FIRST BUSINESS FINANCIAL SERVICES, INC. 10-Q

Item 1. Financial Statements First Business Financial Services, Inc. Consolidated Balance Sheets June 30, 2022 December 31, 2021 (Unaudited) (In Thousands, Except Share Data) Assets Cash and due from banks $ 39,251 $ 9,697 Short-term investments 56,233 47,413 Cash and cash equivalents 95,484 57,110 Securities available-for-sale, at fair value 208,643 205,702 Securities held-to-maturity, at amortized cost 13,968 19,746 Loans held for sale 2,256 3,570 Loans and leases receivable, net of allowance for loan and lease losses of $ 24,104 and $ 24,336 , respectively 2,265,996 2,215,072 Premises and equipment, net 1,899 1,694 Foreclosed properties 124 164 Right-of-use assets, net 5,772 4,910 Bank-owned life insurance 54,324 53,600 Federal Home Loan Bank stock, at cost 22,959 13,336 Goodwill and other intangible assets 12,262 12,268 Derivatives 44,461 26,343 Accrued interest receivable and other assets 48,868 39,390 Total assets $ 2,777,016 $ 2,652,905 Liabilities and Stockholders’ Equity Deposits $ 1,869,331 $ 1,957,923 Federal Home Loan Bank advances and other borrowings 596,642 403,451 Junior subordinated notes — 10,076 Lease liabilities 7,207 5,406 Derivatives 40,357 28,283 Accrued interest payable and other liabilities 13,556 15,344 Total liabilities 2,527,093 2,420,483 Stockholders’ equity: Preferred stock, Series A; $ 0.01 par value, 7 % non-cumulative perpetual preferred stock liquidation preference $ 1,000 per share, 2,500,000 shares authorized, 12,500 and no shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively 11,992 — Common stock, $ 0.01 par value, 25,000,000 shares authorized, 9,367,337 and 9,326,361 shares issued, 8,474,699 and 8,457,564 shares outstanding at June 30, 2022 and December 31, 2021, respectively 94 93 Additional paid-in capital 86,123 85,797 Retained earnings 186,302 170,020 Accumulated other comprehensive loss ( 11,588 ) ( 1,457 ) Treasury stock, 892,638 and 868,797 shares at June 30, 2022 and December 31, 2021, respectively, at cost ( 23,000 ) ( 22,031 ) Total stockholders’ equity 249,923 232,422 Total liabilities and stockholders’ equity $ 2,777,016 $ 2,652,905 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, 2022 2021 2022 2021 (In Thousands, Except Per Share Data) Interest income Loans and leases $ 25,687 $ 23,591 $ 48,759 $ 46,386 Securities 1,064 816 2,039 1,669 Short-term investments 280 192 468 351 Total interest income 27,031 24,599 51,266 48,406 Interest expense Deposits 1,058 943 1,824 1,962 Federal Home Loan Bank advances and other borrowings 2,313 1,727 3,851 3,377 Junior subordinated notes — 277 504 552 Total interest expense 3,371 2,947 6,179 5,891 Net interest income 23,660 21,652 45,087 42,515 Provision for loan and lease losses ( 3,727 ) ( 958 ) ( 4,582 ) ( 3,026 ) Net interest income after provision for loan and lease losses 27,387 22,610 49,669 45,541 Non-interest income Private wealth management service fees 2,852 2,744 5,693 5,151 Gain on sale of Small Business Administration loans 951 1,203 1,537 2,281 Service charges on deposits 1,041 941 2,040 1,859 Loan fees 697 569 1,349 1,114 Increase in cash surrender value of bank-owned life insurance 350 350 698 699 Net gain on sale of securities — 29 — 29 Swap fees 471 — 697 684 Other non-interest income 510 485 2,244 1,699 Total non-interest income 6,872 6,321 14,258 13,516 Non-interest expense Compensation 14,020 13,255 27,658 25,912 Occupancy 568 533 1,123 1,085 Professional fees 1,298 913 2,468 1,778 Data processing 892 798 1,673 1,569 Marketing 670 511 1,170 902 Equipment 235 261 479 506 Computer software 1,117 1,129 2,199 2,244 FDIC insurance 296 280 610 642 Other non-interest expense 360 504 900 876 Total non-interest expense 19,456 18,184 38,280 35,514 Income before income tax expense 14,803 10,747 25,647 23,543 Income tax expense 3,599 2,512 5,771 5,577 Net income 11,204 8,235 19,876 17,966 Preferred stock dividend 246 — 246 — Net income available to common shareholders $ 10,958 $ 8,235 $ 19,630 $ 17,966 Earnings per common share Basic $ 1.29 $ 0.95 $ 2.31 $ 2.08 Diluted 1.29 0.95 2.31 2.08 Dividends declared per share 0.1975 0.18 0.395 0.36 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, 2022 2021 2022 2021 (In Thousands) Net income $ 11,204 $ 8,235 $ 19,876 $ 17,966 Other comprehensive (loss) income Securities available-for-sale: Unrealized securities (losses) gains arising during the period ( 7,184 ) 662 ( 19,665 ) ( 1,576 ) Reclassification adjustment for net gain realized in net income — ( 29 ) — ( 29 ) Securities held-to-maturity: Amortization of net unrealized losses transferred from available-for-sale 3 7 8 15 Interest rate swaps: Unrealized gains (losses) on interest rate swaps arising during the period 2,175 ( 271 ) 6,044 1,818 Income tax benefit (expense) 1,281 ( 94 ) 3,482 ( 58 ) Total other comprehensive (loss) income ( 3,725 ) 275 ( 10,131 ) 170 Comprehensive income $ 7,479 $ 8,510 $ 9,745 $ 18,136 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 Preferred Stock 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 loss — — — — — 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 4 Table of Contents Common Shares Outstanding Preferred Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total (In Thousands, Except Share Data) Balance at January 1, 2022 8,457,564 $ — $ 93 $ 85,797 $ 170,020 $ ( 1,457 ) $ ( 22,031 ) $ 232,422 Net income — — — — 8,672 — — 8,672 Other comprehensive loss — — — — — ( 6,406 ) — ( 6,406 ) Issuance of preferred stock, net of issuance costs — 11,992 — — — — — 11,992 Share-based compensation - restricted shares and employee stock purchase plan 47,864 — 1 608 — — — 609 Issuance of common stock under the employee stock purchase plan 1,380 — — 40 — — — 40 Treasury stock re-issued — — — ( 1,002 ) — — 1,002 — Cash dividends ($ 0.1975 per share) — — — — ( 1,670 ) — — ( 1,670 ) Treasury stock purchased ( 18,223 ) — — — — — ( 608 ) ( 608 ) Balance at March 31, 2022 8,488,585 $ 11,992 $ 94 $ 85,443 $ 177,022 $ ( 7,863 ) $ ( 21,637 ) $ 245,051 Net income — — — — 11,204 — — 11,204 Other comprehensive income — — — — — ( 3,725 ) — ( 3,725 ) Share-based compensation - restricted shares and employee stock purchase plan 25,860 — — 645 — — — 645 Issuance of common stock under the employee stock purchase plan 1,254 — — 35 — — — 35 Preferred stock dividends — — — — ( 246 ) — — ( 246 ) Cash dividends ($ 0.1975 per share) — — — — ( 1,678 ) — — ( 1,678 ) Treasury stock purchased ( 41,000 ) — — — — — ( 1,363 ) ( 1,363 ) Balance at June 30, 2022 8,474,699 $ 11,992 $ 94 $ 86,123 $ 186,302 $ ( 11,588 ) $ ( 23,000 ) $ 249,923 See accompanying Notes to Unaudited Consolidated Financial Statements. 5 Table of Contents First Business Financial Services, Inc. Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 2022 2021 (In Thousands) Operating activities Net income $ 19,876 $ 17,966 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes, net ( 1,695 ) ( 1,359 ) Impairment of tax credit investments ( 351 ) — Provision for loan and lease losses ( 4,582 ) ( 3,026 ) Derivative credit valuation adjustment — ( 376 ) Depreciation, amortization and accretion, net 2,025 1,845 Loss on disposal of equipment — 56 Share-based compensation 1,254 1,138 Net gain on sale of securities — ( 29 ) Increase in bank-owned life insurance policies ( 698 ) ( 699 ) Origination of loans for sale ( 61,278 ) ( 48,137 ) Sale of SBA loans originated for sale 64,129 53,054 Gain on sale of loans originated for sale ( 1,537 ) ( 2,281 ) Net loss on foreclosed properties, including impairment valuation 20 1 Loan servicing right impairment valuation — ( 78 ) Excess tax benefit (expense) from share-based compensation 183 ( 16 ) Returns on investments in limited partnerships 314 — Payments on operating lease liabilities ( 817 ) ( 788 ) Payments received on operating leases 90 82 Net increase in accrued interest receivable and other assets ( 13,814 ) ( 1,152 ) Net increase (decrease) in accrued interest payable and other liabilities 13,658 ( 1,230 ) Net cash provided by operating activities 16,777 14,971 Investing activities Proceeds from maturities, redemptions, and paydowns of available-for-sale securities 20,185 31,315 Proceeds from maturities, redemptions, and paydowns of held-to-maturity securities 5,761 3,969 Proceeds from sale of available-for-sale securities — 14,955 Purchases of available-for-sale securities ( 43,231 ) ( 35,559 ) Proceeds from sale of foreclosed properties 37 — Net (increase) decrease in loans and leases ( 46,359 ) 2,444 Investments in limited partnerships ( 363 ) — Returns of investments in limited partnerships — 60 Distribution from historic development entities 282 57 Investment in low-income housing entities ( 5,937 ) ( 1,307 ) Investment in Federal Home Loan Bank stock ( 23,370 ) ( 6,314 ) Proceeds from the sale of Federal Home Loan Bank stock 13,746 6,440 Purchases of leasehold improvements and equipment, net ( 469 ) ( 135 ) Proceeds from sale of leasehold improvements and equipment — 12 Premium payment on bank owned life insurance policies ( 25 ) — Proceeds from redemption of Trust II stock 315 — Net cash used in investing activities ( 79,428 ) 15,937 Financing activities Net (decrease) increase in deposits ( 88,592 ) 305,191 Proceeds from Federal Home Loan Bank advances 1,413,844 510,300 6 Table of Contents Repayment of Federal Home Loan Bank advances ( 1,228,543 ) ( 517,000 ) Repayment of subordinated notes payable ( 9,090 ) — Proceeds from issuance of subordinated notes payable 20,000 — Repayment of junior subordinated notes payable ( 10,076 ) — Net (decrease) increase in long-term borrowed funds ( 3,020 ) 7,653 Cash dividends paid ( 3,348 ) ( 3,097 ) Preferred stock dividends paid ( 246 ) — Proceeds from issuance of common stock under ESPP 75 81 Proceeds from issuance of preferred stock 11,992 — Purchase of treasury stock ( 1,971 ) ( 968 ) Net cash provided by financing activities 101,025 302,160 Net increase in cash and cash equivalents 38,374 333,068 Cash and cash equivalents at the beginning of the period 57,110 56,909 Cash and cash equivalents at the end of the period $ 95,484 $ 389,977 Supplementary cash flow information Cash paid during the period for: Interest paid on deposits and borrowings $ 5,707 $ 7,469 Income taxes paid ( 31 ) 7,658 Non-cash investing and financing activities: Right-of-use assets obtained in exchange for operating lease liabilities — 316 Transfer from loans and leases to foreclosed properties 17 149 See accompany Notes to Unaudited Consolidated Financial Statements 7 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 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 bank consulting services to community banks. The Bank is subject to competition from other financial institutions and service providers, and is also subject to state and federal regulations. As of June 30, 2022, FBB had 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”), BOC Investment, LLC (“BOC”), Mitchell Street Apartments Investment, LLC (“Mitchell Street”), and FBB Tax Credit Investment, LLC (“FBB Tax Credit”). 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, 2021. 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”) was not consolidated into the financial statements. As of March 30, 2022, the Bank’s trust preferred securities were redeemed and Trust II was subsequently dissolved. 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, and income taxes. The results of operations for the three and six months ended June 30, 2022, are not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, 2022. 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, 2021. Recent Accounting Pronouncements In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-13, “ Financial Instruments- Credit Losses (Topic 326), ” which is often referred to as Current Expected Credit Losses (“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 1, 2020 to January 1, 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 has deferred 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 8 Table of Contents credit losses. Management is currently calculating sample expected loss computations and developing the allowance methodology and assumptions that will be used under the new standard. Management 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 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 the London Interbank Offered Rate (“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, and does not expect such adoption to have a material impact on its accounting and disclosures. In August 2021, the FASB issued ASU No. 2021-06 “Presentation of Financial Statements (Topic 205), Financial Services-Depository and Lending (Topic 942), and Financial Services-Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants.” This ASU amends the SEC sections of the Codification related to Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update to Statistical Disclosures for Bank and Savings and Loan Registrants. The guidance is effective upon its addition to the FASB codification. The Corporation is assessing the impact of ASU 2021-06 and its impact on its disclosures. In March 2022, the FASB issued ASU 2022-02 "Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." The amendments in this update eliminate the accounting guidance for troubled debt restructurings (“TDRs”) by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance in paragraphs 310-20-35-9 through 35-11 to determine whether a modification results in a new loan or a continuation of an existing loan. Additionally, for public business entities, the amendments in this Update require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost in the vintage disclosures required by paragraph 326-20-50-6. The guidance is effective for the Corporation upon the adoption of ASU 2016-13, January 1, 2023. The Corporation is currently assessing the impact of ASU 2022-02 on its disclosures and control structure; however, the Corporation does not expect the adoption of this standard to have a material impact on the consolidated financial statements. 9 Table of Contents Note 2 — 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, 2022 2021 2022 2021 (Dollars in Thousands, Except Share Data) Basic earnings per common share Net income $ 11,204 $ 8,235 $ 19,876 $ 17,966 Less: preferred stock dividends 246 — 246 — Less: earnings allocated to participating securities 310 238 547 493 Basic earnings allocated to common shareholders $ 10,648 $ 7,997 $ 19,083 $ 17,473 Weighted-average common shares outstanding, excluding participating securities 8,225,838 8,385,069 8,245,317 8,381,868 Basic earnings per common share $ 1.29 $ 0.95 $ 2.31 $ 2.08 Diluted earnings per common share Earnings allocated to common shareholders, diluted $ 10,648 $ 7,997 $ 19,083 $ 17,473 Weighted-average diluted common shares outstanding, excluding participating securities 8,225,838 8,385,069 8,245,317 8,381,868 Diluted earnings per common share $ 1.29 $ 0.95 $ 2.31 $ 2.08 Note 3 — Share-Based Compensation The Corporation adopted the 2019 Equity Incentive Plan (the “Plan”) during the quarter ended June 30, 2019. The Plan is administered by the Compensation Committee of the Board of Directors (the “Board”) 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, 2022, 154,002 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. Restricted Stock Under the Plan, the Corporation may grant restricted stock awards (“RSA”), restricted stock units (“RSU”), 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 (“PRSU”) and time-based restricted stock awards to its plan participants. Vesting of the performance-based restricted stock units will be measured on the relative Total Shareholder Return (“TSR”) and relative Return on Equity (“ROE”) and will cliff-vest after a three-year measurement period based on the Corporation’s TSR performance and ROE performance compared to a broad peer group of over 100 banks. At the end of the performance period, the number of actual shares to be awarded varies between 0% and 200% of target amounts. The 10 Table of Contents restricted stock awards issued to executive officers will vest ratably over a three-year period. Compensation expense is recognized for PRSU 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 ROE metric will be adjusted if there is a change in the expectation of ROE. 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, 2021 and the six months ended June 30, 2022 was as follows: RSA Weighted Average Grant Price PRSU Weighted Average Grant Price RSU Weighted Average Grant Price Total Weighted Average Grant Price Nonvested balance as of January 1, 2021 143,246 $ 23.04 39,570 $ 28.85 4,988 $ 24.08 187,804 $ 24.29 Granted (1) 67,515 22.39 23,550 27.12 2,065 21.68 93,130 23.57 Vested ( 61,384 ) 22.26 — — ( 2,001 ) 22.91 ( 63,385 ) 22.28 Forfeited ( 7,760 ) 23.24 — — — — ( 7,760 ) 23.24 Nonvested balance as of December 31, 2021 141,617 23.06 63,120 28.20 5,052 23.56 209,789 24.62 Granted (1) 55,275 33.59 37,335 24.71 335 33.60 92,945 30.02 Vested ( 46,367 ) 23.38 ( 43,020 ) 18.91 ( 1,552 ) 24.17 ( 90,939 ) 21.28 Forfeited ( 1,807 ) 25.60 — — — — ( 1,807 ) 25.60 Nonvested balance as of June 30, 2022 148,718 $ 26.84 57,435 $ 32.89 3,835 $ 24.19 209,988 $ 28.45 Unrecognized compensation cost (in thousands) $ 3,222 $ 1,239 $ 70 $ 4,531 Weighted average remaining recognition period (in years) 2.67 2.00 1.97 2.47 (1) The number of restricted shares/units shown includes the shares that would be granted if the target level of performance is achieved plus related to the performance based restricted stock units. The number of shares actually issued may vary. During the six months ended June 30, 2022, an additional 21,510 were issued related to actual performance results of previously granted awards. 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 Corporation 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, 2022, the Corporation issued 2,634 shares of common stock under the ESPP. As of June 30, 2022, 238,122 shares remained available for issuance under the ESPP. Share-based compensation expense related to restricted stock and ESPP 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, 2022 2021 2022 2021 (In Thousands) Share-based compensation expense $ 645 $ 607 $ 1,254 $ 1,138 11 Table of Contents Note 4 — 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, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In Thousands) Available-for-sale: U.S. treasuries $ 4,974 $ — $ ( 401 ) 4,573 U.S. government agency securities - government-sponsored enterprises 17,059 248 ( 393 ) 16,914 Municipal securities 43,995 7 ( 5,228 ) 38,774 Residential mortgage-backed securities - government issued 17,148 2 ( 1,284 ) 15,866 Residential mortgage-backed securities - government-sponsored enterprises 104,040 3 ( 8,085 ) 95,958 Commercial mortgage-backed securities - government issued 3,834 — ( 337 ) 3,497 Commercial mortgage-backed securities - government-sponsored enterprises 36,275 — ( 4,195 ) 32,080 Other securities 980 1 — 981 $ 228,305 $ 261 $ ( 19,923 ) $ 208,643 As of December 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In Thousands) Available-for-sale: U.S. treasuries $ 4,971 $ — $ ( 57 ) $ 4,914 U.S. government agency securities - government-sponsored enterprises 19,797 248 ( 110 ) 19,935 Municipal securities 30,828 473 ( 344 ) 30,957 Residential mortgage-backed securities - government issued 19,563 238 ( 140 ) 19,661 Residential mortgage-backed securities - government-sponsored enterprises 85,748 741 ( 784 ) 85,705 Commercial mortgage-backed securities - government issued 5,801 36 ( 66 ) 5,771 Commercial mortgage-backed securities - government-sponsored enterprises 36,786 313 ( 568 ) 36,531 Other securities 2,205 23 — 2,228 $ 205,699 $ 2,072 $ ( 2,069 ) $ 205,702 12 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, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In Thousands) Held-to-maturity: Municipal securities $ 8,291 $ 23 $ ( 26 ) $ 8,288 Residential mortgage-backed securities - government issued 1,878 — ( 57 ) 1,821 Residential mortgage-backed securities - government-sponsored enterprises 1,792 — ( 48 ) 1,744 Commercial mortgage-backed securities - government-sponsored enterprises 2,007 — ( 11 ) 1,996 $ 13,968 $ 23 $ ( 142 ) $ 13,849 As of December 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In Thousands) Held-to-maturity: Municipal securities $ 13,009 $ 222 $ ( 3 ) $ 13,228 Residential mortgage-backed securities - government issued 2,226 40 — 2,266 Residential mortgage-backed securities - government-sponsored enterprises 2,502 76 — 2,578 Commercial mortgage-backed securities - government-sponsored enterprises 2,009 195 — 2,204 $ 19,746 $ 533 $ ( 3 ) $ 20,276 U.S. Treasuries contains treasury bonds issued by the United States Treasury. 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 no sales of available-for-sale securities that occurred during the three and six months ended June 30, 2022 and there were seven sales of available-for-sale securities that occurred during the three and six months ended June 30, 2021. At June 30, 2022 and December 31, 2021, securities with a fair value of $ 39.7 million and $ 70.3 million, respectively, were pledged to secure various obligations, including interest rate swap contracts and municipal deposits. 13 Table of Contents The amortized cost and fair value of securities by contractual maturity at June 30, 2022 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 $ 2,757 $ 2,755 $ 3,962 $ 3,973 Due in one year through five years 12,882 12,115 4,130 4,109 Due in five through ten years 58,532 53,524 4,940 4,862 Due in over ten years 154,134 140,249 936 905 $ 228,305 $ 208,643 $ 13,968 $ 13,849 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, 2022 and December 31, 2021. At June 30, 2022, the Corporation held 164 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, 2022, the Corporation held 11 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. 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, 2022 and 2021. 14 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, 2022 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. treasuries $ 4,573 $ 401 $ — $ — $ 4,573 $ 401 U.S. government agency securities - government-sponsored enterprises 926 73 2,181 320 3,107 393 Municipal securities 33,074 3,895 3,517 1,333 36,591 5,228 Residential mortgage-backed securities - government issued 14,826 1,284 — — 14,826 1,284 Residential mortgage-backed securities - government-sponsored enterprises 83,381 6,556 11,394 1,529 94,775 8,085 Commercial mortgage-backed securities - government issued 3,497 337 — — 3,497 337 Commercial mortgage-backed securities - government-sponsored enterprises 26,080 3,048 6,000 1,147 32,080 4,195 $ 166,357 $ 15,594 $ 23,092 $ 4,329 $ 189,449 $ 19,923 As of December 31, 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. treasuries $ 4,914 $ 57 $ — $ — $ 4,914 $ 57 U.S. government agency securities - government-sponsored enterprises 978 22 2,412 88 3,390 110 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 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, 2022 and December 31, 2021. At June 30, 2022, the Corporation held 23 held-to-maturity securities that were in an unrealized loss position. Such securities have not experienced credit rating downgrades; however, they have primarily declined in value due to the current interest rate environment. At June 30, 2022, the Corporation held one held-to-maturity security that had been in a 15 Table of Contents continuous unrealized loss position for twelve months or greater. It is expected that the Corporation will recover the entire amortized cost basis of each held-to-maturity security based upon an evaluation of aforementioned factors. Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the three and six months ended June 30, 2022 and 2021. 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, 2022 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 $ 1,742 $ 8 $ 268 $ 18 $ 2,010 $ 26 Residential mortgage-backed securities - government issued 1,821 57 — — 1,821 57 Residential mortgage-backed securities - government-sponsored enterprises 3,364 48 — — 3,364 48 Commercial mortgage-backed securities - government-sponsored enterprises 376 11 — — 376 11 $ 7,303 $ 124 $ 268 $ 18 $ 7,571 $ 142 As of December 31, 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 $ — $ — $ 284 $ 3 $ 284 $ 3 16 Table of Contents Note 5 — Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses Loan and lease receivables consist of the following: June 30, 2022 December 31, 2021 (In Thousands) Commercial real estate: Commercial real estate — owner occupied $ 258,375 $ 235,589 Commercial real estate — non-owner occupied 651,920 661,423 Land development 42,545 42,792 Construction 203,913 179,841 Multi-family 314,392 320,072 1-4 family 17,335 14,911 Total commercial real estate 1,488,480 1,454,628 Commercial and industrial 741,363 730,819 Direct financing leases, net 13,718 15,743 Consumer and other: Home equity and second mortgages 5,132 4,223 Other 42,387 35,518 Total consumer and other 47,519 39,741 Total gross loans and leases receivable 2,291,080 2,240,931 Less: Allowance for loan and lease losses 24,104 24,336 Deferred loan fees 980 1,523 Loans and leases receivable, net $ 2,265,996 $ 2,215,072 As of June 30, 2022 and December 31, 2021, the Corporation had $ 8.3 million and $ 27.9 million, respectively, in gross PPP loans outstanding included in the commercial and industrial loan category and deferred processing fees outstanding of $ 113,000 and $ 557,000 , 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 on-balance sheet is comprised of the following: June 30, 2022 December 31, 2021 (In Thousands) SBA 7(a) loans $ 32,927 $ 33,223 SBA 504 loans 38,569 41,394 SBA Express loans and lines of credit 233 387 SBA PPP loans 8,285 27,854 Total SBA loans $ 80,014 $ 102,858 As of June 30, 2022 and December 31, 2021, $ 944,000 and $ 1.7 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, 2022, and 2021, was $ 11.9 million and $ 9.0 million, respectively. The total principal amount of the guaranteed portions of SBA loans sold during the six months ended June 30, 2022, and 2021, was 17 Table of Contents $ 17.4 million and $ 19.6 million, respectively. Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the three months ended June 30, 2022, and 2021, 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, 2022, and December 31, 2021, was $ 95.9 million and $ 93.0 million, respectively. The total principal amount of transferred participation interests in other, non-SBA originated loans during the three months ended June 30, 2022, and 2021, was $ 23.0 million and $ 11.8 million, respectively. The total principal amount of transferred participation interests in other, non-SBA originated loans during the six months ended June 30, 2022, and 2021, was $ 45.2 million and $ 16.9 million, respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer. No gain or loss was recognized on participation interests in other, non-SBA originated loans as they were transferred at or near the date of loan origination and the payments received for servicing the portion of the loans participated represents adequate compensation. The total outstanding balance of these transferred loans at June 30, 2022, and December 31, 2021, was $ 199.0 million and $ 195.2 million, respectively. As of June 30, 2022, and December 31, 2021, the total amount of the Corporation’s partial ownership of these transferred loans on the unaudited Consolidated Balance Sheets was $ 320.2 million and $ 314.5 million, respectively. As of June 30, 2022 and December 31, 2021, the non-SBA originated participation portfolio contained no impaired loans. 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, 2022 and December 31, 2021. 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, 2022 Category I II III IV Total (Dollars in Thousands) Commercial real estate: Commercial real estate — owner occupied $ 203,127 $ 36,688 $ 18,447 $ 113 $ 258,375 Commercial real estate — non-owner occupied 540,971 92,025 18,924 — 651,920 Land development 42,221 324 — — 42,545 Construction 162,066 17,475 24,372 — 203,913 Multi-family 280,188 23,018 11,186 — 314,392 1-4 family 13,470 3,832 — 33 17,335 Total commercial real estate 1,242,043 173,362 72,929 146 1,488,480 Commercial and industrial 576,320 119,543 39,922 5,578 741,363 Direct financing leases, net 9,136 320 4,213 49 13,718 Consumer and other: Home equity and second mortgages 3,047 1,822 263 — 5,132 Other 42,153 234 — — 42,387 Total consumer and other 45,200 2,056 263 — 47,519 Total gross loans and leases receivable $ 1,872,699 $ 295,281 $ 117,327 $ 5,773 $ 2,291,080 Category as a % of total portfolio 81.74 % 12.89 % 5.12 % 0.25 % 100.00 % 18 Table of Contents December 31, 2021 Category I II III IV Total (Dollars in Thousands) Commercial real estate: Commercial real estate — owner occupied $ 192,849 $ 31,611 $ 10,781 $ 348 $ 235,589 Commercial real estate — non-owner occupied 540,572 88,880 31,971 — 661,423 Land development 41,745 1,047 — — 42,792 Construction 130,285 18,973 30,583 — 179,841 Multi-family 280,183 28,623 11,266 — 320,072 1-4 family 12,057 2,113 402 339 14,911 Total commercial real estate 1,197,691 171,247 85,003 687 1,454,628 Commercial and industrial 594,388 97,678 32,964 5,789 730,819 Direct financing leases, net 10,829 168 4,647 99 15,743 Consumer and other: Home equity and second mortgages 2,473 1,683 67 — 4,223 Other 35,249 269 — — 35,518 Total consumer and other 37,722 1,952 67 — 39,741 Total gross loans and leases receivable $ 1,840,630 $ 271,045 $ 122,681 $ 6,575 $ 2,240,931 Category as a % of total portfolio 82.14 % 12.10 % 5.47 % 0.29 % 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 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 TDRs, 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 19 Table of Contents 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: 20 Table of Contents June 30, 2022 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 $ — $ — $ — $ — $ 258,262 $ 258,262 Non-owner occupied — — — — 651,920 651,920 Land development — — — — 42,545 42,545 Construction 13,400 — — 13,400 190,513 203,913 Multi-family — — — — 314,392 314,392 1-4 family — — — — 17,302 17,302 Commercial and industrial 3,685 437 — 4,122 731,851 735,973 Direct financing leases, net 2,827 59 — 2,886 10,783 13,669 Consumer and other: Home equity and second mortgages — — — — 5,132 5,132 Other — — — — 42,387 42,387 Total 19,912 496 — 20,408 2,265,087 2,285,495 Non-accruing loans and leases Commercial real estate: Owner occupied — — 113 113 — 113 Non-owner occupied — — — — — — Land development — — — — — — Construction — — — — — — Multi-family — — — — — — 1-4 family — — — — 33 33 Commercial and industrial 77 79 1,377 1,533 3,857 5,390 Direct financing leases, net — — 49 49 — 49 Consumer and other: Home equity and second mortgages — — — — — — Other — — — — — — Total 77 79 1,539 1,695 3,890 5,585 Total loans and leases Commercial real estate: Owner occupied — — 113 113 258,262 258,375 Non-owner occupied — — — — 651,920 651,920 Land development — — — — 42,545 42,545 Construction 13,400 — — 13,400 190,513 203,913 Multi-family — — — — 314,392 314,392 1-4 family — — — — 17,335 17,335 Commercial and industrial 3,762 516 1,377 5,655 735,708 741,363 Direct financing leases, net 2,827 59 49 2,935 10,783 13,718 Consumer and other: Home equity and second mortgages — — — — 5,132 5,132 Other — — — — 42,387 42,387 Total $ 19,989 $ 575 $ 1,539 $ 22,103 $ 2,268,977 $ 2,291,080 Percent of portfolio 0.87 % 0.03 % 0.07 % 0.97 % 99.03 % 100.00 % 21 Table of Contents December 31, 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 $ 420 $ — $ — $ 420 $ 234,821 $ 235,241 Non-owner occupied — — — — 661,423 661,423 Land development — — — — 42,792 42,792 Construction 394 — — 394 179,447 179,841 Multi-family — — — — 320,072 320,072 1-4 family 100 — — 100 14,472 14,572 Commercial and industrial 907 536 — 1,443 723,804 725,247 Direct financing leases, net 281 14 — 295 15,349 15,644 Consumer and other: Home equity and second mortgages — — — — 4,223 4,223 Other — — — — 35,518 35,518 Total 2,102 550 — 2,652 2,231,921 2,234,573 Non-accruing loans and leases Commercial real estate: Owner occupied — — 113 113 235 348 Non-owner occupied — — — — — — Land development — — — — — — Construction — — — — — — Multi-family — — — — — — 1-4 family — — — — 339 339 Commercial and industrial 23 36 1,445 1,504 4,068 5,572 Direct financing leases, net — — 84 84 15 99 Consumer and other: Home equity and second mortgages — — — — — — Other — — — — — — Total 23 36 1,642 1,701 4,657 6,358 Total loans and leases Commercial real estate: Owner occupied 420 — 113 533 235,056 235,589 Non-owner occupied — — — — 661,423 661,423 Land development — — — — 42,792 42,792 Construction 394 — — 394 179,447 179,841 Multi-family — — — — 320,072 320,072 1-4 family 100 — — 100 14,811 14,911 Commercial and industrial 930 572 1,445 2,947 727,872 730,819 Direct financing leases, net 281 14 84 379 15,364 15,743 Consumer and other: Home equity and second mortgages — — — — 4,223 4,223 Other — — — — 35,518 35,518 Total $ 2,125 $ 586 $ 1,642 $ 4,353 $ 2,236,578 $ 2,240,931 Percent of portfolio 0.09 % 0.03 % 0.07 % 0.19 % 99.81 % 100.00 % 22 Table of Contents The Corporation’s total impaired assets consisted of the following: June 30, 2022 December 31, 2021 (In Thousands) Non-accrual loans and leases Commercial real estate: Commercial real estate — owner occupied $ 113 $ 348 Commercial real estate — non-owner occupied — — Land development — — Construction — — Multi-family — — 1-4 family 33 339 Total non-accrual commercial real estate 146 687 Commercial and industrial 5,390 5,572 Direct financing leases, net 49 99 Consumer and other: Home equity and second mortgages — — Other — — Total non-accrual consumer and other loans — — Total non-accrual loans and leases 5,585 6,358 Foreclosed properties, net 124 164 Total non-performing assets 5,709 6,522 Performing troubled debt restructurings 188 217 Total impaired assets $ 5,897 $ 6,739 June 30, 2022 December 31, 2021 Total non-accrual loans and leases to gross loans and leases 0.24 % 0.28 % Total non-performing assets to total gross loans and leases plus foreclosed properties, net 0.25 0.29 Total non-performing assets to total assets 0.21 0.25 Allowance for loan and lease losses to gross loans and leases 1.05 1.09 Allowance for loan and lease losses to non-accrual loans and leases 431.58 382.76 As of June 30, 2022 and December 31, 2021, $ 615,000 and $ 627,000 of the non-accrual loans and leases were considered TDRs, respectively. The Corporation has allocated $ 138,000 and $ 134,000 of specific reserves to TDRs as of June 30, 2022 and December 31, 2021, respectively. There were no unfunded commitments associated with TDR loans and leases as of June 30, 2022. All loans and leases modified as TDRs 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. 23 Table of Contents The following table provides the number of loans modified as a TDR and the pre- and post-modification recorded investment by class of receivable for the three and six months ended June 30, 2021: For the Three Months Ended June 30, For the Six Months Ended June 30, 2021 2021 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 and industrial — — — 1 $ 56 $ 43 During the three and six months ended June 30, 2022, no loans were modified as a TDR. Restructured loan modifications may include payment schedule modifications, interest rate concessions, maturity date extensions, principal reduction, or some combination of these concessions. During the six months ended June 30, 2021, the modification of terms primarily consisted of payment schedule modifications. There were no loans modified as a TDR during the 12 months ended June 30, 2022 which subsequently defaulted during the three and six months ended June 30, 2022 and one with a recorded investment of $ 269,000 that defaulted during the three and six months ended June 30, 2021. Additionally, the Corporation worked with borrowers impacted by COVID-19 and provided modifications to include interest only deferrals and principal and interest deferrals. These modifications were excluded from TDR classification under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators. As of June 30, 2022, the Corporation had no deferrals outstanding. As of December 31, 2021, the Corporation had three deferrals outstanding, representing $ 293,000 in total loans. 24 Table of Contents The following represents additional information regarding the Corporation’s impaired loans and leases, including performing TDRs, by class: As of and for the Six Months Ended June 30, 2022 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 $ 113 $ 151 $ — $ 343 $ 13 $ 735 $ ( 722 ) Non-owner occupied — — — — — 1 ( 1 ) Land development — — — — — — — Construction — — — — — — — Multi-family — — — — — — — 1-4 family 33 38 — 193 6 29 ( 23 ) Commercial and industrial 3,998 4,099 — 4,256 135 45 90 Direct financing leases, net — — — 26 — 2 ( 2 ) Consumer and other: Home equity and second mortgages — — — — — — — Other — — — — — — — Total 4,144 4,288 — 4,818 154 812 ( 658 ) With impairment reserve recorded: Commercial real estate: Owner occupied — — — — — — — Non-owner occupied — — — — — — — Land development — — — — — — — Construction — — — — — — — Multi-family — — — — — — — 1-4 family — — — — — — — Commercial and industrial 1,580 1,580 1,205 1,142 51 1 50 Direct financing leases, net 49 49 49 49 1 — 1 Consumer and other: Home equity and second mortgages — — — — — — — Other — — — — — — — Total 1,629 1,629 1,254 1,191 52 1 51 Total: Commercial real estate: Owner occupied 113 151 — 343 13 735 ( 722 ) Non-owner occupied — — — — — 1 ( 1 ) Land development — — — — — — — Construction — — — — — — — Multi-family — — — — — — — 1-4 family 33 38 — 193 6 29 ( 23 ) Commercial and industrial 5,578 5,679 1,205 5,398 186 46 140 Direct financing leases, net 49 49 49 75 1 2 ( 1 ) Consumer and other: Home equity and second mortgages — — — — — — — Other — — — — — — — Grand total $ 5,773 $ 5,917 $ 1,254 $ 6,009 $ 206 $ 813 $ ( 607 ) (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. 25 Table of Contents As of and for the Year Ended December 31, 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 $ 348 $ 386 $ — $ 2,217 $ 145 $ 218 $ ( 73 ) Non-owner occupied — — — 2,281 233 16 217 Land development — — — 7 — — — Construction — — — — — — — Multi-family — — — — — — — 1-4 family 339 344 — 285 60 24 36 Commercial and industrial 3,717 3,819 — 7,914 522 179 343 Direct financing leases, net 15 15 — 2 1 — 1 Consumer and other: Home equity and second mortgages — — — 40 7 9 ( 2 ) Other — — — 8 23 — 23 Total 4,419 4,564 — 12,754 991 446 545 With impairment reserve recorded: Commercial real estate: Owner occupied — — — — — — — Non-owner occupied — — — — — — — Land development — — — — — — — Construction — — — — — — — Multi-family — — — — — — — 1-4 family — — — — — — — Commercial and industrial 2,072 2,072 1,439 1,456 109 8 101 Direct financing leases, net 84 84 66 50 4 — 4 Consumer and other: Home equity and second mortgages — — — — — — — Other — — — — — — — Total 2,156 2,156 1,505 1,506 113 8 105 Total: Commercial real estate: Owner occupied 348 386 — 2,217 145 218 ( 73 ) Non-owner occupied — — — 2,281 233 16 217 Land development — — — 7 — — — Construction — — — — — — — Multi-family — — — — — — — 1-4 family 339 344 — 285 60 24 36 Commercial and industrial 5,789 5,891 1,439 9,370 631 187 444 Direct financing leases, net 99 99 66 52 5 — 5 Consumer and other: Home equity and second mortgages — — — 40 7 9 ( 2 ) Other — — — 8 23 — 23 Grand total $ 6,575 $ 6,720 $ 1,505 $ 14,260 $ 1,104 $ 454 $ 650 (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. 26 Table of Contents The difference between the recorded investment of loans and leases and the unpaid principal balance of $ 144,000 and $ 145,000 as of June 30, 2022, and December 31, 2021, 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 $ 188,000 and $ 217,000 of loans as of June 30, 2022, and December 31, 2021, respectively, that were performing TDRs, 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, 2022 Commercial Real Estate Commercial and Industrial Consumer and Other Total (In Thousands) Beginning balance $ 13,765 $ 8,912 $ 992 $ 23,669 Charge-offs — ( 85 ) — ( 85 ) Recoveries 4,121 117 9 4,247 Net recoveries (charge-offs) 4,121 32 9 4,162 Provision for loan and lease losses ( 4,476 ) 922 ( 173 ) ( 3,727 ) Ending balance $ 13,410 $ 9,866 $ 828 $ 24,104 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) recoveries ( 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 27 Table of Contents As of and for the Six Months Ended June 30, 2022 Commercial Real Estate Commercial and Industrial Consumer and Other Total (In Thousands) Beginning balance $ 15,110 $ 8,413 $ 813 $ 24,336 Charge-offs — ( 107 ) — ( 107 ) Recoveries 4,237 201 19 4,457 Net recoveries (charge-offs) 4,237 94 19 4,350 Provision for loan and lease losses ( 5,937 ) 1,359 ( 4 ) ( 4,582 ) Ending balance $ 13,410 $ 9,866 $ 828 $ 24,104 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 (charge-offs) recoveries 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 28 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, 2022 Commercial Real Estate Commercial and Industrial Consumer and Other Total (In Thousands) Allowance for loan and lease losses: Collectively evaluated for impairment $ 13,410 $ 8,612 $ 828 $ 22,850 Individually evaluated for impairment — 1,254 — 1,254 Total $ 13,410 $ 9,866 $ 828 $ 24,104 Loans and lease receivables: Collectively evaluated for impairment $ 1,488,334 $ 749,454 $ 47,519 $ 2,285,307 Individually evaluated for impairment 146 5,627 — 5,773 Total $ 1,488,480 $ 755,081 $ 47,519 $ 2,291,080 As of December 31, 2021 Commercial Real Estate Commercial and Industrial Consumer and Other Total (In Thousands) Allowance for loan and lease losses: Collectively evaluated for impairment $ 15,110 $ 6,908 $ 813 $ 22,831 Individually evaluated for impairment — 1,505 — 1,505 Total $ 15,110 $ 8,413 $ 813 $ 24,336 Loans and lease receivables: Collectively evaluated for impairment $ 1,453,941 $ 740,674 $ 39,741 $ 2,234,356 Individually evaluated for impairment 687 5,888 — 6,575 Total $ 1,454,628 $ 746,562 $ 39,741 $ 2,240,931 Note 6 — Leases The Corporation leases various office spaces and specialized lending production offices under non-cancellable operating leases which expire on various dates through 2033. 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 2022, the Corporation entered into a new lease in the Southeast Wisconsin market resulting in a $ 1.6 million right-of-use asset. In addition, the Corporation received a $ 991,000 tenant improvement allowance which is recognized as a lease incentive and deducted from 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. During the first quarter 2022, the Corporation amended the sublease agreement and the amendment did not result in any impairment. 29 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, 2022 2021 2022 2021 (In Thousands) Operating lease cost $ 382 $ 374 $ 765 $ 749 Short-term lease cost 37 49 74 88 Variable lease cost 140 111 266 239 Less: sublease income ( 45 ) ( 43 ) ( 90 ) ( 82 ) Total lease cost, net $ 514 $ 491 $ 1,015 $ 994 Quantitative information regarding the Corporation’s operating leases was as follows: June 30, 2022 December 31, 2021 Weighted-average remaining lease term (in years) 6.84 5.05 Weighted-average discount rate 2.72 % 2.51 % The following maturity analysis shows the undiscounted cash flows due on the Corporation’s operating lease liabilities: (In Thousands) 2022 $ 832 2023 1,248 2024 1,073 2025 949 2026 935 Thereafter 3,003 Total undiscounted cash flows 8,040 Discount on cash flows ( 833 ) Total lease liability $ 7,207 Note 7 — Other Assets A summary of accrued interest receivable and other assets was as follows: June 30, 2022 December 31, 2021 (In Thousands) Accrued interest receivable $ 6,433 $ 5,497 Net deferred tax asset 7,870 6,175 Investment in historic development entities 2,369 2,299 Investment in low-income housing development entity 8,901 2,964 Investment in limited partnerships 11,435 9,874 Investment in Trust II — 315 Prepaid expenses 3,760 2,689 Other assets 8,100 9,577 Total accrued interest receivable and other assets $ 48,868 $ 39,390 As of March 30, 2022, the Corporation surrendered its common shares for no gain or loss and exited the Trust II entity, which was subsequently dissolved. Previously, the Corporation was 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. The investment in Trust II of $ 315,000 as of December 31, 2021 is included in accrued interest receivable and other assets. 30 Table of Contents Note 8 — Deposits The composition of deposits is shown below. Average balances represent year to date averages. June 30, 2022 December 31, 2021 Balance Average Balance Average Rate Balance Average Balance Average Rate (Dollars in Thousands) Non-interest-bearing transaction accounts $ 544,507 $ 559,793 — % $ 589,559 $ 536,981 — % Interest-bearing transaction accounts 466,785 517,923 0.23 530,225 506,693 0.19 Money market accounts 731,718 775,808 0.22 754,410 693,608 0.17 Certificates of deposit 114,000 63,098 0.54 54,091 47,020 0.84 Wholesale deposits 12,321 14,282 2.94 29,638 119,831 0.82 Total deposits $ 1,869,331 $ 1,930,904 0.19 $ 1,957,923 $ 1,904,133 0.19 A summary of annual maturities of in-market and wholesale certificates of deposit at June 30, 2022 is as follows: (In Thousands) Maturities during the year ended December 31, 2022 $ 90,092 2023 16,724 2024 16,541 2025 402 2026 490 Thereafter 2,072 $ 126,321 Wholesale deposits include $ 12.3 million of wholesale certificates of deposit and no non-reciprocal interest-bearing transaction accounts at June 30, 2022, compared to $ 19.6 million and $ 10.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at December 31, 2021. Deposits include $ 25.3 million and $ 7.9 million of certificates of deposit and wholesale deposits which are denominated in amounts greater than $250,000 at June 30, 2022 and December 31, 2021, respectively. Note 9 — 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, 2022 December 31, 2021 Balance Weighted Average Balance Weighted Average Rate Balance Weighted Average Balance Weighted Average Rate (Dollars in Thousands) Federal funds purchased $ — $ 22 2.01 % $ — $ — — % FHLB advances 554,100 417,518 1.29 % 368,800 376,781 1.30 % Line of credit — 171 2.76 500 78 2.90 Other borrowings 8,267 9,600 4.05 10,363 8,090 4.11 Subordinated notes payable 34,275 35,901 5.27 23,788 23,766 5.94 Junior subordinated notes (1) — 4,898 20.58 10,076 10,068 11.05 $ 596,642 $ 468,110 1.86 $ 413,527 $ 418,783 1.86 31 Table of Contents (1) Weighted average rate of junior subordinated notes reflects the accelerated amortization of subordinated debt issuance costs as a result of the early redemption of the junior subordinated notes during the first quarter of 2022. A summary of annual maturities of borrowings at June 30, 2022 is as follows: (In Thousands) Maturities during the year ended December 31, 2022 $ 338,300 2023 42,300 2024 35,500 2025 48,000 2026 60,000 Thereafter 72,542 $ 596,642 In September 2008, Trust II completed the sale of $ 10.0 million of 10.50 % fixed rate trust preferred securities (“Trust Preferred Securities”). Trust II also issued common securities of $ 315,000 . Trust II used the proceeds from the offering to purchase $ 10.3 million of 10.50 % junior subordinated notes of the Corporation. The Trust Preferred Securities are mandatorily redeemable upon the maturity of the junior subordinated notes on September 26, 2038. As of March 30, 2022 the junior subordinated notes were redeemed and the remaining unamortized debt issuance cost was accelerated due to the early redemption. As of December 31, 2021 the unamortized debt issuance cost included in junior subordinated notes on the Consolidated Balance Sheets was $ 239,000 . The Corporation issued a new subordinated note payable as of March 4, 2022. The principal amount of the newly issued subordinated note payable was $ 20.0 million which qualified as Tier 2 capital. The subordinated note bears a fixed interest rate of 3.50 % with a maturity date of March 15, 2032. The subordinated note payable has certain performance debt covenants of which the Corporation was in compliance. The Corporation may, at its option, redeem the note, in whole or part, at any time after the fifth anniversary of issuance. As of June 16, 2022, the $ 9.1 million subordinated notes payable that bore a fixed interest rate of 6.00 % were redeemed, and the remaining unamortized debt issuance cost was accelerated due to the early redemption. As of June 30, 2022, $ 725,000 of debt issuance costs remain in the subordinated note payable balance, of which $ 456,000 is related to the recently issued subordinated note. As of June 30, 2022, the Corporation had other borrowings of $ 8.2 million, which consisted of sold loans accounted for as secured borrowings because they did not qualify for true sale accounting. As of June 30, 2022 and December 31, 2021, 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, 2022, the Corporation pays a fee on this line of credit. During both the six months ended June 30, 2022 and 2021, the Corporation incurred interest expense of $ 6,600 due to this fee. Note 10 — Preferred Stock On March 4, 2022, the Corporation issued 12,500 shares, or $ 12.5 million in aggregate liquidation preference, of 7.0 % Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A, par value $ 0.01 per share, with a liquidation preference of $ 1,000 per share (the “Series A Preferred Stock”) in a private placement to institutional investors. The net proceeds received from the issuance of the Series A Preferred Stock were $ 12.0 million. The Corporation expects to pay dividends on the Series A Preferred Stock when and if declared by the Board, at a fixed rate of 7.0 % per annum, payable quarterly, in arrears, on March 15, June 15, September 15 and December 15 of each year up to, but excluding, March 15, 2027. For each dividend period from and including March 15, 2027, dividends will be paid at a floating rate of Three-Month Term Secured Overnight Financing Rate (“SOFR”) plus a spread of 539 basis points per annum. During the three and six months ended June 30, 2022, the Board of Directors declared a cash preferred stock dividend of $ 246,000 . The Series A Preferred Stock is perpetual and has no stated maturity. The Corporation may redeem the Series A Preferred Stock at its option at a redemption price equal to $ 1,000 per share, plus any declared and unpaid dividends (without regard to any undeclared dividends), subject to regulatory approval, on or after March 15, 2027 or within 90 days following a regulatory capital treatment event, in accordance with the terms of the Series A Preferred Stock. 32 Table of Contents 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) and 504 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 $ 673,000 at June 30, 2022, which is reported in accrued interest payable and other liabilities on the unaudited Consolidated Balance Sheets. The summary of the activity in the SBA recourse reserve is as follows: As of and for the Three Months Ended June 30, As of and for the Six Months Ended June 30, 2022 2021 2022 2021 (In Thousands) Balance at the beginning of the period $ 559 $ 593 $ 635 $ 723 SBA recourse provision 114 245 38 115 Charge-offs, net — ( 8 ) — ( 8 ) Balance at the end of the period $ 673 $ 830 $ 673 $ 830 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 33 Table of Contents particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Assets and liabilities measured at fair value on a recurring basis, segregated by fair value hierarchy level, are summarized below: June 30, 2022 Fair Value Measurements Using Level 1 Level 2 Level 3 Total (In Thousands) Assets: Securities available-for-sale: U.S. treasuries $ — $ 4,573 $ — $ 4,573 U.S. government agency securities - government-sponsored enterprises — 16,914 — 16,914 Municipal securities — 38,774 — 38,774 Residential mortgage-backed securities - government issued — 15,866 — 15,866 Residential mortgage-backed securities - government-sponsored enterprises — 95,958 — 95,958 Commercial mortgage-backed securities - government issued — 3,497 — 3,497 Commercial mortgage-backed securities - government-sponsored enterprises — 32,080 — 32,080 Other securities — 981 — 981 Interest rate swaps — 44,461 — 44,461 Liabilities: Interest rate swaps — 40,357 — 40,357 December 31, 2021 Fair Value Measurements Using Level 1 Level 2 Level 3 Total (In Thousands) Assets: Securities available-for-sale: U.S. treasuries $ — $ 4,914 $ — $ 4,914 U.S. government agency securities - government-sponsored enterprises — 19,935 — 19,935 Municipal securities — 30,957 — 30,957 Residential mortgage-backed securities - government issued — 19,661 — 19,661 Residential mortgage-backed securities - government-sponsored enterprises — 85,705 — 85,705 Commercial mortgage-backed securities - government issued — 5,771 — 5,771 Commercial mortgage-backed securities - government-sponsored enterprises — 36,531 — 36,531 Other securities — 2,228 — 2,228 Interest rate swaps — 26,343 — 26,343 Liabilities: Interest rate swaps — 28,283 — 28,283 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, 2022 or the year ended December 31, 2021 related to the above measurements. 34 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, 2022 Fair Value Measurements Using Level 1 Level 2 Level 3 Total (In Thousands) Impaired loans $ — $ — $ 720 $ 720 Foreclosed properties — — 124 124 Loan servicing rights — — 1,594 1,594 December 31, 2021 Fair Value Measurements Using Level 1 Level 2 Level 3 Total (In Thousands) Impaired loans $ — $ — $ 1,000 $ 1,000 Foreclosed properties — — 164 164 Loan servicing rights — — 1,601 1,601 Impaired loans were written down to the fair value of their underlying collateral less costs to sell of $ 720,000 and $ 1.0 million at June 30, 2022 and December 31, 2021, 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 8 % - 100 % as of the measurement date of June 30, 2022. The weighted average of those unobservable inputs was 32 %. 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. 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: 35 Table of Contents June 30, 2022 Carrying Amount Fair Value Total Level 1 Level 2 Level 3 (In Thousands) Financial assets: Cash and cash equivalents $ 95,484 $ 95,484 $ 95,484 $ — $ — Securities available-for-sale 208,643 208,643 — 208,643 — Securities held-to-maturity 13,968 13,849 — 13,849 — Loans held for sale 2,256 2,437 — 2,437 — Loans and lease receivables, net 2,265,996 2,258,728 — — 2,258,728 Federal Home Loan Bank stock 22,959 N/A N/A N/A N/A Accrued interest receivable 6,433 6,433 6,433 — — Interest rate swaps 44,461 44,461 — 44,461 — Financial liabilities: Deposits 1,869,331 1,869,191 1,743,010 126,181 — Federal Home Loan Bank advances and other borrowings 596,642 587,308 — 587,308 — Accrued interest payable 1,708 1,708 1,708 — — Interest rate swaps 40,357 40,357 — 40,357 — Off-balance sheet items: Standby letters of credit 116 116 — — 116 N/A = The fair value is not applicable due to restrictions placed on transferability December 31, 2021 Carrying Amount Fair Value Total Level 1 Level 2 Level 3 (In Thousands) Financial assets: Cash and cash equivalents $ 57,110 $ 57,110 $ 57,110 $ — $ — Securities available-for-sale 205,702 205,702 — 205,702 — Securities held-to-maturity 19,746 20,276 — 20,276 — Loans held for sale 3,570 3,927 — 3,927 — Loans and lease receivables, net 2,215,072 2,241,093 — — 2,241,093 Federal Home Loan Bank stock 13,336 N/A N/A N/A N/A Accrued interest receivable 5,497 5,497 5,497 — — Interest rate swaps 26,343 26,343 — 26,343 — Financial liabilities: Deposits 1,957,923 1,968,195 1,894,273 73,922 — Federal Home Loan Bank advances and other borrowings 403,451 409,894 — 409,894 — Junior subordinated notes 10,076 8,844 — — 8,844 Accrued interest payable 1,008 1,008 1,008 — — Interest rate swaps 28,283 28,283 — 28,283 — Off-balance sheet items: Standby letters of credit 203 203 — — 203 N/A = The fair value is not applicable due to restrictions placed on transferability 36 Table of Contents 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 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. 37 Table of Contents 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. As of June 30, 2022 and December 31, 2021, the credit valuation allowance was $ 191,000 . The Corporation receives fixed rates and pays floating rates based upon designated benchmark interest rates used on the swaps with commercial borrowers. Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements. The Corporation pays fixed rates and receives floating rates based upon designated benchmark interest rates used on the swaps with dealer counterparties. Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and are reported on the unaudited Consolidated Balance Sheet. The gross amount of dealer counterparty swaps, without regard to the enforceable master netting agreement, was a gross derivative liability of $ 3.2 million and $ 40.3 million gross derivative asset. No right of offset existed with the dealer counterparty swaps as of June 30, 2022. 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, 2022 and 2021 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. A pre-tax unrealized gain of $ 1.7 million and $ 5.7 million was recognized in other comprehensive income for the three and six months ended June 30, 2022, and there were no ineffective portions of these hedges. The Corporation also enters into interest rate swaps to mitigate market value volatility on certain long-term fixed securities. The objective of the hedge is to protect the Corporation against changes in fair value due to changes in benchmark interest rates. The instruments are designated as fair value hedges as the changes in the fair value of the interest rate swap are expected to offset changes in the fair value of the hedged item attributable to changes in the SOFR swap rate, the designated benchmark interest rate. 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 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. A pre-tax unrealized gain of $ 426,000 and $ 376,000 was recognized in other comprehensive income for the three and six months ended June 30, 2022 and there was no ineffective portion of these hedges. 38 Table of Contents As of June 30, 2022 Number of Instruments Notional Amount Weighted Average Maturity (In Years) Fair Value (Dollars in Thousands) Included in Derivative assets Derivatives not designated as hedging instruments Interest rate swap agreements on loans with commercial loan customers 12 $ 131,393 8.91 $ 3,215 Interest rate swap agreements on loans with third-party counter parties 81 646,078 8.12 37,142 Derivatives designated as hedging instruments Interest rate swap related to AFS securities 11 $ 12,500 9.78 $ 377 Interest rate swap related to FHLB borrowings 12 $ 124,400 3.19 $ 3,727 Included in Derivative liabilities Derivatives not designated as hedging instruments Interest rate swap agreements on loans with commercial loan customers 69 $ 514,685 7.92 $ 40,357 As of December 31, 2021 Number of Instruments Notional Amount Weighted Average Maturity (In Years) Fair Value (Dollars in Thousands) Included in Derivative assets Derivatives not designated as hedging instruments Interest rate swap agreements on loans with commercial loan customers 41 $ 411,913 8.18 $ 26,343 Included in Derivative liabilities Derivatives not designated as hedging instruments Interest rate swap agreements on loans with commercial loan customers 39 $ 228,676 8.70 $ 6,595 Interest rate swap agreements on loans with third-party counter parties 80 640,589 8.37 19,748 Derivatives designated as hedging instruments Interest rate swap related to FHLB borrowings 10 $ 106,000 3.17 $ 1,940 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 Board 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 39 Table of Contents 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 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. Quantitative 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. 40 Table of Contents As of June 30, 2022, 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, 2022 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 $ 309,573 11.56 % $ 214,312 8.00 % $ 281,285 10.50 % N/A N/A First Business Bank 301,151 11.25 214,190 8.00 281,125 10.50 $ 267,738 10.00 % Tier 1 capital (to risk-weighted assets) Consolidated $ 250,331 9.34 % $ 160,734 6.00 % $ 227,707 8.50 % N/A N/A First Business Bank 276,184 10.32 160,643 6.00 227,577 8.50 $ 214,190 8.00 % Common equity tier 1 capital (to risk-weighted assets) Consolidated $ 238,339 8.90 % $ 120,551 4.50 % $ 187,523 7.00 % N/A N/A First Business Bank 276,184 10.32 120,482 4.50 187,417 7.00 $ 174,030 6.50 % Tier 1 leverage capital (to adjusted assets) Consolidated $ 250,331 9.19 % $ 108,923 4.00 % $ 108,923 4.00 % N/A N/A First Business Bank 276,184 10.15 108,823 4.00 108,823 4.00 $ 136,029 5.00 % As of December 31, 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 $ 281,745 10.82 % $ 208,337 8.00 % $ 273,443 10.50 % N/A N/A First Business Bank 280,448 10.78 208,142 8.00 273,187 10.50 $ 260,178 10.00 % Tier 1 capital (to risk-weighted assets) Consolidated $ 232,795 8.94 % $ 156,253 6.00 % $ 221,358 8.50 % N/A N/A First Business Bank 255,286 9.81 156,107 6.00 221,151 8.50 $ 208,142 8.00 % Common equity tier 1 capital (to risk-weighted assets) Consolidated $ 222,719 8.55 % $ 117,190 4.50 % $ 182,295 7.00 % N/A N/A First Business Bank 255,286 9.81 117,080 4.50 182,124 7.00 $ 169,116 6.50 % Tier 1 leverage capital (to adjusted assets) Consolidated $ 232,795 8.94 % $ 104,145 4.00 % $ 104,145 4.00 % N/A N/A First Business Bank 255,286 9.81 104,045 4.00 104,045 4.00 $ 130,056 5.00 % 41 Table of Contents