What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-02-22 compared with 2022-02-23 · 389 added, 257 removed, 1672 unchanged (28% of the section changed)

24 unchanged sentences

Premises and equipment, net 4,340 1,694

Foreclosed properties 164 34

Repossessed assets 95 164

Right-of-use assets, net 7,690 4,910

15 unchanged sentences

Stockholders’ equity:

Preferred stock, $ 0.01 par value, 2,500,000 shares authorized, none issued or outstanding

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 or outstanding at December 31, 2022 and 2021, respectively

Common stock, $ 0.01 par value, 25,000,000 shares authorized, 9,371,078 and 9,326,361 shares issued, 8,362,085 and 8,457,564 shares outstanding at December 31, 2022 and 2021, respectively

12 unchanged sentences

For the Year Ended December 31,

2022 2021 2020

(In Thousands, Except Share Data)

17 unchanged sentences

Loan fees 3,010 2,506 1,826

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

Bank-owned life insurance income 2,227 1,413 1,402

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

11 unchanged sentences

FDIC insurance 1,042 1,143 1,238

Collateral liquidation costs 265 328

Net loss on foreclosed properties 15 383

Impairment of tax credit investments — — 2,395

SBA recourse benefit ( 76 ) ( 278 )

Loss on early extinguishment of debt — 744

Other non-interest expense 2,393 2,407 4,220

3 unchanged sentences

Net income $ 40,858 $ 35,755 $ 16,978

Preferred stock dividend 683 — —

Income available to common shareholders $ 40,175 $ 35,755 $ 16,978

Earnings per common share:

6 unchanged sentences

For the Year Ended December 31,

2022 2021 2020

(In Thousands)

15 unchanged sentences

Consolidated Statements of Changes in Stockholders’ Equity

Common Shares Outstanding Common

Common Shares Outstanding Preferred Stock Common

Stock Additional

21 unchanged sentences

Balance at December 31, 2021 8,457,564 — 93 85,797 170,020 ( 1,457 ) ( 22,031 ) 232,422

Net income — — — — 40,858 — — 40,858

Other comprehensive loss — — — — — ( 13,853 ) — ( 13,853 )

Issuance of preferred stock, net of issuance costs — 11,992 — — — — — 11,992

Share-based compensation - restricted shares and employee stock purchase plan 75,564 — 1 2,583 — — — 2,584

Issuance of common stock under the employee stock purchase plan 4,535 — — 134 — — — 134

Treasury stock re-issued — — — ( 1,002 ) — — 1,002 —

Preferred stock dividends — — — — ( 683 ) — — ( 683 )

Cash dividends ($ 0.79 per share)

— — — — ( 6,688 ) — — ( 6,688 )

Treasury stock purchased ( 175,578 ) — — — — ( 6,126 ) ( 6,126 )

Balance at December 31, 2022 8,362,085 11,992 $ 94 $ 87,512 $ 203,507 $ ( 15,310 ) $ ( 27,155 ) $ 260,640

See accompanying Notes to Consolidated Financial Statements.

2 unchanged sentences

For the Year Ended December 31,

2022 2021 2020

(In Thousands)

3 unchanged sentences

Deferred income taxes, net ( 775 ) 1,223 ( 2,007 )

Impairment of tax credit investments — 2,395

Tax credit investments (recovery) impairment ( 351 ) — 2,395

Provision for loan and lease losses ( 3,868 ) ( 5,803 ) 16,808

SBA recourse benefit ( 76 ) ( 278 )

Derivative credit valuation adjustment ( 270 ) 461

Depreciation, amortization and accretion, net 4,066 3,554 3,465

2 unchanged sentences

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

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

Increase in value of bank-owned life insurance policies ( 1,413 ) ( 1,402 )

Amortization of tax credit investments 1,035 — —

Gain on sale of tax credits — — ( 275 )

Bank-owned life insurance policy income ( 2,227 ) ( 1,413 ) ( 1,402 )

Origination of loans for sale ( 124,915 ) ( 99,266 ) ( 81,609 )

1 unchanged sentence

Gain on sale of loans originated for sale ( 2,537 ) ( 4,044 ) ( 2,899 )

Net loss on foreclosed properties, including impairment valuation 15 383

Gain on sale of community development entity 1 —

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

Net loss on repossessed assets, including impairment valuation ( 429 ) 15 383

Return on investment in limited partnerships 721 371 —

Excess tax benefit (expense) from share-based compensation 264 48 ( 32 )

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

Payments received on operating leases 170 113

Net payments on operating lease liabilities ( 1,470 ) ( 1,431 ) ( 1,444 )

Net increase in accrued interest receivable and other assets ( 7,728 ) ( 6,745 ) ( 11,131 )

6 unchanged sentences

Purchases of available-for-sale securities ( 75,740 ) ( 93,019 ) ( 66,879 )

Proceeds from sale of foreclosed properties — 2,582

Proceeds from sale of repossessed assets 71 — 2,582

Net increase in loans and leases ( 199,467 ) ( 86,660 ) ( 439,223 )

1 unchanged sentence

Returns of investments in limited partnerships 17 32 211

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

Investment in historic development entities — ( 3,254 )

Distribution from historic development entities 57 30

Proceeds from sale of historic development entity state tax credit — 2,529

Investment in tax credit investments ( 11,454 ) ( 2,964 ) ( 3,254 )

Distribution from tax credit investments 474 57 30

Proceeds from the sale of tax credits — — 2,529

Investment in Federal Home Loan Bank and Federal Reserve Bank Stock ( 45,660 ) ( 7,439 ) ( 20,509 )

4 unchanged sentences

Premium payment on bank owned life insurance policies ( 50 ) — ( 25 )

Proceeds from bank owned life insurance claim 1,859 — —

Proceeds from redemption of Trust II stock 315 — —

Net cash used in investing activities ( 245,267 ) ( 111,012 ) ( 454,507 )

1 unchanged sentence

Net increase in deposits 210,283 102,407 325,137

For the Year Ended December 31,

(In Thousands)

Repayment of Federal Home Loan Bank advances ( 2,374,849 ) ( 814,000 ) ( 1,219,944 )

1 unchanged sentence

Loss on early extinguishment of debt — — 744

For the Year Ended December 31,

2022 2021 2020

(In Thousands)

Proceeds from issuance of subordinated notes payable 20,000 — —

Repayment of subordinated notes payable ( 9,090 ) — —

Repayment of junior subordinated debt ( 10,076 ) — —

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

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

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

Net (decrease) increase in long-term borrowed funds ( 5,132 ) 9,998 300

Cash dividends paid ( 6,688 ) ( 6,166 ) ( 5,652 )

Preferred stock dividends paid ( 683 ) — —

Proceeds from issuance of common stock under ESPP 134 160 66

Proceeds from issuance of preferred stock 11,992 — —

Purchase of treasury stock ( 6,126 ) ( 5,478 ) ( 1,672 )

Net cash provided by financing activities 252,194 75,221 417,679

Net decrease in cash and cash equivalents 201 ( 10,193 )

Net increase (decrease) in cash and cash equivalents 45,572 201 ( 10,193 )

Cash and cash equivalents at the beginning of the period 57,110 56,909 67,102

3 unchanged sentences

Interest paid on deposits and borrowings $ 20,110 $ 13,206 $ 18,412

Income taxes paid 14,519 3,451

Net income taxes paid 8,038 14,519 3,451

Non-cash investing and financing activities:

Transfer of loans to foreclosed properties 146 80

Remeasurement of lease liability 316 190

Transfer of loans to repossessed assets 50 146 80

Lease liability in exchange for right-of-use-asset 6,265 316 190

See accompanying Notes to Consolidated Financial Statements.

8 unchanged sentences

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

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

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 December 31, 2022, FBB had the following wholly-owned subsidiaries:

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

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

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

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

Basis of Presentation.

1 unchanged sentence

All significant intercompany balances and transactions have been eliminated in consolidation.

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

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, level of the Small Business Administration (“SBA”) recourse reserve, and income taxes.

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

30 unchanged sentences

Loans and leases which management has the intent and ability to hold for the foreseeable future or until maturity are reported at their outstanding principal balance with adjustments for partial charge-offs, the allowance for loan and lease losses, deferred fees or costs on originated loans and leases, and unamortized premiums or discounts on any purchased loans.

A loan or a lease is accounted for as a troubled debt restructuring if the Corporation, for economic or legal reasons related to the borrower’s financial condition, grants a concession to the borrower that it would not otherwise consider.

A loan or a lease is accounted for as a troubled debt restructuring (“TDRs”) if the Corporation, for economic or legal reasons related to the borrower’s financial condition, grants a concession to the borrower that it would not otherwise consider.

A troubled debt restructuring may involve the receipt of assets from the debtor in partial or full satisfaction of the loan or lease or a modification of terms, such as a reduction of the stated interest rate or face amount of the loan or lease, a reduction of accrued interest, an extension of the maturity date at a stated interest rate lower than the current market rate for a new loan or lease with similar risk, or some combination of these concessions.

19 unchanged sentences

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

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

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

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

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

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

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

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

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

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

Allowance for Loan and Lease Losses.

39 unchanged sentences

Improvements which extend the useful life are capitalized and depreciated over the remaining useful life of the assets.

Foreclosed Properties.

Repossessed Assets.

Property acquired by repossession, foreclosure, or by deed in lieu of foreclosure is recorded at the fair value of the underlying property, less costs to sell.

This fair value becomes the new cost basis for the foreclosed property.

This fair value becomes the new cost basis for the repossessed asset.

Any write-down in the carrying value of a loan or lease at the time of acquisition is charged to the allowance for loan and lease losses.

1 unchanged sentence

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

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

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

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

2 unchanged sentences

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

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

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

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

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

Bank-Owned Life Insurance.

14 unchanged sentences

Goodwill and Other Intangible Assets.

Goodwill and other intangible assets consist primarily of goodwill, core deposit intangibles, and loan servicing rights.

Goodwill and other intangible assets consist primarily of goodwill and loan servicing rights.

Core deposit intangibles have estimated finite lives and are amortized on an accelerated basis to expense over a period of seven years.

41 unchanged sentences

The Corporation establishes SBA recourse reserves on the guaranteed portions of sold SBA loans.

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

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

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

The general reserve methodology is based on the evaluation of several factors, including but not limited to:

credit quality trends within the SBA portfolio, changes in underlying collateral, and the Corporation’s ability to originate, fund, or service sold SBA loans in accordance with SBA regulations.

The recourse reserve is reported in accrued interest payable and other liabilities on the Consolidated Balance Sheets.

A reserve is established for loans that present a collateral shortfall and it is probable that the guaranty associated with the sold portion of the SBA loan is ineligible.

In the ordinary course of business, the Corporation sells the guaranteed portions of SBA loans to third parties.

The Corporation has a continuing involvement in each of the transferred lending arrangements by way of relationship management, servicing the loans, as well as being subject to normal and customary requirements of the SBA loan program;

The Corporation has a continuing involvement in each of the transferred lending arrangements by way of relationship management, servicing the

loans, as well as being subject to normal and customary requirements of the SBA loan program;

however, there are no further obligations to the third-party participant required of the Corporation, other than standard representations and warranties related to sold amounts.

19 unchanged sentences

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

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

For the year ended December 31, 2022, no realized securities gains or losses were recognized, and for the year ended December 31, 2021, realized securities gains of $ 29,000 , and was reclassified out of accumulated other comprehensive loss.

Earnings Per Common Share.

13 unchanged sentences

Share-Based Compensation.

The Corporation may grant restricted stock awards, restricted stock units, and other stock based awards to plan participants, subject to forfeiture upon the occurrence of certain events until the dates specified in the

participant’s award agreement.

The Corporation accounts for forfeitures as they occur.

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.

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.

Dividend equivalent units with respect to restricted stock grants made after January 2023 will be deferred at paid at the time of vesting.

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

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

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

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

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

2 unchanged sentences

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

The restricted stock awards issued to executive officers will vest ratably over a three-year period.

Compensation expense is recognized for performance-based restricted stock units over the requisite service and performance period of generally three years for the entire expected award on a straight-line basis.

10 unchanged sentences

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.

2 unchanged sentences

” 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 will be deferring adoption.

As a smaller reporting company, the Corporation elected to defer adoption.

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

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

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

During the fourth quarter of 2022 and first quarter of 2023, management had the model validated by a third party, performed a full parallel run, and finalized the methodology, processes and internal controls.

Management’s model utilizes national GDP and unemployment as inputs to the reasonable and supportable forecast.

Management estimates the adoption will result in an initial increase to allowance for credit losses, including the allowance for unfunded commitments, of approximately $1.0 million to $4.0 million.

The actual impact at adoption will depend on the composition of the loan portfolio as well as the economic environment and forecasts as of the adoption date.

In March 2020, the FASB issued ASU No.

4 unchanged sentences

In January 2021, the FASB issued ASU 2021-01 which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.

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

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

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

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

The Corporation adopted this standard in the fourth quarter 2022.

The Corporation utilized available optional expedients to simplify accounting analyses for contract modifications and allow hedging relationships to continue without de-designation where there are qualifying changes in the critical terms.

The adoption of this standard did not have material effect on the Corporation’s operating results or financial condition.

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 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.

Note 2 – Cash and Cash Equivalents

21 unchanged sentences

$ 239,751 $ 160 $ ( 27,887 ) $ 212,024

$ 205,699 $ 2,072 $ ( 2,069 ) $ 205,702

As of December 31, 2021

3 unchanged sentences

Available-for-sale:

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

government agency securities - government-sponsored enterprises

36 unchanged sentences

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 issued

represent securities guaranteed by the Government National Mortgage Association.

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

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

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

There were seven sales of available-for-sale securities in 2021 and one sale in 2020.

There were no sales of available-for-sale securities that occurred during the year ended December 31, 2022.

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

For the Year Ended December 31,

2022 2021 2020

(In Thousands)

17 unchanged sentences

Such securities have not experienced credit rating downgrades;

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

At December 31, 2021, the Corporation held three available-for-sale securities that have been in a continuous unrealized loss position for twelve months or greater.

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

At December 31, 2022, the Corporation held 45 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.

28 unchanged sentences

Available-for-sale:

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

government agency obligations - government-sponsored enterprises

2 unchanged sentences

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

41,277 629 4,249 155 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

$ 102,993 $ 1,914 $ 4,249 $ 155 $ 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 December 31, 2022 and 2021.

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

At December 31, 2022, the Corporation held 40 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.

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

At December 31, 2022, the Corporation held one held-to-maturity security that had been in a continuous loss position for twelve months or greater.

11 unchanged sentences

$ 6,035 $ 52 $ 267 $ 18 $ 6,302 $ 70

Residential mortgage-backed securities - government issued

1,518 107 — — 1,518 107

Residential mortgage-backed securities - government-sponsored enterprises

1,444 93 — — 1,444 93

Commercial mortgage backed securities - government-sponsored enterprises 1,904 102 — — 1,904 102

$ 10,901 $ 354 $ 267 $ 18 $ 11,168 $ 372

December 31, 2021

7 unchanged sentences

$ — $ — $ 284 $ 3 $ 284 $ 3

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

26 unchanged sentences

Loans and leases receivable, net $ 2,418,836 $ 2,215,072

As of December 31, 2021 and 2020, the Corporation had $ 27.9 million and $ 228.9 million, respectively, in gross PPP loans outstanding included in the commercial and industrial loan category and deferred processing fees outstanding of $ 557,000 and $ 3.5 million, respectively, included in deferred loan fees.

As of December 31, 2022 and 2021, the Corporation had $ 554,000 and $ 27.9 million, respectively, in gross PPP loans outstanding included in the commercial and industrial loan category and deferred processing fees outstanding of $ 48,000 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.

20 unchanged sentences

As of December 31, 2022 and 2021, the total amount of the Corporation’s partial ownership of these transferred loans on the Consolidated Balance Sheets was $ 339.0 million and $ 314.5 million, respectively.

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

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

As of December 31, 2022 and 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 Consolidated Balance Sheets as of December 31, 2021 and $ 410,000 as of December 31, 2020.

There were no loan participations purchased on the Consolidated Balance Sheets as of December 31, 2022 and 2021.

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

5 unchanged sentences

Repayments ( 1,560 ) ( 914 )

Change due to status of executive officers and directors ( 160 ) —

Balance at end of year $ 224 $ 1,288

54 unchanged sentences

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

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

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

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

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.

117 unchanged sentences

Total non-accrual loans and leases 3,659 6,358

Foreclosed properties, net 164 34

Repossessed assets, net 95 164

Total non-performing assets 3,754 6,522

3 unchanged sentences

Total non-accrual loans and leases to gross loans and leases 0.15 % 0.28 %

Total non-performing assets to total gross loans and leases plus foreclosed properties, net 0.29 1.24

Total non-performing assets to total gross loans and leases plus repossessed assets, net 0.15 0.29

Total non-performing assets to total assets 0.13 0.25

1 unchanged sentence

Allowance for loan and lease losses to non-accrual loans and leases 662.20 382.76

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

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

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

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

As of December 31, 2022 and 2021, $ 30,000 and $ 627,000 of the non-accrual loans and leases were considered TDRs, respectively.

As of December 31, 2022 and 2021, the Corporation allocated $ 0 and $ 134,000 of specific reserves to TDRs, respectively.

There were no unfunded commitments associated with TDR loans and leases as of December 31, 2022.

All loans and leases modified as a TDR 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.

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

The following table provides the number of loans modified as TDRs and the pre- and post-modification recorded investment by class of receivable:

For the Year Ended December 31,

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Investment Post-Modification

Investment Number of Loans Pre-Modification

Investment Post-Modification

(Dollars in Thousands)

Commercial real estate:

Commercial real estate — owner occupied

— $ — $ — 2 $ 299 $ 272

Commercial and industrial 3 $ 239 $ 217

Total 3 $ 239 $ 217 6 $ 6,585 $ 1,167

For the year ended December 31, 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.

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

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

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

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

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

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

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

There were no loans modified as a TDR during the previous 12 months which subsequently defaulted during the year ended December 31, 2022 and one with a recorded investment of $ 280,000 that defaulted during the year ended December 31, 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 December 31, 2022, the Corporation had no deferrals outstanding.

As of December 31, 2021, the Corporation had three deferrals outstanding, representing $ 293,000 in total loans.

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

As of and for the Year Ended December 31, 2022

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

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

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

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

As of and for the Year Ended December 31, 2020

Investment (1)

Balance Impairment

Reserve Average

Investment (2)

Income Interest

Recognized Net Foregone

(In Thousands)

With no impairment reserve recorded:

Commercial real estate:

Owner occupied $ 4,338 $ 4,365 $ — $ 4,565 $ 291 $ 72 $ 219

Non-owner occupied 3,783 6,563 — 1,519 486 — 486

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

Construction — — — — — — —

Multi-family — — — — — — —

1-4 family 46 51 — 307 31 141 ( 110 )

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

Direct financing leases, net — — — 89 — — —

Consumer and other:

Home equity and second mortgages

— — — 1 — — —

Other 21 688 — 85 41 — 41

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

With impairment reserve recorded:

Commercial real estate:

Owner occupied 1,091 4,792 471 2,349 384 — 384

Non-owner occupied — — — — — — —

Land development — — — — — — —

Construction — — — — — — —

Multi-family — — — — — — —

1-4 family 250 250 29 21 — — —

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

Direct financing leases, net 49 49 49 39 3 — 3

Consumer and other:

Home equity and second mortgages

40 40 7 — 1 — 1

Other — — — — — — —

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

Commercial real estate:

Owner occupied 5,429 9,157 471 6,914 675 72 603

Non-owner occupied 3,783 6,563 — 1,519 486 — 486

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

Construction — — — — — — —

Multi-family — — — — — — —

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

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

Direct financing leases, net 49 49 49 128 3 — 3

Consumer and other:

Home equity and second mortgages 40 40 7 1 1 — 1

Other 21 688 — 85 41 — 41

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

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

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

The difference between the recorded investment of loans and leases and the unpaid principal balance of $ 26,000 and $ 145,000 as of December 31, 2022 and 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 $ 156,000 and $ 217,000 of loans as of December 31, 2022 and 2021, respectively, that were performing TDRs, and although not on non-accrual, were reported as impaired due to the concession in terms.

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.

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Recoveries 3,935 1,168 23 5,126

Net recoveries (charge-offs) 3,679 ( 2,059 ) ( 2 ) 1,618

Provision for loan and lease losses ( 5,726 ) ( 121 ) 44 ( 5,803 )

Ending balance $ 15,110 $ 8,413 $ 813 $ 24,336

As of and for the Year Ended December 31, 2020

Real Estate Commercial

Industrial Consumer

and Other Total

(In Thousands)

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

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

Recoveries 4 325 3 332

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

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The Corporation leases equipment under direct financing leases expiring in future years.

Some of these leases provide for additional rents based on use in excess of a stipulated minimum number of hours and generally allow the lessees to purchase the equipment for fair value at the end of the lease term.

Some of these leases provide for additional rents and generally allow the lessees to purchase the equipment for fair value at the end of the lease term.

Future aggregate maturities of minimum lease payments to be received are as follows:

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Depreciation expense was $ 578,000 , $ 585,000 , and $ 822,000 for the years ended December 31, 2022, 2021, and 2020, respectively.

During 2022, the Corporation relocated its Southeastern Wisconsin office.

This resulted in additional leasehold improvements and equipment of $ 1.8 million and $ 602,000 , respectively.

Note 6 – Leases

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

During 2021, the Corporation extended the term of two of its office spaces by one and three years, resulting in a $ 316,000 increase in the right-of-use assets in exchange for a lease liability.

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

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

In November 2022, the Corporation relocated its Southeast Wisconsin office resulting in a $ 1.6 million right-of-use asset and $ 2.5 million lease liability.

The Corporation received a $ 991,000 tenant improvement allowance related to this lease, which is recognized as a lease incentive and deducted from the right-of-use asset.

In October 2022, the Corporation also entered into a new lease in the Kansas City metropolitan area that will begin in June 2023, resulting in a $ 2.6 million right-of-use asset and $ 3.7 million lease liability.

The Corporation received a $ 1.1 million tenant improvement allowance related to this lease.

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

During the first quarter of 2022, the Corporation amended the sublease agreement and the amendment did not result in any impairment.

The components of total lease expense were as follows:

For the Year Ended December 31,

2022 2021 2020

(In Thousands)

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

December 31, 2021 December 31, 2020

December 31, 2022 December 31, 2021 December 31, 2020

Weighted-average remaining lease term (in years)

8.06 5.05 5.80

Weighted-average discount rate

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Goodwill is not amortized, but is subject to impairment tests on an annual basis and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount (including goodwill).

At December 31, 2021 and 2020, the Corporation had goodwill of $ 10.7 million, which was related to the acquisition of Alterra in 2014.

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

At December 31, 2022 and 2021, the Corporation had goodwill of $ 10.7 million, which was related to the acquisition of Alterra Bank in 2014.

The Corporation conducted its annual impairment test on December 31, 2022, utilizing a qualitative assessment, and concluded that it was more likely than not the estimated fair value of the reporting unit exceeded its carrying value, resulting in no impairment.

Other Intangible Assets

The Corporation has intangible assets that are amortized consisting of loan servicing rights and core deposit intangibles.

The Corporation has intangible assets that are amortized consisting of loan servicing rights.

Loan servicing rights are recognized upon sale of the guaranteed portions of SBA loans with servicing rights retained.

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

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

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

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

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

During the year ended December 31, 2022, the Corporation

recognized $ 1,000 of impairment expense.

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

Note 8 – Other Assets

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The Corporation is not the general partner, does not have controlling ownership, and is not the primary beneficiary in any of these limited partnerships and the limited partnerships have not been consolidated.

These investments are accounted for using the equity method of accounting and are evaluated for impairment at the end of each reporting period.

These investments are accounted for using the equity and proportional amortization method of accounting and are evaluated for impairment at the end of each reporting period.

Historic Rehabilitation Tax Credits

The Corporation invests in development entities through BOC, Mitchell Street, and FBB Tax Credit, wholly-owned subsidiaries of FBB, to rehabilitate historic buildings.

The Corporation invests in development entities through BOC Investment, LLC (“BOC”), Mitchell Street, and FBB Tax Credit, wholly-owned subsidiaries of FBB, to rehabilitate historic buildings.

On June 30, 2022, the Corporation exercised the put option and exited the BOC entity.

As of December 31, 2022, the Corporation had no remaining investment in the BOC.

At December 31, 2022 and 2021, the net carrying value of the investments were $ 2.2 million and $ 2.3 million, respectively.

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

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

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

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

During the year ended December 31, 2020, the Corporation received $ 2.7 million in state tax credits, which were sold to a third party resulting in $ 275,000 gain on sale.

Low-Income Housing Tax Credits

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

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

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

These investments are accounted for using the proportional amortization method of accounting.

At December 31, 2022 and 2021, the net carrying value of the investments were $ 13.5 million and $ 3.0 million, respectively.

During 2022 and 2021, the Corporation invested $ 11.5 million and $ 3.0 million in these partnerships, respectively.

During 2022, the Corporation recognized $ 1.4 million in tax benefit and $ 1.0 million in amortization related to these partnerships.

During 2021, the Corporation did not recognize any tax benefit or amortization related to these partnerships.

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

New Market Tax Credits

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

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

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

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

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

Other Investments

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

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

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

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

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

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

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

The Corporation’s equity investment in mezzanine funds, consisting of Aldine Capital Fund II, LP, Aldine Capital Fund III, LP, and Aldine Capital Fund IV, LP, totaled $ 12.8 million and $ 9.4 million as of December 31, 2022 and 2021, respectively.

As of December 31, 2022, the Corporation has $ 6.4 million remaining of the original $ 15.0 million commitment to these partnerships.

The Corporation’s share of these partnerships’ income included in other non-interest income in the Consolidated Statements of Income for the years ended December 31, 2022, 2021 and 2020 was $ 3.0 million, $ 2.5 million, and $ 520,000 , respectively.

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

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

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

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

There were no losses related to these investments during the year ended December 31, 2022.

The Corporation’s equity investment in Dane Workforce Housing Fund LLC, a Wisconsin limited liability company focused on community development by providing affordable workforce housing units in Dane County, Wisconsin, totaled $ 653,000 and $ 367,000 as of December 31, 2022 and 2021, respectively.

As of December 31, 2022, the Corporation had a $ 320,000 commitment remaining of the original $ 1.0 million.

The Corporation’s share of the investment fund’s income included in other non-interest income in the Consolidated Statements of Income for the year ended December 31, 2022 and 2021 was $ 8,000 and $ 2,000 , respectively.

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

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

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

There were no losses for the year ended December 31, 2022.

During 2020, the Corporation had no income or loss activity related to this investment.

The Corporation’s equity investment in BankTech Ventures, LP, a venture capital fund, focused on the community banking industry through strategic investments in growth-stage startups that directly support community banking needs, totaled $ 154,000 and $ 120,000 as of December 31, 2022 and 2021, respectively.

The Corporation had a $ 780,000 commitment remaining of the original $ 1.0 million as of December 31, 2022.

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

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

For the years ended December 31, 2022, 2021, and 2020, there was no income included in other non-interest income in the Consolidated Statements of Income related to this investment.

The Corporation’s share of these partnerships’ losses included in other non-interest expense in the Consolidated Statements of Income for the year ended December 31, 2022 was $ 21,000 .

During 2021 and 2020, the Corporation had no loss activity related to this investment.

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 and 2020 is included in accrued interest receivable and other assets.

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.

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

5 unchanged sentences

Investment in low-income housing development entity 13,514 2,964

Investment in a community development entity — 5,306

Investment in limited partnerships 13,599 9,874

20 unchanged sentences

2023 $ 234,750

Thereafter 2,072

Wholesale deposits include $ 187.2 million and $ 15.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at December 31, 2022, compared to $ 19.6 million and $ 10.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts at December 31, 2021.

9 unchanged sentences

Federal funds purchased $ — $ 14 7.42 % $ — $ — — %

Federal Reserve PPPLF — — — — 15,207 0.35

FHLB advances

6 unchanged sentences

— 2,429 20.75 10,076 10,068 11.05

$ 456,808 $ 460,438 2.12 $ 413,527 $ 418,783 1.86

(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 December 31, 2022 is as follows:

6 unchanged sentences

There were $ 416.4 million of term FHLB advances outstanding at December 31, 2022 with stated fixed interest rates ranging from 0.31 % to 4.69 % compared to $ 368.8 million of term FHLB advances outstanding at December 31, 2021 with stated fixed interest rates ranging from 0.00 % to 2.51 %.

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

The term FHLB advances outstanding at December 31, 2022 are due at various dates through July 2027.

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

1 unchanged sentence

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

As of December 31, 2021, the line of credit carried an interest rate of LIBOR + 2.75 % with an interest rate floor of 2.85 % that matured on February 19, 2021 and had certain performance debt covenants of which the Corporation was in compliance.

As of December 31, 2022, the line of credit carried an interest rate of SOFR + 2.36% that matured on February 19, 2023 and had certain performance debt covenants of which the Corporation was in compliance.

The Corporation pays a commitment fee on this senior line of credit.

For the years ended December 31, 2022, 2021, and 2020 the Corporation incurred $ 13,000 additional interest expense due to this fee.

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

There was no outstanding balance on the line of credit as of December 31, 2022.

On February 20, 2023, the credit line was renewed for one additional year with pricing terms of 1-month term SOFR + 2.36 % and a maturity date of February 19, 2024.

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

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

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

The Corporation issued a new subordinated note payable as of March 4, 2022.

The principal amount of the newly issued subordinated note was $ 20.0 million which qualified as Tier II 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 financial performance covenants, with which the Corporation was in compliance as of December 31, 2022.

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.

The Corporation also has another series of subordinated notes payable, which qualify as Tier II capital.

At December 31, 2022, $ 15.0 million bore a fixed interest rate of 5.50 % with a maturity date of August 15, 2029.

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

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

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

In September 2008, Trust II completed the sale of $ 10.0 million of 10.50 % fixed rate trust preferred securities (“Preferred Securities”).

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

As of December 31, 2022, $ 659,000 of debt issuance costs remain in the subordinated note payable balance, of which $ 409,000 is related to the recently issued subordinated note.

At December 31, 2022, the aggregate principal amount of subordinated notes payable outstanding was $ 34.3 million.

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 (“Notes”) of the Corporation.

The Preferred Securities are mandatorily redeemable upon the maturity of the Notes on September 26, 2038.

The Preferred Securities qualify under the risk-based capital guidelines as Tier 1 capital for regulatory purposes.

Per the provisions of the Dodd-Frank Act, bank holding companies with total assets of less than $15 billion are not required to phase out trust preferred securities as an element of Tier 1 capital as other, larger institutions must.

The Corporation used the proceeds from the sale of the Notes for general corporate purposes including providing additional capital to its subsidiaries.

As of December 31, 2021, $ 239,000 of debt issuance costs remain reflected in junior subordinated notes on the Consolidated Balance Sheets.

The Corporation has the right to redeem the Notes at each interest payment date on or after September 26, 2013.

The Corporation also has the right to redeem the Notes, in whole but not in part, after the occurrence of certain special events.

Special events are limited to:

(1) a change in capital treatment resulting in the inability of the Corporation to include the Notes in Tier 1 capital, (2) a change in laws or regulations that could require Trust II to register as an investment company under the Investment Company Act of 1940, as amended;

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

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

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

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

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

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

Trust II used the proceeds from the offering to purchase $ 10 million of 10.50 % junior subordinated notes of the Corporation.

The Trust Preferred Securities were 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 Sheet was $ 293,000 .

As of December 31, 2022, the Corporation had other borrowings of $ 6.1 million, which consisted of sold loans accounted for as secured borrowings because they did not qualify for true sale accounting.

Note 11 — 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 year ended December 31, 2022, the Board of Directors declared preferred stock cash dividends of $ 683,000 .

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.

Note 12 – Regulatory Capital

3 unchanged sentences

The Corporation regularly reviews and updates, when appropriate, its Capital and Liquidity Action Plan, which is designed to help ensure appropriate capital adequacy, to plan for future capital needs, and to ensure that the Corporation serves as a source of financial strength to the Bank.

The Corporation’s and the Bank’s Boards of Directors and management teams adhere to the appropriate regulatory guidelines on decisions which affect their respective capital positions, including but not limited to, decisions relating to the payment of dividends and increasing indebtedness.

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”).

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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.

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:

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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.

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

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.

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For the Year Ended December 31,

2022 2021 2020

(Dollars in Thousands, Except Share Data)

1 unchanged sentence

Net income $ 40,858 $ 35,755 $ 16,978

preferred stock dividends 683 — —

earnings allocated to participating securities 1,106 1,053 423

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

At the 2021 annual shareholders meeting, an amendment to the 2019 equity plan was approved, increasing the number of shares in the Plan by 180,000.

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

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 December 31, 2022, 134,812 shares were available for future grants under the Plan.

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

The Corporation may issue new shares and shares from its treasury stock for shares delivered under the Plan.

Restricted Stock

Under the Plan, the Corporation may grant restricted stock awards, restricted stock units, and other stock based awards to plan participants, subject to forfeiture upon the occurrence of certain events until the dates specified in the participant’s award agreement.

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, RSA 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.

Dividend equivalent units with respect to restricted stock grants made after January 2023 will be deferred at paid at the time of vesting.

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

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

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

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

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 PRSU 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 restricted stock awards issued to executive officers will vest ratably over a three-year period.

Compensation expense is recognized for performance based restricted stock units over the requisite service and performance period of generally three years for the entire expected award on a straight-line basis.

The compensation expense for the awards expected to vest for the percentage of performance based restricted stock units subject to the ROAE metric will be adjusted if there is a change in the expectation of ROAE.

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

Restricted stock activity was as follows:

For the Year Ended December 31,

Number of Restricted Shares Weighted

Fair Value Number of

Shares Weighted

Nonvested balance at beginning of year 187,804 $ 24.29 176,935 $ 22.51

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 PRSU 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, 2022, 2021, and 2020 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, 2020 152,277 $ 22.37 21,510 $ 26.77 3,148 $ 20.36 176,935 $ 22.51

57,305 24.08 18,060 31.32 3,410 25.82 78,775 25.82

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Forfeited ( 11,002 ) 22.86 — — — — ( 11,002 ) 22.86

Nonvested balance as of end of year 209,789 24.62 187,804 24.29

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

Nonvested balance as of December 31, 2020 143,246 23.04 39,570 28.85 4,988 24.08 187,804 24.29

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

62,560 34.04 37,335 24.71 3,115 27.95 103,010 30.47

Vested ( 62,353 ) 23.21 ( 43,020 ) 18.91 ( 2,062 ) 23.20 ( 107,435 ) 21.49

Forfeited ( 8,507 ) 26.15 — — — — ( 8,507 ) 26.15

Nonvested balance as of December 31, 2022 133,317 $ 27.95 57,435 $ 32.89 6,105 $ 25.92 196,857 $ 29.32

Unrecognized compensation cost (in thousands) $ 2,516 $ 1,041 $ 91 $ 3,648

Weighted average remaining recognition period (in years) 2.43 1.75 1.70 2.22

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

The number of shares actually issued may vary.

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

During the year ended December 31, 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 Company is authorized to issue up to 250,000 shares of common stock under the ESPP.

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.

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For the Year Ended December 31,

2022 2021 2020

(In Thousands)

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

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

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

The Corporation made a matching contribution of 3 % to all eligible employees which totaled $ 1.1 million, $ 987,000 , and $ 896,000 for the years ended December 31, 2022, 2021, and 2020, respectively.

Discretionary profit sharing contributions for substantially all employees of 5.2 %, or $ 1.6 million, 4.7 %, or $ 1.3 million, and 5.0 %, or $ 1.2 million, were made in 2022, 2021, and 2020, respectively.

As of December 31, 2022, 2021, and 2020, the Corporation had a deferred compensation plan under which it provided contributions to supplement the retirement income of one executive.

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For the Year Ended December 31,

2022 2021 2020

(In Thousands)

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State ( 42 ) ( 110 ) ( 329 )

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

Deferred tax (benefit) expense ( 775 ) 1,223 ( 2,007 )

Total income tax expense $ 11,386 $ 11,275 $ 1,327

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Allowance for loan and lease losses $ 6,267 $ 6,312

SBA recourse reserve 215 302

Deferred compensation 2,342 2,016

State net operating loss carryforwards 265 436

Write-down of foreclosed properties 5 —

Tax credit carryforwards — 1,831

Write-down of repossessed assets 11 5

Non-accrual loan interest 47 176

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Unrealized losses on securities 5,263 501

Share-based compensation 725 618

Other 125 216

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

December 31, 2021 December 31, 2020

December 31, 2022 December 31, 2021 December 31, 2020

(In Thousands)

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Deferred taxes allocated to other comprehensive income ( 4,761 ) ( 181 ) 143

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

Deferred income tax benefit (expense) $ 775 $ ( 1,223 ) $ 2,007

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

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Year Ended December 31,

2022 2021 2020

(Dollars in Thousands)

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Tax credits, net ( 338 ) — ( 2,535 )

Share-based compensation ( 392 ) — —

Section 162(m) limitation 118 — —

Other ( 138 ) 55 123

Total income tax expense $ 11,386 $ 11,275 $ 1,327

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

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

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

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

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

As of December 31, 2022 and 2021 the credit valuation allowance was $ 38,000 and $ 191,000 , respectively.

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.

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

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

At December 31, 2021, the aggregate amortizing notional value of interest rate swaps with dealer counterparties was also $ 640.6 million.

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

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

Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and are reported on the Consolidated Balance Sheet as a net derivative liability of $ 19.7 million.

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

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 asset of $ 61.4 million and gross derivative liability of $ 1.0 million.

No right of offset existed with the dealer counterparty swaps as of December 31, 2022.

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

All changes in 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 years ended December 31, 2022, 2021, and 2020 had an insignificant impact on the 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.

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

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

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

As of December 31, 2021, the aggregate notional value of interest rate swaps designated as cash flow hedges was $ 106.0 million.

These interest rate swaps mature between December 2022 and December 2027.

A pre-tax unrealized loss of $ 3.6 million was recognized in other comprehensive income for the year ended December 31, 2021 and there was no ineffective portion of these hedges.

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

Interest Rate Swap Contracts

Asset Derivatives Liability Derivatives

Balance Sheet Location Fair Value Balance Sheet Location Fair Value

(In Thousands)

A pre-tax unrealized gain of $ 8.5 million and $ 3.6 million was recognized in other comprehensive income for the year ended December 31, 2022 and 2021, while a pre-tax unrealized loss of $ 3.0 million was recognized in other comprehensive income for the year ended December 31, 2020, 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.

A pre-tax unrealized gain of $ 602,000 was recognized in other comprehensive income for the year ended December 31, 2022 and there was no ineffective portion of these hedges.

No pre-tax unrealized gain or loss was recognized in other comprehensive income for the years ended December 31, 2021 and 2020.

As of December 31, 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

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

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

Interest rate swap agreements on loans with commercial loan customers 2 $ 65,352 4.83 $ 1,010

Interest rate swap agreements on loans with third-party counter parties 84 744,233 7.37 60,409

Derivatives designated as hedging instruments

December 31, 2021 Accumulated other comprehensive income (1)

$ 1,940 Derivatives $ 1,940

December 31, 2020 Accumulated other comprehensive income (1)

$ 5,550 Derivatives $ 5,550

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

Interest rate swap related to AFS securities 11 $ 12,500 9.28 $ 602

Interest rate swap related to FHLB borrowings 11 116,400 2.88 6,560

Included in Derivative liabilities

Derivatives not designated as hedging instruments

Interest rate swap agreements on loans with commercial loan customers 82 $ 678,881 7.61 $ 61,419

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 18 – Commitments and Contingencies

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Generally, standby letters of credit expire within one year and are collateralized by accounts receivable, equipment, inventory, and commercial properties.

The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients.

The credit risk involved in issuing letters of credit is essentially the same as that involved

in extending loan facilities to clients.

The fair value of standby letters of credit is recorded as a liability when the standby letter of credit is issued.

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

The Corporation sells the guaranteed portions of SBA 7(a) loans, as well as participation interests in other, non-SBA originated, loans to third parties.

The Corporation sells the guaranteed portions of SBA 7(a) 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.

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Fair value is defined as the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date and is based on exit prices.

Fair value includes assumptions about risk,

such as nonperformance risk in liability fair values, and is a market-based measurement, not an entity-specific measurement.

Fair value includes assumptions about risk, such as nonperformance risk in liability fair values, and is a market-based measurement, not an entity-specific measurement.

The standard describes three levels of inputs that may be used to measure fair value.

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Commercial mortgage-backed securities - government-sponsored enterprises — 26,377 — 26,377

Other securities — 2,228 — 2,228

Interest rate swaps — 68,581 — 68,581

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Securities available-for-sale:

treasuries $ — $ 4,914 $ — $ 4,914

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

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Impaired loans $ — $ — $ 1,022 $ 1,022

Foreclosed properties — — 164 164

Repossessed assets — — 95 95

Loan servicing rights — — 1,491 1,491

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Impaired loans $ — $ — $ 1,000 $ 1,000

Foreclosed properties — — 34 34

Repossessed assets — — 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 $ 1.0 million and $ 17.2 million at December 31, 2021 and 2020, respectively, through the establishment of specific reserves or by recording charge-offs when the carrying value exceeded the fair value of the underlying collateral of impaired loans.

Impaired loans were written down to the fair value of their underlying collateral less costs to sell of $ 1.0 million at December 31, 2022 and 2021 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.

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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.

Repossessed assets, 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 repossessed asset.

The fair value of a repossessed asset, 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.

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(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.

Loan servicing rights are classified in Level 3 of the fair value hierarchy due to the nature of the valuation inputs.

Fair Value of Financial Instruments

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Federal Home Loan Bank advances and other borrowings 456,808 440,242 — 440,242 —

Junior subordinated notes 10,076 8,844 — — 8,844

Accrued interest payable 4,053 4,053 4,053 — —

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Premises and equipment, net 66 76

Right-of-use assets — 3,797

Other assets 1,239 2,045

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Junior subordinated notes and other borrowings $ 34,341 $ 34,364

Lease liabilities — 4,114

Accrued interest payable and other liabilities 3,562 969

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For the Year Ended December 31,

2022 2021 2020

(In Thousands)

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Loss before income tax benefit and equity in undistributed net income of consolidated subsidiaries

4,065 5,835 5,693

Income tax benefit 1,387 1,483 1,388

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For the Year Ended December 31,

2022 2021 2020

(In Thousands)

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Payments on operating lease liabilities — — ( 560 )

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

Net increase (decreases) in other liabilities 2,592 ( 2,090 ) ( 574 )

Other, net ( 538 ) 3,413 560

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Dividends received from subsidiaries 2,008 8,534 12,034

Proceeds from redemption of Trust II stock 315 — —

Net cash provided by investing activities 2,323 8,534 12,034

Financing activities

Net increase in long-term borrowed funds 55 55

Net (decrease) increase in long-term borrowed funds ( 357 ) 55 55

Proceeds from issuance of subordinated notes payable 20,000 — —

Repayment of subordinated notes payable ( 9,090 ) — —

Repayment of junior subordinated debentures ( 10,076 ) — —

Proceeds from issuance of preferred stock 11,992 — —

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

Purchase of treasury stock ( 6,126 ) ( 5,477 ) ( 1,672 )

Preferred stock dividends paid ( 683 ) — —

Cash dividends paid ( 6,688 ) ( 6,166 ) ( 5,652 )

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12,556 14,041 14,803 10,844 11,470 12,017 10,747 12,796

Income tax expense (benefit)

2,879 2,819 2,512 3,065 1,254 1,143 ( 1,928 ) 858

Income tax expense 2,400 3,215 3,599 2,172 2,879 2,819 2,512 3,065

Net income $ 10,156 $ 10,826 $ 11,204 $ 8,672 $ 8,591 $ 9,198 $ 8,235 $ 9,731

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

(the "Corporation") as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements").

(the "Corporation") as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements").

We also have audited the Corporation’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework:

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Corporation as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Corporation as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework:

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

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

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

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

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

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

• Evaluation of the reasonableness of management’s judgments related to the assessed level of risk for the qualitative factors and the resulting allocation to the allowance;

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

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/s/ Crowe LLP

We have served as the Company’s auditor since 2017, which is the year the engagement letter was signed for the audit of the 2018 financial statements.

We have served as the Corporation’s auditor since 2017, which is the year the engagement letter was signed for the audit of the 2018 financial statements.

Oak Brook, Illinois

2 unchanged sentences

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data