FIRST BUSINESS FINANCIAL SERVICES, INC. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF FIRST BUSINESS FINANCIAL SERVICES Consolidated Financial Statements Page No. Consolidated Balance Sheets as of December 31, 2022 and 2021 67 Consolidated Statements of Income for the Years Ended December 31, 202 2, 2021, and 2020 68 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021 , and 2020 69 Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 202 2, 2021, and 2020 70 Consolidated Statements of Cash Flows for the Years Ended December 31, 202 2, 2021, and 2020 71 Notes to Consolidated Financial Statements 73 Report of Independent Registered Public Accounting Firm (PCAOB ID 173 ) 123 66 Table of Contents First Business Financial Services, Inc. Consolidated Balance Sheets December 31, 2022 December 31, 2021 (In Thousands, Except Share Data) Assets Cash and due from banks $ 25,811 $ 9,697 Short-term investments 76,871 47,413 Cash and cash equivalents 102,682 57,110 Securities available-for-sale, at fair value 212,024 205,702 Securities held-to-maturity, at amortized cost 12,635 19,746 Loans held for sale 2,632 3,570 Loans and leases receivable, net of allowance for loan and lease losses of $ 24,230 and $ 24,336 , respectively 2,418,836 2,215,072 Premises and equipment, net 4,340 1,694 Repossessed assets 95 164 Right-of-use assets, net 7,690 4,910 Bank-owned life insurance 54,018 53,600 Federal Home Loan Bank stock, at cost 17,812 13,336 Goodwill and other intangible assets 12,159 12,268 Derivatives 68,581 26,343 Accrued interest receivable and other assets 63,107 39,390 Total assets $ 2,976,611 $ 2,652,905 Liabilities and Stockholders’ Equity Deposits $ 2,168,206 $ 1,957,923 Federal Home Loan Bank advances and other borrowings 456,808 403,451 Junior subordinated notes — 10,076 Lease liabilities 10,175 5,406 Derivatives 61,419 28,283 Accrued interest payable and other liabilities 19,363 15,344 Total liabilities 2,715,971 2,420,483 Stockholders’ equity: Preferred stock, Series A; $ 0.01 par value, 7 % non-cumulative perpetual preferred stock liquidation preference $ 1,000 per share, 2,500,000 shares authorized, 12,500 and no shares issued or outstanding at December 31, 2022 and 2021, respectively 11,992 — 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 94 93 Additional paid-in capital 87,512 85,797 Retained earnings 203,507 170,020 Accumulated other comprehensive loss ( 15,310 ) ( 1,457 ) Treasury stock, 1,008,993 and 868,797 shares at December 31, 2022 and 2021, respectively, at cost ( 27,155 ) ( 22,031 ) Total stockholders’ equity 260,640 232,422 Total liabilities and stockholders’ equity $ 2,976,611 $ 2,652,905 See accompanying Notes to Consolidated Financial Statements. 67 Table of Contents First Business Financial Services, Inc. Consolidated Statements of Income For the Year Ended December 31, 2022 2021 2020 (In Thousands, Except Share Data) Interest income Loans and leases $ 115,368 $ 91,844 $ 89,160 Securities 4,472 3,410 4,187 Short-term investments 1,531 741 832 Total interest income 121,371 95,995 94,179 Interest expense Deposits 13,178 3,553 8,922 Federal Home Loan Bank advances and other borrowings 9,267 6,667 7,070 Junior subordinated notes 504 1,113 1,116 Total interest expense 22,949 11,333 17,108 Net interest income 98,422 84,662 77,071 Provision for loan and lease losses ( 3,868 ) ( 5,803 ) 16,808 Net interest income after provision for loan and lease losses 102,290 90,465 60,263 Non-interest income Private wealth management service fees 10,881 10,784 8,611 Gain on sale of Small Business Administration loans 2,537 4,044 2,899 Service charges on deposits 3,849 3,837 3,415 Loan fees 3,010 2,506 1,826 Bank-owned life insurance income 2,227 1,413 1,402 Net gain (loss) on sale of securities — 29 ( 4 ) Swap fees 1,793 1,368 6,860 Other non-interest income 5,131 4,119 1,931 Total non-interest income 29,428 28,100 26,940 Non-interest expense Compensation 57,742 51,710 45,850 Occupancy 2,358 2,180 2,252 Professional fees 4,881 3,736 3,530 Data processing 3,197 3,087 2,734 Marketing 2,354 2,022 1,580 Equipment 1,091 990 1,199 Computer software 4,416 4,260 3,900 FDIC insurance 1,042 1,143 1,238 Impairment of tax credit investments — — 2,395 Other non-interest expense 2,393 2,407 4,220 Total non-interest expense 79,474 71,535 68,898 Income before income tax expense 52,244 47,030 18,305 Income tax expense 11,386 11,275 1,327 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: Basic $ 4.75 $ 4.17 $ 1.97 Diluted 4.75 4.17 1.97 Dividends declared per share 0.79 0.72 0.66 See accompanying Notes to Consolidated Financial Statements. 68 Table of Contents First Business Financial Services, Inc. Consolidated Statements of Comprehensive Income For the Year Ended December 31, 2022 2021 2020 (In Thousands) Net income $ 40,858 $ 35,755 $ 16,978 Other comprehensive (loss) income Securities available-for-sale: Unrealized securities (losses) gains arising during the period ( 27,730 ) ( 4,312 ) 3,526 Reclassification adjustment for net (gain) loss realized in net income — ( 29 ) 4 Securities held-to-maturity: Amortization of net unrealized losses transferred from available-for-sale 14 26 39 Interest rate swaps: Unrealized gains (losses) on interest rate swaps arising during the period 9,102 3,610 ( 3,011 ) Income tax benefit (expense) 4,761 181 ( 143 ) Total other comprehensive (loss) income ( 13,853 ) ( 524 ) 415 Comprehensive income $ 27,005 $ 35,231 $ 17,393 See accompanying Notes to Consolidated Financial Statements. 69 Table of Contents First Business Financial Services, Inc. Consolidated Statements of Changes in Stockholders’ Equity Common Shares Outstanding Preferred Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total (In Thousands, Except Share Data) Balance at January 1, 2020 8,566,044 — $ 92 $ 81,188 $ 129,105 $ ( 1,348 ) $ ( 14,881 ) $ 194,156 Net income — — — — 16,978 — — 16,978 Other comprehensive income — — — — — 415 — 415 Share-based compensation - restricted shares and employee stock purchase plan 67,773 — — 1,871 — — — 1,871 Issuance of common stock under the employee stock purchase plan 3,967 — — 66 — — — 66 Cash dividends ($ 0.66 per share) — — — — ( 5,652 ) — — ( 5,652 ) Treasury stock purchased ( 70,824 ) — — — — — ( 1,672 ) ( 1,672 ) Balance at December 31, 2020 8,566,960 — 92 83,125 140,431 ( 933 ) ( 16,553 ) 206,162 Net income — — — — 35,755 — — 35,755 Other comprehensive loss — — — — — ( 524 ) — ( 524 ) Share-based compensation - restricted shares and employee stock purchase plan 85,370 — 1 2,512 — — — 2,513 Issuance of common stock under the employee stock purchase plan 6,531 — — 160 — — — 160 Cash dividends ($ 0.72 per share) — — — — ( 6,166 ) — — ( 6,166 ) Treasury stock purchased ( 201,297 ) — — — — — ( 5,478 ) ( 5,478 ) 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. 70 Table of Contents First Business Financial Services, Inc. Consolidated Statements of Cash Flows For the Year Ended December 31, 2022 2021 2020 (In Thousands) Operating activities Net income $ 40,858 $ 35,755 $ 16,978 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes, net ( 775 ) 1,223 ( 2,007 ) Tax credit investments (recovery) impairment ( 351 ) — 2,395 Provision for loan and lease losses ( 3,868 ) ( 5,803 ) 16,808 Depreciation, amortization and accretion, net 4,066 3,554 3,465 Share-based compensation 2,584 2,513 1,871 Net loss on disposal of fixed assets — 78 — Net (gain) loss on sale of securities — ( 29 ) 4 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 ) Sale of SBA loans originated for sale 128,391 108,435 81,018 Gain on sale of loans originated for sale ( 2,537 ) ( 4,044 ) ( 2,899 ) 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 ) 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 ) Net increase in accrued interest payable and other liabilities 5,026 2,731 4,512 Net cash provided by operating activities 38,645 35,992 26,635 Investing activities Proceeds from maturities, redemptions and paydowns of available-for-sale securities 40,835 51,166 58,290 Proceeds from maturities, redemptions and paydowns of held-to-maturity securities 7,080 6,586 6,268 Proceeds from sale of available-for-sale securities — 14,955 839 Purchases of available-for-sale securities ( 75,740 ) ( 93,019 ) ( 66,879 ) Proceeds from sale of repossessed assets 71 — 2,582 Net increase in loans and leases ( 199,467 ) ( 86,660 ) ( 439,223 ) Investments in limited partnerships ( 1,508 ) ( 1,059 ) ( 1,986 ) Returns of investments in limited partnerships 17 32 211 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 ) Proceeds from the sale of Federal Home Loan Bank Stock 41,184 7,680 14,884 Purchases of leasehold improvements and equipment, net ( 3,223 ) ( 391 ) ( 264 ) Proceeds from sale of leasehold improvements and equipment, net — 44 — Purchases of bank owned life insurance policies — — ( 8,000 ) 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 ) Financing activities Net increase in deposits 210,283 102,407 325,137 Repayment of Federal Home Loan Bank advances ( 2,374,849 ) ( 814,000 ) ( 1,219,944 ) Proceeds from Federal Home Loan Bank advances 2,422,429 788,300 1,318,700 Loss on early extinguishment of debt — — 744 71 Table of Contents 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 (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 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 Cash and cash equivalents at the end of the period $ 102,682 $ 57,110 $ 56,909 Supplementary cash flow information Cash paid during the period for: Interest paid on deposits and borrowings $ 20,110 $ 13,206 $ 18,412 Net income taxes paid 8,038 14,519 3,451 Non-cash investing and financing activities: 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. 72 Table of Contents First Business Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 – Nature of Operations and Summary of Significant Accounting Policies Nature of Operations. The accounting and reporting practices of First Business Financial Services, Inc. (“FBFS” or the “Corporation”), through our wholly-owned subsidiary, First Business Bank (“FBB” or the “Bank”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). FBB operates as a commercial banking institution primarily in Wisconsin and the greater Kansas City metropolitan area. The Bank provides a full range of financial services to businesses, business owners, executives, professionals, and high net worth individuals. FBB also offers bank consulting services to community banks. The Bank is subject to competition from other financial institutions and service providers, and is also subject to state and federal regulations. As of December 31, 2022, FBB had the following wholly-owned subsidiaries: First Business Specialty Finance, LLC (“FBSF”), First Madison Investment Corp. (“FMIC”), ABKC Real Estate, LLC (“ABKC”), FBB Real Estate 2, LLC (“FBB RE 2”), Mitchell Street Apartments Investment, LLC (“Mitchell Street”), and FBB Tax Credit Investment LLC (“FBB Tax Credit”). Basis of Presentation. The Consolidated Financial Statements include the accounts of the Corporation and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. In accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 810, the Corporation’s ownership interest in FBFS Statutory Trust II (“Trust II”) was not consolidated into the financial statements. As of March 30, 2022, the Bank’s trust preferred securities were redeemed and Trust II was subsequently dissolved. Management of the Corporation is required to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that could significantly change in the near-term include the value of securities and interest rate swaps, level of the allowance for loan and lease losses, lease residuals, property under operating leases, goodwill, and income taxes. Certain amounts in prior periods may have been reclassified to conform to the current presentation. Subsequent events have been evaluated through the date of the issuance of the Consolidated Financial Statements. No significant subsequent events have occurred through this date requiring adjustment to the financial statements or disclosures. Cash and Cash Equivalents. The Corporation considers federal funds sold, interest-bearing deposits, and short-term investments that have original maturities of three months or less to be cash equivalents. Securities. The Corporation classifies its investment and mortgage-related securities as available-for-sale, held-to-maturity, and trading. Debt securities that the Corporation has the positive intent and ability to hold to maturity are classified as held-to-maturity and are stated at amortized cost. Debt securities bought expressly for the purpose of selling in the near term are classified as trading securities and are measured at fair value with unrealized gains and losses reported in earnings. Debt securities not classified as held-to-maturity or as trading are classified as available-for-sale. Available-for-sale securities are measured at fair value with unrealized gains and losses reported as a separate component of stockholders’ equity, net of tax. Realized gains and losses, and declines in value deemed to be other than temporary, are included in the Consolidated Statements of Income as a component of non-interest income. The cost of securities sold is based on the specific identification method. The Corporation did not hold any trading securities at December 31, 2022 or 2021. Discounts and premiums on securities are accreted and amortized into interest income using the effective yield method over the estimated life (based on maturity date, call date, or weighted average life) of the related security. Declines in the fair value of investment securities (with certain exceptions for debt securities noted below) that are deemed to be other-than-temporary are charged to earnings as a realized loss and a new cost basis for the securities is established. In evaluating other-than-temporary impairment, management considers the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value in the near term. Declines in the fair value of debt securities below amortized cost are deemed to be other-than-temporary in circumstances where: (1) the Corporation has the intent to sell a security; (2) it is more likely than not that the Corporation will be required to sell the security before recovery of its amortized cost basis; or (3) the Corporation does not expect to recover the entire amortized cost basis of the security. If the Corporation intends to sell a security or if it is more likely than not that the Corporation will be required to sell the security before recovery, an other-than-temporary impairment write-down is recognized in earnings equal to the difference between the security’s amortized cost basis and its fair value. If the Corporation does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the other-than-temporary impairment write-down is separated into an amount representing credit loss, which is recognized in earnings, and an amount related to all other factors, which is recognized in other comprehensive income. 73 Table of Contents Loans Held for Sale. The guaranteed portions of SBA loans which are originated and intended for sale in the secondary market are classified as held for sale. These loans are carried at the lower of cost or fair value in the aggregate. Unrealized losses on such loans are recognized through a valuation allowance by a charge to other non-interest income. Gains and losses on the sale of loans are also included in other non-interest income. As assets specifically originated for sale, the origination of, disposition of, and gain/loss on these loans are classified as operating activities in the Consolidated Statement of Cash Flows. Fees received from the borrower and direct costs to originate the loans are deferred and recognized as part of the gain or loss on sale. There was $ 2.6 million and $ 3.6 million in loans held for sale outstanding at December 31, 2022 and 2021, respectively. Loans and Leases. 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 (“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. Restructured loans can involve loans remaining on non-accrual, moving to non-accrual, or continuing on accrual status, depending on individual facts and circumstances. Non-accrual restructured loans are included and treated with all other non-accrual loans. In addition, all accruing restructured loans are reported as troubled debt restructurings which are considered and accounted for as impaired loans. Generally, restructured loans remain on non-accrual until the borrower has attained a sustained period of repayment performance under the modified loan terms (generally a minimum of six months). However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms and whether the loan should be returned to or maintained on accrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains on non-accrual. The CARES Act (as modified by the Consolidated Appropriations Act, 2021) permitted banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs if the loan was not more than 30 days delinquent as of December 31, 2019 and the modification was made before January 1, 2022. Interagency guidance from the federal bank regulatory agencies regarding TDRs has also been issued in response to COVID-19 and is generally consistent with the relief granted under the CARES Act. The Corporation is applying this statutory and regulatory guidance to qualifying loan modifications. Interest on non-impaired loans and leases is accrued and credited to income on a daily basis based on the unpaid principal balance and is calculated using the effective interest method. Per policy, a loan or a lease is considered impaired and placed on non-accrual status when it becomes 90 days past due or it is doubtful that contractual principal and interest will be collected in accordance with the terms of the contract. A loan or lease is determined to be past due if the borrower fails to meet a contractual payment and will continue to be considered past due until all contractual payments are received. When a loan or lease is placed on non-accrual, the interest accrual is discontinued and previously accrued but uncollected interest is deducted from interest income. If collectability of the contractual principal and interest is in doubt, payments received are first applied to reduce the loan principal. If collectability of the contractual payments is not in doubt, payments may be applied to interest for interest amounts due on a cash basis. As soon as it is determined with certainty that the principal of an impaired loan or lease is uncollectable, either through collections from the borrower or disposition of the underlying collateral, the portion of the carrying balance that exceeds the estimated measurement value of the loan or lease is charged off. Loans or leases are returned to accrual status when they are brought current in terms of both principal and accrued interest due, have performed in accordance with contractual terms for a reasonable period of time, and when the ultimate collectability of total contractual principal and interest is no longer doubtful. Transfers of assets, including but not limited to the guaranteed portions of SBA loans and participation interests in other, non-SBA originated loans, that upon completion of the transfer satisfy the conditions to be reported as a sale, including legal isolation, are derecognized from the Consolidated Financial Statements. Transfers of assets that upon completion of the transfer do not meet the conditions of a sale are recorded on a gross basis with a secured borrowing identified to reflect the amount of the transferred interest. 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 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 74 Table of Contents 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. The allowance for loan and lease losses is maintained at a level that management deems appropriate to absorb probable and estimable losses inherent in the loan and lease portfolios. The methodology applied for determining inherent losses stems from current risk characteristics of the loan and lease portfolio, an assessment of individual impaired loans and leases, actual loss experience, and adverse situations that may affect the borrower’s ability to repay. The methodology also focuses on evaluation of several factors for each portfolio category, including but not limited to: 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. Impaired and other loans and leases have risk characteristics that are unique to an individual borrower and the loss must be estimated on an individual basis. Loans and leases that are not individually reviewed and measured for impairment are aggregated and historical loss statistics are primarily used to determine the risk of loss. The measurement of the estimate of loss is reliant upon historical experience, information about the ability of the individual debtor to pay, and the appraisal of loan collateral in light of current economic conditions. An estimate of loss is an approximation of what portion of all amounts receivable, according to the contractual terms of that receivable, is deemed uncollectible. Determination of the allowance is inherently subjective because it requires estimation of amounts and timing of expected future cash flows on impaired loans and leases, estimation of losses on types of loans and leases based on historical losses, and consideration of current economic trends, both local and national. Based on management’s periodic review using all previously mentioned pertinent factors, a provision for loan and lease losses is charged to expense when it is determined an increase in the allowance for loan and lease losses is appropriate. A negative provision for loan and lease losses may be recognized if management determines a reduction in the level of allowance for loan and lease losses is appropriate. Loan and lease losses are charged against the allowance and recoveries are credited to the allowance. The allowance for loan and lease losses contains specific allowances established for expected losses on impaired loans and leases. Impaired loans and leases are defined as loans and leases for which, based on current information and events, it is probable that the Corporation will be unable to collect scheduled principal and interest payments according to the contractual terms of the loan or lease agreement. Loans and leases subject to impairment are defined as non-accrual and restructured loans and leases. Impaired loans and leases are evaluated on an individual basis to determine the amount of specific reserve or charge-off required, if any. The measurement value of impaired loans and leases is determined based on the present value of expected future cash flows discounted at the loan’s effective interest rate (the contractual interest rate adjusted for any net deferred loan fees or costs, premium or discount existing at the origination or acquisition of the loan), the market price of the loan or lease, or the fair value of the underlying collateral less costs to sell, if the loan or lease is collateral dependent. A loan or lease is collateral dependent if repayment is expected to be provided principally by the underlying collateral. A loan’s effective interest rate may change over the life of the loan based on subsequent changes in rates or indices, or may be fixed at the rate in effect at the date the loan was determined to be impaired. Subsequent to the initial impairment, any significant change in the amount or timing of an impaired loan or lease’s future cash flows will result in a reassessment of the valuation allowance to determine if an adjustment is necessary. Measurements based on observable market price or fair value of the collateral may change over time and require a reassessment of the allowance if there is a significant change in either measurement base. Any increase in the present value of expected future cash flows attributable to the passage of time is recorded as interest income accrued on the net carrying amount of the loan or lease at the effective interest rate used to discount the impaired loan or lease’s estimated future cash flows. Any change in present value attributable to changes in the amount or timing of expected future cash flows is recorded as loan loss expense in the same manner in which impairment was initially recognized or as a reduction of loan loss expense that otherwise would be reported. Where the level of loan or lease impairment is measured using observable market price or fair value of collateral, any decrease in the observable market price of an impaired loan or lease or fair value of the collateral of an impaired collateral-dependent loan or lease is recorded as loan loss expense in the same manner in which impairment was initially recognized. Any increase in the observable market value of the impaired loan or lease or fair value of the collateral of an impaired collateral-dependent loan or lease is recorded as a reduction in the amount of loan loss expense that otherwise would be reported. Net Investment in Direct Financing Leases. The net investment in direct financing lease agreements represents total undiscounted payments plus estimated unguaranteed residual value (approximating 3 % to 20 % of the cost of the related equipment) and is recorded as lease receivables when the lease is signed and the leased property is delivered to the client. The excess of the minimum lease payments and residual values over the cost of the equipment is recorded as unearned lease income. 75 Table of Contents Unearned lease income is recognized over the term of the lease on a basis which results in an approximate level rate of return on the unrecovered lease investment. Lease payments are recorded when due under the lease contract. Residual values are established at lease inception equal to the estimated value to be received from the equipment following termination of the initial lease and such estimated value considers all relevant information and circumstances regarding the equipment. In estimating the equipment’s fair value at lease termination, the Corporation relies on internally or externally prepared appraisals, published sources of used equipment prices, and historical experience adjusted for known current industry and economic trends. The Corporation’s estimates are periodically reviewed to ensure reasonableness; however, the amounts the Corporation will ultimately realize could differ from the estimated amounts. When there are other than temporary declines in the Corporation’s carrying amount of the unguaranteed residual value, the carrying value is reduced and charged to non-interest expense. Premises and Equipment, net. The cost of capitalized leasehold improvements is amortized on the straight-line method over the lesser of the term of the respective lease or estimated economic life. Equipment is stated at cost less accumulated depreciation and amortization which is calculated by the straight-line method over the estimated useful lives of three to ten years. Maintenance and repair costs are charged to expense as incurred. Improvements which extend the useful life are capitalized and depreciated over the remaining useful life of the assets. 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 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. Any subsequent write-downs to reflect current fair value, as well as gains and losses on disposition and revenues are recorded in non-interest expense. Costs relating to the development and improvement of the property are capitalized while holding period costs are charged to other non-interest expense. Leases. 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. Lease expense is recognized evenly over the lease term. Variable lease payments are recognized as period costs. 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 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. Bank-owned life insurance (“BOLI”) is reported at the amount that would be realized if the life insurance policies were surrendered on the balance sheet date. BOLI policies owned by the Bank are purchased with the objective to fund certain future employee benefit costs with the death benefit proceeds. The cash surrender value of such policies is recorded in bank-owned life insurance on the Consolidated Balance Sheets and changes in the value are recorded in non-interest income. The total death benefit of all BOLI policies was $ 133.8 million and $ 135.9 million as of December 31, 2022 and 2021, respectively. There are no restrictions on the use of BOLI proceeds nor are there any contractual restrictions on the ability to surrender the policy. As of December 31, 2022 and 2021, there were no borrowings against the cash surrender value of the BOLI policies. Federal Home Loan Bank Stock. The Bank is required to maintain Federal Home Loan Bank (“FHLB”) stock as members of the FHLB, and in amounts as required by the FHLB. This equity security is “restricted” in that it can only be sold back to the FHLB or another member institution at par. Therefore, it is less liquid than other marketable equity securities and the fair value is equal to cost. At December 31, 2022 and 2021, the Bank had FHLB stock of $ 17.8 million and $ 13.3 million, respectively. The Corporation periodically evaluates its holding in FHLB stock for impairment. Should the stock be impaired, it would be written down to its estimated fair value. There were no impairments recorded on FHLB stock during the years ended December 31, 2022 or 2021. Goodwill and Other Intangible Assets. 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. Loan servicing rights, when originated, are initially recorded at fair value and subsequently amortized in proportion to and over the period of estimated net servicing income. The Corporation reviews other intangible assets for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, in which case an impairment charge would be recorded. Goodwill is not amortized but is subject to impairment tests on at least an annual basis, and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount (including goodwill). An initial qualitative evaluation is made to assess the likelihood of impairment and determine whether further quantitative testing to calculate the fair value is necessary. When the qualitative evaluation indicates that impairment is 76 Table of Contents more likely than not, quantitative testing is required whereby the fair value of each reporting unit is calculated and compared to the recorded book value. If the calculated fair value of the reporting unit exceeds its carrying value, goodwill is not considered impaired. If the carrying value of a reporting unit exceeds its calculated fair value, an impairment charge is recognized in earnings in an amount equal to the difference. Other Investments. The Corporation owns certain equity investments in other corporate organizations which are not consolidated because the Corporation does not own more than a 50 % interest or exercise control over the organization. Investments in corporations representing at least a 20 % interest are generally accounted for using the equity method and investments in corporations representing less than 20 % interest are generally accounted for at cost. Investments in limited partnerships representing from at least a 3 % up to a 50 % interest in the entity are generally accounted for using the equity method and investments in limited partnerships representing less than 3 % are generally accounted for at cost. All of these investments are periodically evaluated for impairment. Should an investment be impaired, it would be written down to its estimated fair value. The equity investments are reported in other assets and the income and expense from such investments, if any, is reported in non-interest income and non-interest expense. Derivative Instruments. The Corporation uses derivative instruments to protect against the risk of adverse price or interest rate movements on the value of certain assets, liabilities, future cash flows, and economic hedges for written client derivative contracts. Derivative instruments represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash to the other party based on a notional amount and an underlying variable, as specified in the contract, and may be subject to master netting agreements. Market risk is the risk of loss arising from an adverse change in interest rates, exchange rates, or equity prices. The Corporation’s primary market risk is interest rate risk. Instruments designed to manage interest rate risk include interest rate swaps, interest rate options, and interest rate caps and floors with indices that relate to the pricing of specific assets and liabilities. The nature and volume of the derivative instruments used to manage interest rate risk depend on the level and type of assets and liabilities on the balance sheet and the risk management strategies for the current and anticipated rate environments. Counterparty risk with respect to derivative instruments occurs when a counterparty to a derivative contract with an unrealized gain fails to perform according to the terms of the agreement. Counterparty risk is managed by limiting the counterparties to highly rated dealers, requiring collateral postings when values are in deficit positions, applying uniform credit standards to all activities with credit risk, and monitoring the size and the maturity structure of the derivative portfolio. All derivative instruments are to be carried at fair value on the Consolidated Balance Sheets. The accounting for the gain or loss due to changes in the fair value of a derivative instrument depends on whether the derivative instrument qualifies as a hedge. If the derivative instrument does not qualify as a hedge, the gains or losses are reported in earnings when they occur. However, if the derivative instrument qualifies as a hedge, the accounting varies based on the type of risk being hedged. The Corporation utilizes interest rate swaps offered directly to qualified commercial borrowers, which do not qualify for hedge accounting, and therefore, all changes in fair value and gains and losses on these instruments are reported in earnings as they occur. The effects of netting arrangements are disclosed within the Notes of the Consolidated Financial Statements. The Corporation offers interest rate swap products directly to qualified commercial borrowers. The Corporation economically hedges client derivative transactions by entering into offsetting interest rate swap contracts executed with a third party. Derivative transactions executed as part of this program are not considered hedging instruments and are marked-to-market through earnings each period. The derivative contracts have mirror-image terms, which results in the positions’ changes in fair value offsetting through earnings each period. The credit risk and risk of non-performance embedded in the fair value calculations is different between the dealer counterparties and the commercial borrowers which may result in a difference in the changes in the fair value of the mirror-image swaps. The Corporation incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the counterparty’s risk in the fair value measurements. When evaluating the fair value of its derivative contracts for the effects of non-performance and credit risk, the Corporation considers the impact of netting and any applicable credit enhancements such as collateral postings, thresholds and guarantees. 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 are designated as a cash flow hedge as the receipt of floating interest from the counterparty is used to manage interest rate risk associated with forecasted issuances of short-term FHLB advances. The change in fair value of the hedging instrument is recorded in accumulated other comprehensive income. SBA Recourse Reserve. 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. 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 77 Table of Contents 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. In the event of a loss resulting from default and a determination by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Corporation, the SBA may require the Corporation to repurchase the loan, deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of the principal loss related to the deficiency from the Corporation. The Corporation must comply with applicable SBA regulations in order to maintain the guaranty. In addition, the Corporation retains the option to repurchase the sold guaranteed portion of an SBA loan if the loan defaults. Income Taxes. Deferred income tax assets and liabilities are computed for temporary differences in timing between the financial statement and tax basis of assets and liabilities that result in taxable or deductible amounts in the future based on enacted tax law and rates applicable to periods in which the differences are expected to affect taxable income. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, appropriate tax planning strategies, and projections for future taxable income over the period which the deferred tax assets are deductible. When necessary, valuation allowances are established to reduce deferred tax assets to the realizable amount. Management believes it is more likely than not that the Corporation will realize the benefits of these deductible differences, net of the existing valuation allowances. Income tax expense or benefit represents the tax payable or tax refundable for a period, adjusted by the applicable change in deferred tax assets and liabilities for that period. The Corporation also invests in certain development entities that generate federal and state historic tax credits. The tax benefits associated with these investments are accounted for under the flow-through method and are recognized when the respective project is placed in service. The Corporation and its subsidiaries file a consolidated federal income tax return and separate state income tax returns. Tax sharing agreements allocate taxes to each legal entity for the settlement of intercompany taxes. The Corporation applies a more likely than not standard to each of its tax positions when determining the amount of tax expense or benefit to record in its financial statements. Unrecognized tax benefits are recorded in other liabilities. The Corporation recognizes accrued interest relating to unrecognized tax benefits in income tax expense and penalties in other non-interest expense. Other Comprehensive Income or Loss. 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, 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. Earnings per common share (“EPS”) is computed using the two-class method. Basic EPS is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding for the period, excluding any participating securities. Participating securities include unvested restricted shares. Unvested restricted shares are considered participating securities because holders of these securities receive non-forfeitable dividends at the same rate as the holders of the Corporation’s common stock. Diluted EPS is computed by dividing net income allocated to common shares adjusted for reallocation of undistributed earnings of unvested restricted shares by the weighted average number of common shares determined for the basic EPS plus the dilutive effect of common stock equivalents using the treasury stock method based on the average market price for the period. Segments and Related Information. The Corporation is required to report each operating segment based on materiality thresholds of ten percent or more of certain amounts, such as revenue. Additionally, the Corporation is required to report separate operating segments until the revenue attributable to such segments is at least 75 percent of total consolidated revenue. The Corporation provides a broad range of financial services to individuals and companies. These services include demand, time, and savings products, the sale of certain non-deposit financial products, and commercial and retail lending, leasing and private wealth management services. While the Corporation’s chief decision-maker monitors the revenue streams of the various products, services, and locations, operations are managed and financial performance is evaluated on a corporate-wide basis. The Corporation’s business units have similar basic characteristics in the nature of the products, production processes and type or class of client for products or services; therefore, these business units are considered one operating segment. Share-Based Compensation. The Corporation may grant restricted stock awards, restricted stock units, and other stock based awards to plan participants, subject to forfeiture upon the occurrence of certain events until the dates specified in the participant’s award agreement. 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 78 Table of Contents 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 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. The Corporation issues a combination of performance-based restricted stock units and restricted stock awards to plan participants. Vesting of the performance-based restricted stock units will be measured on Total Shareholder Return (“TSR”) and Return on Average Equity (“ROAE”) and will cliff-vest after a three-year measurement period based on the Corporation’s performance relative to a custom peer group. At the end of the performance period, the number of actual shares to be awarded varies between 0% and 200% of target amounts. 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. The Corporation offers an Employee Stock Purchase Plan (“ESPP”) to all qualifying employees. The plan qualifies as an ESPP under section 423 of the Internal Revenue Code of 1986. Under the ESPP, eligible employees may enroll in a three month offer period that begins January, April, July, and October of each year. Employees may purchase a limited number of shares on the Corporation’s common stock at 90% of the fair market value on the last day of the offering period. The ESPP is treated as a compensatory plan for purposes of share-based compensation expense. Recent Accounting Pronouncements. In June 2016, the FASB issued ASU No. 2016-13, “ Financial Instruments- Credit Losses (Topic 326), ” which is often referred to as CECL. The ASU replaces the incurred loss impairment methodology for recognizing credit losses with a methodology that reflects all expected credit losses. Entities will apply the amendments in the ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In November 2019, the FASB issued ASU No. 2019-10, “ Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). ” The ASU delays the effective date for the credit losses standard from January 1, 2020 to January 1, 2023 for certain entities, including certain Securities and Exchange Commission filers, public business entities, and private companies. As a smaller reporting company, the Corporation 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. 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. 2020-04 "“Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary, optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. In January 2021, the FASB issued ASU 2021-01 which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The 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 79 Table of Contents 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 Cash and due from banks was approximately $ 25.8 million and $ 9.7 million at December 31, 2022 and 2021, respectively. As of March 26, 2020, the Federal Reserve Bank (“FRB”) reduced reserve requirement ratios to zero percent for all depository institutions. FRB balances were $ 76.5 million and $ 47.0 million at December 31, 2022 and 2021, respectively, and are included in short-term investments on the Consolidated Balance Sheets. Short-term investments, considered cash equivalents, were $ 76.9 million and $ 47.4 million at December 31, 2022 and 2021, respectively. Note 3 – Securities The amortized cost and fair value of securities available-for-sale and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows: As of December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In Thousands) Available-for-sale: U.S. treasuries $ 4,977 $ — $ ( 532 ) $ 4,445 U.S. government agency securities - government-sponsored enterprises 13,666 70 ( 531 ) 13,205 Municipal securities 45,088 90 ( 5,867 ) 39,311 Residential mortgage-backed securities - government issued 21,790 — ( 2,359 ) 19,431 Residential mortgage-backed securities - government-sponsored enterprises 119,265 — ( 12,942 ) 106,323 Commercial mortgage-backed securities - government issued 3,450 — ( 518 ) 2,932 Commercial mortgage-backed securities - government-sponsored enterprises 31,515 — ( 5,138 ) 26,377 Other securities — — — — $ 239,751 $ 160 $ ( 27,887 ) $ 212,024 80 Table of Contents As of December 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In Thousands) Available-for-sale: U.S. treasuries $ 4,971 $ — $ ( 57 ) $ 4,914 U.S. government agency securities - government-sponsored enterprises 19,797 248 ( 110 ) 19,935 Municipal securities 30,828 473 ( 344 ) 30,957 Residential mortgage-backed securities - government issued 19,563 238 ( 140 ) 19,661 Residential mortgage-backed securities - government-sponsored enterprises 85,748 741 ( 784 ) 85,705 Commercial mortgage-backed securities - government issued 5,801 36 ( 66 ) 5,771 Commercial mortgage-backed securities - government-sponsored enterprises 36,786 313 ( 568 ) 36,531 Other securities 2,205 23 — 2,228 $ 205,699 $ 2,072 $ ( 2,069 ) $ 205,702 The amortized cost and fair value of securities held-to-maturity and the corresponding amounts of gross unrealized gains and losses were as follows: As of December 31, 2022 Amortized Cost Gross Unrecognized Gains Gross Unrecognized Losses Fair Value (In Thousands) Held-to-maturity: Municipal securities $ 7,467 $ 7 $ ( 70 ) $ 7,404 Residential mortgage-backed securities - government issued 1,625 — ( 107 ) 1,518 Residential mortgage-backed securities - government-sponsored enterprises 1,537 — ( 93 ) 1,444 Commercial mortgage-backed securities - government-sponsored enterprises 2,006 — ( 102 ) 1,904 $ 12,635 $ 7 $ ( 372 ) $ 12,270 As of December 31, 2021 Amortized Cost Gross Unrecognized Gains Gross Unrecognized Losses Fair Value (In Thousands) Held-to-maturity: Municipal securities $ 13,009 $ 222 $ ( 3 ) $ 13,228 Residential mortgage-backed securities - government issued 2,226 40 — 2,266 Residential mortgage-backed securities - government-sponsored enterprises 2,502 76 — 2,578 Commercial mortgage-backed securities - government-sponsored enterprises 2,009 195 — 2,204 $ 19,746 $ 533 $ ( 3 ) $ 20,276 U.S. Treasuries contains treasury bonds issued by the United States Treasury. U.S. government agency securities - government-sponsored enterprises represent securities issued by Federal National Mortgage Association (“FNMA”) and the SBA. Municipal securities include securities issued by various municipalities located primarily within Wisconsin and are primarily general obligation bonds that are tax-exempt in nature. Residential and commercial mortgage-backed securities - government issued 81 Table of Contents represent securities guaranteed by the Government National Mortgage Association. Residential and commercial mortgage-backed securities - government-sponsored enterprises include securities guaranteed by the Federal Home Loan Mortgage Corporation, FNMA, and the FHLB. Other securities represent certificates of deposit of insured banks and savings institutions with an original maturity greater than three months. There were seven sales of available-for-sale securities 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) Gross gains $ — $ 92 $ — Gross losses — ( 63 ) ( 4 ) Net gains (losses) on sale of available-for-sale securities $ — $ 29 $ ( 4 ) Proceeds from sale of available-for-sale securities $ — $ 14,955 $ 839 At December 31, 2022 and 2021, securities with a fair value of $ 35.9 million and $ 70.3 million, respectively, were pledged to secure various obligations, including interest rate swap contracts and municipal deposits. The amortized cost and fair value of securities by contractual maturity at December 31, 2022 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations with or without call or prepayment penalties. Available-for-Sale Held-to-Maturity Amortized Cost Fair Value Amortized Cost Fair Value (In Thousands) Due in one year or less $ 603 $ 593 $ 2,146 $ 2,136 Due in one year through five years 15,208 13,884 5,806 5,679 Due in five through ten years 55,058 48,141 3,823 3,670 Due in over ten years 168,882 149,406 860 785 $ 239,751 $ 212,024 $ 12,635 $ 12,270 The tables below show the Corporation’s gross unrealized losses and fair value of available-for-sale investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at December 31, 2022 and 2021. At December 31, 2022, the Corporation held 175 available-for-sale securities that were in an unrealized loss position. Such securities have not experienced credit rating downgrades; 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. The Corporation reviews its securities on a quarterly basis to monitor its exposure to other-than-temporary impairment. Consideration is given to such factors as the length of time and extent to which the security has been in an unrealized loss position, changes in security ratings, and an evaluation of the present value of expected future cash flows, if necessary. Based on the Corporation’s evaluation, it is expected that the Corporation will recover the entire amortized cost basis of each security. Accordingly, no other-than-temporary impairment was recorded in the Consolidated Statements of Income for the years ended December 31, 2022 and 2021. A summary of unrealized loss information for securities available-for-sale, categorized by security type and length of time for which the security has been in a continuous unrealized loss position, follows: 82 Table of Contents December 31, 2022 Less than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (In Thousands) Available-for-sale: U.S. treasuries $ — $ — $ 4,446 $ 532 $ 4,446 $ 532 U.S. government agency securities - government-sponsored enterprises — — 2,969 531 2,969 531 Municipal securities 26,759 3,132 10,133 2,735 36,892 5,867 Residential mortgage-backed securities - government issued 9,624 436 9,807 1,923 19,431 2,359 Residential mortgage-backed securities - government-sponsored enterprises 71,474 6,433 34,849 6,509 106,323 12,942 Commercial mortgage-backed securities - government issued 1,236 112 1,696 406 2,932 518 Commercial mortgage-backed securities - government-sponsored enterprises 7,758 984 18,619 4,154 26,377 5,138 $ 116,851 $ 11,097 $ 82,519 $ 16,790 $ 199,370 $ 27,887 December 31, 2021 Less than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (In Thousands) Available-for-sale: U.S. treasuries $ 4,914 $ 57 $ — $ — $ 4,914 $ 57 U.S. government agency obligations - government-sponsored enterprises 3,390 110 — — 3,390 110 Municipal securities 12,568 344 — — 12,568 344 Residential mortgage-backed securities - government issued 12,745 140 — — 12,745 140 Residential mortgage-backed securities - government-sponsored enterprises 41,277 629 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, 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 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. It is expected that the Corporation will recover the entire amortized cost basis of each held-to-maturity security based upon an evaluation of aforementioned factors. Accordingly, no other-than-temporary impairment was recorded in the Consolidated Statements of Income for the years ended December 31, 2022 and 2021. 83 Table of Contents A summary of unrealized loss information for securities held-to-maturity, categorized by security type and length of time for which the security has been in a continuous unrealized loss position, follows: December 31, 2022 Less than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (In Thousands) Held-to-maturity: Municipal securities $ 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 Less than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (In Thousands) Held-to-maturity: Municipal securities $ — $ — $ 284 $ 3 $ 284 $ 3 $ — $ — $ 284 $ 3 $ 284 $ 3 84 Table of Contents Note 4 – Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses Loan and lease receivables consist of the following: December 31, 2022 December 31, 2021 (In Thousands) Commercial real estate: Commercial real estate — owner occupied $ 268,354 $ 235,589 Commercial real estate — non-owner occupied 687,091 661,423 Land development 50,803 42,792 Construction 167,948 179,841 Multi-family 350,026 320,072 1-4 family 17,728 14,911 Total commercial real estate 1,541,950 1,454,628 Commercial and industrial 841,178 730,819 Direct financing leases, net 12,149 15,743 Consumer and other: Home equity and second mortgages 6,761 4,223 Other 41,177 35,518 Total consumer and other 47,938 39,741 Total gross loans and leases receivable 2,443,215 2,240,931 Less: Allowance for loan and lease losses 24,230 24,336 Deferred loan fees 149 1,523 Loans and leases receivable, net $ 2,418,836 $ 2,215,072 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. The SBA provides a guaranty to the lender of 100% of principal and interest, unless the lender violated an obligation under the agreement. As loan losses are expected to be immaterial, if any at all, due to the guaranty, management excluded the PPP loans from the allowance for loan and lease losses calculation. Management funded these short-term loans primarily through a combination of excess cash held at the Federal Reserve and from an increase in in-market deposits. The total amount of the Corporation’s ownership of SBA loans on-balance sheet is comprised of the following: December 31, 2022 December 31, 2021 (In Thousands) SBA 7(a) loans $ 36,047 $ 33,223 SBA 504 loans 25,098 41,394 SBA Express loans and lines of credit 130 387 SBA PPP loans 554 27,854 Total SBA loans $ 61,829 $ 102,858 As of December 31, 2022 and 2021, $ 1.1 million and $ 1.7 million of SBA loans were considered impaired, respectively. Loans transferred to third parties consist of the guaranteed portions of SBA loans which the Corporation sold in the secondary market and participation interests in other, non-SBA originated loans. The total principal amount of the guaranteed portions of SBA loans sold during the year ended December 31, 2022 and 2021 was $ 29.9 million and $ 33.5 million, respectively. Each of 85 Table of Contents the transfers of these financial assets met the qualifications for sale accounting, and therefore, all of the loans transferred during the year ended December 31, 2022 and 2021 have been derecognized in the Consolidated Financial Statements. The guaranteed portions of SBA loans were transferred at their fair value and the related gain was recognized upon the transfer as non-interest income in the Consolidated Financial Statements. The total outstanding balance of sold SBA loans at December 31, 2022 and 2021 was $ 88.5 million and $ 93.0 million, respectively. The total principal amount of transferred participation interests in other, non-SBA originated loans during the year ended December 31, 2022 and 2021 was $ 96.0 million and $ 70.9 million, respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer. No gain or loss was recognized on participation interests in other, non-SBA originated loans as they were transferred at or near the date of loan origination and the payments received for servicing the portion of the loans participated represents adequate compensation. The total outstanding balance of these transferred loans at December 31, 2022 and 2021 was $ 222.9 million and $ 195.2 million, respectively. 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, 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, 2022 and 2021. Certain of the Corporation’s executive officers, directors, and their related interests are loan clients of the Bank. These loans to related parties are summarized below: December 31, 2022 December 31, 2021 (In Thousands) Balance at beginning of year $ 1,288 $ 1,632 New loans 656 570 Repayments ( 1,560 ) ( 914 ) Change due to status of executive officers and directors ( 160 ) — Balance at end of year $ 224 $ 1,288 The following tables illustrate ending balances of the Corporation’s loan and lease portfolio, including impaired loans by class of receivable, and considering certain credit quality indicators: December 31, 2022 Category I II III IV Total (Dollars in Thousands) Commercial real estate: Commercial real estate — owner occupied $ 256,242 $ 2,602 $ 9,510 $ — $ 268,354 Commercial real estate — non-owner occupied 630,396 34,022 22,673 — 687,091 Land development 50,803 — — — 50,803 Construction 157,157 — 10,791 — 167,948 Multi-family 342,030 7,996 — — 350,026 1-4 family 17,600 98 — 30 17,728 Total commercial real estate 1,454,228 44,718 42,974 30 1,541,950 Commercial and industrial 783,158 19,954 34,281 3,785 841,178 Direct financing leases, net 10,490 365 1,294 — 12,149 Consumer and other: Home equity and second mortgages 6,761 — — — 6,761 Other 41,177 — — — 41,177 Total consumer and other 47,938 — — — 47,938 Total gross loans and leases receivable $ 2,295,814 $ 65,037 $ 78,549 $ 3,815 $ 2,443,215 Category as a % of total portfolio 93.97 % 2.66 % 3.21 % 0.16 % 100.00 % 86 Table of Contents December 31, 2021 Category I II III IV Total (Dollars in Thousands) Commercial real estate: Commercial real estate — owner occupied $ 218,965 $ 5,495 $ 10,781 $ 348 $ 235,589 Commercial real estate — non-owner occupied 599,089 30,363 31,971 — 661,423 Land development 42,291 501 — — 42,792 Construction 140,181 9,077 30,583 — 179,841 Multi-family 300,589 8,217 11,266 — 320,072 1-4 family 14,012 158 402 339 14,911 Total commercial real estate 1,315,127 53,811 85,003 687 1,454,628 Commercial and industrial 686,123 5,943 32,964 5,789 730,819 Direct financing leases, net 10,892 105 4,647 99 15,743 Consumer and other: Home equity and second mortgages 3,925 231 67 — 4,223 Other 35,385 133 — — 35,518 Total consumer and other 39,310 364 67 — 39,741 Total gross loans and leases receivable $ 2,051,452 $ 60,223 $ 122,681 $ 6,575 $ 2,240,931 Category as a % of total portfolio 91.55 % 2.69 % 5.47 % 0.29 % 100.00 % Each credit is evaluated for proper risk rating upon origination, at the time of each subsequent renewal, upon receipt and evaluation of updated financial information from the Corporation’s borrowers or as other circumstances dictate. The Corporation primarily uses a nine grade risk rating system to monitor the ongoing credit quality of its loans and leases. The risk rating grades follow a consistent definition and are then applied to specific loan types based on the nature of the loan. Each risk rating is subjective and, depending on the size and nature of the credit, subject to various levels of review and concurrence on the stated risk rating. In addition to its nine grade risk rating system, the Corporation groups loans into four loan and related risk categories which determine the level and nature of review by management. Category I — Loans and leases in this category are performing in accordance with the terms of the contract and generally exhibit no immediate concerns regarding the security and viability of the underlying collateral, financial stability of the borrower, integrity or strength of the borrowers’ management team or the industry in which the borrower operates. The Corporation monitors Category I loans and leases through payment performance, continued maintenance of its personal relationships with such borrowers and continued review of such borrowers’ compliance with the terms of their respective agreements. Category II — Loans and leases in this category are beginning to show signs of deterioration in one or more of the Corporation’s core underwriting criteria such as financial stability, management strength, industry trends or collateral values. Management will place credits in this category to allow for proactive monitoring and resolution with the borrower to possibly mitigate the area of concern and prevent further deterioration or risk of loss to the Corporation. Category II loans are considered performing but are monitored frequently by the assigned business development officer and by asset quality review committees. Category III — Loans and leases in this category are identified by management as warranting special attention. However, the balance in this category is not intended to represent the amount of adversely classified assets held by the Bank. Category III loans and leases generally exhibit undesirable characteristics, such as evidence of adverse financial trends and conditions, managerial problems, deteriorating economic conditions within the related industry or evidence of adverse public filings and may exhibit collateral shortfall positions. Management continues to believe that it will collect all contractual principal and interest in accordance with the original terms of the contracts relating to the loans and leases in this category, and therefore Category III loans are considered performing with no specific reserves established for this category. Category III loans are monitored by management and asset quality review committees on a monthly basis. Category IV — Loans and leases in this category are considered to be impaired. Impaired loans and leases, with the exception of performing TDRs, have been placed on non-accrual as management has determined that it is unlikely that the Bank will receive the contractual principal and interest in accordance with the original terms of the agreement. Impaired loans are 87 Table of Contents individually evaluated to assess the need for the establishment of specific reserves or charge-offs. When analyzing the adequacy of collateral, the Corporation obtains external appraisals at least annually for impaired loans and leases. External appraisals are obtained from the Corporation’s approved appraiser listing and are independently reviewed to monitor the quality of such appraisals. To the extent a collateral shortfall position is present, a specific reserve or charge-off will be recorded to reflect the magnitude of the impairment. Loans and leases in this category are monitored by management and asset quality review committees on a monthly basis. The delinquency aging of the loan and lease portfolio by class of receivable was as follows: 88 Table of Contents December 31, 2022 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Past Due Total Past Due Current Total Loans and Leases (Dollars in Thousands) Accruing loans and leases Commercial real estate: Owner occupied $ — $ — $ — $ — $ 268,354 $ 268,354 Non-owner occupied 215 — — 215 686,876 687,091 Land development — — — — 50,803 50,803 Construction — — — — 167,948 167,948 Multi-family — — — — 350,026 350,026 1-4 family — — — — 17,698 17,698 Commercial and industrial 1,431 379 — 1,810 835,739 837,549 Direct financing leases, net 6 24 — 30 12,119 12,149 Consumer and other: Home equity and second mortgages — — — — 6,761 6,761 Other — — — — 41,177 41,177 Total 1,652 403 — 2,055 2,437,501 2,439,556 Non-accruing loans and leases Commercial real estate: Owner occupied — — — — — — Non-owner occupied — — — — — — Land development — — — — — — Construction — — — — — — Multi-family — — — — — — 1-4 family — — — — 30 30 Commercial and industrial 439 126 2,464 3,029 600 3,629 Direct financing leases, net — — — — — — Consumer and other: Home equity and second mortgages — — — — — — Other — — — — — — Total 439 126 2,464 3,029 630 3,659 Total loans and leases Commercial real estate: Owner occupied — — — — 268,354 268,354 Non-owner occupied 215 — — 215 686,876 687,091 Land development — — — — 50,803 50,803 Construction — — — — 167,948 167,948 Multi-family — — — — 350,026 350,026 1-4 family — — — — 17,728 17,728 Commercial and industrial 1,870 505 2,464 4,839 836,339 841,178 Direct financing leases, net 6 24 — 30 12,119 12,149 Consumer and other: Home equity and second mortgages — — — — 6,761 6,761 Other — — — — 41,177 41,177 Total $ 2,091 $ 529 $ 2,464 $ 5,084 $ 2,438,131 $ 2,443,215 Percent of portfolio 0.09 % 0.02 % 0.10 % 0.21 % 99.79 % 100.00 % 89 Table of Contents December 31, 2021 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Past Due Total Past Due Current Total Loans and Leases (Dollars in Thousands) Accruing loans and leases Commercial real estate: Owner occupied $ 420 $ — $ — $ 420 $ 234,821 $ 235,241 Non-owner occupied — — — — 661,423 661,423 Land development — — — — 42,792 42,792 Construction 394 — — 394 179,447 179,841 Multi-family — — — — 320,072 320,072 1-4 family 100 — — 100 14,472 14,572 Commercial and industrial 907 536 — 1,443 723,804 725,247 Direct financing leases, net 281 14 — 295 15,349 15,644 Consumer and other: Home equity and second mortgages — — — — 4,223 4,223 Other — — — — 35,518 35,518 Total 2,102 550 — 2,652 2,231,921 2,234,573 Non-accruing loans and leases Commercial real estate: Owner occupied — — 113 113 235 348 Non-owner occupied — — — — — — Land development — — — — — — Construction — — — — — — Multi-family — — — — — — 1-4 family — — — — 339 339 Commercial and industrial 23 36 1,445 1,504 4,068 5,572 Direct financing leases, net — — 84 84 15 99 Consumer and other: Home equity and second mortgages — — — — — — Other — — — — — — Total 23 36 1,642 1,701 4,657 6,358 Total loans and leases Commercial real estate: Owner occupied 420 — 113 533 235,056 235,589 Non-owner occupied — — — — 661,423 661,423 Land development — — — — 42,792 42,792 Construction 394 — — 394 179,447 179,841 Multi-family — — — — 320,072 320,072 1-4 family 100 — — 100 14,811 14,911 Commercial and industrial 930 572 1,445 2,947 727,872 730,819 Direct financing leases, net 281 14 84 379 15,364 15,743 Consumer and other: Home equity and second mortgages — — — — 4,223 4,223 Other — — — — 35,518 35,518 Total $ 2,125 $ 586 $ 1,642 $ 4,353 $ 2,236,578 $ 2,240,931 Percent of portfolio 0.09 % 0.03 % 0.07 % 0.19 % 99.81 % 100.00 % 90 Table of Contents The Corporation’s total impaired assets consisted of the following: December 31, 2022 December 31, 2021 (In Thousands) Non-accrual loans and leases Commercial real estate: Commercial real estate — owner occupied $ — $ 348 Commercial real estate — non-owner occupied — — Land development — — Construction — — Multi-family — — 1-4 family 30 339 Total non-accrual commercial real estate 30 687 Commercial and industrial 3,629 5,572 Direct financing leases, net — 99 Consumer and other: Home equity and second mortgages — — Other — — Total non-accrual consumer and other loans — — Total non-accrual loans and leases 3,659 6,358 Repossessed assets, net 95 164 Total non-performing assets 3,754 6,522 Performing troubled debt restructurings 156 217 Total impaired assets $ 3,910 $ 6,739 December 31, 2022 December 31, 2021 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 repossessed assets, net 0.15 0.29 Total non-performing assets to total assets 0.13 0.25 Allowance for loan and lease losses to gross loans and leases 0.99 1.09 Allowance for loan and lease losses to non-accrual loans and leases 662.20 382.76 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 as TDRs and the pre- and post-modification recorded investment by class of receivable: For the Year Ended December 31, 2021 Number of Loans Pre-Modification Recorded Investment Post-Modification Recorded Investment (Dollars in Thousands) Commercial and industrial 3 $ 239 $ 217 91 Table of Contents 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 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. 92 Table of Contents The following represents additional information regarding the Corporation’s impaired loans and leases, including performing TDRs, by class: As of and for the Year Ended December 31, 2022 Recorded Investment (1) Unpaid Principal Balance Impairment Reserve Average Recorded Investment (2) Foregone Interest Income Interest Income Recognized Net Foregone Interest Income (In Thousands) With no impairment reserve recorded: Commercial real estate: Owner occupied $ — $ — $ — $ 180 $ 14 $ 759 $ ( 745 ) Non-owner occupied — — — — — 1 ( 1 ) Land development — — — — — — — Construction — — — — — 47 ( 47 ) Multi-family — — — — — — — 1-4 family 30 35 — 112 8 41 ( 33 ) Commercial and industrial 1,193 1,194 — 3,271 275 585 ( 310 ) Direct financing leases, net — — — 67 2 2 — Consumer and other: Home equity and second mortgages — — — — — — — Other — — — — — — — Total 1,223 1,229 — 3,630 299 1,435 ( 1,136 ) With impairment reserve recorded: Commercial real estate: Owner occupied — — — — — — — Non-owner occupied — — — — — — — Land development — — — — — — — Construction — — — — — — — Multi-family — — — — — — — 1-4 family — — — — — — — Commercial and industrial 2,592 2,612 1,650 1,454 101 1 100 Direct financing leases, net — — — — — — — Consumer and other: Home equity and second mortgages — — — — — — — Other — — — — — — — Total 2,592 2,612 1,650 1,454 101 1 100 Total: Commercial real estate: Owner occupied — — — 180 14 759 ( 745 ) Non-owner occupied — — — — — 1 ( 1 ) Land development — — — — — — — Construction — — — — — 47 ( 47 ) Multi-family — — — — — — — 1-4 family 30 35 — 112 8 41 ( 33 ) Commercial and industrial 3,785 3,806 1,650 4,725 376 586 ( 210 ) Direct financing leases, net — — — 67 2 2 — Consumer and other: Home equity and second mortgages — — — — — — — Other — — — — — — — Grand total $ 3,815 $ 3,841 $ 1,650 $ 5,084 $ 400 $ 1,436 $ ( 1,036 ) (1) The recorded investment represents the unpaid principal balance net of any partial charge-offs. (2) Average recorded investment is calculated primarily using daily average balances. 93 Table of Contents As of and for the Year Ended December 31, 2021 Recorded Investment (1) Unpaid Principal Balance Impairment Reserve Average Recorded Investment (2) Foregone Interest Income Interest Income Recognized Net Foregone Interest Income (In Thousands) With no impairment reserve recorded: Commercial real estate: Owner occupied $ 348 $ 386 $ — $ 2,217 $ 145 $ 218 $ ( 73 ) Non-owner occupied — — — 2,281 233 16 217 Land development — — — 7 — — — Construction — — — — — — — Multi-family — — — — — — — 1-4 family 339 344 — 285 60 24 36 Commercial and industrial 3,717 3,819 — 7,914 522 179 343 Direct financing leases, net 15 15 — 2 1 — 1 Consumer and other: Home equity and second mortgages — — — 40 7 9 ( 2 ) Other — — — 8 23 — 23 Total 4,419 4,564 — 12,754 991 446 545 With impairment reserve recorded: Commercial real estate: Owner occupied — — — — — — — Non-owner occupied — — — — — — — Land development — — — — — — — Construction — — — — — — — Multi-family — — — — — — — 1-4 family — — — — — — — Commercial and industrial 2,072 2,072 1,439 1,456 109 8 101 Direct financing leases, net 84 84 66 50 4 — 4 Consumer and other: Home equity and second mortgages — — — — — — — Other — — — — — — — Total 2,156 2,156 1,505 1,506 113 8 105 Total: Commercial real estate: Owner occupied 348 386 — 2,217 145 218 ( 73 ) Non-owner occupied — — — 2,281 233 16 217 Land development — — — 7 — — — Construction — — — — — — — Multi-family — — — — — — — 1-4 family 339 344 — 285 60 24 36 Commercial and industrial 5,789 5,891 1,439 9,370 631 187 444 Direct financing leases, net 99 99 66 52 5 — 5 Consumer and other: Home equity and second mortgages — — — 40 7 9 ( 2 ) Other — — — 8 23 — 23 Grand total $ 6,575 $ 6,720 $ 1,505 $ 14,260 $ 1,104 $ 454 $ 650 (1) The recorded investment represents the unpaid principal balance net of any partial charge-offs. (2) Average recorded investment is calculated primarily using daily average balances. 94 Table of Contents As of and for the Year Ended December 31, 2020 Recorded Investment (1) Unpaid Principal Balance Impairment Reserve Average Recorded Investment (2) Foregone Interest Income Interest Income Recognized Net Foregone Interest Income (In Thousands) With no impairment reserve recorded: Commercial real estate: Owner occupied $ 4,338 $ 4,365 $ — $ 4,565 $ 291 $ 72 $ 219 Non-owner occupied 3,783 6,563 — 1,519 486 — 486 Land development 890 5,187 — 1,192 14 — 14 Construction — — — — — — — Multi-family — — — — — — — 1-4 family 46 51 — 307 31 141 ( 110 ) Commercial and industrial 9,888 12,337 — 13,951 1,219 423 796 Direct financing leases, net — — — 89 — — — Consumer and other: Home equity and second mortgages — — — 1 — — — Other 21 688 — 85 41 — 41 Total 18,966 29,191 — 21,709 2,082 636 1,446 With impairment reserve recorded: Commercial real estate: Owner occupied 1,091 4,792 471 2,349 384 — 384 Non-owner occupied — — — — — — — Land development — — — — — — — Construction — — — — — — — Multi-family — — — — — — — 1-4 family 250 250 29 21 — — — Commercial and industrial 6,267 6,972 3,125 3,585 324 — 324 Direct financing leases, net 49 49 49 39 3 — 3 Consumer and other: Home equity and second mortgages 40 40 7 — 1 — 1 Other — — — — — — — Total 7,697 12,103 3,681 5,994 712 — 712 Total: Commercial real estate: Owner occupied 5,429 9,157 471 6,914 675 72 603 Non-owner occupied 3,783 6,563 — 1,519 486 — 486 Land development 890 5,187 — 1,192 14 — 14 Construction — — — — — — — Multi-family — — — — — — — 1-4 family 296 301 29 328 31 141 ( 110 ) Commercial and industrial 16,155 19,309 3,125 17,536 1,543 423 1,120 Direct financing leases, net 49 49 49 128 3 — 3 Consumer and other: Home equity and second mortgages 40 40 7 1 1 — 1 Other 21 688 — 85 41 — 41 Grand total $ 26,663 $ 41,294 $ 3,681 $ 27,703 $ 2,794 $ 636 $ 2,158 (1) The recorded investment represents the unpaid principal balance net of any partial charge-offs. (2) Average recorded investment is calculated primarily using daily average 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. When a 95 Table of Contents loan is placed on non-accrual, interest accrual is discontinued and previously accrued but uncollected interest is deducted from interest income. Cash payments collected on non-accrual loans are first applied to such loan’s principal. Foregone interest represents the interest that was contractually due on the loan but not received or recorded. To the extent the amount of principal on a non-accrual loan is fully collected and additional cash is received, the Corporation will recognize interest income. To determine the level and composition of the allowance for loan and lease losses, the Corporation categorizes the portfolio into segments with similar risk characteristics. First, the Corporation evaluates loans and leases for potential impairment classification. The Corporation analyzes each loan and lease determined to be impaired on an individual basis to determine a specific reserve based upon the estimated value of the underlying collateral for collateral-dependent loans, or alternatively, the present value of expected cash flows. The Corporation applies historical trends from established risk factors to each category of loans and leases that has not been individually evaluated for the purpose of establishing the general portion of the allowance. A summary of the activity in the allowance for loan and lease losses by portfolio segment is as follows: As of and for the Year Ended December 31, 2022 Commercial Real Estate Commercial and Industrial Consumer and Other Total (In Thousands) Beginning balance $ 15,110 $ 8,413 $ 813 $ 24,336 Charge-offs — ( 958 ) ( 21 ) ( 979 ) Recoveries 4,262 437 42 4,741 Net recoveries (charge-offs) 4,262 ( 521 ) 21 3,762 Provision for loan and lease losses ( 6,812 ) 3,236 ( 292 ) ( 3,868 ) Ending balance $ 12,560 $ 11,128 $ 542 $ 24,230 As of and for the Year Ended December 31, 2021 Commercial Real Estate Commercial and Industrial Consumer and Other Total (In Thousands) Beginning balance $ 17,157 $ 10,593 $ 771 $ 28,521 Charge-offs ( 256 ) ( 3,227 ) ( 25 ) ( 3,508 ) 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 Commercial Real Estate Commercial and 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 ) Provision for loan and lease losses 12,420 4,197 191 16,808 Ending balance $ 17,157 $ 10,593 $ 771 $ 28,521 96 Table of Contents The following tables provide information regarding the allowance for loan and lease losses and balances by type of allowance methodology: December 31, 2022 Commercial Real Estate Commercial and Industrial Consumer and Other Total (In Thousands) Allowance for loan and lease losses: Collectively evaluated for impairment $ 12,560 $ 9,478 $ 542 $ 22,580 Individually evaluated for impairment — 1,650 — 1,650 Total $ 12,560 $ 11,128 $ 542 $ 24,230 Loans and lease receivables: Collectively evaluated for impairment $ 1,541,920 $ 849,542 $ 47,938 2,439,400 Individually evaluated for impairment 30 3,785 — 3,815 Total $ 1,541,950 $ 853,327 $ 47,938 $ 2,443,215 December 31, 2021 Commercial Real Estate Commercial and Industrial Consumer and Other Total (In Thousands) Allowance for loan and lease losses: Collectively evaluated for impairment $ 15,110 $ 6,908 $ 813 $ 22,831 Individually evaluated for impairment — 1,505 — 1,505 Total $ 15,110 $ 8,413 $ 813 $ 24,336 Loans and lease receivables: Collectively evaluated for impairment $ 1,453,941 $ 740,674 $ 39,741 $ 2,234,356 Individually evaluated for impairment 687 5,888 — 6,575 Total $ 1,454,628 $ 746,562 $ 39,741 $ 2,240,931 The Corporation’s net investment in direct financing leases consists of the following: December 31, 2022 December 31, 2021 (In Thousands) Minimum lease payments receivable $ 10,673 $ 13,641 Estimated unguaranteed residual values in leased property 2,776 3,564 Unearned lease and residual income ( 1,300 ) ( 1,462 ) Investment in commercial direct financing leases $ 12,149 $ 15,743 The Corporation leases equipment under direct financing leases expiring in future years. 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. 97 Table of Contents Future aggregate maturities of minimum lease payments to be received are as follows: (In Thousands) Maturities during year ended December 31, 2023 $ 4,246 2024 2,802 2025 1,507 2026 967 2027 637 Thereafter 514 $ 10,673 Note 5 – Premises and Equipment A summary of premises and equipment was as follows: As of December 31, 2022 2021 (In Thousands) Leasehold improvements $ 4,525 $ 2,727 Furniture and equipment 8,250 6,824 Total premises and equipment 12,775 9,551 Less: accumulated depreciation ( 8,435 ) ( 7,857 ) Total premises and equipment, net $ 4,340 $ 1,694 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 The Corporation leases various office spaces and specialized lending production offices under non-cancellable operating leases which expire on various dates through 2033. The Corporation also leases office equipment. The Corporation recognizes a right-of-use asset and an operating lease liability for all leases, with the exception of short-term leases. Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term. 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: 98 Table of Contents For the Year Ended December 31, 2022 2021 2020 (In Thousands) Operating lease cost $ 1,544 $ 1,513 $ 1,494 Short-term lease cost 148 158 222 Variable lease cost 604 492 522 Less: sublease income (179) (170) (113) Total lease cost, net $ 2,117 $ 1,993 $ 2,125 Quantitative information regarding the Corporation’s operating leases was as follows: 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 3.40 % 2.51 % 3.03 % The following maturity analysis shows the undiscounted cash flows due on the Corporation’s operating lease liabilities: (In Thousands) 2023 $ 1,511 2024 1,527 2025 1,408 2026 1,400 2027 1,428 Thereafter 4,688 Total undiscounted cash flows 11,962 Discount on cash flows ( 1,787 ) Total lease liability $ 10,175 Note 7 – Goodwill and Other Intangible Assets Goodwill 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, 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. Loan servicing rights are recognized upon sale of the guaranteed portions of SBA loans with servicing rights retained. When SBA loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Loan servicing assets are subsequently measured using the amortization method, which requires servicing rights to be amortized into interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. For the years ended December 31, 2022, 2021, and 2020, loan servicing asset amortization totaled $ 634,000 , $ 412,000 , and $ 458,000 , respectively. The estimated fair value of the Corporation’s loan servicing asset was $ 1.5 million and $ 1.6 million as of December 31, 2022 and 2021, respectively. 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 year ended December 31, 2022, the Corporation 99 Table of Contents 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 The Corporation is a limited partner in several limited partnership investments. 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 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 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 2021, the Corporation had no activity related to these investments. 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. 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. Other Investments 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. 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 . 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. 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. 100 Table of Contents As of March 30, 2022, the Corporation surrendered its common shares for no gain or loss and exited the Trust II entity, which was subsequently dissolved. Previously, the Corporation was the sole owner of $ 315,000 of common securities issued by Trust II. The purpose of Trust II was to complete the sale of $ 10.0 million of 10.50 % fixed rate preferred securities. Trust II, a wholly owned subsidiary of the Corporation, is not consolidated into the financial statements of the Corporation. The investment in Trust II of $ 315,000 as of December 31, 2021 is included in accrued interest receivable and other assets. A summary of accrued interest receivable and other assets was as follows: December 31, 2022 December 31, 2021 (In Thousands) Accrued interest receivable $ 9,403 $ 5,497 Net deferred tax asset 11,711 6,175 Investment in historic development entities 2,176 2,299 Investment in low-income housing development entity 13,514 2,964 Investment in limited partnerships 13,599 9,874 Investment in Trust II — 315 Prepaid expenses 3,821 2,689 Other assets 8,883 9,577 Total accrued interest receivable and other assets $ 63,107 $ 39,390 Note 9 – Deposits The composition of deposits is shown below. December 31, 2022 December 31, 2021 Balance Average Balance Average Rate Balance Average Balance Average Rate (Dollars in Thousands) Non-interest-bearing transaction accounts $ 537,107 $ 566,230 — % $ 589,559 $ 536,981 — % Interest-bearing transaction accounts 576,601 503,668 0.79 530,225 506,693 0.19 Money market accounts 698,505 761,469 0.82 754,410 693,608 0.17 Certificates of deposit 153,757 97,448 1.39 54,091 47,020 0.84 Wholesale deposits 202,236 48,825 3.31 29,638 119,831 0.82 Total deposits $ 2,168,206 $ 1,977,640 0.67 $ 1,957,923 $ 1,904,133 0.19 A summary of annual maturities of in-market and wholesale certificates of deposit at December 31, 2022 is as follows: (In Thousands) Maturities during the year ended December 31, 2023 $ 234,750 2024 12,804 2025 14,442 2026 25,493 2027 51,432 Thereafter 2,072 $ 340,993 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. 101 Table of Contents Deposits include $ 81.6 million and $ 7.9 million of certificates of deposit and wholesale deposits which are denominated in amounts greater than $250,000 at December 31, 2022 and 2021, respectively. Note 10 – FHLB Advances, Other Borrowings and Junior Subordinated Notes The composition of borrowed funds is shown below. December 31, 2022 December 31, 2021 Balance Weighted Average Balance Weighted Average Rate Balance Weighted Average Balance Weighted Average Rate (Dollars in Thousands) Federal funds purchased $ — $ 14 7.42 % $ — $ — — % FHLB advances 416,380 414,191 1.70 368,800 376,781 1.30 Line of credit — 85 2.78 500 78 2.90 Other borrowings 6,088 8,624 5.23 10,363 8,090 4.11 Subordinated notes payable 34,340 35,095 5.06 23,788 23,766 5.94 Junior subordinated notes (1) — 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: (In Thousands) Maturities during the year ended December 31, 2023 $ 236,880 2024 35,500 2025 56,000 2026 60,000 2027 28,000 Thereafter $ 40,428 $ 456,808 The Corporation has a $ 600.8 million FHLB line of credit available for advances which is collateralized as noted below. At December 31, 2022, $ 184.4 million of this line remained unused. 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, 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. Loans totaling approximately $ 1.059 billion and $ 1.305 billion were pledged as collateral at December 31, 2022 and 2021, respectively. The Corporation has a senior line of credit with a third-party financial institution of $ 10.5 million. 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 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 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 102 Table of Contents 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. 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 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 The Corporation and the Bank are subject to various regulatory capital requirements administered by Federal and Wisconsin banking agencies. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions on the part of regulators, that if undertaken, could have a direct material effect on the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory practices. The Corporation’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The Corporation regularly reviews and updates, when appropriate, its Capital and Liquidity Action Plan, which is designed to help ensure appropriate capital adequacy, to plan for future capital needs, and to ensure that the Corporation serves as a source of financial strength to the Bank. The Corporation’s and the Bank’s Board and management teams adhere to the appropriate regulatory guidelines on decisions which affect their respective capital positions, including but not limited to, decisions relating to the payment of dividends and increasing indebtedness. As a bank holding company, the Corporation’s ability to pay dividends is affected by the policies and enforcement powers of the Board of Governors of the Federal Reserve system (the “Federal Reserve”). Federal Reserve guidance urges financial institutions to strongly consider eliminating, deferring, or significantly reducing dividends if: (i) net income available to common shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividend; (ii) the prospective rate of earnings retention is not consistent with the bank holding company’s capital needs and overall current and prospective financial condition; or (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital ratios. Management intends, when appropriate under regulatory guidelines, to consult with the Federal Reserve Bank of Chicago and provide it with information on the Corporation’s then-current and prospective 103 Table of Contents earnings and capital position in advance of declaring any cash dividends. As a Wisconsin corporation, the Corporation is subject to the limitations of the Wisconsin Business Corporation Law, which prohibit the Corporation from paying dividends if such payment would: (i) render the Corporation unable to pay its debts as they become due in the usual course of business, or (ii) result in the Corporation’s assets being less than the sum of its total liabilities plus the amount needed to satisfy the preferential rights upon dissolution of any shareholders with preferential rights superior to those shareholders receiving the dividend. The Bank is also subject to certain legal, regulatory, and other restrictions on their ability to pay dividends to the Corporation. As a bank holding company, the payment of dividends by the Bank to the Corporation is one of the sources of funds the Corporation could use to pay dividends, if any, in the future and to make other payments. Future dividend decisions by the Bank and the Corporation will continue to be subject to compliance with various legal, regulatory, and other restrictions as defined from time to time. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of Total Common Equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to adjusted total assets. These risk-based capital requirements presently address credit risk related to both recorded and off-balance sheet commitments and obligations. In July 2013, the FRB and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks. These rules are applicable to all financial institutions that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as bank and savings and loan holding companies other than “small bank holding companies” (generally non-publicly traded bank holding companies with consolidated assets of less than $1 billion). Under the final rules, minimum requirements increased for both the quantity and quality of capital held by the Corporation. The rules include a new Common Equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, require a minimum ratio of Total Capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. The rules also permit banking organizations with less than $15 billion in assets to retain, through a one-time election, the past treatment for accumulated other comprehensive income, which did not affect regulatory capital. The Corporation elected to retain this treatment, which reduces the volatility of regulatory capital ratios. The Corporation also must comply with the 2.5% conservation buffer, which the Corporation met as of December 31, 2022. As of December 31, 2022, the Corporation’s capital levels exceeded the regulatory minimums and the Bank’s capital levels remained characterized as well capitalized under the regulatory framework. The following tables summarize both the Corporation’s and the Bank’s capital ratios and the ratios required by their federal regulators: 104 Table of Contents As of December 31, 2022 Actual Minimum Required for Capital Adequacy Purposes For Capital Adequacy Purposes Plus Capital Conservation Buffer Minimum Required to Be Well Capitalized Under Prompt Corrective Action Requirements Amount Ratio Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) Total capital (to risk-weighted assets) Consolidated $ 323,893 11.26 % $ 230,180 8.00 % $ 302,111 10.50 % N/A N/A First Business Bank 323,021 11.22 230,367 8.00 302,357 10.50 $ 287,959 10.00 % Tier 1 capital (to risk-weighted assets) Consolidated $ 264,843 9.20 % $ 172,635 6.00 % $ 244,566 8.50 % N/A N/A First Business Bank 298,312 10.36 172,775 6.00 244,765 8.50 $ 230,367 8.00 % Common equity tier 1 capital (to risk-weighted assets) Consolidated $ 252,851 8.79 % $ 129,476 4.50 % $ 201,407 7.00 % N/A N/A First Business Bank 298,312 10.36 129,581 4.50 201,571 7.00 $ 187,173 6.50 % Tier 1 leverage capital (to adjusted assets) Consolidated $ 264,843 9.17 % $ 115,464 4.00 % $ 115,464 4.00 % N/A N/A First Business Bank 298,312 10.34 115,402 4.00 115,402 4.00 $ 144,252 5.00 % 105 Table of Contents As of December 31, 2021 Actual Minimum Required for Capital Adequacy Purposes For Capital Adequacy Purposes Plus Capital Conservation Buffer Minimum Required to Be Well Capitalized Under Prompt Corrective Action Requirements Amount Ratio Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) Total capital (to risk-weighted assets) Consolidated $ 281,745 10.82 % $ 208,337 8.00 % $ 273,443 10.50 % N/A N/A First Business Bank 280,448 10.78 208,142 8.00 273,187 10.50 $ 260,178 10.00 % Tier 1 capital (to risk-weighted assets) Consolidated $ 232,795 8.94 % $ 156,253 6.00 % $ 221,358 8.50 % N/A N/A First Business Bank 255,286 9.81 156,107 6.00 221,151 8.50 $ 208,142 8.00 % Common equity tier 1 capital (to risk-weighted assets) Consolidated $ 222,719 8.55 % $ 117,190 4.50 % $ 182,295 7.00 % N/A N/A First Business Bank 255,286 9.81 117,080 4.50 182,124 7.00 $ 169,116 6.50 % Tier 1 leverage capital (to adjusted assets) Consolidated $ 232,795 8.94 % $ 104,145 4.00 % $ 104,145 4.00 % N/A N/A First Business Bank 255,286 9.81 104,045 4.00 104,045 4.00 $ 130,056 5.00 % The following table reconciles stockholders’ equity to federal regulatory capital at December 31, 2022 and 2021, respectively: As of December 31, 2022 2021 (In Thousands) Stockholders’ equity of the Corporation $ 260,640 $ 232,422 Net unrealized and accumulated losses on specific items 15,310 1,457 Disallowed servicing assets ( 706 ) ( 727 ) Disallowed goodwill and other intangibles ( 10,401 ) ( 10,433 ) Junior subordinated notes — 10,076 Tier 1 capital 264,843 232,795 Allowable general valuation allowances and subordinated debt 59,050 48,950 Total capital $ 323,893 $ 281,745 Note 13 – Earnings per Common Share Earnings per common share are computed using the two-class method. Basic earnings per common share are computed by dividing net income allocated to common shares by the weighted average number of shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include unvested restricted shares. Unvested restricted shares are considered participating securities because holders of these securities receive non-forfeitable dividends, or dividend equivalents, at the same rate as holders of the Corporation’s common stock. Diluted earnings per share are computed by dividing net income allocated to common shares adjusted for reallocation of undistributed earnings of unvested restricted shares by the weighted average number of shares determined for the basic earnings per common share computation plus the dilutive effect of common stock equivalents using the treasury stock method. 106 Table of Contents For the Year Ended December 31, 2022 2021 2020 (Dollars in Thousands, Except Share Data) Basic earnings per common share Net income $ 40,858 $ 35,755 $ 16,978 Less: preferred stock dividends 683 — — Less: earnings allocated to participating securities 1,106 1,053 423 Basic earnings allocated to common shareholders $ 39,069 $ 34,702 $ 16,555 Weighted-average common shares outstanding, excluding participating securities 8,226,943 8,314,921 8,384,464 Basic earnings per common share $ 4.75 $ 4.17 $ 1.97 Diluted earnings per common share Earnings allocated to common shareholders, diluted $ 39,069 $ 34,702 $ 16,555 Weighted-average diluted common shares outstanding, excluding participating securities 8,226,943 8,314,921 8,384,464 Diluted earnings per common share $ 4.75 $ 4.17 $ 1.97 Note 14 – Share-Based Compensation The Corporation adopted the 2019 Equity Incentive Plan (the “Plan”) during the quarter ended June 30, 2019. The Plan is administered by the Compensation Committee of the Board of Directors (the “Board”) of the Corporation and provides for the grant of equity ownership opportunities through incentive stock options and nonqualified stock options (“Stock Options”), restricted stock, restricted stock units, dividend equivalent units, and any other type of award permitted by the Plan. As of 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. Restricted Stock Under the Plan, the Corporation may grant restricted stock awards (“RSA”), restricted stock units (“RSU”), and other stock-based awards to plan participants, subject to forfeiture upon the occurrence of certain events until the dates specified in the participant’s award agreement. While restricted stock is subject to forfeiture, 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. Compensation expense for restricted stock is recognized over the requisite service period of generally three or four years for the entire award on a straight-line basis. Upon vesting of restricted stock, the benefit of tax deductions in excess of recognized compensation expense is reflected as an income tax benefit in the Consolidated Statements of Income. The Corporation may issue a combination of performance-based restricted stock units (“PRSU”) and time-based restricted stock awards to its plan participants. Vesting of the 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. 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. 107 Table of Contents 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 Granted (1) 57,305 24.08 18,060 31.32 3,410 25.82 78,775 25.82 Vested ( 55,334 ) 22.31 — — ( 1,570 ) 20.41 ( 56,904 ) 22.26 Forfeited ( 11,002 ) 22.86 — — — — ( 11,002 ) 22.86 Nonvested balance as of December 31, 2020 143,246 23.04 39,570 28.85 4,988 24.08 187,804 24.29 Granted (1) 67,515 22.39 23,550 27.12 2,065 21.68 93,130 23.57 Vested ( 61,384 ) 22.26 — — ( 2,001 ) 22.91 ( 63,385 ) 22.28 Forfeited ( 7,760 ) 23.24 — — — — ( 7,760 ) 23.24 Nonvested balance as of December 31, 2021 141,617 23.06 63,120 28.20 5,052 23.56 209,789 24.62 Granted (1) 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. 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 Corporation is authorized to issue up to 250,000 shares of common stock under the ESPP. The plan qualifies as an employee stock purchase plan under section 423 of the Internal Revenue Code of 1986. Under the ESPP, eligible employees may enroll in a three month offer period that begins January, April, July, and October of each year. Employees may elect to purchase a limited number of shares on the Corporation's common stock at 90 % of the fair market value on the last day of the offering period. The ESPP is treated as a compensatory item for purposes of share-based compensation expense. During the year ended December 31, 2022, the Corporation issued 4,535 shares of common stock under the ESPP. At December 31, 2022, 234,966 shares remained available for issuance under the ESPP. Share-based compensation expense related to restricted stock and ESPP included in the Consolidated Statements of Income was as follows: For the Year Ended December 31, 2022 2021 2020 (In Thousands) Share-based compensation expense $ 2,584 $ 2,513 $ 1,871 108 Table of Contents Note 15 – Employee Benefit Plans The Corporation maintains a contributory 401(k) defined contribution plan covering substantially all employees. The Corporation matches 100% of amounts contributed by each participating employee, up to 3 % of the employee’s compensation. The Corporation may also make discretionary profit sharing contributions up to an additional 6 % of salary. 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 $ 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. Under the terms of the plan, benefits to be received are generally payable within six months of the date of the termination of employment with the Corporation. The expense associated with the deferred compensation plan for the years ended December 31, 2022, 2021, and 2020 was $ 382,000 , $ 237,000 , and $ 193,000 , respectively. The present value of future payments under the remaining plan of $ 2.3 million and $ 1.9 million at December 31, 2022 and 2021, respectively, is included in accrued interest payable and other liabilities on the Consolidated Balance Sheets. The Corporation owned life insurance policies on the life of the executive covered by the deferred compensation plan, which had cash surrender values and death benefits of approximately $ 2.9 million and $ 6.1 million, respectively, at December 31, 2022 and cash surrender values and death benefits of approximately $ 2.8 million and $ 6.1 million, respectively, at December 31, 2021. The remaining balance of the cash surrender value of bank-owned life insurance of $ 51.0 million and $ 50.8 million as of December 31, 2022 and 2021, respectively, is related to policies on a number of then-qualified individuals affiliated with the Bank. Note 16 – Income Taxes Income tax expense consists of the following: For the Year Ended December 31, 2022 2021 2020 (In Thousands) Current: Federal $ 9,174 $ 6,965 $ 1,948 State 2,987 3,087 1,386 Current tax expense 12,161 10,052 3,334 Deferred: Federal ( 733 ) 1,333 ( 1,678 ) State ( 42 ) ( 110 ) ( 329 ) Deferred tax (benefit) expense ( 775 ) 1,223 ( 2,007 ) Total income tax expense $ 11,386 $ 11,275 $ 1,327 Deferred income tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax basis. Deferred tax assets and liabilities are measured using enacted tax rates to apply to taxable income in the period in which the temporary differences are expected to be recovered or settled. Net deferred tax assets are included in accrued interest receivable and other assets in the Consolidated Balance Sheets. 109 Table of Contents The significant components of the Corporation’s deferred tax assets and liabilities were as follows: December 31, 2022 December 31, 2021 (In Thousands) Deferred tax assets: Allowance for loan and lease losses $ 6,267 $ 6,312 Deferred compensation 2,342 2,016 State net operating loss carryforwards 265 436 Write-down of repossessed assets 11 5 Non-accrual loan interest 47 176 Capital loss carryforwards 21 21 Unrealized losses on securities 5,263 501 Share-based compensation 725 618 Other 125 216 Total deferred tax assets 15,066 10,301 Deferred tax liabilities: Leasing and fixed asset activities 2,197 3,014 Loan servicing asset 393 420 Other 765 692 Total deferred tax liabilities 3,355 4,126 Net deferred tax asset $ 11,711 $ 6,175 The tax effects of unrealized gains and losses on securities are components of other comprehensive income. A reconciliation of the change in net deferred tax assets to deferred tax expense is as follows: December 31, 2022 December 31, 2021 December 31, 2020 (In Thousands) Change in net deferred tax assets $ 5,536 $ ( 1,042 ) $ 1,864 Deferred taxes allocated to other comprehensive income ( 4,761 ) ( 181 ) 143 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. In making the determination that the realization of the deferred tax was more likely than not, the Corporation considered several factors including its recent earnings history, its expected earnings in the future, appropriate tax planning strategies, and expiration dates associated with operating loss carryforwards. The Corporation had state net operating loss carryforwards of approximately $ 6.3 million and $ 7.0 million at December 31, 2022 and 2021, respectively, which can be used to offset future state taxable income. The Corporation believes it will be able to fully utilize its established deferred tax assets and Wisconsin state net operating losses and therefore no valuation allowance has been established as of December 31, 2022 and 2021. 110 Table of Contents The provision for income taxes differs from that computed at the federal statutory corporate tax rate as follows: Year Ended December 31, 2022 2021 2020 (Dollars in Thousands) Income before income tax expense $ 52,244 $ 47,030 $ 18,305 Tax expense at statutory federal rate of 21% applied to income before income tax expense $ 10,971 $ 9,876 $ 3,844 State income tax, net of federal effect 2,337 2,351 837 Tax-exempt security and loan income, net of TEFRA adjustments ( 704 ) ( 710 ) ( 648 ) Bank-owned life insurance ( 468 ) ( 297 ) ( 294 ) 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 Effective tax rate 21.79 % 23.97 % 7.25 % There were no uncertain tax positions outstanding as of December 31, 2022 and 2021. As of December 31, 2022, tax years remaining open for the State of Wisconsin tax were 2018 through 2021. Federal tax years that remained open were 2019 through 2021. As of December 31, 2022, there were also no unrecognized tax benefits that are expected to significantly increase or decrease within the next twelve months. Note 17 – Derivative Financial Instruments The Corporation offers interest rate swap products directly to qualified commercial borrowers. The Corporation economically hedges client derivative transactions by entering into offsetting interest rate swap contracts executed with a third party. Derivative transactions executed as part of this program are not considered hedging instruments and are marked-to-market through earnings each period. The derivative contracts have mirror-image terms, which results in the positions’ changes in fair value offsetting through earnings each period. The credit risk and risk of non-performance embedded in the fair value calculations is different between the dealer counterparties and the commercial borrowers which may result in a difference in the changes in the fair value of the mirror-image swaps. The Corporation incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the counterparty’s risk in the fair value measurements. When evaluating the fair value of its derivative contracts for the effects of non-performance and credit risk, the Corporation considered the impact of netting and any applicable credit enhancements such as collateral postings, thresholds and guarantees. As of 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. 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 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. 111 Table of Contents The Corporation also enters into interest rate swaps to manage interest rate risk and reduce the cost of match-funding certain long-term fixed rate loans. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. The instruments are designated as cash flow hedges as the receipt of floating rate interest from the counterparty is used to manage interest rate risk associated with forecasted issuances of short-term FHLB advances. The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affects earnings. A pre-tax unrealized gain of $ 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. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affects earnings. A pre-tax unrealized gain of $ 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 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 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 $ 61,419 112 Table of Contents 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 The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of clients. These financial instruments include commitments to extend credit and standby letters of credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the Consolidated Financial Statements. The contract amounts reflect the extent of involvement the Bank has in these particular classes of financial instruments. In the event of non-performance, the Bank’s exposure to credit loss for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments and conditional obligations as they do for instruments reflected in the Consolidated Financial Statements. An accrual for credit losses on financial instruments with off-balance sheet risk would be recorded separate from any valuation account related to any such recognized financial instrument. As of December 31, 2022 and 2021, there were no accrued credit losses for financial instruments with off-balance sheet risk. Financial instruments whose contract amounts represent potential credit risk were as follows: At December 31, 2022 2021 (In Thousands) Commitments to extend credit, primarily commercial loans $ 913,042 $ 768,442 Standby letters of credit 15,013 16,815 Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition in the contract. Commitments generally have fixed expiration dates or other termination clauses and may have a fixed interest rate or a rate which varies with the prime rate or other market indices and may require payment of a fee. Since some commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements of the Bank. The Bank evaluates the creditworthiness of each client on a case-by-case basis and generally extends credit only on a secured basis. Collateral obtained varies but consists primarily of commercial real estate, accounts receivable, inventory, equipment, and securities. There is generally no market for commercial loan commitments, the fair value of which would approximate the present value of any fees expected to be received as a result of the commitment. These are not considered to be material to the financial statements. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a client to a third party. 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 113 Table of Contents 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. The fair value has been estimated to approximate the fees received by the Bank for issuance. 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) and 504 loans, as well as participation interests in other, non-SBA originated, loans to third parties. The Corporation has a continuing involvement in each of the transferred lending arrangements by way of relationship management and servicing the loans, as well as being subject to normal and customary requirements of the SBA loan program and standard representations and warranties related to sold amounts. In the event of a loss resulting from default and a determination by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Corporation, the SBA may require the Corporation to repurchase the loan, deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of the principal loss related to the deficiency from the Corporation. The Corporation must comply with applicable SBA regulations in order to maintain the guaranty. In addition, the Corporation retains the option to repurchase the sold guaranteed portion of an SBA loan if the loan defaults. Management has assessed estimated losses inherent in the outstanding guaranteed portions of SBA loans sold in accordance with ASC 450, Contingencies , and determined a recourse reserve based on the probability of future losses for these loans to be $ 441,000 and $ 635,000 at December 31, 2022 and 2021, respectively, which is reported in accrued interest payable and other liabilities on the Consolidated Balance Sheets. The summary of the activity in the SBA recourse reserve is as follows: As of and For the Year Ended December 31, 2022 2021 (In Thousands) Balance at the beginning of the period $ 635 $ 723 SBA recourse benefit ( 188 ) ( 76 ) Charge-offs, net ( 6 ) ( 12 ) Balance at the end of the period $ 441 $ 635 In the normal course of business, various legal proceedings involving the Corporation are pending. Management, based upon advice from legal counsel, does not anticipate any significant losses as a result of these actions. Management believes that any liability arising from any such proceedings currently existing or threatened will not have a material adverse effect on the Corporation’s financial position, results of operations, and cash flows. Note 19 – Fair Value Disclosures The Corporation determines the fair values of its financial instruments based on the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is defined as the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date and is based on exit prices. Fair value includes assumptions about risk, such as nonperformance risk in liability fair values, and is a market-based measurement, not an entity-specific measurement. The standard describes three levels of inputs that may be used to measure fair value. Level 1 — Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date. Level 2 — Level 2 inputs are inputs, other than quoted prices included with Level 1, that are observable for the asset or liability either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 — Level 3 inputs are supported by little or no market activity and are significant to the fair value of the assets or liabilities. 114 Table of Contents In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Corporation’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Assets and liabilities measured at fair value on a recurring basis, segregated by fair value hierarchy level, are summarized below: December 31, 2022 Fair Value Measurements Using Level 1 Level 2 Level 3 Total (In Thousands) Assets: Securities available-for-sale: U.S. treasuries $ — $ 4,445 $ — $ 4,445 U.S. government agency securities - government-sponsored enterprises — 13,205 — 13,205 Municipal securities — 39,311 — 39,311 Residential mortgage-backed securities - government issued — 19,431 — 19,431 Residential mortgage-backed securities - government-sponsored enterprises — 106,323 — 106,323 Commercial mortgage-backed securities - government issued — 2,932 — 2,932 Commercial mortgage-backed securities - government-sponsored enterprises — 26,377 — 26,377 Interest rate swaps — 68,581 — 68,581 Liabilities: Interest rate swaps — 61,419 — 61,419 December 31, 2021 Fair Value Measurements Using Level 1 Level 2 Level 3 Total (In Thousands) Assets: Securities available-for-sale: U.S. treasuries $ — $ 4,914 $ — $ 4,914 U.S. government agency securities - government-sponsored enterprises — 19,935 — 19,935 Municipal securities — 30,957 — 30,957 Residential mortgage-backed securities - government issued — 19,661 — 19,661 Residential mortgage-backed securities - government-sponsored enterprises — 85,705 — 85,705 Commercial mortgage-backed securities - government issued — 5,771 — 5,771 Commercial mortgage-backed securities - government-sponsored enterprises — 36,531 — 36,531 Other securities — 2,228 — 2,228 Interest rate swaps — 26,343 — 26,343 Liabilities: Interest rate swaps — 28,283 — 28,283 For assets and liabilities measured at fair value on a recurring basis, there were no transfers between the levels during the year ended December 31, 2022 or 2021 related to the above measurements. 115 Table of Contents Assets and liabilities measured at fair value on a non-recurring basis, segregated by fair value hierarchy, are summarized below: December 31, 2022 Fair Value Measurements Using Level 1 Level 2 Level 3 Total (In Thousands) Impaired loans $ — $ — $ 1,022 $ 1,022 Repossessed assets — — 95 95 Loan servicing rights — — 1,491 1,491 December 31, 2021 Fair Value Measurements Using Level 1 Level 2 Level 3 Total (In Thousands) Impaired loans $ — $ — $ 1,000 $ 1,000 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 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. These techniques included observable inputs for the individual impaired loans being evaluated such as current appraisals, recent sales of similar assets, or other observable market data, and unobservable inputs, typically when discounts are applied to appraisal values to adjust such values to current market conditions or to reflect net realizable values. The quantification of unobservable inputs for Level 3 impaired loan values range from 8 % - 100 % as of the measurement date of December 31, 2022. The weighted average of those unobservable inputs was 31 %. The majority of the impaired loans are considered collateral dependent loans or are supported by an SBA guaranty. 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. When SBA loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. The servicing rights are subsequently measured using the amortization method, which requires amortization into interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. The Corporation periodically reviews this portfolio for impairment and engages a third-party valuation firm to assess the fair value of the overall servicing rights portfolio. Loan servicing rights do not trade in an active, open market with readily observable prices. While sales of loan servicing rights do occur, the precise terms and conditions typically are not readily available to allow for a “quoted price for similar assets” comparison. Accordingly, the Corporation utilizes an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of its loan servicing rights. The valuation model incorporates prepayment assumptions to project loan servicing rights cash flows based on the current interest rate scenario, which is then discounted to estimate an expected fair value of the loan servicing rights. The valuation model considers portfolio characteristics of the underlying serviced portion of the SBA loans and uses the following significant unobservable inputs: (1) constant prepayment rate (“CPR”) assumptions based on the SBA sold pools historical CPR as quoted in Bloomberg and (2) a discount rate. Loan servicing rights are classified in Level 3 of the fair value hierarchy due to the nature of the valuation inputs. 116 Table of Contents Fair Value of Financial Instruments The Corporation is required to disclose estimated fair values for its financial instruments. Fair value estimates, methods and assumptions, consistent with exit price concepts for fair value measurements, are set forth below: December 31, 2022 Carrying Amount Fair Value Total Level 1 Level 2 Level 3 (In Thousands) Financial assets: Cash and cash equivalents $ 102,682 $ 102,682 $ 102,682 $ — $ — Securities available-for-sale 212,024 212,024 — 212,024 — Securities held-to-maturity 12,635 12,270 — 12,270 — Loans held for sale 2,632 2,829 — 2,829 — Loans and lease receivables, net 2,418,836 2,394,702 — — 2,394,702 Federal Home Loan Bank stock 17,812 N/A N/A N/A N/A Accrued interest receivable 9,403 9,403 9,403 — — Interest rate swaps 68,581 68,543 — 68,543 — Financial liabilities: Deposits 2,168,206 2,167,444 1,827,215 340,229 — Federal Home Loan Bank advances and other borrowings 456,808 440,242 — 440,242 — Accrued interest payable 4,053 4,053 4,053 — — Interest rate swaps 61,419 61,419 — 61,419 — Off-balance sheet items: Standby letters of credit 184 184 — — 184 N/A = The fair value is not applicable due to restrictions placed on transferability 117 Table of Contents December 31, 2021 Carrying Amount Fair Value Total Level 1 Level 2 Level 3 (In Thousands) Financial assets: Cash and cash equivalents $ 57,110 $ 57,110 $ 57,110 $ — $ — Securities available-for-sale 205,702 205,702 — 205,702 — Securities held-to-maturity 19,746 20,276 — 20,276 — Loans held for sale 3,570 3,927 — 3,927 — Loans and lease receivables, net 2,215,072 2,241,093 — — 2,241,093 Federal Home Loan Bank stock 13,336 N/A N/A N/A N/A Accrued interest receivable 5,497 5,497 5,497 — — Interest rate swaps 26,343 26,343 — 26,343 — Financial liabilities: Deposits 1,957,923 1,968,195 1,894,273 73,922 — Federal Home Loan Bank advances and other borrowings 403,451 409,894 — 409,894 — Junior subordinated notes 10,076 8,844 — — 8,844 Accrued interest payable 1,008 1,008 1,008 — — Interest rate swaps 28,283 28,283 — 28,283 — Off-balance sheet items: Standby letters of credit 203 203 — — 203 N/A = The fair value is not applicable due to restrictions placed on transferability Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the Consolidated Balance Sheets. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Corporation. Securities: The fair value measurements of investment securities are determined by a third-party pricing service which considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, credit information and the securities’ terms and conditions, among other things. The fair value measurements are subject to independent verification by another pricing source on a quarterly basis to review for reasonableness. Any significant differences in pricing are reviewed with appropriate members of management who have the relevant technical expertise to assess the results. The Corporation has determined that these valuations are classified in Level 2 of the fair value hierarchy. When the independent pricing service does not provide a fair value measurement for a particular security, the Corporation will estimate the fair value based on specific information about each security. Fair values derived in this manner are classified in Level 3 of the fair value hierarchy. Loans Held for Sale: Loans held for sale, which consist of the guaranteed portions of SBA loans, are carried at the lower of cost or estimated fair value. The estimated fair value is based on what secondary markets are currently offering for portfolios with similar characteristics. Interest Rate Swaps: The carrying amount and fair value of existing derivative financial instruments are based upon independent valuation models, which use widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative contract. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The Corporation incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the 118 Table of Contents respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Corporation considers the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. Limitations: Fair value estimates are made at a discrete point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holding of a particular financial instrument. Because no market exists for a significant portion of the Corporation’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and are not considered in the estimates. Note 20 – Condensed Parent Only Financial Information The following represents the condensed financial information of the Corporation only: Condensed Balance Sheets December 31, 2022 December 31, 2021 (In Thousands) Assets Cash and cash equivalents $ 3,129 $ 331 Investments in subsidiaries, at equity 294,109 265,303 Premises and equipment, net 66 76 Other assets 1,239 2,045 Total assets $ 298,543 $ 267,755 Liabilities and Stockholders’ Equity Junior subordinated notes and other borrowings $ 34,341 $ 34,364 Accrued interest payable and other liabilities 3,562 969 Total liabilities 37,903 35,333 Stockholders’ equity 260,640 232,422 Total liabilities and stockholders’ equity $ 298,543 $ 267,755 119 Table of Contents Condensed Statements of Income For the Year Ended December 31, 2022 2021 2020 (In Thousands) Net interest expense $ 2,295 $ 2,539 $ 2,540 Non-interest income Consulting and rental income from consolidated subsidiaries 5,794 2,417 21,320 Other non-interest income 69 34 34 Total non-interest income 5,863 2,451 21,354 Non-interest expense 7,633 5,747 24,507 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 Loss before equity in undistributed net income of consolidated subsidiaries 2,678 4,352 4,305 Equity in undistributed net income of consolidated subsidiaries 43,536 40,107 21,283 Net income $ 40,858 $ 35,755 $ 16,978 120 Table of Contents Condensed Statements of Cash Flows For the Year Ended December 31, 2022 2021 2020 (In Thousands) Operating activities Net income $ 40,858 $ 35,755 $ 16,978 Adjustments to reconcile net income to net cash used in operating activities: Equity in undistributed earnings of consolidated subsidiaries ( 43,536 ) ( 40,107 ) ( 21,283 ) Share-based compensation 2,584 2,513 1,871 Excess tax (benefit) expense from share-based compensation ( 91 ) ( 27 ) 8 Payments on operating lease liabilities — — ( 560 ) Net increase (decreases) in other liabilities 2,592 ( 2,090 ) ( 574 ) Other, net ( 538 ) 3,413 560 Net cash used in operating activities 1,869 ( 543 ) ( 3,000 ) Investing activities 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 (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 ) Net proceeds from purchases of ESPP shares 134 160 66 Net cash used in financing activities ( 1,394 ) ( 10,928 ) ( 7,203 ) Net (decrease) increase in cash and due from banks 2,798 ( 2,937 ) 1,831 Cash and cash equivalents at the beginning of the period 331 3,268 1,437 Cash and cash equivalents at the end of the period $ 3,129 $ 331 $ 3,268 121 Table of Contents Note 21 – Condensed Quarterly Earnings (unaudited) 2022 2021 Fourth Quarter Third Quarter Second Quarter First Quarter Fourth Quarter Third Quarter Second Quarter First Quarter (Dollars in Thousands, Except Per Share Data) Interest income $ 38,319 $ 31,786 $ 27,031 $ 24,235 $ 23,575 $ 24,014 $ 24,599 $ 23,807 Interest expense 10,867 5,902 3,371 2,809 2,651 2,791 2,947 2,944 Net interest income 27,452 25,884 23,660 21,426 20,924 21,223 21,652 20,863 Provision for loan and lease losses 702 12 ( 3,727 ) ( 855 ) ( 508 ) ( 2,269 ) ( 958 ) ( 2,068 ) Non-interest income 6,973 8,197 6,872 7,386 7,569 7,015 6,321 7,195 Non-interest expense 21,167 20,028 19,456 18,823 17,531 18,490 18,184 17,330 Income before income tax expense 12,556 14,041 14,803 10,844 11,470 12,017 10,747 12,796 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 Per common share: Basic earnings $ 1.18 $ 1.25 $ 1.29 $ 1.02 $ 1.01 $ 1.07 $ 0.95 $ 1.12 Diluted earnings 1.18 1.25 1.29 1.02 1.01 1.07 0.95 1.12 Dividends declared 0.1975 0.1975 0.1975 0.1975 0.18 0.18 0.18 0.18 122 Table of Contents Report of Independent Registered Public Accounting Firm Shareholders and the Board of Directors First Business Financial Services, Inc. Madison, Wisconsin Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of First Business Financial Services, Inc. (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, 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: (2013) issued by COSO. Basis for Opinions The Corporation management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Corporation’s financial statements and an opinion on the Corporation’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 123 Table of Contents Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance and Provision for Loan and Lease Losses – Qualitative Factors As described in Notes 1- Nature of Operations and Summary of Significant Accounting Policies, and 4- Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses to the consolidated financial statements, the Corporation’s allowance for loan and lease losses is an accounting estimate that requires significant management judgment in the evaluation of the quality of the loan and lease portfolio and the application of qualitative factors. The allowance for loan and lease losses is composed of loans collectively and individually evaluated for impairment. The specific allowance on loans individually evaluated for impairment relates to non-accrual and restructured loans and leases. The portion of the allowance for the collectively evaluated loans is reliant upon historical experience, as well as quantitative and qualitative factors. The calculation of the allowance for loan losses involves significant estimates and subjective assumptions, which require a high degree of judgment. The methodology applied for determining inherent losses stems from current risk characteristics of the loan and lease portfolio, an assessment of individual impaired loans and leases, actual loss experience, and adverse situations that may affect the borrower’s ability to repay. The collectively evaluated component of the allowance for loan and lease losses utilizes a historical loss rate calculation for each loan and lease category with similar risk characteristics. The average loss rates are adjusted for qualitative factors and applied to the end of period loan and lease portfolio balances to estimate probable incurred losses in the loan and lease portfolio. The qualitative factors and measurements used to quantify the risks within each of these categories are subjectively selected by management, using certain objective measurements period over period. The current period measurements are evaluated and assigned a factor commensurate with the current level of risk within each loan and lease category. The qualitative factor is increased or decreased for each loan and lease category based on management’s assessment of these qualitative factors: 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. We identified auditing the estimate of the aggregate effect of the qualitative factors as a critical audit matter as it involved especially subjective auditor judgment. Auditing management’s determination of qualitative factors involved especially subjective auditor judgment because management’s estimate relies on an inherently subjective analysis to determine the quantitative impact the factors have on the allowance. Management’s analysis of these factors requires significant judgment. The primary procedures we performed to address this critical audit matter included: Testing the effectiveness of controls over the evaluation of the items used to estimate the qualitative factors, including controls addressing: • The reliability and relevancy of data used as the basis for the adjustments relating to qualitative factors; • Management’s judgments related to the assessed level of risk and the qualitative factor used to adjust the average loss rates; • The mathematical accuracy of the dollar amount applied to the qualitative factor; and • Management’s review of trends and the movement within each qualitative factor and the overall allowance balance. Substantively testing management’s process, including evaluating their judgments and assumptions, for developing the qualitative factors, which included: 124 Table of Contents • 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 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; • Verifying the mathematical accuracy of the adjustment factors for the qualitative component and the dollar amount of the reserve derived from the qualitative factor assessment; • Tracing the allowance allocation from the qualitative factor analysis to the overall allowance calculation. /s/ Crowe LLP 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 February 22, 2023 125 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.