What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-23 compared with 2021-02-24 · 191 added, 245 removed, 1738 unchanged (20% of the section changed)

8 unchanged sentences

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID 173 )

First Business Financial Services, Inc.

66 unchanged sentences

Increase in cash surrender value of bank-owned life insurance 1,413 1,402

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

Net gain (loss) on sale of securities 29 ( 4 )

Swap fees 1,368 6,860

13 unchanged sentences

Impairment of tax credit investments — 2,395

SBA recourse (benefit) provision ( 278 ) 188

SBA recourse benefit ( 76 ) ( 278 )

Loss on early extinguishment of debt — 744

14 unchanged sentences

Net income $ 35,755 $ 16,978

Other comprehensive income, before tax

Other comprehensive (loss) income

Securities available-for-sale:

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

Reclassification adjustment for net loss realized in net income 4 46

Unrealized securities (losses) gains arising during the period ( 4,312 ) 3,526

Reclassification adjustment for net (gain) loss realized in net income ( 29 ) 4

Securities held-to-maturity:

1 unchanged sentence

Interest rate swaps:

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

Income tax expense ( 143 ) ( 115 )

Total other comprehensive gain 415 336

Unrealized gains (losses) on interest rate swaps arising during the period 3,610 ( 3,011 )

Income tax benefit (expense) 181 ( 143 )

Total other comprehensive (loss) income ( 524 ) 415

Comprehensive income

8 unchanged sentences

Comprehensive

(Loss) Income Treasury

Loss Treasury

(In Thousands, Except Share Data)

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

Cumulative effect of adoption of ASC Topic 842

— — — 687 — — 687

Net income — — — 16,978 — — 16,978

Other comprehensive income — — — — 415 — 415

Share-based compensation - restricted shares

93,521 1 1,565 — — — 1,566

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

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

Cash dividends ($ 0.66 per share)

3 unchanged sentences

Net income — — — 35,755 — — 35,755

Other comprehensive income — — — — 415 — 415

Other comprehensive loss — — — — ( 524 ) — ( 524 )

Share-based compensation - restricted shares and employee stock purchase plan 85,370 1 2,512 — — — 2,513

15 unchanged sentences

Provision for loan and lease losses ( 5,803 ) 16,808

SBA recourse (benefit) provision ( 278 ) 188

SBA recourse benefit ( 76 ) ( 278 )

Derivative credit valuation adjustment ( 270 ) 461

1 unchanged sentence

Share-based compensation 2,513 1,871

Net loss on sale of securities 4 46

Net loss on disposal of fixed assets 78 —

Net (gain) loss on sale of securities ( 29 ) 4

Gain on sale of historic development entity state tax credit — ( 275 )

4 unchanged sentences

Net loss on foreclosed properties, including impairment valuation 15 383

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

Right-of-use asset impairment — 299

Excess tax benefit from share-based compensation ( 32 ) ( 102 )

Gain on sale of community development entity 1 —

Loan servicing asset impairment valuation recovery ( 63 ) ( 16 )

Return on investment in limited partnerships 371 —

Excess tax benefit (expense) from share-based compensation 48 ( 32 )

Payments on operating lease liabilities ( 1,601 ) ( 1,557 )

12 unchanged sentences

Returns of investments in limited partnerships 32 211

Investment in low-income housing ( 2,964 ) —

Investment in historic development entities — ( 3,254 )

4 unchanged sentences

Purchases of leasehold improvements and equipment, net ( 391 ) ( 264 )

Proceeds from sale of leasehold improvements and equipment, net 44 —

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

3 unchanged sentences

Net increase in deposits 102,407 325,137

For the Year Ended December 31,

(In Thousands)

Repayment of Federal Home Loan Bank advances ( 814,000 ) ( 1,219,944 )

1 unchanged sentence

Loss on early extinguishment of debt — 744

Proceeds from issuance of subordinated notes payable — 15,000

For the Year Ended December 31,

(In Thousands)

Repayment of subordinated notes payable — ( 15,000 )

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

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

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

Net increase in long-term borrowed funds 9,998 300

Cash dividends paid ( 6,166 ) ( 5,652 )

9 unchanged sentences

Income taxes paid 14,519 3,451

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

Non-cash investing and financing activities:

Transfer of loans to foreclosed properties 146 80

Remeasurement of lease liability 316 190

See accompanying Notes to Consolidated Financial Statements.

6 unchanged sentences

generally accepted accounting principles (“GAAP”).

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

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

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

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

FBB also offers 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.

As of December 31 2021, FBB had the following wholly-owned subsidiaries:

First Business Capital Corp.

(“FBCC”), First Madison Investment Corp.

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

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

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

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

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

Basis of Presentation.

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

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

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

Actual results could differ significantly from those estimates.

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

If the Corporation does not

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

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

Loans Held for Sale.

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

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

The CARES Act (as modified by the Consolidated Appropriations Act, 2021) permitted banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs if the loan was not more than 30 days delinquent as of December 31, 2019 and the modification was made before January 1, 2022.

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

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

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

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

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

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

Unamortized net loan or lease fees or costs for loans and leases that result from a refinance or restructure with only minor modifications to the original loan or lease contract are carried forward as a part of the net investment in the new loan or lease.

Unamortized net loan or lease fees or costs for loans and leases that result from a refinance or restructure with only minor modifications to the original

loan or lease contract are carried forward as a part of the net investment in the new loan or lease.

For troubled debt restructurings, all fees received in connection with a modification of terms are applied as a reduction of the loan or lease and any related costs, including direct loan origination costs, are charged to expense as incurred.

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

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

When the qualitative evaluation indicates that impairment is

more likely than not, quantitative testing is required whereby the fair value of each reporting unit is calculated and compared to the recorded book value.

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

35 unchanged sentences

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

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

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

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

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

24 unchanged sentences

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

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

For the year ended December 31, 2021, realized securities gains of $ 29,000 and for the year ended December 31, 2020, realized securities losses of $ 4,000 , each were reclassified out of accumulated other comprehensive loss, respectively.

Earnings Per Common Share.

10 unchanged sentences

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

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

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

therefore, these business units are considered one operating segment.

Share-Based Compensation.

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.

participant’s award agreement.

The Corporation accounts for forfeitures as they occur.

4 unchanged sentences

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

Beginning in 2019, the Corporation issued a combination of performance based restricted stock units and restricted stock awards to its executive officers.

The Corporation issues a combination of performance based restricted stock units and restricted stock awards to plan participants.

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.

4 unchanged sentences

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

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

The Corporation offers an Employee Stock Purchase Plan (“ESPP”) to all qualifying employees.

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

2 unchanged sentences

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

Adoption of New Accounting Standards .

In January 2017, the FASB issued ASU No.

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

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

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

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

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

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

In August 2018, the FASB issued ASU No.

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

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

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

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

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

Recent Accounting Pronouncements.

3 unchanged sentences

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

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

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

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

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

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

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

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

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

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

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

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

Note 2 - Other Events

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

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

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

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

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

The full impact of COVID-19 remains uncertain.

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

economies, markets, and employment.

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

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

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

The increase in the allowance for loan and lease losses was in large part due to an increase in several qualitative factors after careful evaluation by management.

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

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

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

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

As of December 31, 2020, the Corporation had 38 deferrals outstanding, representing $ 27.0 million in total loans, or 1.4 % of gross loans and leases, excluding gross PPP loans, compared to $ 131.5 million, or 7.1 % of gross loans and leases, excluding gross PPP loans as of September 30, 2020.

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

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

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

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

businesses and consumers struggling as a result of the pandemic.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As of February 1, 2021, the Corporation had processed and approved over 300 applications for the most recent phase of the PPP program for approximately $ 85 million.

In March 2020, the FASB issued ASU No.

2020-04 "“Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary, optional guidance to ease the potential burden in accounting for reference rate reform.

The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.

It is intended to help stakeholders during the global market-wide reference rate transition period.

In January 2021, the FASB issued ASU 2021-01 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.

The guidance is effective for all entities as of March 12, 2020 through December 31, 2022.

The Corporation continues to implement its transition plan toward cessation of LIBOR and the modification of its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR.

The Corporation expects to utilize the LIBOR transition relief allowed under ASU 2020-04 and ASU 2020-01, as applicable, and does not expect such adoption to have a material impact on its accounting and disclosures.

The Corporation will continue to assess the impact as the reference rate transition occurs over the next two years.

Note 2 – Cash and Cash Equivalents

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

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

FRB balances were $ 47.0 million and $ 26.7 million at December 31, 2021 and 2020, respectively, and are included in short-term investments on the Consolidated Balance Sheets.

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Available-for-sale:

treasuries $ 4,971 $ — $ ( 57 ) $ 4,914

government agency securities - government-sponsored enterprises

49 unchanged sentences

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

Treasuries contains treasury bonds issued by the United States Treasury.

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

1 unchanged sentence

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

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

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

Residential and commercial mortgage-backed securities - government-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 one and 69 sales of available-for-sale securities that occurred during the year ended December 31, 2020 and 2019, respectively.

There were seven and one sales of available-for-sale securities that occurred during the year ended December 31, 2021 and 2020, respectively.

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

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Gross losses ( 63 ) ( 4 )

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

Net gains (losses) on sale of available-for-sale securities $ 29 $ ( 4 )

Proceeds from sale of available-for-sale securities $ 14,955 $ 839

14 unchanged sentences

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

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

At December 31, 2021, the Corporation held three available-for-sale securities that have 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.

11 unchanged sentences

Available-for-sale:

treasuries $ 4,914 $ 57 $ — $ — $ 4,914 $ 57

government agency securities - government-sponsored enterprises 978 22 2,412 88 3,390 110

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

Municipal securities

12,568 344 — — 12,568 344

Residential mortgage-backed securities - government issued 12,745 140 — — 12,745 140

Residential mortgage-backed securities - government-sponsored enterprises

41,276 629 4,250 155 45,526 784

Commercial mortgage-backed securities - government issued 2,193 66 — — 2,193 66

Commercial mortgage-backed securities - government-sponsored enterprises 25,906 568 — — 25,906 568

$ 100,580 $ 1,826 $ 6,662 $ 243 $ 107,242 $ 2,069

8 unchanged sentences

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

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

Municipal securities

2,863 4 — — 2,863 4

Residential mortgage-backed securities - government-sponsored enterprises

19,078 49 — — 19,078 49

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

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

$ 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 December 31, 2021 and 2020.

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

At December 31, 2021, the Corporation held one held-to-maturity security that was in an unrealized loss position.

Such securities have not experienced credit rating downgrades;

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

Residential mortgage-backed securities - government issued

— — 1,887 9 1,887 9

Residential mortgage-backed securities - government-sponsored enterprises

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

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

Note 4 – Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses

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Loans and leases receivable, net $ 2,215,072 $ 2,117,449

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

As of December 31, 2021 and 2020, the Corporation had $ 27.9 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 $ 557,000 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.

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The total principal amount of the guaranteed portions of SBA loans sold during the year ended December 31, 2021 and 2020 was $ 33.5 million and $ 29.2 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 year ended December 31, 2020 and 2019 have been derecognized in the Consolidated Financial Statements.

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

4 unchanged sentences

As of December 31, 2021 and 2020, the total amount of the Corporation’s partial ownership of these transferred loans on the Consolidated Balance Sheets was $ 314.5 million and $ 276.5 million, respectively.

As of December 31, 2021, the non-SBA originated participation portfolio contained no impaired loans.

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

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

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

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

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

The total amount of loan participations purchased on the Consolidated Balance Sheets as of December 31, 2020 and 2019 was $ 410,000 and $ 492,000 , respectively.

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

Certain of the Corporation’s executive officers, directors, and their related interests are loan clients of the Bank.

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

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

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

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

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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.

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.

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Allowance for loan and lease losses to non-accrual loans and leases 382.76 107.15

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

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

As of December 31, 2021 and 2020, $ 627,000 and $ 6.5 million of the non-accrual loans and leases were considered troubled debt restructurings, respectively.

The Corporation has allocated $ 134,000 and $ 760,000 of specific reserves to troubled debt restructurings as of December 31, 2021 and 2020, respectively.

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

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For the year ended December 31, 2021, the modification of terms primarily consisted of payment schedule modifications or principal reductions.

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

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

There were no loans modified in a troubled debt restructuring during the previous 12 months which subsequently defaulted during the year ended December 31, 2021.

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

Additionally, the Corporation continues to work with borrowers impacted by COVID-19 and has provided modifications to include interest only deferrals and principal and interest deferrals.

These modifications are excluded from troubled debt restructuring classification under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators.

As of December 31, 2021 and 2020, the Corporation had three and 38 deferral requests outstanding, representing $ 293,000 and $ 27.0 million in total loans, respectively.

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

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

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

The difference between the recorded investment of loans and leases and the unpaid principal balance of $ 145,000 and $ 14.6 million as of December 31, 2021 and 2020, respectively, represents partial charge-offs of loans and leases resulting from losses due to the appraised value of the collateral securing the loans and leases being below the carrying values of the loans and leases.

Impaired loans and leases also included $ 217,000 and $ 46,000 of loans as of December 31, 2021 and 2020, respectively, that were performing troubled debt restructurings, and although not on non-accrual, were reported as impaired due to the concession

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

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

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:

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Recoveries 4 325 3 332

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

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

Provision for loan and lease losses 12,420 4,197 191 16,808

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Note 6 – 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 leases various office spaces and specialized lending production offices under non-cancellable operating leases which expire on various dates through 2028.

The Corporation also leases office equipment.

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

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

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

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.

Also during 2021, the Corporation entered into a new lease in Indiana resulting in a $ 117,000 increase to the right of use asset.

In 2019, the Corporation entered into a sublease for office space it vacated in its Kansas City metropolitan area which expires in 2023.

The components of total lease expense were as follows:

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The Corporation conducted its annual impairment test on August 1, 2021, utilizing a qualitative assessment, and concluded that it was more likely than not the estimated fair value of the reporting unit exceeded its carrying value, resulting in no impairment.

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

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

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

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

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

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

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

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

Other Intangible Assets

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

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

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

The net book value of the core deposit intangible was $ 25,000 and $ 60,000 as of December 31, 2020 and 2019, respectively.

During the years ended December 31, 2021 and 2020, impairment recovery of $ 63,000 and $ 16,000 , respectively, was recognized.

The core deposit intangibles have a finite life and is amortized over a period of seven years, and were fully amortized during 2021.

There was no net book value of the core deposit intangible as of December 31, 2021 and $ 25,000 as of December 31, 2020.

For the years ended December 31, 2021 and 2020, amortization totaled $ 25,000 and $ 35,000 , respectively.

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At December 31, 2021 and 2020, the net carrying value of the investments were $ 2.3 million and $ 2.4 million, respectively.

During 2020, the Corporation contributed $ 4.4 million to these partnerships, recognized $ 2.8 million in federal historic tax credits, and $ 1.9 million in impairment related to these investments.

During 2020, the Corporation contributed $ 4.4 million to these partnerships and recognized $ 2.8 million in federal historic tax credits, and $ 1.9 million in impairment related to these investments.

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

During 2021, the Corporation had no activity related to these investments.

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

Low-Income Housing Tax Credits

The Corporation invests in development entities through FBB Tax Credit, wholly-owned subsidiaries of FBB, to develop buildings that offer low-income housing.

At December 31, 2021, the net carrying value of the investments were $ 3.0 million.

During 2021, the Corporation contributed $ 3.0 million to these partnerships, and did not recognize any tax credits or impairment related to these partnerships.

As of December 31, 2020 the Corporation had no low-income housing tax credit investments.

New Market Tax Credits

The Corporation invested in a community development entity (“CDE”) through Rimrock Road, a wholly-owned subsidiary of FBB, to develop and operate a real estate project located in a low-income community.

At December 31, 2020 and 2019, Rimrock Road had one CDE investment with a net carrying value of $ 5.3 million and $ 5.6 million respectively.

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

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

On November 24, 2021, the Corporation exercised the put option and exited the Rimrock Road entity.

As of December 31, 2021, the Corporation had no remaining investment in the CDE.

At December 31, 2020, Rimrock Road had one CDE investment with a net carrying value of $ 5.3 million.

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

Other Investments

The Corporation has an equity investment in Aldine Capital Fund, LP, a mezzanine fund, of $ 60,000 and $ 54,000 recorded as of December 31, 2020 and 2019, respectively.

The Corporation had an equity investment in Aldine Capital Fund, LP, a mezzanine fund.

As of December 31, 2020, the Corporation had an equity investment in Aldine Capital Fund, LP of $ 60,000 and the final distribution was received January 15, 2021.

The Corporation’s equity investment in Aldine Capital Fund II, LP, also a mezzanine fund, totaled $ 4.9 million and $ 3.5 million as of December 31, 2021 and 2020, respectively.

As of December 31, 2021, the Corporation had $ 1.3 million remaining of the original $ 5.0 million commitment to Aldine II.

The Corporation’s equity investment in Aldine Capital Fund III, LP, also a mezzanine fund, totaled $ 4.5 million and $ 2.8 million as of December 31, 2021 and 2020, respectively.

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

As of December 31, 2021, the Corporation had $ 1.1 million remaining of the $ 5.0 million commitment.

The Corporation’s share of these partnerships’ income included in other non-interest income in the Consolidated Statements of Income for the years ended December 31, 2021 and 2020 was $ 2.5 million and $ 520,000 , respectively.

The Corporation’s share of these partnerships’ losses included in other non-interest expense in the Consolidated Statements of Income for the year ended December 31, 2021 and 2020 was $ 24,000 and $ 99,000 , respectively.

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

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

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

The Corporation has an equity investment in Dane Workforce Housing Fund LLC, a Wisconsin limited liability company, focused on community development by providing affordable workforce housing units in Dane County, Wisconsin, of $ 367,000 and $ 275,000 recorded as of December 31, 2021 and 2020, respectively.

The Corporation had a $ 615,000 commitment remaining of the original $ 1.0 million as of December 31, 2021.

The Corporation’s share of the investment fund’s income included in other non-interest income in the Consolidated Statements of Income for the year ended December 31, 2021 was $ 2,000 .

The Corporation’s share of these partnerships’ losses included in other non-interest expense in the Consolidated Statements of Income for the year ended December 31, 2021 was $ 19,000 .

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

The Corporation has an equity investment in BankTech Ventures, LP, a venture capital fund, focused on the community banking industry through strategic investments in growth-stage startups that directly support banking needs, of $ 120,000 recorded as of December 31, 2021.

The Corporation had a $ 880,000 commitment remaining of the original $ 1.0 million as of December 31, 2021.

No activity was recognized for the years ended December 31, 2021 and 2020.

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

The purpose of Trust II was to complete the sale of $ 10.0 million of 10.50 % fixed rate preferred securities.

Trust II, a wholly owned subsidiary of the Corporation, is not consolidated into the financial statements of the Corporation.

Trust II, a wholly owned subsidiary of the

Corporation, is not consolidated into the financial statements of the Corporation.

The investment in Trust II of $ 315,000 as of December 31, 2021 and 2020 is included in accrued interest receivable and other assets.

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Investment in historic development entities 2,299 2,356

Investment in low-income housing development entity 2,964 —

Investment in a community development entity — 5,306

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2022 $ 68,020

Thereafter 1,044

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

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

Wholesale deposits include $ 19.6 million and $ 10.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at December 31, 2021, compared to $ 47.5 million and $ 125.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts at December 31, 2020.

Deposits include $ 7.9 million and $ 28.7 million of certificates of deposit and wholesale deposits which are denominated in amounts greater than $250,000 at December 31, 2021 and 2020, respectively.

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

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368,800 376,781 1.30 394,500 379,891 1.45

Line of credit

500 78 2.90 — — —

Other borrowings 10,363 8,090 4.11 920 676 12.60

Subordinated notes payable 23,788 23,766 5.94 23,747 23,725 5.95

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

Junior subordinated notes 10,076 10,068 11.05 10,062 10,054 11.09

$ 413,527 $ 418,783 1.86 $ 429,229 $ 429,624 1.91

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

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

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The term FHLB advances outstanding at December 31, 2021 are due at various dates through February 2030.

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

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

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

Loans totaling approximately $ 644.6 million and $ 507.6 million were pledged as collateral at December 31, 2020 and 2019, respectively.

Loans totaling approximately $ 1.305 billion and $ 1.219 billion were pledged as collateral at December 31, 2021 and 2020, respectively.

The Corporation has a senior line of credit with a third-party financial institution of $ 10.5 million.

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For the years ended December 31, 2021 and 2020 the Corporation incurred $ 13,000 additional interest expense due to this fee.

There was no outstanding balance on the line of credit as of December 31, 2020.

On February 12, 2021, the credit line was renewed for one additional year with pricing terms of LIBOR + 2.75 % and a maturity date of February 19, 2022.

The Corporation has subordinated notes payable.

There was $ 500,000 outstanding balance on the line of credit as of December 31, 2021.

On February 11, 2022, the credit line was renewed for one additional year with pricing terms of 1-month term SOFR + 2.36 % and a maturity date of February 19, 2023.

The Corporation has two series of subordinated notes payable, each of which qualifies as Tier II capital.

At December 31, 2021, the aggregate principal amount of subordinated notes payable outstanding was $ 23.8 million, which qualified for Tier 2 capital.

At December 31, 2021, $ 15.0 million bore a fixed interest rate of 5.50 % with a maturity date of August 15, 2029 and $ 9.1 million bore a fixed interest rate of 6.00 % with a maturity date of April 15, 2027.

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

the Corporation was in compliance.

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

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

The Corporation may, at its option, redeem the 5.50 % notes, in whole or part, at any time after August 15, 2024, and may redeem the 6.00 % notes any time after June 15, 2022.

As of December 31, 2021, $ 302,000 of debt issuance costs remain in the subordinated notes payable balance.

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

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

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

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

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

As of December 31, 2021, the Corporation had other borrowings of $ 10.4 million, which consisted of $ 10.4 million of sold loans accounted for as secured borrowings because they did not qualify for true sale accounting.

During 2021, the Corporation paid in full the borrowings associated with our investment in a community development entity.

Note 11 – Regulatory Capital

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

In July 2013, the FRB and the Federal Deposit Insurance Corporation approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S.

In July 2013, the FRB and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S.

These rules are applicable to all financial institutions that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as bank and savings and loan holding companies other than “small bank holding companies” (generally non-publicly traded bank holding companies with consolidated assets of less than $1 billion).

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

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

The Corporation also must comply with the 2.5% conservation buffer, which the Corporation met as of December 31, 2021.

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

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Note 13 – Share-Based Compensation

The Corporation adopted the Plan during the quarter ended June 30, 2019.

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.

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

As of December 31, 2021, 219,837 shares were available for future grants under the Plan.

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

Beginning in 2019, the Corporation issued a combination of performance based restricted stock units and restricted stock awards to its executive officers.

The Corporation may issue a combination of performance based restricted stock units and restricted stock awards to its plan participants.

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

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The number of shares actually issued may vary.

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

As of December 31, 2021, the Corporation had $ 3.3 million of unrecognized compensation cost related to nonvested share-based compensation expense, which the Corporation expects to recognize over a weighted-average period of approximately 2.10 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 ESPP is authorized to issue 250,000 shares.

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

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 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.

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

During the year ended December 31, 2021, the Corporation issued 6,532 shares of common stock under the ESPP.

At December 31, 2021, 239,502 shares remained available for issuance under the ESPP.

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

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

For the Year Ended December 31,

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

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

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

The Corporation made a matching contribution of 3 % to all eligible employees which totaled $ 987,000 and $ 896,000 , for the years ended December 31, 2021 and 2020, respectively.

Discretionary profit sharing contributions for substantially all employees of 4.7 %, or $ 1.3 million, and 5.0 %, or $ 1.2 million, were made in 2021 and 2020, respectively.

As of December 31, 2021 and 2020, the Corporation had a deferred compensation plan under which it provided contributions to supplement the retirement income of one executive.

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State ( 110 ) ( 329 )

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

Deferred tax expense (benefit) 1,223 ( 2,007 )

Total income tax expense $ 11,275 $ 1,327

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State net operating loss carryforwards 436 482

Write-down of foreclosed properties 5 —

Tax credit carryforwards — 1,831

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Other 619 356

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

Valuation allowance — —

Total deferred tax assets 10,301 12,864

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Deferred taxes allocated to other comprehensive income ( 181 ) 143

Deferred income tax benefit $ 2,007 $ 2,296

Deferred income tax (expense) benefit $ ( 1,223 ) $ 2,007

Realization of the deferred tax asset over time is dependent upon the Corporation generating sufficient taxable earnings in future periods.

1 unchanged sentence

The Corporation had state net operating loss carryforwards of approximately $ 7.0 million and $ 7.7 million at December 31, 2021 and 2020, respectively, which can be used to offset future state taxable income.

The Corporation believes it will be able to fully utilize its Wisconsin state net operating losses under this law and therefore no valuation allowance has been established as of December 31, 2020.

The Corporation believes it will be able to fully utilize its established deferred tax assets and Wisconsin state net operating losses and therefore no valuation allowance has been established as of December 31, 2021and 2020.

The provision for income taxes differs from that computed at the federal statutory corporate tax rate as follows:

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

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

The credit valuation allowance was $ 191,000 and $ 461,000 as of December 31, 2021 and 2020, respectively.

At December 31, 2021, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was $ 640.6 million.

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

These interest rate swaps mature between March 2021 and December 2037.

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

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

These commercial borrower swaps were reported on the Consolidated Balance Sheet as a derivative asset of $ 49.4 million, included in accrued interest receivable and other assets, and as a derivative liability of $ 58,000 , included in accrued interest payable and other liabilities.

These commercial borrower swaps were reported on the Consolidated Balance Sheet as a derivative asset of $ 26.3 million and as a derivative liability of $ 6.6 million.

As of December 31, 2021, no interest rate swaps were in default.

1 unchanged sentence

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

These interest rate swaps mature in March 2021 through December 2037.

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

The gross amount of dealer counterparty swaps, without regard to the enforceable master netting agreement, was a gross derivative liability of $ 49.4 million and a gross derivative asset of $ 58,000 .

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

The gross amount of dealer counterparty swaps, without regard to the enforceable master netting agreement, was a gross derivative liability of $ 26.3 million and a gross derivative asset of $ 6.6 million.

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

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

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

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

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

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

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Derivatives not designated as hedging instruments

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

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

December 31, 2021 Derivatives $ 26,343 Derivatives $ 26,343

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

Derivatives designated as hedging instruments

December 31, 2021 Accumulated other comprehensive income (1)

$ 5,550 Accrued interest payable and other liabilities

$ 1,940 Derivatives $ 1,940

December 31, 2020 Accumulated other comprehensive income (1)

$ 2,539 Accrued interest payable and other liabilities

$ 5,550 Derivatives $ 5,550

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

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The fees are recorded into income and the fair value of the guarantee is decreased ratably over the term of the standby letter of credit.

The Corporation sells the guaranteed portions of SBA loans, as well as participation interests in other, non-SBA originated, loans to third parties.

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.

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

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

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 $ 635,000 and $ 723,000 at December 31, 2021 and 2020, respectively, which is reported in accrued interest payable and other liabilities on the Consolidated Balance Sheets.

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

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Balance at the beginning of the period $ 723 $ 1,345

SBA recourse (benefit) provision ( 278 ) 188

SBA recourse benefit ( 76 ) ( 278 )

Charge-offs, net ( 12 ) ( 344 )

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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.

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.

Note 18 – Fair Value Disclosures

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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.

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.

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Securities available-for-sale:

treasuries $ — $ 4,914 $ — $ 4,914

government agency securities - government-sponsored enterprises — 19,935 — 19,935

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The weighted average of those unobservable inputs was 24 %.

The majority of the impaired loans are considered collateral dependent loans or are supported by a SBA guaranty.

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.

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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 Consolidated Balance Sheets.

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This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.

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

In adjusting the fair value of its derivative

contracts for the effect of nonperformance risk, the Corporation considers the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

The Corporation incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the

respective counterparty’s nonperformance risk in the fair value measurements.

In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Corporation considers the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

Fair value estimates are made at a discrete point in time, based on relevant market information and information about the financial instrument.

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Share-based compensation 2,513 1,871

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

Excess tax (benefit) expense from share-based compensation ( 27 ) 8

Payments on operating lease liabilities — ( 560 )

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

Net decreases in other liabilities ( 2,090 ) ( 574 )

Other, net 3,413 560

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Financing activities

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

Proceeds from issuance of subordinated notes payable — 15,000

Repayment of subordinated notes payable — ( 15,000 )

Net increase in long-term borrowed funds 55 55

Proceeds from purchased funds and other short-term debt 500 —

Purchase of treasury stock ( 5,477 ) ( 1,672 )

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Net cash used in financing activities ( 10,928 ) ( 7,203 )

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

Net (decrease) increase in cash and due from banks ( 2,937 ) 1,831

Cash and cash equivalents at the beginning of the period 3,268 1,437

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Allowance and Provision for Loan and Lease Losses – Qualitative Factors

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

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

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

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

As described in Notes 1- Nature of Operations and Summary of Significant Accounting Policies, and 4- Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses to the consolidated financial statements, the Corporation’s allowance for loan and lease losses is an accounting estimate that requires significant management judgment in the evaluation of the quality of the loan and lease portfolio and the application of qualitative factors.

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

The specific allowance on loans individually evaluated for impairment relates to non-accrual and restructured loans and leases.

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

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

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

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

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

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

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

assessment of these qualitative factors:

The qualitative factor is increased or decreased for each loan and lease category based on management’s assessment of these qualitative factors:

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

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

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

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

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

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

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

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

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

• Management’s review of trends and the movement within each qualitative factor and the overall allowance balance.

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

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

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

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

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

• Verifying the mathematical accuracy of the adjustment factors for the qualitative component and the dollar amount of the reserve derived from the qualitative factor assessment;

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

5 unchanged sentences

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data