FIRST BUSINESS FINANCIAL SERVICES, INC. 10-Q

Item 1. Financial Statements First Business Financial Services, Inc. Consolidated Balance Sheets June 30, 2021 December 31, 2020 (Unaudited) (In Thousands, Except Share Data) Assets Cash and due from banks $ 24,577 $ 29,538 Short-term investments 365,400 27,371 Cash and cash equivalents 389,977 56,909 Securities available-for-sale, at fair value 171,219 183,925 Securities held-to-maturity, at amortized cost 22,382 26,374 Loans held for sale 6,059 8,695 Loans and leases receivable, net of allowance for loan and lease losses of $ 25,675 and $ 28,521 , respectively 2,117,886 2,117,449 Premises and equipment, net 1,747 1,998 Foreclosed properties 179 34 Right-of-use assets, net 5,472 5,814 Bank-owned life insurance 52,887 52,188 Federal Home Loan Bank stock, at cost 13,451 13,578 Goodwill and other intangible assets 12,178 12,018 Derivatives 32,377 49,377 Accrued interest receivable and other assets 39,855 39,478 Total assets $ 2,865,669 $ 2,567,837 Liabilities and Stockholders’ Equity Deposits $ 2,160,707 $ 1,855,516 Federal Home Loan Bank advances and other borrowings 420,113 419,167 Junior subordinated notes 10,069 10,062 Lease liabilities 6,005 6,386 Derivatives 36,109 54,927 Accrued interest payable and other liabilities 11,214 15,617 Total liabilities 2,644,217 2,361,675 Stockholders’ equity: 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, 9,323,605 and 9,234,460 shares issued, 8,617,761 and 8,566,960 shares outstanding at June 30, 2021 and December 31, 2020, respectively 93 92 Additional paid-in capital 84,343 83,125 Retained earnings 155,300 140,431 Accumulated other comprehensive loss ( 763 ) ( 933 ) Treasury stock, 705,844 and 667,500 shares at June 30, 2021 and December 31, 2020, respectively, at cost ( 17,521 ) ( 16,553 ) Total stockholders’ equity 221,452 206,162 Total liabilities and stockholders’ equity $ 2,865,669 $ 2,567,837 See accompanying Notes to Unaudited Consolidated Financial Statements. 1 Table of Contents First Business Financial Services, Inc. Consolidated Statements of Income (Unaudited) For the Three Months Ended June 30, For the Six Months Ended June 30, 2021 2020 2021 2020 (In Thousands, Except Per Share Data) Interest income Loans and leases $ 23,591 $ 21,548 $ 46,386 $ 43,397 Securities 816 1,070 1,669 2,258 Short-term investments 192 143 351 477 Total interest income 24,599 22,761 48,406 46,132 Interest expense Deposits 943 1,924 1,962 6,040 Federal Home Loan Bank advances and other borrowings 1,727 1,672 3,377 3,600 Junior subordinated notes 277 277 552 555 Total interest expense 2,947 3,873 5,891 10,195 Net interest income 21,652 18,888 42,515 35,937 Provision for loan and lease losses ( 958 ) 5,469 ( 3,026 ) 8,651 Net interest income after provision for loan and lease losses 22,610 13,419 45,541 27,286 Non-interest income Private wealth management service fees 2,744 2,124 5,151 4,235 Gain on sale of Small Business Administration loans 1,203 574 2,281 839 Service charges on deposits 941 829 1,859 1,647 Loan fees 569 451 1,114 936 Increase in cash surrender value of bank-owned life insurance 350 377 699 672 Net gain (loss) on sale of securities 29 — 29 ( 4 ) Swap fees — 1,655 684 3,336 Other non-interest income 485 309 1,699 1,072 Total non-interest income 6,321 6,319 13,516 12,733 Non-interest expense Compensation 13,255 10,796 25,912 21,848 Occupancy 533 554 1,085 1,126 Professional fees 913 859 1,778 1,678 Data processing 798 710 1,569 1,386 Marketing 511 352 902 813 Equipment 261 304 506 595 Computer software 1,129 966 2,244 1,856 FDIC insurance 280 239 642 448 Collateral liquidation costs 84 115 178 236 Net (gain) loss on foreclosed properties ( 1 ) 348 1 450 Impairment of tax credit investments — 1,841 — 1,954 SBA recourse provision (benefit) 245 ( 30 ) 115 ( 5 ) Loss on early extinguishment of debt — 744 — 744 Other non-interest expense 176 545 582 1,359 Total non-interest expense 18,184 18,343 35,514 34,488 Income before income tax expense (benefit) 10,747 1,395 23,543 5,531 Income tax expense (benefit) 2,512 ( 1,928 ) 5,577 ( 1,070 ) Net income $ 8,235 $ 3,323 $ 17,966 $ 6,601 Earnings per common share Basic $ 0.95 $ 0.38 $ 2.08 $ 0.77 Diluted 0.95 0.38 2.08 0.77 Dividends declared per share 0.18 0.165 0.36 0.33 See accompanying Notes to Unaudited Consolidated Financial Statements. 2 Table of Contents First Business Financial Services, Inc. Consolidated Statements of Comprehensive Income (Unaudited) For the Three Months Ended June 30, For the Six Months Ended June 30, 2021 2020 2021 2020 (In Thousands) Net income $ 8,235 $ 3,323 $ 17,966 $ 6,601 Other comprehensive income (loss), before tax Securities available-for-sale: Unrealized securities gains (losses) arising during the period 662 ( 264 ) ( 1,576 ) 4,237 Reclassification adjustment for net (gain) loss realized in net income ( 29 ) — ( 29 ) 4 Securities held-to-maturity: Amortization of net unrealized losses transferred from available-for-sale 7 10 15 20 Interest rate swaps: Unrealized (losses) gains on interest rate swaps arising during the period ( 271 ) ( 418 ) 1,818 ( 4,043 ) Income tax (expense) benefit ( 94 ) 171 ( 58 ) ( 56 ) Total other comprehensive income (loss) 275 ( 501 ) 170 162 Comprehensive income $ 8,510 $ 2,822 $ 18,136 $ 6,763 See accompanying Notes to Unaudited Consolidated Financial Statements. 3 Table of Contents First Business Financial Services, Inc. Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) Common Shares Outstanding Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total (In Thousands, Except Share Data) Balance at January 1, 2020 8,566,044 $ 92 $ 81,188 $ 129,105 $ ( 1,348 ) $ ( 14,881 ) $ 194,156 Net income — — — 3,278 — — 3,278 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 — — — — ( 501 ) — ( 501 ) 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 Common Shares Outstanding Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total (In Thousands, Except Share Data) Balance at January 1, 2021 8,566,960 $ 92 $ 83,125 $ 140,431 $ ( 933 ) $ ( 16,553 ) $ 206,162 Net income — — — 9,731 — — 9,731 Other comprehensive loss — — — — ( 105 ) — ( 105 ) 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) — — — ( 1,541 ) — — ( 1,541 ) Treasury stock purchased ( 14,795 ) — — — — ( 326 ) ( 326 ) Balance at March 31, 2021 8,638,195 $ 93 $ 83,694 $ 148,621 $ ( 1,038 ) $ ( 16,879 ) $ 214,491 Net income — — — 8,235 — — 8,235 Other comprehensive income — — — — 275 — 275 Share-based compensation - restricted shares and employee stock purchase plan 1,421 — 607 — — — 607 Issuance of common stock under the employee stock purchase plan 1,694 — 42 — — — 42 Cash dividends ($ 0.18 per share) — — — ( 1,556 ) — — ( 1,556 ) Treasury stock purchased ( 23,549 ) — — — — ( 642 ) ( 642 ) Balance at June 30, 2021 8,617,761 $ 93 $ 84,343 $ 155,300 $ ( 763 ) $ ( 17,521 ) $ 221,452 See accompanying Notes to Unaudited Consolidated Financial Statements. 4 Table of Contents First Business Financial Services, Inc. Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 2021 2020 (In Thousands) Operating activities Net income $ 17,966 $ 6,601 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes, net ( 1,359 ) ( 133 ) Impairment of tax credit investments — 1,954 Provision for loan and lease losses ( 3,026 ) 8,651 SBA recourse provision (benefit) 115 ( 5 ) Derivative credit valuation adjustment ( 376 ) — Depreciation, amortization and accretion, net 1,845 1,637 Loss on disposal of equipment 56 — Share-based compensation 1,138 933 Net (gain) loss on sale of securities ( 29 ) 4 Increase in bank-owned life insurance policies ( 699 ) ( 672 ) Origination of loans for sale ( 48,137 ) ( 39,931 ) Sale of SBA loans originated for sale 53,054 32,303 Gain on sale of loans originated for sale ( 2,281 ) ( 839 ) Net loss on foreclosed properties, including impairment valuation 1 450 Loan servicing right impairment valuation ( 78 ) — Excess tax (benefit) expense from share-based compensation ( 16 ) 19 Payments on operating lease liabilities ( 788 ) ( 775 ) Payments received on operating leases 82 56 Net increase in accrued interest receivable and other assets ( 1,152 ) ( 50,989 ) Net (decrease) increase in accrued interest payable and other liabilities ( 1,345 ) 42,042 Net cash provided by operating activities 14,971 1,306 Investing activities Proceeds from maturities, redemptions, and paydowns of available-for-sale securities 31,315 22,457 Proceeds from maturities, redemptions, and paydowns of held-to-maturity securities 3,969 2,844 Proceeds from sale of available-for-sale securities 14,955 839 Purchases of available-for-sale securities ( 35,559 ) ( 17,753 ) Proceeds from sale of foreclosed properties — 1,160 Net decrease (increase) in loans and leases 2,444 ( 343,016 ) Returns of investments in limited partnerships 60 — Investment in historic development entities — ( 259 ) Distribution from historic development entities 57 30 Investment in low-income housing ( 1,307 ) — Investment in Federal Home Loan Bank and Federal Reserve Bank stock ( 6,314 ) ( 6,892 ) Proceeds from the sale of Federal Home Loan Bank stock 6,440 1,375 Purchases of leasehold improvements and equipment, net ( 135 ) ( 141 ) Proceeds from sale of leasehold improvements and equipment 12 — Purchases of bank-owned life insurance policies — ( 8,000 ) Net cash provided (used) in investing activities 15,937 ( 347,356 ) Financing activities Net increase in deposits 305,191 179,996 Proceeds from Federal Home Loan Bank advances 510,300 498,500 Repayment of Federal Home Loan Bank advances ( 517,000 ) ( 383,243 ) 5 Table of Contents Loss on early extinguishment of debt — 744 Proceeds from the Federal Reserve Paycheck Protection Program Lending Facility — 29,605 Net increase in long-term borrowed funds 7,653 27 Cash dividends paid ( 3,097 ) ( 2,824 ) Proceeds from issuance of common stock under ESPP 81 — Purchase of treasury stock ( 968 ) ( 1,466 ) Net cash provided by financing activities 302,160 321,339 Net increase (decrease) in cash and cash equivalents 333,068 ( 24,711 ) Cash and cash equivalents at the beginning of the period 56,909 67,102 Cash and cash equivalents at the end of the period $ 389,977 $ 42,391 Supplementary cash flow information Cash paid during the period for: Interest paid on deposits and borrowings $ 7,469 $ 11,064 Income taxes paid 7,658 1,356 Non-cash investing and financing activities: Increase in right-of-use exchange for operating lease liability 316 — Transfer from loans and leases to foreclosed properties 149 80 See accompany Notes to Unaudited Consolidated Financial Statements 6 Table of Contents Notes to Unaudited Consolidated Financial Statements Note 1 — Nature of Operations and Summary of Significant Accounting Policies Nature of Operations The accounting and reporting practices of First Business Financial Services, Inc. (“FBFS” or the “Corporation”), through our wholly-owned subsidiary, First Business Bank (“FBB” or the “Bank”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). FBB operates as a commercial banking institution primarily in Wisconsin and the greater Kansas City Metro. 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 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. Basis of Presentation The accompanying unaudited Consolidated Financial Statements were prepared in accordance with GAAP and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Corporation’s Consolidated Financial Statements and footnotes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020. The unaudited Consolidated Financial Statements include the accounts of the Corporation and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 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 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 six months ended June 30, 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. Subsequent events have been evaluated through the date of the issuance of the unaudited Consolidated Financial Statements. No significant subsequent events have occurred through this date requiring adjustment to the financial statements or disclosures. The Corporation has not changed its significant accounting and reporting policies from those disclosed in the Corporation’s Form 10-K for the year ended December 31, 2020. Recent Accounting Pronouncements In June 2016, the FASB issued ASU No. 2016-13, “ Financial Instruments- Credit Losses (Topic 326), ” which is often referred to as CECL. The ASU replaces the incurred loss impairment methodology for recognizing credit losses with a methodology that reflects all expected credit losses. 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. 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. In November 2019, the FASB issued ASU No. 2019-10, “ Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). ” The ASU delays the effective date for the credit losses standard from January 2020 to January 2023 for certain entities, including certain Securities and Exchange Commission filers, public business entities, and private companies. 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 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 7 Table of Contents 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. 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. 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 included temporarily limiting lobby hours and transitioning the vast majority of the Corporation’s workforce to remote work. The Corporation did not incur any significant disruptions to its business activities during this time of transition and extended remote work. The second half of 2020 saw improvements in economic trends, but continued waves of new cases of COVID-19 created continued uncertainty in the economic environment. However, at the end of the fourth quarter of 2020 and into the first quarter of 2021, the rollout of new vaccines and the ratification of two additional stimulus laws resulted in lower infection rates and significant improvement in the outlook of the economy. In the second quarter of 2021, the Corporation communicated return to office plans to employees. Based on the national and local guidelines, the Corporation developed a phased-in approach for returning to the office. Under this phased-in approach, offices opened in early June 2021. The return to office included enhanced safety protocols and processes to provide the best working environment possible for employees. 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 has had a significant adverse impact on certain industries the Corporation serves, including retail, restaurants and food services, hospitality, and entertainment. As of June 30, 2021, the Corporation’s aggregate outstanding exposure in these segments was $ 195.5 million, or 9.6 % of the Corporation’s gross loans and leases less net PPP loans. 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 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 June 30, 2021, the Corporation had five deferral requests outstanding, representing $ 20.5 million in total loans, or 1.0 % of gross loans and leases, excluding net PPP loans, compared to $ 27.0 million, or 1.4 % of gross loans and leases, excluding net PPP loans as of December 31, 2020. Of the $ 20.5 million of deferred loans outstanding as of June 30, 2021, $ 19.8 million relate to two hospitality credits which went on deferral during the second quarter of 2021 and are both accruing interest and current on payments. For loans subject to the program, each borrower is required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts will be moved to the end of the loan term. The loans will not be reported as past due during the deferral period. 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 8 Table of Contents 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 June 30, 2021, the Corporation had $ 123.8 million in gross PPP loans outstanding and deferred processing fees outstanding of $ 3.1 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 six months ended June 30, 2021, $ 2.5 million and $ 4.8 million, respectively, 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. Note 3 — Earnings per Common Share Earnings per common share are computed using the two-class method. Basic earnings per common share are computed by dividing net income allocated to common shares by the weighted-average number of shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include unvested restricted shares. Unvested restricted shares are considered participating securities because holders of these securities receive non-forfeitable dividends, or dividend equivalents, at the same rate as holders of the Corporation’s common stock. Diluted earnings per share are computed by dividing net income allocated to common shares adjusted for reallocation of undistributed earnings of unvested restricted shares by the weighted average number of shares determined for the basic earnings per common share computation plus the dilutive effect of common stock equivalents using the treasury stock method. For the Three Months Ended June 30, For the Six Months Ended June 30, 2021 2020 2021 2020 (Dollars in Thousands, Except Share Data) Basic earnings per common share Net income $ 8,235 $ 3,323 $ 17,966 $ 6,601 Less: earnings allocated to participating securities 238 93 493 173 Basic earnings allocated to common shareholders $ 7,997 $ 3,230 $ 17,473 $ 6,428 Weighted-average common shares outstanding, excluding participating securities 8,385,069 8,392,197 8,381,868 8,379,696 Basic earnings per common share $ 0.95 $ 0.38 $ 2.08 $ 0.77 Diluted earnings per common share Earnings allocated to common shareholders, diluted $ 7,997 $ 3,230 $ 17,473 $ 6,428 Weighted-average diluted common shares outstanding, excluding participating securities 8,385,069 8,392,197 8,381,868 8,379,696 Diluted earnings per common share $ 0.95 $ 0.38 $ 2.08 $ 0.77 Note 4 — Share-Based Compensation The Corporation adopted the 2019 Equity Incentive Plan (the “Plan”) during the quarter ended June 30, 2019. At the 2021 annual shareholders meeting, an amendment to the 2019 equity plan was approved, increasing the number of shares in the plan by 180,000. 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 June 30, 2021, 219,531 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. The Corporation may issue new shares and shares from its treasury stock for shares delivered under the Plan. 9 Table of Contents Restricted Stock Under the Plan, the Corporation may grant restricted stock awards, restricted stock units, and other stock-based awards to plan participants, subject to forfeiture upon the occurrence of certain events until the dates specified in the participant’s award agreement. While restricted stock is subject to forfeiture, restricted stock award participants may exercise full voting rights and will receive all dividends and other distributions paid with respect to the restricted shares. Restricted stock units do not have voting rights and are provided dividend equivalents. The restricted stock granted under the Plan is typically subject to a vesting period. Compensation expense for restricted stock is recognized over the requisite service period of generally three or four years for the entire award on a straight-line basis. Upon vesting of restricted stock, the benefit of tax deductions in excess of recognized compensation expense is reflected as an income tax benefit in the unaudited Consolidated Statements of Income. The Corporation may 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. The restricted stock awards issued to executive officers will vest ratably over a three-year period. Compensation expense is recognized for performance-based restricted stock units over the requisite service and performance period of generally three years for the entire expected award on a straight-line basis. The compensation expense for the awards expected to vest for the percentage of performance-based restricted stock units subject to the ROAE metric will be adjusted if there is a change in the expectation of ROAE. 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, 2020 and the six months ended June 30, 2021 was as follows: Number of Restricted Shares Weighted Average Grant-Date Fair Value Nonvested balance as of January 1, 2020 176,935 $ 22.51 Granted (1) 78,775 25.82 Vested ( 56,904 ) 22.26 Forfeited ( 11,002 ) 22.86 Nonvested balance as of December 31, 2020 187,804 24.29 Granted (1) 90,055 23.39 Vested ( 34,070 ) 22.61 Forfeited ( 4,379 ) 23.39 Nonvested balance as of June 30, 2021 239,410 $ 24.21 (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 June 30, 2021, the Corporation had $ 4.1 million of unvested compensation expense, which the Corporation expects to recognize over a weighted-average period of approximately 2.4 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 of common stock 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 six months ended June 30, 2021, the Corporation issued 3,469 shares of common stock under the ESPP. As of June 30, 2021, 242,564 shares remained available for issuance under the ESPP. 10 Table of Contents Share-based compensation expense related to restricted stock included in the unaudited Consolidated Statements of Income was as follows: For the Three Months Ended June 30, For the Six Months Ended June 30, 2021 2020 2021 2020 (In Thousands) Share-based compensation expense $ 607 $ 516 $ 1,138 $ 933 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 June 30, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In Thousands) Available-for-sale: U.S. government agency securities - government-sponsored enterprises $ 20,929 $ 279 $ ( 64 ) $ 21,144 Municipal securities 28,081 547 ( 148 ) 28,480 Residential mortgage-backed securities - government issued 11,872 364 — 12,236 Residential mortgage-backed securities - government-sponsored enterprises 78,669 1,479 ( 265 ) 79,883 Commercial mortgage-backed securities - government issued 3,988 102 — 4,090 Commercial mortgage-backed securities - government-sponsored enterprises 22,736 533 ( 138 ) 23,131 Other securities 2,205 50 — 2,255 $ 168,480 $ 3,354 $ ( 615 ) $ 171,219 As of December 31, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In Thousands) Available-for-sale: U.S. government agency securities - government-sponsored enterprises $ 22,699 $ 9 $ ( 79 ) $ 22,629 Municipal securities 24,067 716 ( 4 ) 24,779 Residential mortgage-backed securities - government issued 9,894 509 — 10,403 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 Commercial mortgage-backed securities - government-sponsored enterprises 12,584 781 — 13,365 Other securities 2,205 74 — 2,279 $ 179,581 $ 4,476 $ ( 132 ) $ 183,925 11 Table of Contents 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 June 30, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In Thousands) Held-to-maturity: Municipal securities $ 14,710 $ 316 $ ( 10 ) $ 15,016 Residential mortgage-backed securities - government issued 2,783 81 — 2,864 Residential mortgage-backed securities - government-sponsored enterprises 2,879 99 — 2,978 Commercial mortgage-backed securities - government-sponsored enterprises 2,010 245 — 2,255 $ 22,382 $ 741 $ ( 10 ) $ 23,113 As of December 31, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In Thousands) Held-to-maturity: Municipal securities $ 17,106 $ 417 $ ( 15 ) $ 17,508 Residential mortgage-backed securities - government issued 3,564 112 — 3,676 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 U.S. government agency securities - government-sponsored enterprises represent securities issued by Federal National Mortgage Association (“FNMA”) and the SBA. Municipal securities include securities issued by various municipalities located primarily within Wisconsin and are primarily general obligation bonds that are tax-exempt in nature. Residential and commercial mortgage-backed securities - government issued represent securities guaranteed by the Government National Mortgage Association. Residential and commercial mortgage-backed securities - government-sponsored enterprises include securities guaranteed by the Federal Home Loan Mortgage Corporation, FNMA, and the FHLB. Other securities represent certificates of deposit of insured banks and savings institutions with an original maturity greater than three months. There were seven sales of available-for-sale securities that occurred during the three and six months ended June 30, 2021. There were no sales of available-for-sale securities that occurred during three months ended June 30, 2020 and one sale that occurred during the six months ended June 30, 2020. At June 30, 2021 and December 31, 2020, securities with a fair value of $ 37.0 million and $ 73.7 million, respectively, were pledged to secure various obligations, including interest rate swap contracts. 12 Table of Contents The amortized cost and fair value of securities by contractual maturity at June 30, 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. Available-for-Sale Held-to-Maturity Amortized Cost Fair Value Amortized Cost Fair Value (In Thousands) Due in one year or less $ 1,225 $ 1,251 $ 3,882 $ 3,909 Due in one year through five years 7,546 7,707 8,427 8,570 Due in five through ten years 42,803 43,827 8,359 8,845 Due in over ten years 116,906 118,434 1,714 1,789 $ 168,480 $ 171,219 $ 22,382 $ 23,113 The tables below show the Corporation’s gross unrealized losses and fair value of available-for-sale investments aggregated by investment category and length of time that individual investments were in a continuous loss position at June 30, 2021 and December 31, 2020. At June 30, 2021, the Corporation held 23 available-for-sale 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. At June 30, 2021, the Corporation held no 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. The Corporation reviews its securities on a quarterly basis to monitor its exposure to other-than-temporary impairment. Consideration is given to such factors as the length of time and extent to which the security has been in an unrealized loss position, changes in security ratings, and an evaluation of the present value of expected future cash flows, if necessary. 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 six months ended June 30, 2021 and 2020. 13 Table of Contents A summary of unrealized loss information for securities available-for-sale, categorized by security type and length of time for which the security has been in a continuous unrealized loss position, follows: As of June 30, 2021 Less than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (In Thousands) Available-for-sale: U.S. government agency securities - government-sponsored enterprises $ 3,436 $ 64 $ — $ — $ 3,436 $ 64 Municipal securities 9,144 148 — — 9,144 148 Residential mortgage-backed securities - government-sponsored enterprises 30,349 265 — — 30,349 265 Commercial mortgage-backed securities - government-sponsored enterprises 12,160 138 — — 12,160 138 $ 55,089 $ 615 $ — $ — $ 55,089 $ 615 As of December 31, 2020 Less than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (In Thousands) Available-for-sale: U.S. government agency securities - government-sponsored enterprises $ 11,602 $ 45 $ 4,031 $ 34 $ 15,633 $ 79 Municipal securities 2,863 4 — — 2,863 4 Residential mortgage-backed securities - government-sponsored enterprises 19,078 49 — — 19,078 49 $ 33,543 $ 98 $ 4,031 $ 34 $ 37,574 $ 132 The tables below show the Corporation’s gross unrealized losses and fair value of held-to-maturity investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at June 30, 2021 and December 31, 2020. At June 30, 2021, the Corporation held two held-to-maturity securities that were in an unrealized loss position and had been in a continuous loss position for twelve months or greater. Such securities have not experienced credit rating downgrades; however, they have primarily declined in value due to the current interest rate environment. 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 six months ended June 30, 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 June 30, 2021 Less than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (In Thousands) Held-to-maturity: Municipal securities $ — $ — $ 493 $ 10 $ 493 $ 10 14 Table of Contents As of December 31, 2020 Less than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (In Thousands) Held-to-maturity: Municipal securities $ 276 $ 13 $ 213 $ 2 $ 489 $ 15 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: June 30, 2021 December 31, 2020 (In Thousands) Commercial real estate: Commercial real estate — owner occupied $ 253,600 $ 253,882 Commercial real estate — non-owner occupied 614,289 564,532 Land development 45,056 49,839 Construction 139,943 141,043 Multi-family 319,351 311,556 1-4 family 19,769 38,284 Total commercial real estate 1,392,008 1,359,136 Commercial and industrial 695,442 732,318 Direct financing leases 18,142 22,331 Consumer and other: Home equity and second mortgages 5,740 7,833 Other 36,567 28,897 Total consumer and other 42,307 36,730 Total gross loans and leases receivable 2,147,899 2,150,515 Less: Allowance for loan and lease losses 25,675 28,521 Deferred loan fees 4,338 4,545 Loans and leases receivable, net $ 2,117,886 $ 2,117,449 15 Table of Contents As of June 30, 2021 and December 31, 2020, the Corporation had $ 123.8 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 $ 3.1 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 is comprised of the following: June 30, 2021 December 31, 2020 (In Thousands) SBA 7(a) loans $ 28,367 $ 36,266 SBA 504 loans 33,547 26,327 SBA Express loans and lines of credit 765 1,251 SBA PPP loans 123,838 228,870 Total SBA loans $ 186,517 $ 292,714 As of June 30, 2021 and December 31, 2020, $ 3.4 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 June 30, 2021, and 2020, was $ 9.0 million and $ 6.5 million, respectively. The total principal amount of the guaranteed portions of SBA loans sold during the six months ended June 30, 2021, and 2020, was $ 19.6 million and $ 9.2 million, respectively. Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the three and six months ended June 30, 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 June 30, 2021, and December 31, 2020, was $ 87.8 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 June 30, 2021, and 2020, was $ 11.8 million and $ 10.3 million, respectively. The total principal amount of transferred participation interests in other, non-SBA originated loans during the six months ended June 30, 2021, and 2020, was $ 16.9 million and $ 22.2 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 June 30, 2021, and December 31, 2020, was $ 157.9 million and $ 153.6 million, respectively. As of June 30, 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 $ 269.5 million and $ 276.5 million, respectively. As of June 30, 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. There were no loan participations purchased on the unaudited Consolidated Balance Sheets as of June 30, 2021, and the total of loan participations purchased as of December 31, 2020 was $ 410,000 . 16 Table of Contents 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: June 30, 2021 Category I II III IV Total (Dollars in Thousands) Commercial real estate: Commercial real estate — owner occupied $ 209,728 $ 24,892 $ 16,855 $ 2,125 $ 253,600 Commercial real estate — non-owner occupied 501,162 73,182 36,947 2,998 614,289 Land development 44,304 752 — — 45,056 Construction 92,465 15,954 31,524 — 139,943 Multi-family 287,944 31,407 — — 319,351 1-4 family 18,440 636 649 44 19,769 Total commercial real estate 1,154,043 146,823 85,975 5,167 1,392,008 Commercial and industrial 612,572 31,714 44,940 6,216 695,442 Direct financing leases, net 12,469 555 5,069 49 18,142 Consumer and other: Home equity and second mortgages 5,630 — 75 35 5,740 Other 36,402 154 — 11 36,567 Total consumer and other 42,032 154 75 46 42,307 Total gross loans and leases receivable $ 1,821,116 $ 179,246 $ 136,059 $ 11,478 $ 2,147,899 Category as a % of total portfolio 84.79 % 8.35 % 6.33 % 0.53 % 100.00 % December 31, 2020 Category I II III IV Total (Dollars in Thousands) Commercial real estate: Commercial real estate — owner occupied $ 185,943 $ 34,917 $ 27,593 $ 5,429 $ 253,882 Commercial real estate — non-owner occupied 432,053 90,942 37,754 3,783 564,532 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 Commercial and industrial 623,346 27,201 65,616 16,155 732,318 Direct financing leases, net 15,597 730 5,955 49 22,331 Consumer and other: 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 Total gross loans and leases receivable $ 1,757,904 $ 205,898 $ 160,050 $ 26,663 $ 2,150,515 Category as a % of total portfolio 81.75 % 9.57 % 7.44 % 1.24 % 100.00 % Each credit is evaluated for proper risk rating upon origination, at the time of each subsequent renewal, upon receipt and evaluation of updated financial information from the Corporation’s borrowers, or as other circumstances dictate. The Corporation primarily uses a nine grade risk rating system to monitor the ongoing credit quality of its loans and leases. The risk rating grades follow a consistent definition and are then applied to specific loan types based on the nature of the loan. Each risk rating is subjective and, depending on the size and nature of the credit, subject to various levels of review and concurrence on 17 Table of Contents the stated risk rating. In addition to its nine grade risk rating system, the Corporation groups loans into four loan and related risk categories which determine the level and nature of review by management. Category I — Loans and leases in this category are performing in accordance with the terms of the contract and generally exhibit no immediate concerns regarding the security and viability of the underlying collateral, financial stability of the borrower, integrity or strength of the borrowers’ management team, or the industry in which the borrower operates. The Corporation monitors Category I loans and leases through payment performance, continued maintenance of its personal relationships with such borrowers, and continued review of such borrowers’ compliance with the terms of their respective agreements. Category II — Loans and leases in this category are beginning to show signs of deterioration in one or more of the Corporation’s core underwriting criteria such as financial stability, management strength, industry trends, or collateral values. Management will place credits in this category to allow for proactive monitoring and resolution with the borrower to possibly mitigate the area of concern and prevent further deterioration or risk of loss to the Corporation. Category II loans are considered performing but are monitored frequently by the assigned business development officer and by asset quality review committees. Category III — Loans and leases in this category are identified by management as warranting special attention. However, the balance in this category is not intended to represent the amount of adversely classified assets held by the Bank. Category III loans and leases generally exhibit undesirable characteristics, such as evidence of adverse financial trends and conditions, managerial problems, deteriorating economic conditions within the related industry, or evidence of adverse public filings and may exhibit collateral shortfall positions. Management continues to believe that it will collect all contractual principal and interest in accordance with the original terms of the contracts relating to the loans and leases in this category, and therefore Category III loans are considered performing with no specific reserves established for this category. Category III loans are monitored by management and asset quality review committees on a monthly basis. Category IV — Loans and leases in this category are 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 are individually evaluated to assess the need for the establishment of specific reserves or charge-offs. When analyzing the adequacy of collateral, the Corporation obtains external appraisals at least annually for impaired loans and leases. External appraisals are obtained from the Corporation’s approved appraiser listing and are independently reviewed to monitor the quality of such appraisals. To the extent a collateral shortfall position is present, a specific reserve or charge-off will be recorded to reflect the magnitude of the impairment. Loans and leases in this category are monitored by management and asset quality review committees on a monthly basis. The delinquency aging of the loan and lease portfolio by class of receivable was as follows: 18 Table of Contents June 30, 2021 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Past Due Total Past Due Current Total Loans and Leases (Dollars in Thousands) Accruing loans and leases Commercial real estate: Owner occupied $ — $ — $ — $ — $ 251,475 $ 251,475 Non-owner occupied — — — — 611,291 611,291 Land development — — — — 45,056 45,056 Construction — — — — 139,943 139,943 Multi-family — — — — 319,351 319,351 1-4 family 354 — — 354 19,371 19,725 Commercial and industrial 268 68 — 336 688,946 689,282 Direct financing leases, net — — — — 18,093 18,093 Consumer and other: Home equity and second mortgages — — — — 5,705 5,705 Other — — — — 36,556 36,556 Total 622 68 — 690 2,135,787 2,136,477 Non-accruing loans and leases Commercial real estate: Owner occupied — — 268 268 1,857 2,125 Non-owner occupied — — — — 2,998 2,998 Land development — — — — — — Construction — — — — — — Multi-family — — — — — — 1-4 family — — 44 44 — 44 Commercial and industrial 53 75 1,800 1,928 4,232 6,160 Direct financing leases, net — — — — 49 49 Consumer and other: Home equity and second mortgages — — — — 35 35 Other — — 11 11 — 11 Total 53 75 2,123 2,251 9,171 11,422 Total loans and leases Commercial real estate: Owner occupied — — 268 268 253,332 253,600 Non-owner occupied — — — — 614,289 614,289 Land development — — — — 45,056 45,056 Construction — — — — 139,943 139,943 Multi-family — — — — 319,351 319,351 1-4 family 354 — 44 398 19,371 19,769 Commercial and industrial 321 143 1,800 2,264 693,178 695,442 Direct financing leases, net — — — — 18,142 18,142 Consumer and other: Home equity and second mortgages — — — — 5,740 5,740 Other — — 11 11 36,556 36,567 Total $ 675 $ 143 $ 2,123 $ 2,941 $ 2,144,958 $ 2,147,899 Percent of portfolio 0.03 % 0.01 % 0.10 % 0.14 % 99.86 % 100.00 % 19 Table of Contents December 31, 2020 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Past Due Total Past Due Current Total Loans and Leases (Dollars in Thousands) Accruing loans and leases Commercial real estate: Owner occupied $ — $ — $ — $ — $ 248,453 $ 248,453 Non-owner occupied — — — — 560,749 560,749 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 Direct financing leases, net — — — — 22,282 22,282 Consumer and other: 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 Commercial real estate: Owner occupied — — 272 272 5,157 5,429 Non-owner occupied — — 3,783 3,783 — 3,783 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 Direct financing leases, net — — — — 49 49 Consumer and other: 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 Commercial real estate: Owner occupied — — 272 272 253,610 253,882 Non-owner occupied — — 3,783 3,783 560,749 564,532 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 Direct financing leases, net — — — — 22,331 22,331 Consumer and other: 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 % 20 Table of Contents The Corporation’s total impaired assets consisted of the following: June 30, 2021 December 31, 2020 (In Thousands) Non-accrual loans and leases Commercial real estate: Commercial real estate — owner occupied $ 2,125 $ 5,429 Commercial real estate — non-owner occupied 2,998 3,783 Land development — 890 Construction — — Multi-family — — 1-4 family 44 250 Total non-accrual commercial real estate 5,167 10,352 Commercial and industrial 6,160 16,155 Direct financing leases, net 49 49 Consumer and other: Home equity and second mortgages 35 40 Other 11 21 Total non-accrual consumer and other loans 46 61 Total non-accrual loans and leases 11,422 26,617 Foreclosed properties, net 179 34 Total non-performing assets 11,601 26,651 Performing troubled debt restructurings 56 46 Total impaired assets $ 11,657 $ 26,697 June 30, 2021 December 31, 2020 Total non-accrual loans and leases to gross loans and leases 0.53 % 1.24 % Total non-performing assets to total gross loans and leases plus foreclosed properties, net 0.54 1.24 Total non-performing assets to total assets 0.40 1.04 Allowance for loan and lease losses to gross loans and leases 1.20 1.33 Allowance for loan and lease losses to non-accrual loans and leases 224.79 107.15 As of June 30, 2021, and December 31, 2020, $ 523,000 and $ 6.5 million of the non-accrual loans and leases were considered troubled debt restructurings, respectively. No specific reserves were allocated to troubled debt restructurings as of June 30, 2021 and $ 760,000 were allocated as of December 31, 2020. There were no unfunded commitments associated with troubled debt restructured loans and leases as of June 30, 2021. All loans and leases modified as a troubled debt restructuring are measured for impairment. The nature and extent of the impairment of restructured loans, including those which have experienced a default, is considered in the determination of an appropriate level of the allowance for loan and lease losses. During the three and six months ended June 30, 2021, no loans were modified to a troubled debt restructuring. 21 Table of Contents 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 June 30, For the Six Months Ended June 30, 2020 Number of Loans Pre-Modification Recorded Investment Post-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Post-Modification Recorded Investment (Dollars in Thousands) Commercial real estate: Commercial real estate — owner occupied — $ — $ — 2 $ 299 $ 272 Commercial and industrial 1 4,986 4,986 3 6,007 5,756 Total 1 $ 4,986 $ 4,986 5 $ 6,306 $ 6,028 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 six months ended June 30, 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 and six months ended June 30, 2021. There were two commercial and industrial loans totaling $ 2.7 million and four owner-occupied commercial real estate loans totaling $ 3.8 million modified in a troubled debt restructuring which subsequently defaulted during the three and six months ended June 30, 2020. 22 Table of Contents 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 Six Months Ended June 30, 2021 Recorded Investment (1) Unpaid Principal Balance Impairment Reserve Average Recorded Investment (2) Foregone Interest Income Interest Income Recognized Net Foregone Interest Income (In Thousands) With no impairment reserve recorded: Commercial real estate: Owner occupied $ 1,026 $ 1,026 $ — $ 2,159 $ 100 $ — $ 100 Non-owner occupied 2,998 5,778 — 3,114 265 15 250 Land development — — — 15 — — — Construction — — — — — — — Multi-family — — — — — — — 1-4 family 44 49 — 276 46 13 33 Commercial and industrial 3,834 4,216 — 11,071 388 110 278 Direct financing leases, net — — — — — — — Consumer and other: Home equity and second mortgages 35 35 — 79 10 7 3 Other 11 678 — 16 18 — 18 Total 7,948 11,782 — 16,730 827 145 682 With impairment reserve recorded: Commercial real estate: Owner occupied 1,099 1,129 432 1,048 124 7 117 Non-owner occupied — — — — — — — Land development — — — — — — — Construction — — — — — — — Multi-family — — — — — — — 1-4 family — — — — — — — Commercial and industrial 2,382 2,382 1,540 1,593 129 1 128 Direct financing leases, net 49 49 49 49 1 — 1 Consumer and other: Home equity and second mortgages — — — — — — — Other — — — — — — — Total 3,530 3,560 2,021 2,690 254 8 246 Total: Commercial real estate: Owner occupied 2,125 2,155 432 3,207 224 7 217 Non-owner occupied 2,998 5,778 — 3,114 265 15 250 Land development — — — 15 — — — Construction — — — — — — — Multi-family — — — — — — — 1-4 family 44 49 — 276 46 13 33 Commercial and industrial 6,216 6,598 1,540 12,664 517 111 406 Direct financing leases, net 49 49 49 49 1 — 1 Consumer and other: Home equity and second mortgages 35 35 — 79 10 7 3 Other 11 678 — 16 18 — 18 Grand total $ 11,478 $ 15,342 $ 2,021 $ 19,420 $ 1,081 $ 153 $ 928 (1) The recorded investment represents the unpaid principal balance net of any partial charge-offs. (2) Average recorded investment is calculated primarily using daily average balances. 23 Table of Contents As of and for the Year Ended December 31, 2020 Recorded Investment (1) Unpaid Principal Balance Impairment Reserve Average Recorded Investment (2) Foregone Interest Income Interest Income Recognized Net Foregone Interest Income (In Thousands) With no impairment reserve recorded: Commercial real estate: Owner occupied $ 4,338 $ 4,365 $ — $ 4,565 $ 291 $ 72 $ 219 Non-owner occupied 3,783 6,563 — 1,519 486 — 486 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 Direct financing leases, net — — — 89 — — — Consumer and other: 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: Commercial real estate: Owner occupied 1,091 4,792 471 2,349 384 — 384 Non-owner occupied — — — — — — — 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 Direct financing leases, net 49 49 49 39 3 — 3 Consumer and other: Home equity and second mortgages 40 40 7 — 1 — 1 Other — — — — — — — Total 7,697 12,103 3,681 5,994 712 — 712 Total: Commercial real estate: Owner occupied 5,429 9,157 471 6,914 675 72 603 Non-owner occupied 3,783 6,563 — 1,519 486 — 486 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 Direct financing leases, net 49 49 49 128 3 — 3 Consumer and other: 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. (2) Average recorded investment is calculated primarily using daily average balances. 24 Table of Contents The difference between the recorded investment of loans and leases and the unpaid principal balance of $ 3.9 million and $ 14.6 million as of June 30, 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 $ 56,000 and $ 46,000 of loans as of June 30, 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. Cash payments collected on non-accrual loans are first applied to such loan’s principal. Foregone interest represents the interest that was contractually due on the loan but not received or recorded. To the extent the amount of principal on a non-accrual loan is fully collected and additional cash is received, the Corporation will recognize interest income. To determine the level and composition of the allowance for loan and lease losses, the Corporation categorizes the portfolio into segments with similar risk characteristics. First, the Corporation evaluates loans and leases for potential impairment classification. 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. 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 June 30, 2021 Commercial Real Estate Commercial and Industrial Consumer and Other Total (In Thousands) Beginning balance $ 18,445 $ 9,544 $ 993 $ 28,982 Charge-offs ( 249 ) ( 2,621 ) ( 24 ) ( 2,894 ) Recoveries 84 460 1 545 Net charge-offs ( 165 ) ( 2,161 ) ( 23 ) ( 2,349 ) Provision for loan and lease losses ( 1,404 ) 498 ( 52 ) ( 958 ) Ending balance $ 16,876 $ 7,881 $ 918 $ 25,675 As of and for the Three Months Ended June 30, 2020 Commercial Real Estate Commercial and Industrial Consumer and Other Total (In Thousands) Beginning balance $ 12,597 $ 9,322 $ 829 $ 22,748 Charge-offs ( 27 ) ( 784 ) ( 6 ) ( 817 ) Recoveries 2 62 — 64 Net charge-offs ( 25 ) ( 722 ) ( 6 ) ( 753 ) Provision for loan and lease losses 3,866 1,579 24 5,469 Ending balance $ 16,438 $ 10,179 $ 847 $ 27,464 25 Table of Contents As of and for the Six Months Ended June 30, 2021 Commercial Real Estate Commercial and Industrial Consumer and Other Total (In Thousands) Beginning balance $ 17,157 $ 10,593 $ 771 $ 28,521 Charge-offs ( 249 ) ( 2,765 ) ( 24 ) ( 3,038 ) Recoveries 2,303 913 2 3,218 Net recoveries (charge-offs) 2,054 ( 1,852 ) ( 22 ) 180 Provision for loan and lease losses ( 2,335 ) ( 860 ) 169 ( 3,026 ) Ending balance $ 16,876 $ 7,881 $ 918 $ 25,675 As of and for the Six Months Ended June 30, 2020 Commercial Real Estate Commercial and Industrial Consumer and Other Total (In Thousands) Beginning balance $ 10,852 $ 8,078 $ 590 $ 19,520 Charge-offs ( 27 ) ( 909 ) ( 12 ) ( 948 ) Recoveries 3 238 — 241 Net charge-offs ( 24 ) ( 671 ) ( 12 ) ( 707 ) Provision for loan and lease losses 5,610 2,772 269 8,651 Ending balance $ 16,438 $ 10,179 $ 847 $ 27,464 26 Table of Contents The following tables provide information regarding the allowance for loan and lease losses and balances by type of allowance methodology. As of June 30, 2021 Commercial Real Estate Commercial and Industrial Consumer and Other Total (In Thousands) Allowance for loan and lease losses: Collectively evaluated for impairment $ 16,444 $ 6,292 $ 918 $ 23,654 Individually evaluated for impairment 432 1,589 — 2,021 Total $ 16,876 $ 7,881 $ 918 $ 25,675 Loans and lease receivables: Collectively evaluated for impairment $ 1,386,842 $ 707,319 $ 42,260 $ 2,136,421 Individually evaluated for impairment 5,167 6,265 47 11,479 Total $ 1,392,009 $ 713,584 $ 42,307 $ 2,147,900 As of December 31, 2020 Commercial Real Estate Commercial and Industrial Consumer and Other Total (In Thousands) Allowance for loan and lease losses: Collectively evaluated for impairment $ 16,657 $ 7,419 $ 764 $ 24,840 Individually evaluated for impairment 500 3,174 7 3,681 Total $ 17,157 $ 10,593 $ 771 $ 28,521 Loans and lease receivables: Collectively evaluated for impairment $ 1,348,738 $ 738,445 $ 36,669 $ 2,123,852 Individually evaluated for impairment 10,398 16,204 61 26,663 Total $ 1,359,136 $ 754,649 $ 36,730 $ 2,150,515 Note 7 — Leases 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. The Corporation recognizes a right-of-use asset and an operating lease liability for all leases, with the exception of short-term leases. Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term. During 2021, the Corporation extended the term of two of its office spaces by one and three years, resulting in a $ 316,000 increase in the right-of-use assets in exchange for a lease liability. The Corporation entered into a sublease for office space it vacated in its Kansas City Metro market which expires in 2023. 27 Table of Contents The components of total lease expense were as follows: For the Three Months Ended June 30, For the Six Months Ended June 30, 2021 2020 2021 2020 (In Thousands) Operating lease cost $ 374 $ 372 $ 749 $ 745 Short-term lease cost 49 48 88 122 Variable lease cost 111 126 239 253 Less: sublease income ( 43 ) ( 28 ) ( 82 ) ( 56 ) Total lease cost, net $ 491 $ 518 $ 994 $ 1,064 Quantitative information regarding the Corporation’s operating leases was as follows: June 30, 2021 December 31, 2020 Weighted-average remaining lease term (in years) 5.37 5.80 Weighted-average discount rate 2.94 % 3.03 % The following maturity analysis shows the undiscounted cash flows due on the Corporation’s operating lease liabilities: (In Thousands) 2021 $ 795 2022 1,585 2023 1,059 2024 790 2025 666 Thereafter 1,641 Total undiscounted cash flows 6,536 Discount on cash flows ( 531 ) Total lease liability $ 6,005 Note 8 — Other Assets A summary of accrued interest receivable and other assets was as follows: June 30, 2021 December 31, 2020 (In Thousands) Accrued interest receivable $ 5,857 $ 8,564 Net deferred tax asset 7,256 7,217 Investment in historic development entities 2,299 2,356 Investment in low-income housing development entity 1,307 — Investment in a community development entity 5,306 5,306 Investment in limited partnerships 7,712 6,673 Investment in Trust II 315 315 Prepaid expenses 2,804 2,165 Other assets 6,999 6,882 Total accrued interest receivable and other assets $ 39,855 $ 39,478 28 Table of Contents Note 9 — Deposits The composition of deposits is shown below. Average balances represent year to date averages. June 30, 2021 December 31, 2020 Balance Average Balance Average Rate Balance Average Balance Average Rate (Dollars in Thousands) Non-interest-bearing transaction accounts $ 774,253 $ 506,767 — % $ 472,818 $ 412,825 — % Interest-bearing transaction accounts 511,698 510,024 0.20 503,992 392,576 0.37 Money market accounts 685,127 660,319 0.17 641,504 651,402 0.44 Certificates of deposit 45,137 51,677 1.12 64,694 111,698 1.97 Wholesale deposits 144,492 164,654 0.75 172,508 142,591 1.71 Total deposits $ 2,160,707 $ 1,893,441 0.21 $ 1,855,516 $ 1,711,092 0.52 A summary of annual maturities of in-market and wholesale certificates of deposit at June 30, 2021 is as follows: (In Thousands) Maturities during the year ended December 31, 2021 $ 41,925 2022 29,710 2023 1,948 2024 369 2025 321 Thereafter 356 $ 74,629 Wholesale deposits include $ 29.5 million and $ 115.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at June 30, 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 $ 12.4 million and $ 28.7 million of certificates of deposit and wholesale deposits which are denominated in amounts of $250,000 or more at June 30, 2021 and December 31, 2020, respectively. Note 10 — FHLB Advances, Other Borrowings and Junior Subordinated Notes The composition of borrowed funds is shown below. Average balances represent year to date averages. June 30, 2021 December 31, 2020 Balance Weighted Average Balance Weighted Average Rate Balance Weighted Average Balance Weighted Average Rate (Dollars in Thousands) Federal funds purchased $ — $ — — % $ — $ 71 0.69 % Federal Reserve PPPLF — — — — 15,207 0.35 FHLB advances 387,800 386,371 1.31 394,500 379,891 1.45 Line of credit — 151 2.88 — — — Other borrowings 8,545 5,979 4.34 920 676 12.60 Subordinated notes payable 23,768 23,756 5.94 23,747 23,725 5.95 Junior subordinated notes 10,069 10,064 10.96 10,062 10,054 11.09 $ 430,182 $ 426,321 1.84 $ 429,229 $ 429,624 1.91 29 Table of Contents A summary of annual maturities of borrowings at June 30, 2021 is as follows: (In Thousands) Maturities during the year ended December 31, 2021 $ 138,275 2022 34,000 2023 37,300 2024 35,500 2025 20,596 Thereafter 164,511 $ 430,182 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 %. As of November 2, 2020, the borrowing was paid in full. As of June 30, 2021, the Corporation had other borrowings of $ 8.5 million, which consisted of $ 7.6 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 June 30, 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 the six months ended June 30, 2021 and 2020, the Corporation incurred interest expense of $ 6,600 and $ 7,000 , respectively, due to this fee. Note 11 — Commitments and Contingencies In the normal course of business, various legal proceedings involving the Corporation are pending. Management, based upon advice from legal counsel, does not anticipate any significant losses as a result of these actions. Management believes that any liability arising from any such proceedings currently existing or threatened will not have a material adverse effect on the Corporation’s financial position, results of operations, and cash flows. The Corporation sells the guaranteed portions of SBA 7(a) loans, as well as participation interests in other, non-SBA originated, loans to third parties. The Corporation has a continuing involvement in each of the transferred lending arrangements by way of relationship management and servicing the loans, as well as being subject to normal and customary requirements of the SBA loan program and standard representations and warranties related to sold amounts. In the event of a loss resulting from default and a determination by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Corporation, the SBA may require the Corporation to repurchase the loan, deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of the principal loss related to the deficiency from the Corporation. The Corporation must comply with applicable SBA regulations in order to maintain the guaranty. In addition, the Corporation retains the option to repurchase the sold guaranteed portion of an SBA loan if the loan defaults. Management has assessed estimated losses inherent in the outstanding guaranteed portions of SBA loans sold in accordance with ASC 450, Contingencies , and determined a recourse reserve based on the probability of future losses for these loans to be $ 830,000 at June 30, 2021, which is reported in accrued interest payable and other liabilities on the unaudited Consolidated Balance Sheets. 30 Table of Contents The summary of the activity in the SBA recourse reserve is as follows: As of and for the Three Months Ended June 30, As of and for the Six Months Ended June 30, 2021 2020 2021 2020 (In Thousands) Balance at the beginning of the period $ 593 $ 1,086 $ 723 $ 1,345 SBA recourse provision (benefit) 245 ( 30 ) 115 ( 5 ) Charge-offs, net ( 8 ) ( 49 ) ( 8 ) ( 333 ) Balance at the end of the period $ 830 $ 1,007 $ 830 $ 1,007 Note 12 — Fair Value Disclosures The Corporation determines the fair values of its financial instruments based on the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is defined as the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date and is based on exit prices. Fair value includes assumptions about risk, such as nonperformance risk in liability fair values, and is a market-based measurement, not an entity-specific measurement. The standard describes three levels of inputs that may be used to measure fair value. Level 1 — Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date. Level 2 — Level 2 inputs are inputs, other than quoted prices included with Level 1, that are observable for the asset or liability either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 — Level 3 inputs are supported by little or no market activity and are significant to the fair value of the assets or liabilities. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Corporation’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. 31 Table of Contents Assets and liabilities measured at fair value on a recurring basis, segregated by fair value hierarchy level, are summarized below: June 30, 2021 Fair Value Measurements Using Level 1 Level 2 Level 3 Total (In Thousands) Assets: Securities available-for-sale: U.S. government agency securities - government-sponsored enterprises $ — $ 21,144 $ — $ 21,144 Municipal securities — 28,480 — 28,480 Residential mortgage-backed securities - government issued — 12,236 — 12,236 Residential mortgage-backed securities - government-sponsored enterprises — 79,883 — 79,883 Commercial mortgage-backed securities - government issued — 4,090 — 4,090 Commercial mortgage-backed securities - government-sponsored enterprises — 23,131 — 23,131 Other securities — 2,255 — 2,255 Interest rate swaps — 32,377 — 32,377 Liabilities: Interest rate swaps — 36,109 — 36,109 December 31, 2020 Fair Value Measurements Using Level 1 Level 2 Level 3 Total (In Thousands) Assets: Securities available-for-sale: U.S. government agency securities - government-sponsored enterprises $ — $ 22,629 $ — $ 22,629 Municipal securities — 24,779 — 24,779 Residential mortgage-backed securities - government issued — 10,403 — 10,403 Residential mortgage-backed securities - government-sponsored enterprises — 105,006 — 105,006 Commercial mortgage-backed securities - government issued — 5,464 — 5,464 Commercial mortgage-backed securities - government-sponsored enterprises — 13,365 — 13,365 Other securities — 2,279 — 2,279 Interest rate swaps — 49,377 — 49,377 Liabilities: 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 six months ended June 30, 2021 or the year ended December 31, 2020 related to the above measurements. 32 Table of Contents Assets and liabilities measured at fair value on a non-recurring basis, segregated by fair value hierarchy are summarized below: June 30, 2021 Fair Value Measurements Using Level 1 Level 2 Level 3 Total (In Thousands) Impaired loans $ — $ — $ 7,935 $ 7,935 Foreclosed properties — — 179 179 Loan servicing rights — — 1,500 1,500 December 31, 2020 Fair Value Measurements Using Level 1 Level 2 Level 3 Total (In Thousands) Impaired loans $ — $ — $ 17,203 $ 17,203 Foreclosed properties — — 34 34 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 $ 7.9 million and $ 17.2 million at June 30, 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 10 % - 90 % as of the measurement date of June 30, 2021. The weighted average of those unobservable inputs was 25 %. The majority of the impaired loans are considered collateral dependent loans or are supported by an SBA guaranty. Foreclosed properties, upon initial recognition, are remeasured and reported at fair value through a charge-off to the allowance for loan and lease losses, if deemed necessary, based upon the fair value of the foreclosed property. The fair value of a foreclosed property, upon initial recognition, is estimated using a market approach or based on observable market data, typically a current appraisal, or based upon assumptions specific to the individual property or equipment, such as management applied discounts used to further reduce values to a net realizable value when observable inputs become stale. Loan servicing rights represent the asset retained upon sale of the guaranteed portion of certain SBA loans. When SBA loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. The servicing rights are subsequently measured using the amortization method, which requires amortization into interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. The Corporation periodically reviews this portfolio for impairment and engages a third-party valuation firm to assess the fair value of the overall servicing rights portfolio. Loan servicing rights do not trade in an active, open market with readily observable prices. While sales of loan servicing rights do occur, the precise terms and conditions typically are not readily available to allow for a “quoted price for similar assets” comparison. Accordingly, the Corporation utilizes an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of its loan servicing rights. The valuation model incorporates prepayment assumptions to project loan servicing rights cash flows based on the current interest rate scenario, which is then discounted to estimate an expected fair value of the loan servicing rights. The valuation model considers portfolio characteristics of the underlying serviced portion of the SBA loans and uses the following significant unobservable inputs: (1) constant prepayment rate (“CPR”) assumptions based on the SBA sold pools historical CPR as quoted in Bloomberg and (2) a discount rate. Due to the nature of the valuation inputs, loan servicing rights are classified in Level 3 of the fair value hierarchy. 33 Table of Contents Fair Value of Financial Instruments The Corporation is required to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions, consistent with exit price concepts for fair value measurements, are set forth below: June 30, 2021 Carrying Amount Fair Value Total Level 1 Level 2 Level 3 (In Thousands) Financial assets: Cash and cash equivalents $ 389,977 $ 389,977 $ 389,977 $ — $ — Securities available-for-sale 171,219 171,219 — 171,219 — Securities held-to-maturity 22,382 23,113 — 23,113 — Loans held for sale 6,059 6,604 — 6,604 — Loans and lease receivables, net 2,117,886 2,117,775 — — 2,117,775 Federal Home Loan Bank stock 13,451 N/A N/A N/A N/A Accrued interest receivable 5,857 5,857 5,857 — — Interest rate swaps 32,377 32,377 — 32,377 — Financial liabilities: Deposits 2,160,707 2,161,332 2,086,078 75,254 — Federal Home Loan Bank advances and other borrowings 420,113 428,967 — 428,967 — Junior subordinated notes 10,069 9,994 — — 9,994 Accrued interest payable 1,303 1,303 1,303 — — Interest rate swaps 36,109 36,109 — 36,109 — Off-balance sheet items: Standby letters of credit 115 115 — — 115 N/A = The fair value is not applicable due to restrictions placed on transferability 34 Table of Contents December 31, 2020 Carrying Amount Fair Value Total Level 1 Level 2 Level 3 (In Thousands) Financial assets: Cash and cash equivalents $ 56,909 $ 56,909 $ 56,909 $ — $ — Securities available-for-sale 183,925 183,925 — 183,925 — Securities held-to-maturity 26,374 27,333 — 27,333 — Loans held for sale 8,695 9,478 — 9,478 — Loans and lease receivables, net 2,117,449 2,121,107 — — 2,121,107 Federal Home Loan Bank stock 13,578 N/A N/A N/A N/A Accrued interest receivable 8,564 8,564 8,564 — — Interest rate swaps 49,377 49,377 — 49,377 — 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 — Junior subordinated notes 10,062 9,986 — — 9,986 Accrued interest payable 1,578 1,578 1,578 — — Interest rate swaps 54,927 54,927 — 54,927 — Off-balance sheet items: Standby letters of credit 75 75 — — 75 N/A = The fair value is not applicable due to restrictions placed on transferability Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the unaudited Consolidated Balance Sheets. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Corporation. Securities: The fair value measurements of investment securities are determined by a third-party pricing service which considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, credit information, and the securities’ terms and conditions, among other things. The fair value measurements are subject to independent verification by another pricing source on a quarterly basis to review for reasonableness. Any significant differences in pricing are reviewed with appropriate members of management who have the relevant technical expertise to assess the results. The Corporation has determined that these valuations are classified in Level 2 of the fair value hierarchy. When the independent pricing service does not provide a fair value measurement for a particular security, the Corporation will estimate the fair value based on specific information about each security. Fair values derived in this manner are classified in Level 3 of the fair value hierarchy. Loans Held for Sale: Loans held for sale, which consist of the guaranteed portions of SBA 7(a) loans, are carried at the lower of cost or estimated fair value. The estimated fair value is based on what secondary markets are currently offering for portfolios with similar characteristics. Interest Rate Swaps: The carrying amount and fair value of existing derivative financial instruments are based upon independent valuation models, which use widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative contract. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The Corporation incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the 35 Table of Contents respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Corporation considers the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. Limitations: Fair value estimates are made at a discrete point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holding of a particular financial instrument. Because no market exists for a significant portion of the Corporation’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and are not considered in the estimates. Note 13 — Derivative Financial Instruments The Corporation offers interest rate swap products directly to qualified commercial borrowers. The Corporation economically hedges client derivative transactions by entering into offsetting interest rate swap contracts executed with a third party. Derivative transactions executed as part of this program are not considered hedging instruments and are marked-to-market through earnings each period. The derivative contracts have mirror-image terms, which results in the positions’ changes in fair value offsetting through earnings each period. The credit risk and risk of non-performance embedded in the fair value calculations is different between the dealer counterparties and the commercial borrowers which may result in a difference in the changes in the fair value of the mirror-image swaps. The Corporation incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the counterparty’s risk in the fair value measurements. When evaluating the fair value of its derivative contracts for the effects of non-performance and credit risk, the Corporation considered the impact of netting and any applicable credit enhancements such as collateral postings, thresholds, and guarantees. During the three and six months ended June 30, 2021, the credit valuation adjustment was adjusted resulting in a benefit of $206,000 and $376,000, respectively. At June 30, 2021, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was $ 637.0 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 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 $ 32.4 million and a derivative liability of $ 4.7 million. At June 30, 2021, the aggregate amortizing notional value of interest rate swaps with dealer counterparties was also $ 637.0 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 January 2024 through March 2038. 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 $ 27.7 million. The gross amount of dealer counterparty swaps, without regard to the enforceable master netting agreement, was a gross derivative liability of $ 32.4 million and $ 4.7 million gross derivative asset. No right of offset existed with dealer counterparty swaps as of June 30, 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 six months ended June 30, 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 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. 36 Table of Contents As of June 30, 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 loss of $ 271,000 and gain of $ 1.8 million was recognized in other comprehensive income for the three and six months ended June 30, 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: Interest Rate Swap Contracts Asset Derivatives Liability Derivatives Balance Sheet Location Fair Value Balance Sheet Location Fair Value (In Thousands) Derivatives not designated as hedging instruments June 30, 2021 Derivatives $ 32,377 Derivatives $ 32,377 December 31, 2020 Derivatives $ 49,377 Derivatives $ 49,377 Derivatives designated as hedging instruments June 30, 2021 Accumulated other comprehensive income (1) $ 3,732 Derivatives $ 3,732 December 31, 2020 Accumulated other comprehensive income (1) $ 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. Note 14 — Regulatory Capital The Corporation and the Bank are subject to various regulatory capital requirements administered by Federal and Wisconsin banking agencies. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions on the part of regulators, that if undertaken, could have a direct material effect on the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory practices. The Corporation’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The Corporation regularly reviews and updates, when appropriate, its Capital and Liquidity Action Plan, which is designed to help ensure appropriate capital adequacy, to plan for future capital needs, and to ensure that the Corporation serves as a source of financial strength to the Bank. The Corporation’s and the Bank’s Boards of Directors and management teams adhere to the appropriate regulatory guidelines on decisions which affect their respective capital positions, including but not limited to, decisions relating to the payment of dividends and increasing indebtedness. As a bank holding company, the Corporation’s ability to pay dividends is affected by the policies and enforcement powers of the Board of Governors of the Federal Reserve system (the “Federal Reserve”). Federal Reserve guidance urges financial institutions to strongly consider eliminating, deferring, or significantly reducing dividends if: (i) net income available to common shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividend; (ii) the prospective rate of earnings retention is not consistent with the bank holding company’s capital needs and overall current and prospective financial condition; or (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital ratios. Management intends, when appropriate under regulatory guidelines, to consult with the Federal Reserve Bank of Chicago and provide it with information on the Corporation’s then-current and prospective earnings and capital position in advance of declaring any cash dividends. As a Wisconsin corporation, the Corporation is subject to the limitations of the Wisconsin Business Corporation Law, which prohibit the Corporation from paying dividends if such payment would: (i) render the Corporation unable to pay its debts as they become due in the usual course of business, or (ii) result in the Corporation’s assets being less than the sum of its total liabilities plus the amount needed to satisfy the preferential rights upon dissolution of any shareholders with preferential rights superior to those shareholders receiving the dividend. The Bank is also subject to certain legal, regulatory, and other restrictions on their ability to pay dividends to the Corporation. As a bank holding company, the payment of dividends by the Bank to the Corporation is one of the sources of funds the 37 Table of Contents 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. 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. These risk-based capital requirements presently address credit risk related to both recorded and off-balance sheet commitments and obligations. 38 Table of Contents As of June 30, 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 June 30, 2021 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 Requirements Amount Ratio Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) Total capital (to risk-weighted assets) Consolidated $ 271,536 11.22 % $ 193,679 8.00 % $ 254,203 10.50 % N/A N/A First Business Bank 265,450 10.99 193,309 8.00 253,719 10.50 241,637 10.00 % Tier 1 capital (to risk-weighted assets) Consolidated $ 221,178 9.14 % $ 145,259 6.00 % $ 205,784 8.50 % N/A N/A First Business Bank 238,860 9.89 144,982 6.00 205,391 8.50 193,309 8.00 Common equity tier 1 capital (to risk-weighted assets) Consolidated $ 211,109 8.72 % $ 108,944 4.50 % $ 169,469 7.00 % N/A N/A First Business Bank 238,860 9.89 108,737 4.50 169,146 7.00 157,064 6.50 Tier 1 leverage capital (to adjusted assets) Consolidated $ 221,178 8.48 % $ 104,310 4.00 % $ 104,310 4.00 % N/A N/A First Business Bank 238,860 9.18 104,081 4.00 104,081 4.00 130,102 5.00 As of December 31, 2020 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 Requirements Amount Ratio Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) Total capital (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 % Tier 1 capital (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 Common equity tier 1 capital (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 Tier 1 leverage capital (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 39 Table of Contents