 nine months ended September 30, 2020.

Thereafter 164,497

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 Banks PPP lending efforts.

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

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

As of September 30, 2020 and December 31, 2019, the Corporation was in compliance with its debt covenants under its third-party secured senior line of credit.

The borrowing was fully collateralized by a tranche of PPP loans originated by the Bank on April 15, 2020 and matures 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.

As of March 31, 2021 and December 31, 2020, the Corporation had other borrowings of $ 8.9 million and $ 920,000 respectively, which consisted of $7.9 million of sold loans accounted for as secured borrowings because they did not qualify for true sale accounting, and borrowings associated with our investment in a community development entity.

As of March 31, 2021 and December 31, 2020, the Corporation was in compliance with its debt covenants under its third-party secured senior line of credit.

Per the promissory note dated February 19, 2021, the Corporation pays a fee on this line of credit.

During both the nine months ended September 30, 2020 and 2019, the Corporation incurred interest expense of $ 10,000 due to this fee.

During both the three months ended March 31, 2021 and 2020, the Corporation incurred interest expense of $ 3,000 due to this fee.

Note 11 — Commitments and Contingencies

7 unchanged sentences

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 $ 1.1 million at September 30, 2020, which is reported in accrued interest payable and other liabilities on the unaudited 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 $ 593,000 at March 31, 2021, which is reported in accrued interest payable and other liabilities on the unaudited Consolidated Balance Sheets.

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

As of and for the Three Months Ended September 30, As of and for the Nine Months Ended September 30,

2020 2019 2020 2019

As of and for the Three Months Ended March 31,

(In Thousands)

16 unchanged sentences

Assets and liabilities measured at fair value on a recurring basis, segregated by fair value hierarchy level, are summarized below:

September 30, 2020

March 31, 2021

Fair Value Measurements Using

25 unchanged sentences

Interest rate swaps — 54,927 — 54,927

For assets and liabilities measured at fair value on a recurring basis, there were no transfers between the levels during the three and nine months ended September 30, 2020 or the year ended December 31, 2019 related to the above measurements.

For assets and liabilities measured at fair value on a recurring basis, there were no transfers between the levels during the three months ended March 31, 2021 or the year ended December 31, 2020 related to the above measurements.

Assets and liabilities measured at fair value on a non-recurring basis, segregated by fair value hierarchy are summarized below:

September 30, 2020

March 31, 2021

Fair Value Measurements Using

11 unchanged sentences

Loan servicing rights — — 1,325 1,325

Impaired loans were written down to the fair value of their underlying collateral less costs to sell of $ 22.2 million and $ 15.7 million at September 30, 2020 and December 31, 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.

Impaired loans were written down to the fair value of their underlying collateral less costs to sell of $ 12.9 million and $ 17.2 million at March 31, 2021 and December 31, 2020, 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.

These techniques included observable inputs for the individual impaired loans being evaluated, such as current appraisals, recent sales of similar assets, or other observable market data, and unobservable inputs, typically when discounts are applied to appraisal values to adjust such values to current market conditions or to reflect net realizable values.

The quantification of unobservable inputs for Level 3 impaired loan values range from 5 % - 93 % as of the measurement date of September 30, 2020.

The quantification of unobservable inputs for Level 3 impaired loan values range from 10 % - 91 % as of the measurement date of March 31, 2021.

The weighted average of those unobservable inputs was 29 %.

16 unchanged sentences

Fair value estimates, methods, and assumptions, consistent with exit price concepts for fair value measurements, are set forth below:

September 30, 2020

March 31, 2021

Amount Fair Value

81 unchanged sentences

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.

At September 30, 2020, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was $ 577.9 million.

During the three months ended March 31, 2021, a credit valuation adjustment was recognized resulting in a $170,000 benefit.

At March 31, 2021, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was $ 645.1 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 August 2037.

These interest rate swaps mature between January 2024 and March 2038.

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

These commercial borrower swaps were reported on the unaudited Consolidated Balance Sheet as a derivative asset of $ 58.2 million, included in accrued interest receivable and other assets.

As of September 30, 2020, no interest rate swaps were in default.

At September 30, 2020, the aggregate amortizing notional value of interest rate swaps with dealer counterparties was also $ 577.9 million.

These commercial borrower swaps were reported on the unaudited Consolidated Balance Sheet as a derivative asset of $ 26.1 million and a derivative liability of $ 10.8 million.

At March 31, 2021, the aggregate amortizing notional value of interest rate swaps with dealer counterparties was also $ 645.1 million.

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 August 2037.

Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and are reported on the unaudited Consolidated Balance Sheet as a net derivative liability of $ 58.2 million, included in accrued interest payable and other liabilities.

The gross amount of dealer counterparty swaps, without regard to the enforceable master netting agreement, was a gross derivative liability of $ 58.2 million and no gross derivative asset.

No right of offset existed with dealer counterparty swaps as of September 30, 2020.

These interest rate swaps mature in January 2024 through March 2038.

The gross amount of dealer counterparty swaps, without regard to the enforceable master netting agreement, was a gross derivative liability of $ 26.1 million and $ 10.8 million gross derivative asset.

No right of offset existed with dealer counterparty swaps as of March 31, 2021.

All changes in the fair value of these instruments are recorded in other non-interest income.

Given the mirror-image terms of the outstanding derivative portfolio, the change in fair value for the three and nine months ended September 30, 2020 and 2019 had an insignificant impact on the unaudited Consolidated Statements of Income.

Given the mirror-image terms of the outstanding derivative portfolio, the change in fair value for the three months ended March 31, 2021 and 2020 had an insignificant impact on the unaudited Consolidated Statements of Income.

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

These LIBOR-based 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.

The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affects earnings.

As of September 30, 2020, the aggregate notional value of interest rate swaps designated as cash flow hedges was $ 114.0 million.

As of March 31, 2021, the aggregate notional value of interest rate swaps designated as cash flow hedges was $ 114.0 million.

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

A pre-tax unrealized gain of $ 389,000

and a pre-tax unrealized loss of $ 3.7 million were recognized in other comprehensive income for the three and nine months ended September 30, 2020, respectively, and there was no ineffective portion of these hedges.

A pre-tax unrealized gain of $ 2.1 million was recognized in other comprehensive income for the three months ended March 31, 2021, and there was no ineffective portion of these hedges.

Information about the balance sheet location and fair value of the Corporation’s derivative instruments below:

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Derivatives not designated as hedging instruments

September 30, 2020 Accrued interest receivable and other assets $ 58,210 Accrued interest payable and other liabilities $ 58,210

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

March 31, 2021 Derivatives $ 26,104 Derivatives $ 26,104

December 31, 2020 Derivatives $ 49,377 Derivatives $ 49,377

Derivatives designated as hedging instruments

September 30, 2020 Accumulated other comprehensive income (1)

$ 6,193 Accrued interest payable and other liabilities

March 31, 2021 Accumulated other comprehensive income (1)

$ 3,461 Derivatives $ 3,461

December 31, 2020 Accumulated other comprehensive income (1)

$ 2,539 Accrued interest payable and other liabilities

$ 5,550 Derivatives $ 5,550

(1) The fair value of derivatives designated as hedging instruments included in accumulated other comprehensive income represent pre-tax amounts, which are reported net of tax on the unaudited Consolidated Balance Sheets.

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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;

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

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

or (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital ratios.

Management intends, when appropriate under regulatory guidelines, to consult with the Federal Reserve and provide it with information on the Corporation’s then-current and prospective earnings and capital position in advance of declaring any cash dividends.

Management intends, when appropriate under regulatory guidelines, to consult with the Federal Reserve Bank of Chicago and provide it with information on the Corporation’s then-current and prospective earnings and capital position in advance of declaring any cash dividends.

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

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

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

(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

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These risk-based capital requirements presently address credit risk related to both recorded and off-balance sheet commitments and obligations.

As of September 30, 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.

As of March 31, 2021, the Corporation’s capital levels exceeded the regulatory minimums and the Bank’s capital levels remained characterized as well capitalized under the regulatory framework.

The following tables summarize both the Corporation’s and the Bank’s capital ratios and the ratios required by their federal regulators:

As of September 30, 2020

As of March 31, 2021

Actual Minimum Required for Capital Adequacy Purposes For Capital Adequacy Purposes Plus Capital Conservation Buffer Minimum Required to Be Well

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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-Q

Item 1. Financial Statements