FIRST BUSINESS FINANCIAL SERVICES, INC. 10-Q

Item 1. Financial Statements First Business Financial Services, Inc. Consolidated Balance Sheets September 30, 2023 December 31, 2022 (Unaudited) (In Thousands, Except Share Data) Assets Cash and due from banks $ 23,303 $ 25,811 Short-term investments 109,612 76,871 Cash and cash equivalents 132,915 102,682 Securities available-for-sale, at fair value 272,163 212,024 Securities held-to-maturity, at amortized cost 8,689 12,635 Loans held for sale 4,168 2,632 Loans and leases receivable, net of allowance for credit losses of $ 29,331 and $ 24,230 , respectively 2,734,683 2,418,836 Premises and equipment, net 6,157 4,340 Repossessed assets 61 95 Right-of-use assets, net 6,800 7,690 Bank-owned life insurance 55,123 54,018 Federal Home Loan Bank stock, at cost 13,528 17,812 Goodwill and other intangible assets 12,110 12,159 Derivatives 93,702 68,581 Accrued interest receivable and other assets 78,751 63,107 Total assets $ 3,418,850 $ 2,976,611 Liabilities and Stockholders’ Equity Deposits $ 2,657,007 $ 2,168,206 Federal Home Loan Bank advances and other borrowings 363,891 456,808 Lease liabilities 9,236 10,175 Derivatives 78,696 61,419 Accrued interest payable and other liabilities 29,262 19,363 Total liabilities 3,138,092 2,715,971 Stockholders’ equity: Preferred stock, $ 0.01 par value, 2,500,000 shares authorized, 12,500 shares of 7 % non-cumulative perpetual preferred stock, Series A, outstanding at September 30, 2023 and December 31, 2022, respectively 11,992 11,992 Common stock, $ 0.01 par value, 25,000,000 shares authorized, 9,418,413 and 9,371,078 shares issued, 8,315,186 and 8,362,085 shares outstanding at September 30, 2023 and December 31, 2022, respectively 95 94 Additional paid-in capital 89,947 87,512 Retained earnings 223,068 203,507 Accumulated other comprehensive loss ( 14,234 ) ( 15,310 ) Treasury stock, 1,103,227 and 1,008,993 shares at September 30, 2023 and December 31, 2022, respectively, at cost ( 30,110 ) ( 27,155 ) Total stockholders’ equity 280,758 260,640 Total liabilities and stockholders’ equity $ 3,418,850 $ 2,976,611 See accompanying Notes to Unaudited Consolidated Financial Statements. 1 Table of Contents First Business Financial Services, Inc. Consolidated Statements of Income (Unaudited) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 (In Thousands, Except Per Share Data) Interest income Loans and leases $ 47,868 $ 30,174 $ 131,962 $ 78,934 Securities 2,198 1,165 5,601 3,204 Short-term investments 875 447 2,604 915 Total interest income 50,941 31,786 140,167 83,053 Interest expense Deposits 19,803 3,181 48,774 5,005 Federal Home Loan Bank advances and other borrowings 2,542 2,721 8,344 6,573 Junior subordinated notes — — — 504 Total interest expense 22,345 5,902 57,118 12,082 Net interest income 28,596 25,884 83,049 70,971 Provision for credit losses 1,817 12 5,610 ( 4,569 ) Net interest income after provision for credit losses 26,779 25,872 77,439 75,540 Non-interest income Private wealth management service fees 2,945 2,618 8,492 8,311 Gain on sale of Small Business Administration loans 851 732 1,771 2,269 Service charges on deposits 835 1,018 2,283 3,058 Loan fees 786 814 2,495 2,163 Increase in cash surrender value of bank-owned life insurance 376 359 1,106 1,057 Net loss on sale of securities — — ( 45 ) — Swap fees 992 341 2,526 1,038 Other non-interest income 1,645 2,315 5,586 4,559 Total non-interest income 8,430 8,197 24,214 22,455 Non-interest expense Compensation 15,573 14,817 46,610 42,475 Occupancy 575 566 1,809 1,689 Professional fees 1,429 1,203 4,012 3,671 Data processing 953 719 2,889 2,391 Marketing 758 543 2,165 1,713 Equipment 349 253 1,000 732 Computer software 1,289 1,128 3,668 3,327 FDIC insurance 680 230 1,653 840 Other non-interest expense 1,583 569 3,181 1,469 Total non-interest expense 23,189 20,028 66,987 58,307 Income before income tax expense 12,020 14,041 34,666 39,688 Income tax expense 2,079 3,215 7,409 8,986 Net income 9,941 10,826 27,257 30,702 Preferred stock dividend 218 218 656 464 Net income available to common shareholders $ 9,723 $ 10,608 $ 26,601 $ 30,238 Earnings per common share Basic $ 1.17 $ 1.25 $ 3.19 $ 3.57 Diluted 1.17 1.25 3.19 3.57 Dividends declared per share 0.2275 0.1975 0.6825 0.5925 See accompanying Notes to Unaudited Consolidated Financial Statements. 2 Table of Contents First Business Financial Services, Inc. Consolidated Statements of Comprehensive Income (Unaudited) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 (In Thousands) Net income $ 9,941 $ 10,826 $ 27,257 $ 30,702 Other comprehensive (loss) income Securities available-for-sale: Unrealized securities losses arising during the period ( 6,194 ) ( 10,174 ) ( 6,446 ) ( 29,839 ) Reclassification adjustment for net loss realized in net income — — 45 — Securities held-to-maturity: Amortization of net unrealized losses transferred from available-for-sale 1 3 4 11 Interest rate swaps: Unrealized gains on interest rate swaps arising during the period 5,713 3,452 7,844 9,496 Income tax benefit (expense) 123 1,719 ( 371 ) 5,201 Total other comprehensive (loss) income ( 357 ) ( 5,000 ) 1,076 ( 15,131 ) Comprehensive income $ 9,584 $ 5,826 $ 28,333 $ 15,571 See accompanying Notes to Unaudited Consolidated Financial Statements. 3 Table of Contents First Business Financial Services, Inc. Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) Common Shares Outstanding Preferred Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total (In Thousands, Except Share Data) Balance at January 1, 2022 8,457,564 $ — $ 93 $ 85,797 $ 170,020 $ ( 1,457 ) $ ( 22,031 ) $ 232,422 Net income — — — — 8,672 — — 8,672 Other comprehensive loss — — — — — ( 6,406 ) — ( 6,406 ) Issuance of preferred stock, net of issuance costs — 11,992 — — — — — 11,992 Share-based compensation - restricted shares and employee stock purchase plan 47,864 — 1 608 — — — 609 Issuance of common stock under the employee stock purchase plan 1,380 — — 40 — — — 40 Treasury stock re-issued — — — ( 1,002 ) — — 1,002 — Cash dividends ($ 0.1975 per share) — — — — ( 1,670 ) — — ( 1,670 ) Treasury stock purchased ( 18,223 ) — — — — — ( 608 ) ( 608 ) Balance at March 31, 2022 8,488,585 $ 11,992 $ 94 $ 85,443 $ 177,022 $ ( 7,863 ) $ ( 21,637 ) $ 245,051 Net income — — — — 11,204 — — 11,204 Other comprehensive loss — — — — — ( 3,725 ) — ( 3,725 ) Share-based compensation - restricted shares and employee stock purchase plan 27,114 — — 645 — — — 645 Issuance of common stock under the employee stock purchase plan 1,254 — — 35 — — — 35 Preferred stock dividends — — — — ( 246 ) — — ( 246 ) Cash dividends ( $ 0.1975 per share) — — — — ( 1,678 ) — — ( 1,678 ) Treasury stock purchased ( 41,000 ) — — — — — ( 1,363 ) ( 1,363 ) Balance at June 30, 2022 8,475,953 $ 11,992 $ 94 $ 86,123 $ 186,302 $ ( 11,588 ) $ ( 23,000 ) $ 249,923 Net income — — — — 10,826 — — 10,826 Other comprehensive loss — — — — — ( 5,000 ) — ( 5,000 ) Share-based compensation - restricted shares and employee stock purchase plan 1,291 — — 651 — — — 651 Issuance of common stock under the employee stock purchase plan 1,006 — — 29 — — — 29 Preferred stock dividends — — — — ( 218 ) — — ( 218 ) Cash dividends ($ 0.1975 per share) — — — — ( 1,675 ) — — ( 1,675 ) Treasury stock purchased ( 46,202 ) — — — — — ( 1,532 ) ( 1,532 ) Balance at September 30, 2022 8,432,048 $ 11,992 $ 94 $ 86,803 $ 195,235 $ ( 16,588 ) $ ( 24,532 ) $ 253,004 4 Table of Contents Common Shares Outstanding Preferred Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total (In Thousands, Except Share Data) Balance at December 31, 2022 8,362,085 $ 11,992 $ 94 $ 87,512 $ 203,507 $ ( 15,310 ) $ ( 27,155 ) $ 260,640 Cumulative change in accounting principle — — — — ( 1,353 ) — — ( 1,353 ) Balance at January 1, 2023 8,362,085 11,992 94 87,512 202,154 ( 15,310 ) ( 27,155 ) 259,287 Net income — — — — 8,979 — — 8,979 Other comprehensive income — — — — — 1,639 — 1,639 Share-based compensation - restricted shares and employee stock purchase plan ( 426 ) — — 634 — — — 634 Issuance of common stock under the employee stock purchase plan 1,005 — — 27 — — — 27 Preferred stock dividends — — — — ( 219 ) — — ( 219 ) Cash dividends ($ 0.2275 per share) — — — — ( 1,906 ) — — ( 1,906 ) Treasury stock purchased ( 56,394 ) — — — — — ( 1,860 ) ( 1,860 ) Balance at March 31, 2023 8,306,270 11,992 94 88,173 209,008 ( 13,671 ) ( 29,015 ) 266,581 Net income — — — — 8,337 — — 8,337 Other comprehensive loss — — — — — ( 206 ) — ( 206 ) Share-based compensation - restricted shares and employee stock purchase plan 45,280 — 1 1,071 — — — 1,072 Issuance of common stock under the employee stock purchase plan 1,044 — — 28 — — — 28 Preferred stock dividends — — — — ( 219 ) — — ( 219 ) Cash dividends ($ 0.2275 per share) — — — — ( 1,889 ) — — ( 1,889 ) Treasury stock purchased ( 37,129 ) — — — — — ( 1,072 ) ( 1,072 ) Balance at June 30, 2023 8,315,465 $ 11,992 $ 95 $ 89,272 $ 215,237 $ ( 13,877 ) $ ( 30,087 ) $ 272,632 Net income — — — — 9,941 — — 9,941 Other comprehensive loss — — — — — ( 357 ) — ( 357 ) Share-based compensation - restricted shares and employee stock purchase plan ( 702 ) — — 643 — — — 643 Issuance of common stock under the employee stock purchase plan 1,134 — — 32 — — — 32 Preferred stock dividends — — — — ( 218 ) — — ( 218 ) Cash dividends ($ 0.2275 per share) — — — — ( 1,892 ) — — ( 1,892 ) Treasury stock purchased ( 711 ) — — — — — ( 23 ) ( 23 ) Balance at September 30, 2023 8,315,186 $ 11,992 $ 95 $ 89,947 $ 223,068 $ ( 14,234 ) $ ( 30,110 ) $ 280,758 See accompanying Notes to Unaudited Consolidated Financial Statements. 5 Table of Contents First Business Financial Services, Inc. Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended September 30, 2023 2022 (In Thousands) Operating activities Net income $ 27,257 $ 30,702 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes, net ( 733 ) ( 2,258 ) Impairment of tax credit investments — ( 351 ) Provision for credit losses 5,610 ( 4,569 ) Depreciation, amortization and accretion, net 2,838 3,088 Share-based compensation 2,349 1,905 Net loss on disposal of fixed assets 73 — Gain on disposal of lease equipment — ( 478 ) Amortization of tax credit investments 2,882 552 Bank-owned life insurance policy income ( 1,106 ) ( 1,057 ) Origination of loans for sale ( 115,925 ) ( 94,433 ) Sale of loans originated for sale 116,160 99,499 Gain on sale of loans originated for sale ( 1,771 ) ( 2,269 ) Net loss on repossessed assets 9 27 Loan servicing right impairment valuation — 15 Return on investment in limited partnerships 3,542 314 Excess tax benefit expense from share-based compensation 185 183 Net payments on operating lease liabilities ( 1,061 ) ( 1,096 ) Net decrease in accrued interest receivable and other assets ( 8,825 ) ( 4 ) Net increase in accrued interest payable and other liabilities 7,474 1,620 Net cash provided by operating activities 38,958 31,390 Investing activities Proceeds from maturities, redemptions, and paydowns of available-for-sale securities 16,536 32,699 Proceeds from maturities, redemptions, and paydowns of held-to-maturity securities 3,932 6,190 Proceeds from sale of available-for-sale securities 5,028 — Purchases of available-for-sale securities ( 88,563 ) ( 54,098 ) Proceeds from sale of repossessed assets 25 37 Net increase in loans and leases ( 321,570 ) ( 86,487 ) Investments in limited partnerships ( 1,106 ) ( 797 ) Returns of investments in limited partnerships 7 17 Investment in tax credit investments ( 11,430 ) ( 11,146 ) Distribution from tax credit investments 33 474 Investment in Federal Home Loan Bank stock ( 30,540 ) ( 35,650 ) Proceeds from the sale of Federal Home Loan Bank stock 34,824 33,285 Purchases of leasehold improvements and equipment, net ( 2,574 ) ( 1,847 ) Purchases of bank-owned life insurance policies — ( 25 ) Proceeds from redemption of Trust II stock — 315 Net cash used in investing activities ( 395,398 ) ( 117,033 ) Financing activities Net increase in deposits 488,801 129,622 Repayment of Federal Home Loan Bank advances ( 1,536,255 ) ( 1,993,844 ) Proceeds from Federal Home Loan Bank advances 1,434,375 2,002,844 Proceeds from issuance of subordinated notes and debentures 15,000 20,000 6 Table of Contents Repayment of subordinated notes and debentures — ( 9,090 ) Repayment of junior subordinated notes payable — ( 10,076 ) Net decrease in long-term borrowed funds ( 6,037 ) ( 3,064 ) Cash dividends paid ( 5,687 ) ( 5,023 ) Preferred stock dividends paid ( 656 ) ( 464 ) Proceeds from issuance of common stock under ESPP 87 104 Proceeds from issuance of preferred stock — 11,992 Purchase of treasury stock ( 2,955 ) ( 3,503 ) Net cash provided by financing activities 386,673 139,498 Net increase in cash and cash equivalents 30,233 53,855 Cash and cash equivalents at the beginning of the period 102,682 57,110 Cash and cash equivalents at the end of the period $ 132,915 $ 110,965 Supplementary cash flow information Cash paid during the period for: Interest paid on deposits and borrowings $ 51,092 $ 11,083 Net income taxes paid (received) 5,022 3,263 Non-cash investing and financing activities: Transfer of loans to repossessed assets — 50 See accompany Notes to Unaudited Consolidated Financial Statements 7 Table of Contents Notes to Unaudited Consolidated Financial Statements Note 1 — Nature of Operations and Summary of Significant Accounting Policies Nature of Operations The accounting and reporting practices of First Business Financial Services, Inc. (“FBFS” or the “Corporation”), through our wholly-owned subsidiary, First Business Bank (“FBB” or the “Bank”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). FBB operates as a commercial banking institution primarily in Wisconsin and the greater Kansas City metropolitan area. The Bank provides a full range of financial services to businesses, business owners, executives, professionals, and high net worth individuals. FBB also offers bank consulting services to community financial institutions. The Bank is subject to competition from other financial institutions and service providers and is also subject to state and federal regulations. As of September 30, 2023, 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 accompanying unaudited Consolidated Financial Statements were prepared in accordance with GAAP and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Corporation’s Consolidated Financial Statements and footnotes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022. The unaudited Consolidated Financial Statements include the accounts of the Corporation and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 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 credit losses, lease residuals, property under operating leases, goodwill, and income taxes. The results of operations for the three and nine months ended September 30, 2023, are not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, 2023. Certain amounts in prior periods may have been reclassified to conform to the current presentation. Subsequent events have been evaluated through the date of the issuance of the unaudited Consolidated Financial Statements. No significant subsequent events have occurred through this date requiring adjustment to the financial statements or disclosures. The Corporation has not changed its significant accounting and reporting policies from those disclosed in the Corporation’s Form 10-K for the year ended December 31, 2022 and updates from the adoption of new accounting standards disclosed in the Corporation’s Form 10-Q for the quarter ended March 31, 2023. Recent Accounting Pronouncements In March 2023, the Financial Accounting Standards Board issued Accounting Standards Update No. 2023-02 “Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force).” The amendments in this Update permit reporting entities to elect to account for their tax equity investments, regardless of the program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. A reporting entity may make an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis rather than electing to apply the proportional amortization method at the reporting entity level or to individual investments. The Corporation is assessing the impact of this standard. 8 Table of Contents Note 2 — Earnings per Common Share Earnings per common share are computed using the two-class method. Basic earnings per common share are computed by dividing net income allocated to common shares by the weighted-average number of shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include unvested restricted shares. Unvested restricted shares are considered participating securities because holders of these securities receive non-forfeitable dividends, or dividend equivalents, at the same rate as holders of the Corporation’s common stock. Diluted earnings per share are computed by dividing net income allocated to common shares adjusted for reallocation of undistributed earnings of unvested restricted shares by the weighted average number of shares determined for the basic earnings per common share computation plus the dilutive effect of common stock equivalents using the treasury stock method. For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 (Dollars in Thousands, Except Share Data) Basic earnings per common share Net income $ 9,941 $ 10,826 $ 27,257 $ 30,702 Less: preferred stock dividends 218 218 656 464 Less: earnings allocated to participating securities 242 281 690 834 Basic earnings allocated to common shareholders $ 9,481 $ 10,327 $ 25,911 $ 29,404 Weighted-average common shares outstanding, excluding participating securities 8,107,641 8,230,902 8,134,587 8,237,879 Basic earnings per common share $ 1.17 $ 1.25 $ 3.19 $ 3.57 Diluted earnings per common share Earnings allocated to common shareholders, diluted $ 9,481 $ 10,327 $ 25,911 $ 29,404 Weighted-average diluted common shares outstanding, excluding participating securities 8,107,641 8,230,902 8,134,587 8,237,879 Diluted earnings per common share $ 1.17 $ 1.25 $ 3.19 $ 3.57 Note 3 — Share-Based Compensation The Corporation initially 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, restricted stock, restricted stock units, dividend equivalent units, and any other type of award permitted by the Plan. As of September 30, 2023, 328,787 shares were available for future grants under the Plan, as amended. Shares covered by awards that expire, terminate, or lapse will again be available for the grant of awards under the Plan. Restricted Stock Under the Plan, the Corporation may grant restricted stock awards (“RSA”), restricted stock units (“RSU”), and other stock-based awards to plan participants, subject to forfeiture upon the occurrence of certain events until the dates specified in the participant’s award agreement. While restricted stock is subject to forfeiture, restricted stock award participants may exercise full voting rights and will receive all dividends and other distributions paid with respect to the restricted shares. RSUs do not have voting rights. RSUs granted prior to 2023 are provided dividend equivalents concurrent with dividends paid to shareholders while RSUs granted in 2023 and after will accrue dividend equivalents payable upon 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 unaudited Consolidated Statements of Income. The Corporation may also issue performance-based restricted stock units (“PRSU”). Vesting of the performance-based restricted stock units will be measured on the relative Total Shareholder Return (“TSR”) and relative Return on Average Equity (“ROAE”) for issuances prior to 2023 or Return on Average Common Equity (“ROACE”) for issuances after 2022, and will cliff-vest after a three-year measurement period based on the Corporation’s TSR performance and ROAE or ROACE 9 Table of Contents performance compared to a broad peer group of over 100 banks. At the end of the performance period, the number of actual shares to be awarded varies between 0% and 200% of target amounts. The restricted stock awards and units issued to executive officers will vest ratably over a three-year period. Compensation expense is recognized for PRSU over the requisite service and performance period of generally three years for the entire expected award on a straight-line basis. The compensation expense for the awards expected to vest for the percentage of performance-based restricted stock units subject to the ROAE or ROACE metric will be adjusted if there is a change in the expectation of ROAE or ROACE. The compensation expense for the awards expected to vest for the percentage of performance based restricted stock units subject to the TSR metric are never adjusted and are amortized utilizing the accounting fair value provided using a Monte Carlo pricing model. Restricted stock activity for the year ended December 31, 2022 and the nine months ended September 30, 2023 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 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 Granted (1) — — 34,840 35.79 52,765 34.43 87,605 34.97 Vested ( 55,500 ) 27.01 ( 36,120 ) 31.32 ( 3,253 ) 26.07 ( 94,873 ) 28.61 Forfeited ( 3,340 ) 29.00 — — ( 180 ) 36.42 ( 3,520 ) 29.37 Nonvested balance as of September 30, 2023 74,477 $ 28.60 56,155 $ 35.70 55,437 $ 33.98 186,069 $ 32.34 Unrecognized compensation cost (in thousands) $ 1,509 $ 1,091 $ 1,510 $ 4,110 Weighted average remaining recognition period (in years) 1.97 1.77 2.90 2.26 (1) The number of restricted shares/units shown includes the shares that would be granted if the target level of performance is achieved related to the performance based restricted stock units. The number of shares actually issued may vary. During the nine months ended September 30, 2023, an additional 18,060 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 nine months ended September 30, 2023, the Corporation issued 3,183 shares of common stock under the ESPP. As of September 30, 2023, 231,783 shares remained available for issuance under the ESPP. Share-based compensation expense related to restricted stock and ESPP included in the unaudited Consolidated Statements of Income was as follows: For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 (In Thousands) Share-based compensation expense $ 643 $ 651 $ 2,349 $ 1,905 10 Table of Contents Note 4 — Securities The amortized cost and fair value of securities available-for-sale and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows: As of September 30, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In Thousands) Available-for-sale: U.S. treasuries $ 14,075 $ — $ ( 534 ) 13,541 U.S. government agency securities - government-sponsored enterprises 28,568 40 ( 669 ) 27,939 Municipal securities 40,510 — ( 7,470 ) 33,040 Residential mortgage-backed securities - government issued 59,274 — ( 3,514 ) 55,760 Residential mortgage-backed securities - government-sponsored enterprises 128,609 — ( 15,626 ) 112,983 Commercial mortgage-backed securities - government issued 3,272 — ( 595 ) 2,677 Commercial mortgage-backed securities - government-sponsored enterprises 31,983 — ( 5,760 ) 26,223 $ 306,291 $ 40 $ ( 34,168 ) $ 272,163 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 $ 239,751 $ 160 $ ( 27,887 ) $ 212,024 11 Table of Contents The amortized cost and fair value of securities held-to-maturity and the corresponding amounts of gross unrecognized gains and losses were as follows: As of September 30, 2023 Amortized Cost Gross Unrecognized Gains Gross Unrecognized Losses Fair Value (In Thousands) Held-to-maturity: Municipal securities $ 4,213 $ — $ ( 140 ) $ 4,073 Residential mortgage-backed securities - government issued 1,312 — ( 99 ) 1,213 Residential mortgage-backed securities - government-sponsored enterprises 1,159 — ( 82 ) 1,077 Commercial mortgage-backed securities - government-sponsored enterprises 2,005 — ( 155 ) 1,850 $ 8,689 $ — $ ( 476 ) $ 8,213 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 U.S. Treasuries contain treasury bonds issued by the United States Treasury. U.S. government agency securities - government-sponsored enterprises represent securities issued by Federal National Mortgage Association (“FNMA”) and the SBA. Municipal securities include securities issued by various municipalities located primarily within Wisconsin and are primarily general obligation bonds that are tax-exempt in nature. Residential and commercial mortgage-backed securities - government issued represent securities guaranteed by the Government National Mortgage Association. Residential and commercial mortgage-backed securities - government-sponsored enterprises include securities guaranteed by the Federal Home Loan Mortgage Corporation, FNMA, and the FHLB. The Corporation sold no available-for-sale securities during the three months ended September 30, 2023 and 16 available-for-sale securities during the nine months ended September 30, 2023. There were no sales of available-for-sale securities during the three and nine months ended September 30, 2022. At September 30, 2023 and December 31, 2022, securities with a fair value of $ 43.3 million and $ 35.9 million, respectively, were pledged to secure various obligations, including interest rate swap contracts and municipal deposits. 12 Table of Contents The amortized cost and fair value of securities by contractual maturity at September 30, 2023 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 $ 20,496 $ 20,439 $ 1,060 $ 1,048 Due in one year through five years 17,471 16,103 3,153 3,025 Due in five through ten years 15,325 13,381 — — Due in over ten years 29,861 24,597 — — 83,153 74,520 4,213 4,073 Residential mortgage-backed securities 187,883 168,743 2,471 2,290 Commercial mortgage-backed securities 35,255 28,900 2,005 1,850 $ 306,291 $ 272,163 $ 8,689 $ 8,213 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 September 30, 2023 and December 31, 2022. At September 30, 2023, the Corporation held 183 available-for-sale securities that were in an unrealized loss position, 153 of which 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 assess declines in fair value for credit losses. Consideration is given to such factors as the credit rating of the borrower, market conditions such as current interest rates, any adverse conditions specific to the security, and delinquency status on contractual payments. For the three and nine months ended September 30, 2023 and 2022, management concluded that in all instances securities with fair value less than carrying value was due to market and other factors; thus, no credit loss provision was required. 13 Table of Contents A summary of unrealized loss information for securities available-for-sale, categorized by security type and length of time for which the security has been in a continuous unrealized loss position, follows: As of September 30, 2023 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 $ 9,079 $ 14 $ 4,462 $ 520 $ 13,541 $ 534 U.S. government agency securities - government-sponsored enterprises 16,295 107 2,938 562 19,233 669 Municipal securities — — 33,040 7,470 33,040 7,470 Residential mortgage-backed securities - government issued 29,423 907 13,828 2,607 43,251 3,514 Residential mortgage-backed securities - government-sponsored enterprises 36,314 1,308 76,669 14,318 112,983 15,626 Commercial mortgage-backed securities - government issued — — 2,677 595 2,677 595 Commercial mortgage-backed securities - government-sponsored enterprises 874 42 25,349 5,718 26,223 5,760 $ 91,985 $ 2,378 $ 158,963 $ 31,790 $ 250,948 $ 34,168 As of 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 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 September 30, 2023 and December 31, 2022. At September 30, 2023, the Corporation held 30 held-to-maturity securities that were in an unrealized loss position, 24 of which have been in a continuous unrealized loss position for twelve months or greater. Management assesses held-to-maturity securities for credit losses on a quarterly basis. The assessment includes review of credit ratings, 14 Table of Contents identification of delinquency and evaluation of market factors. Based on this analysis, management concludes the decline in fair value is due to market factors, specifically changes in interest rates. Accordingly, no credit loss provision was recorded in the unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2023 and 2022. A summary of unrecognized loss information for securities held-to-maturity, categorized by security type and length of time for which the security has been in a continuous unrealized loss position, follows: As of September 30, 2023 Less than 12 Months 12 Months or Longer Total Fair Value Unrecognized Losses Fair Value Unrecognized Losses Fair Value Unrecognized Losses (In Thousands) Held-to-maturity: Municipal securities $ 1,896 $ 46 $ 2,177 $ 94 $ 4,073 $ 140 Residential mortgage-backed securities - government issued — — 1,213 99 1,213 99 Residential mortgage-backed securities - government-sponsored enterprises — — 1,077 82 1,077 82 Commercial mortgage-backed securities - government-sponsored enterprises — — 1,850 155 1,850 155 $ 1,896 $ 46 $ 6,317 $ 430 $ 8,213 $ 476 As of December 31, 2022 Less than 12 Months 12 Months or Longer Total Fair Value Unrecognized Losses Fair Value Unrecognized Losses Fair Value Unrecognized 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 On January 1, 2023, the Corporation adopted ASU 2016-13, which replaced the legacy GAAP other-than-temporary impairment (“OTTI”) model with a credit loss model. ASU 2016-13 requires an allowance on lifetime expected credit losses on held to maturity debt securities. As of January 1, 2023 and September 30, 2023, the Corporation estimated the expected credit losses to be immaterial based on the composition of the securities portfolio. 15 Table of Contents Note 5 — Loans and Allowance for Credit Losses Loan and lease receivables consist of the following: September 30, 2023 December 31, 2022 (In Thousands) Commercial real estate: Commercial real estate — owner occupied $ 236,058 $ 268,354 Commercial real estate — non-owner occupied 753,517 687,091 Construction 211,828 218,751 Multi-family 409,714 350,026 1-4 family 24,235 17,728 Total commercial real estate 1,635,352 1,541,950 Commercial and industrial 1,083,698 853,327 Consumer and other 44,808 47,938 Total gross loans and leases receivable 2,763,858 2,443,215 Less: Allowance for credit losses 29,331 24,230 Deferred loan fees and costs, net ( 156 ) 149 Loans and leases receivable, net $ 2,734,683 $ 2,418,836 Loans transferred to third parties consist of the guaranteed portions of SBA loans which the Corporation sold in the secondary market and participation interests in other, non-SBA originated loans. The total principal amount of the guaranteed portions of SBA loans sold during the three months ended September 30, 2023, and 2022, was $ 10.7 million and $ 9.2 million, respectively. The total principal amount of the guaranteed portions of SBA loans sold during the nine months ended September 30, 2023, and 2022, was $ 20.5 million and $ 26.6 million, respectively. Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the three and nine months ended September 30, 2023, and 2022, have been derecognized in the unaudited Consolidated Financial Statements. The guaranteed portions of SBA loans were transferred at their fair value and the related gain was recognized upon the transfer as non-interest income in the unaudited Consolidated Financial Statements. The total outstanding balance of sold SBA loans at September 30, 2023, and December 31, 2022, was $ 91.1 million and $ 88.5 million, respectively. The total principal amount of transferred participation interests in other, non-SBA originated loans during the three months ended September 30, 2023, and 2022, was $ 39.2 million and $ 25.4 million, respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer. The total principal amount of transferred participation interests in other, non-SBA originated loans during the nine months ended September 30, 2023, and 2022, was $ 93.9 million and $ 70.6 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 September 30, 2023, and December 31, 2022, was $ 265.2 million and $ 222.9 million, respectively. As of September 30, 2023, and December 31, 2022, the total amount of the Corporation’s partial ownership of these transferred loans on the unaudited Consolidated Balance Sheets was $ 362.9 million and $ 339.0 million, respectively. As of September 30, 2023 and December 31, 2022, the non-SBA originated participation portfolio contained no non-performing loans. The Corporation does not share in the participant’s portion of any potential charge-offs. There were no loan participations purchased on the unaudited Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022. 16 Table of Contents The following table illustrates ending balances of the Corporation’s loan and lease portfolio, including non-performing loans by class of receivable, and considering certain credit quality indicators: September 30, 2023 Term Loans Amortized Cost Basis by Origination Year (In Thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total Commercial real estate — owner occupied Category I $ 23,686 $ 35,050 $ 30,899 $ 45,517 $ 22,815 $ 74,599 $ 854 $ 233,420 II — — — — — 2,638 — 2,638 III — — — — — — — — IV — — — — — — — — Total $ 23,686 $ 35,050 $ 30,899 $ 45,517 $ 22,815 $ 77,237 $ 854 $ 236,058 Commercial real estate — non-owner occupied Category I $ 63,933 $ 88,468 $ 73,530 $ 50,707 $ 61,700 $ 327,526 $ 30,764 $ 696,628 II — — — 2,277 16,621 9,177 — 28,075 III — — — — 8,709 20,105 — 28,814 IV — — — — — — — — Total $ 63,933 $ 88,468 $ 73,530 $ 52,984 $ 87,030 $ 356,808 $ 30,764 $ 753,517 Construction Category I $ 22,994 $ 83,860 $ 48,685 $ 34,645 $ 439 $ 7,055 $ 14,150 $ 211,828 II — — — — — — — — III — — — — — — — — IV — — — — — — — — Total $ 22,994 $ 83,860 $ 48,685 $ 34,645 $ 439 $ 7,055 $ 14,150 $ 211,828 Multi-family Category I $ 66,904 $ 35,342 $ 48,858 $ 113,872 $ 23,015 $ 118,710 $ 3,013 $ 409,714 II — — — — — — — — III — — — — — — — — IV — — — — — — — — Total $ 66,904 $ 35,342 $ 48,858 $ 113,872 $ 23,015 $ 118,710 $ 3,013 $ 409,714 1-4 family Category I $ — $ 8,161 $ 2,710 $ 2,378 $ 451 $ 2,941 $ 7,570 $ 24,211 II — — — — — — — — III — — — — — — — — IV — — — — — 24 — 24 Total $ — $ 8,161 $ 2,710 $ 2,378 $ 451 $ 2,965 $ 7,570 $ 24,235 17 Table of Contents September 30, 2023 Term Loans Amortized Cost Basis by Origination Year (In Thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total Commercial and industrial Category I $ 238,317 $ 154,061 $ 92,754 $ 43,801 $ 23,071 $ 30,303 $ 426,772 $ 1,009,079 II 1,005 8,967 866 248 3,372 167 8,537 23,162 III 945 9,024 5,134 6,136 1,184 4,077 7,353 33,853 IV 592 5,325 1,272 425 126 315 9,549 17,604 Total $ 240,859 $ 177,377 $ 100,026 $ 50,610 $ 27,753 $ 34,862 $ 452,211 $ 1,083,698 Consumer and other Category I $ 6,102 $ 9,068 $ 3,266 $ 12,588 $ 2,162 $ 3,579 $ 8,043 $ 44,808 II — — — — — — — — III — — — — — — — — IV — — — — — — — — Total $ 6,102 $ 9,068 $ 3,266 $ 12,588 $ 2,162 $ 3,579 $ 8,043 $ 44,808 Total Loans Category I $ 421,936 $ 414,010 $ 300,702 $ 303,508 $ 133,653 $ 564,713 $ 491,166 $ 2,629,688 II 1,005 8,967 866 2,525 19,993 11,982 8,537 53,875 III 945 9,024 5,134 6,136 9,893 24,182 7,353 62,667 IV 592 5,325 1,272 425 126 339 9,549 $ 17,628 Total $ 424,478 $ 437,326 $ 307,974 $ 312,594 $ 163,665 $ 601,216 $ 516,605 $ 2,763,858 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 18 Table of Contents 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 non-performing loans. 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. Non-performing loans are individually evaluated to assess the need for the establishment of specific reserves or charge-offs. When analyzing the adequacy of collateral, the Corporation obtains external appraisals at least annually. 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. 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: September 30, 2023 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) Performing loans and leases Commercial real estate: Owner occupied $ — $ — $ — $ — $ 236,058 $ 236,058 Non-owner occupied — — — — 753,517 753,517 Construction — — — — 211,828 211,828 Multi-family — — — — 409,714 409,714 1-4 family — — — — 24,211 24,211 Commercial and industrial 1,874 1,269 — 3,143 1,062,951 1,066,094 Consumer and other — — — — 44,808 44,808 Total 1,874 1,269 — 3,143 2,743,087 2,746,230 Non-performing loans and leases Commercial real estate: Owner occupied — — — — — — Non-owner occupied — — — — — — Construction — — — — — — Multi-family — — — — — — 1-4 family — — — — 24 24 Commercial and industrial 408 1,406 5,184 6,998 10,606 17,604 Consumer and other — — — — — — Total 408 1,406 5,184 6,998 10,630 17,628 Total loans and leases Commercial real estate: Owner occupied — — — — 236,058 236,058 Non-owner occupied — — — — 753,517 753,517 Construction — — — — 211,828 211,828 Multi-family — — — — 409,714 409,714 1-4 family — — — — 24,235 24,235 Commercial and industrial 2,282 2,675 5,184 10,141 1,073,557 1,083,698 Consumer and other — — — — 44,808 44,808 Total $ 2,282 $ 2,675 $ 5,184 $ 10,141 $ 2,753,717 $ 2,763,858 Percent of portfolio 0.08 % 0.10 % 0.19 % 0.37 % 99.63 % 100.00 % 19 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) Performing loans and leases Commercial real estate: Owner occupied $ — $ — $ — $ — $ 268,354 $ 268,354 Non-owner occupied 215 — — 215 686,876 687,091 Construction — — — — 218,751 218,751 Multi-family — — — — 350,026 350,026 1-4 family — — — — 17,698 17,698 Commercial and industrial 1,437 403 — 1,840 847,858 849,698 Consumer and other — — — — 47,938 47,938 Total 1,652 403 — 2,055 2,437,501 2,439,556 Non-performing loans and leases Commercial real estate: Owner occupied — — — — — — Non-owner occupied — — — — — — Construction — — — — — — Multi-family — — — — — — 1-4 family — — — — 30 30 Commercial and industrial 439 126 2,464 3,029 600 3,629 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 Construction — — — — 218,751 218,751 Multi-family — — — — 350,026 350,026 1-4 family — — — — 17,728 17,728 Commercial and industrial 1,876 529 2,464 4,869 848,458 853,327 Consumer and other — — — — 47,938 47,938 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 % 20 Table of Contents The Corporation’s total non-performing assets consisted of the following: September 30, 2023 December 31, 2022 (In Thousands) Non-performing loans and leases Commercial real estate: Commercial real estate — owner occupied $ — $ — Commercial real estate — non-owner occupied — — Construction — — Multi-family — — 1-4 family 24 30 Total non-performing commercial real estate 24 30 Commercial and industrial 17,604 3,629 Consumer and other — — Total non-performing loans and leases 17,628 3,659 Repossessed assets, net 61 95 Total non-performing assets $ 17,689 $ 3,754 September 30, 2023 December 31, 2022 Total non-performing loans and leases to gross loans and leases 0.64 % 0.15 % Total non-performing assets to total gross loans and leases plus repossessed assets, net 0.64 0.15 Total non-performing assets to total assets 0.52 0.13 Allowance for credit losses to gross loans and leases 1.12 0.99 Allowance for credit losses to non-performing loans and leases 176.06 662.20 Occasionally, the Corporation modifies loans to borrowers in financial distress. There were two commercial and industrial loans for a total of $ 716,000 modified during the three and nine months ended September 30, 2023. The modifications consisted of payment deferrals. These loans are included in total non-performing loans and are currently 25 and 117 days past due, respectively. No loans were modified during the three and nine ended September 30, 2022. There were no loans to borrowers experiencing financial distress that were modified during the previous 12 months and which subsequently defaulted during the three and nine months ended September 30, 2023 and 2022. There were no unfunded commitments associated with loans modified for borrowers experiencing financial distress as of September 30, 2023. 21 Table of Contents The following represents additional information regarding the Corporation’s non-performing loans and leases, by portfolio segment: As of and for the Nine Months Ended September 30, 2023 Recorded Investment (1) Unpaid Principal Balance Individual Reserve Average Recorded Investment (2) Foregone Interest Income Interest Income Recognized Net Foregone Interest Income (In Thousands) With no individual reserve recorded: Commercial real estate: Owner occupied $ — $ — $ — $ — $ — $ — $ — Non-owner occupied — — — — — — — Construction — — — — — — — Multi-family — — — — — — — 1-4 family 24 29 — 27 3 17 ( 14 ) Commercial and industrial 11,357 11,361 — 4,263 436 70 366 Consumer and other — — — — — — — Total 11,381 11,390 — 4,290 439 87 352 With individual reserve recorded: Commercial real estate: Owner occupied — — — — — — — Non-owner occupied — — — — — — — Construction — — — — — — — Multi-family — — — — — — — 1-4 family — — — — — — — Commercial and industrial 6,247 6,247 3,982 3,412 265 21 244 Consumer and other — — — — — — — Total 6,247 6,247 3,982 3,412 265 21 244 Total: Commercial real estate: Owner occupied — — — — — — — Non-owner occupied — — — — — — — Construction — — — — — — — Multi-family — — — — — — — 1-4 family 24 29 — 27 3 17 ( 14 ) Commercial and industrial 17,604 17,608 3,982 7,675 701 91 610 Consumer and other — — — — — — — Grand total $ 17,628 $ 17,637 $ 3,982 $ 7,702 $ 704 $ 108 $ 596 (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. 22 Table of Contents As of and for the Year Ended December 31, 2022 Recorded Investment (1) Unpaid Principal Balance Individual Reserve Average Recorded Investment (2) Foregone Interest Income Interest Income Recognized Net Foregone Interest Income (In Thousands) With no individual reserve recorded: Commercial real estate: Owner occupied $ — $ — $ — $ 180 $ 14 $ 759 $ ( 745 ) Non-owner occupied — — — — — 1 ( 1 ) Construction — — — — — 47 ( 47 ) Multi-family — — — — — — — 1-4 family 30 35 — 112 8 41 ( 33 ) Commercial and industrial 1,037 1,037 — 3,153 277 587 ( 310 ) Consumer and other — — — — — — — Total 1,067 1,072 — 3,445 299 1,435 ( 1,136 ) With individual reserve recorded: Commercial real estate: Owner occupied — — — — — — — Non-owner occupied — — — — — — — Construction — — — — — — — Multi-family — — — — — — — 1-4 family — — — — — — — Commercial and industrial 2,592 2,612 1,650 1,454 101 1 100 Consumer and 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 ) Construction — — — — — 47 ( 47 ) Multi-family — — — — — — — 1-4 family 30 35 — 112 8 41 ( 33 ) Commercial and industrial 3,629 3,649 1,650 4,607 378 588 ( 210 ) Consumer and other — — — — — — — Grand total $ 3,659 $ 3,684 $ 1,650 $ 4,899 $ 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. The difference between the recorded investment of loans and leases and the unpaid principal balance of $ 9,000 and $ 26,000 as of September 30, 2023, and December 31, 2022, respectively, represents partial charge-offs of loans and leases resulting from losses due to the value of the collateral securing the loans and leases being below the carrying values of the loans and leases. When a loan is placed on non-accrual, interest accrual is discontinued and previously accrued but uncollected interest is deducted from interest income. Cash payments collected on non-accrual loans are first applied to such loan’s principal. Foregone interest represents the interest that was contractually due on the loan but not received or recorded. To the extent the amount of principal on a non-accrual loan is fully collected and additional cash is received, the Corporation will recognize interest income. 23 Table of Contents Allowance for Credit Losses The ACL is an estimate of the expected credit losses on financial assets measured at amortized cost, which is measured using relevant information about past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. A provision for credit losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors as discussed within Note 1 – Nature of Operations and Summary of Significant Accounting Policies included in the Corporation’s Form 10-Q for the period ended March 31, 2023. During the first quarter of 2023, the Corporation adopted ASU 2016-13, including the CECL methodology for estimating the ACL. This standard was adopted using a modified retrospective approach on January 1, 2023, resulting in a $ 484,000 increase to the ACL and a $ 1.3 million increase to the unfunded credit commitments reserve. A cumulative effect adjustment resulting in an $ 1.4 million decrease to retained earnings and a $ 465,000 increase to deferred tax assets was also recorded as of the adoption of ASU 2016-13. Quantitative Considerations The ACL is primarily calculated utilizing a discounted cash flow (“DCF”) model. Key inputs and assumptions used in this model are discussed below: • Forecast model - For each portfolio segment, a loss driver analysis (“LDA”) was performed in order to identify appropriate loss drivers and create a regression model for use in forecasting cash flows. The LDA analysis utilized peer FFIEC Call Report data for all pools. The Corporation plans to update the LDA annually. • Probability of default – PD is the probability that an asset will be in default within a given time frame. The Corporation has defined default as when a charge-off has occurred, a loan goes to non-accrual status, or a loan is greater than 90 days past due. The forecast model is utilized to estimate PDs. • Loss given default – LGD is the percentage of the asset not expected to be collected due to default. The LGD is derived from using a method referred to as Frye Jacobs which uses industry data. • Prepayments and curtailments – Prepayments and curtailments are calculated based on the Corporation’s own data. This analysis is updated annually. • Forecast and reversion – the Corporation has established a one-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average. • Economic forecast – the Corporation utilizes a third party to provide economic forecasts under various scenarios, which are assessed against economic indicators and management’s observations in the market. As of June 30, 2023, the Corporation selected a forecast which forecasts unemployment between 3.81% and 4.58% and GDP growth change between 0.66% and 1.39% over the next four quarters. As of September 30, 2023, the Corporation selected a forecast which forecasts unemployment between 3.89% and 4.10% and GDP growth change between 1.06% and 1.87% over the next four quarters. Following the forecast period, the model reverts to long-term averages over four quarters. Management believes that the resulting quantitative reserve appropriately balances economic indicators with identified risks. Qualitative Considerations In addition to the quantitative model, management considers the need for qualitative adjustment for risks not considered in the DCF. Factors that are considered by management in determining loan collectability and the appropriate level of the ACL are listed below: • The Corporation’s lending policies and procedures, including changes in lending strategies, underwriting standards and practices for collections, write-offs, and recoveries; • Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the Corporation operates that affect the collectability of financial assets; • The experience, ability, and depth of the Corporation’s lending, investment, collection, and other relevant management and staff; • The volume of past due financial assets, the volume of non-performing assets, and the volume and severity of adversely classified or graded assets; • The existence and effect of industry concentrations of credit; • The nature and volume of the portfolio segment or class; • The quality of the Corporation’s credit review function; • The effect of other external factors such as the regulatory, legal and technological environments, competition, and events such as natural disasters or pandemics. 24 Table of Contents ACL Activity A summary of the activity in the allowance for credit losses by portfolio segment is as follows: As of and for the Three Months Ended September 30, 2023 Owner Occupied Non-Owner Occupied Construction Multi-Family 1-4 Family Commercial and Industrial Consumer and Other Total (In Thousands) Beginning balance $ 1,721 $ 5,241 $ 2,293 $ 3,426 $ 249 $ 16,223 $ 544 $ 29,697 Charge-offs — — — — — ( 562 ) — ( 562 ) Recoveries 3 — — — 9 72 — 84 Net recoveries (charge-offs) 3 — — — 9 ( 490 ) — ( 478 ) Provision for credit losses ( 151 ) 26 68 96 ( 10 ) 1,833 ( 45 ) 1,817 Ending balance $ 1,573 $ 5,267 $ 2,361 $ 3,522 $ 248 $ 17,566 $ 499 $ 31,036 Components: Allowance for loan losses 1,556 5,209 1,441 3,512 228 16,946 439 29,331 Allowance for unfunded credit commitments 17 58 920 10 20 620 60 1,705 Total ACL $ 1,573 $ 5,267 $ 2,361 $ 3,522 $ 248 $ 17,566 $ 499 $ 31,036 As of and for the Three Months Ended September 30, 2022 Commercial Real Estate Commercial and Industrial Consumer and Other Total (In Thousands) Beginning balance $ 13,410 $ 9,866 $ 828 $ 24,104 Charge-offs — ( 33 ) ( 21 ) ( 54 ) Recoveries 23 50 8 81 Net recoveries 23 17 ( 13 ) 27 Provision for credit losses ( 492 ) 629 ( 125 ) 12 Ending balance $ 12,941 $ 10,512 $ 690 $ 24,143 As of and for the Nine Months Ended September 30, 2023 Owner Occupied Non-Owner Occupied Construction Multi-Family 1-4 Family Commercial and Industrial Consumer and Other Total (In Thousands) Beginning balance $ 1,766 $ 5,108 $ 1,646 $ 2,634 $ 207 $ 12,403 $ 466 $ 24,230 Impact of adopting ASC 326 ( 204 ) ( 242 ) 796 ( 386 ) ( 45 ) 1,873 26 1,818 Charge-offs — — — — — ( 1,057 ) — ( 1,057 ) Recoveries 5 1 — — 30 386 13 435 Net recoveries (charge-offs) 5 1 — — 30 ( 671 ) 13 ( 622 ) Provision for credit losses 6 400 ( 81 ) 1,274 56 3,961 ( 6 ) 5,610 Ending balance $ 1,573 $ 5,267 $ 2,361 $ 3,522 $ 248 $ 17,566 $ 499 $ 31,036 Components: Allowance for loan losses 1,556 5,209 1,441 3,512 228 16,946 439 29,331 Allowance for unfunded credit commitments 17 58 920 10 20 620 60 1,705 Total ACL $ 1,573 $ 5,267 $ 2,361 $ 3,522 $ 248 $ 17,566 $ 499 $ 31,036 25 Table of Contents As of and for the Nine Months Ended September 30, 2022 Commercial Real Estate Commercial and Industrial Consumer and Other Total (In Thousands) Beginning balance $ 15,110 $ 8,413 $ 813 $ 24,336 Charge-offs — ( 140 ) ( 21 ) ( 161 ) Recoveries 4,259 251 27 4,537 Net recoveries (charge-offs) 4,259 111 6 4,376 Provision for credit losses ( 6,428 ) 1,988 ( 129 ) ( 4,569 ) Ending balance $ 12,941 $ 10,512 $ 690 $ 24,143 ACL Summary Loans collectively evaluated for credit losses in the following tables include all performing loans at September 30, 2023 and December 31, 2022. Loans individually evaluated for credit losses include all non-performing loans. The following tables provide information regarding the allowance for credit losses and balances by type of allowance methodology. As of September 30, 2023 Owner Occupied Non-Owner Occupied Construction Multi-Family 1-4 Family Commercial and Industrial Consumer and Other Total (In Thousands) Allowance for credit losses: Collectively evaluated for credit losses $ 1,556 $ 5,209 $ 1,441 $ 3,512 $ 228 $ 12,964 $ 439 $ 25,349 Individually evaluated for credit loss — — — — — 3,982 — 3,982 Total $ 1,556 $ 5,209 $ 1,441 $ 3,512 $ 228 $ 16,946 $ 439 $ 29,331 Loans and lease receivables: Collectively evaluated for credit losses $ 236,058 $ 753,517 $ 211,828 $ 409,714 $ 24,211 $ 1,066,094 $ 44,808 $ 2,746,230 Individually evaluated for credit loss — — — — 24 17,604 — 17,628 Total $ 236,058 $ 753,517 $ 211,828 $ 409,714 $ 24,235 $ 1,083,698 $ 44,808 $ 2,763,858 As of December 31, 2022 Commercial Real Estate Commercial and Industrial Consumer and Other Total (In Thousands) Allowance for credit losses: Collectively evaluated for credit losses $ 11,361 $ 10,753 $ 466 $ 22,580 Individually evaluated for credit loss — 1,650 — 1,650 Total $ 11,361 $ 12,403 $ 466 $ 24,230 Loans and lease receivables: Collectively evaluated for credit losses $ 1,541,920 $ 849,698 $ 47,938 $ 2,439,556 Individually evaluated for credit loss 30 3,629 — 3,659 Total $ 1,541,950 $ 853,327 $ 47,938 $ 2,443,215 26 Table of Contents 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 June 2023, the Corporation relocated its Kansas City metropolitan area office 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, which is recognized as a lease incentive and deducted from the right-of-use asset. The components of total lease expense were as follows: For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 (In Thousands) Operating lease cost $ 338 $ 382 $ 1,088 $ 1,147 Short-term lease cost 36 38 145 112 Variable lease cost 139 142 436 408 Less: sublease income — ( 45 ) ( 75 ) ( 134 ) Total lease cost, net $ 513 $ 517 $ 1,594 $ 1,533 Quantitative information regarding the Corporation’s operating leases was as follows: September 30, 2023 December 31, 2022 Weighted-average remaining lease term (in years) 7.89 8.06 Weighted-average discount rate 3.56 % 3.40 % The following maturity analysis shows the undiscounted cash flows due on the Corporation’s operating lease liabilities: (In Thousands) 2023 $ 374 2024 1,527 2025 1,408 2026 1,400 2027 1,428 Thereafter 4,688 Total undiscounted cash flows 10,825 Discount on cash flows ( 1,589 ) Total lease liability $ 9,236 27 Table of Contents Note 7 — Other Assets A summary of accrued interest receivable and other assets was as follows: September 30, 2023 December 31, 2022 (In Thousands) Accrued interest receivable $ 12,380 $ 9,403 Net deferred tax asset 10,624 11,711 Investment in historic development entities 2,461 2,176 Investment in low-income housing development entity 21,744 13,514 Investment in limited partnerships 15,196 13,599 Prepaid expenses 4,762 3,821 Other assets 11,584 8,883 Total accrued interest receivable and other assets $ 78,751 $ 63,107 Note 8 — Deposits The composition of deposits is shown below. Average balances represent year-to-date averages. September 30, 2023 December 31, 2022 Balance Average Balance Average Rate Balance Average Balance Average Rate (Dollars in Thousands) Non-interest-bearing transaction accounts $ 430,011 $ 455,653 — % $ 537,107 $ 566,230 — % Interest-bearing transaction accounts 779,789 657,155 3.26 576,601 503,668 0.79 Money market accounts 694,199 663,284 3.01 698,505 761,469 0.82 Certificates of deposit 285,265 271,684 3.95 153,757 97,448 1.39 Wholesale deposits 467,743 311,038 4.15 202,236 48,825 3.31 Total deposits $ 2,657,007 $ 2,358,814 2.76 $ 2,168,206 $ 1,977,640 0.67 A summary of annual maturities of in-market and wholesale certificates of deposit at September 30, 2023 is as follows: (In Thousands) Maturities during the year ended December 31, 2023 $ 365,358 2024 121,040 2025 17,504 2026 50,660 2027 73,837 Thereafter 14,609 $ 643,008 Wholesale deposits include $ 357.7 million and $ 110.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at September 30, 2023, compared to $ 187.2 million and $ 15.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at December 31, 2022. The Corporation has entered into derivative contracts hedging a portion of the certificates of deposit included in the 2023 maturities above. As of September 30, 2023, the notional amount of derivatives designated as cash flow hedges totaled $ 256.3 million with a weighted average remaining maturity of 4.4 years and a weighted average rate of 3.79 %. 28 Table of Contents Certificates of deposit and wholesale deposits denominated in amounts greater than $250,000 were $ 109.0 million at September 30, 2023 and $ 81.6 million at December 31, 2022. Note 9 — FHLB Advances, Other Borrowings and Subordinated Notes and Debentures The composition of borrowed funds is shown below. Average balances represent year-to-date averages. September 30, 2023 December 31, 2022 Balance Weighted Average Balance Weighted Average Rate Balance Weighted Average Balance Weighted Average Rate (Dollars in Thousands) Federal funds purchased $ — $ 4 5.35 % $ — $ 14 7.42 % FHLB advances 314,500 368,913 2.54 416,380 414,191 1.70 Line of credit — 50 7.24 — 85 2.78 Other borrowings — 802 8.31 6,088 8,624 5.23 Subordinated notes and debentures 49,391 34,495 4.84 34,340 35,095 5.06 Junior subordinated notes (1) — — — — 2,429 20.75 $ 363,891 $ 404,264 2.75 $ 456,808 $ 460,438 2.12 (1) Weighted average rate of junior subordinated notes and debentures 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 September 30, 2023 is as follows: (In Thousands) Maturities during the year ended December 31, 2023 $ 103,000 2024 35,500 2025 48,000 2026 60,000 2027 28,000 Thereafter 89,391 $ 363,891 The Corporation issued new subordinated debentures as of September 29, 2023. The aggregate principal amount of the newly issued subordinated debentures was $ 15.0 million which qualified as Tier 2 capital. The subordinated debentures bear a fixed interest rate of 8.0 % with a maturity date of September 29, 2033. The Corporation may, at its option, redeem the debentures, in whole or part, at any time after the fifth anniversary of issuance. As of September 30, 2023, $ 608,000 of debt issuance costs remain in the subordinated note and debenture payable balance, of which $ 50,000 is related to the recently issued subordinated debentures. 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. As of September 30, 2023, the Corporation had no other borrowings. The Corporation has entered into derivative contracts hedging a portion of the borrowings included in the 2023 maturities above. As of September 30, 2023, the notional amount of derivatives designated as cash flow hedges totaled $ 96.4 million with a weighted average remaining maturity of 2.7 years and a weighted average rate of 1.78 %. As of September 30, 2023 and December 31, 2022, the Corporation was in compliance with its debt covenants under its third-party secured senior line of credit. 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 . 29 Table of Contents Note 10 — Preferred Stock On March 4, 2022, the Corporation issued 12,500 shares, or $ 12.5 million in aggregate liquidation preference, of 7.0 % Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A, par value $ 0.01 per share, with a liquidation preference of $ 1,000 per share (the “Series A Preferred Stock”) in a private placement to institutional investors. The net proceeds received from the issuance of the Series A Preferred Stock were $ 12.0 million. The Corporation expects to pay dividends on the Series A Preferred Stock when and if declared by the Board, at a fixed rate of 7.0 % per annum, payable quarterly, in arrears, on March 15, June 15, September 15 and December 15 of each year up to, but excluding, March 15, 2027. For each dividend period from and including March 15, 2027, dividends will be paid at a floating rate of Three-Month Term SOFR plus a spread of 539 basis points per annum. During the three and nine months ended September 30, 2023, the Board of Directors declared an aggregate preferred stock dividend of $ 218,000 and $ 656,000 , respectively. 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 11 — Commitments and Contingencies In the normal course of business, various legal proceedings involving the Corporation are pending. Management, based upon advice from legal counsel, does not anticipate any significant losses as a result of these actions. Management believes that any liability arising from any such proceedings currently existing or threatened will not have a material adverse effect on the Corporation’s financial position, results of operations, and cash flows. The Corporation sells the guaranteed portions of SBA 7(a) and 504 loans, as well as participation interests in other, non-SBA originated, loans to third parties. The Corporation has a continuing involvement in each of the transferred lending arrangements by way of relationship management and servicing the loans, as well as being subject to normal and customary requirements of the SBA loan program and standard representations and warranties related to sold amounts. In the event of a loss resulting from default and a determination by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Corporation, the SBA may require the Corporation to repurchase the loan, deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of the principal loss related to the deficiency from the Corporation. The Corporation must comply with applicable SBA regulations in order to maintain the guaranty. In addition, the Corporation retains the option to repurchase the sold guaranteed portion of an SBA loan if the loan defaults. Management has assessed estimated losses inherent in the outstanding guaranteed portions of SBA loans sold in accordance with ASC 450, Contingencies , and determined a recourse reserve based on the probability of future losses for these loans to be $ 983,000 at September 30, 2023, which is reported in accrued interest payable and other liabilities on the unaudited Consolidated Balance Sheets. The summary of the activity in the SBA recourse reserve is as follows: As of and for the Three Months Ended September 30, As of and for the Nine Months Ended September 30, 2023 2022 2023 2022 (In Thousands) Balance at the beginning of the period $ 752 $ 673 $ 441 $ 635 SBA recourse provision 242 96 565 134 Charge-offs, net ( 11 ) ( 6 ) ( 23 ) ( 6 ) Balance at the end of the period $ 983 $ 763 $ 983 $ 763 Note 12 — Fair Value Disclosures The Corporation determines the fair values of its financial instruments based on the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is defined as the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date and is based on exit prices. Fair value includes assumptions about risk, 30 Table of Contents such as nonperformance risk in liability fair values, and is a market-based measurement, not an entity-specific measurement. The standard describes three levels of inputs that may be used to measure fair value. Level 1 — Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date. Level 2 — Level 2 inputs are inputs, other than quoted prices included with Level 1, that are observable for the asset or liability either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 — Level 3 inputs are supported by little or no market activity and are significant to the fair value of the assets or liabilities. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Corporation’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Assets and liabilities measured at fair value on a recurring basis, segregated by fair value hierarchy level, are summarized below: September 30, 2023 Fair Value Measurements Using Level 1 Level 2 Level 3 Total (In Thousands) Assets: Securities available-for-sale: U.S. treasuries $ — $ 13,541 $ — $ 13,541 U.S. government agency securities - government-sponsored enterprises — 27,939 — 27,939 Municipal securities — 33,040 — 33,040 Residential mortgage-backed securities - government issued — 55,760 — 55,760 Residential mortgage-backed securities - government-sponsored enterprises — 112,983 — 112,983 Commercial mortgage-backed securities - government issued — 2,677 — 2,677 Commercial mortgage-backed securities - government-sponsored enterprises — 26,223 — 26,223 Interest rate swaps — 93,702 — 93,702 Liabilities: Interest rate swaps — 78,696 — 78,696 31 Table of Contents 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 For assets and liabilities measured at fair value on a recurring basis, there were no transfers between the levels during the three and nine months ended September 30, 2023 or the year ended December 31, 2022 related to the above measurements. Assets and liabilities measured at fair value on a non-recurring basis, segregated by fair value hierarchy are summarized below: September 30, 2023 Fair Value Measurements Using Level 1 Level 2 Level 3 Total (In Thousands) Collateral-dependent loans $ — $ — $ 2,559 $ 2,559 Repossessed assets — — 61 61 Loan servicing rights — — 1,443 1,443 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 Collateral-dependent loans were written down to the fair value of their underlying collateral less costs to sell of $ 2.6 million and $ 1.0 million at September 30, 2023 and December 31, 2022, respectively, through the establishment of specific reserves or by recording charge-offs when the carrying value exceeded the fair value of the underlying collateral of impaired loans. Valuation techniques consistent with the market approach, income approach, or cost approach were used to measure fair value. These techniques included observable inputs for the individual impaired loans being evaluated, such as current appraisals, recent sales of similar assets, or other observable market data, and unobservable inputs, typically when discounts are applied to appraisal values to adjust such values to current market conditions or to reflect net realizable values. The quantification of unobservable inputs for Level 3 impaired loan values range from 10 % - 100 % as of the measurement date of September 30, 2023. The weighted average of those unobservable inputs was 41 %. The majority of the impaired loans are considered collateral dependent loans or are supported by an SBA guaranty. 32 Table of Contents Repossessed assets, upon initial recognition, are remeasured and reported at fair value through a charge-off to the allowance for credit 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. Due to the nature of the valuation inputs, loan servicing rights are classified in Level 3 of the fair value hierarchy. Fair Value of Financial Instruments The Corporation is required to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions, consistent with exit price concepts for fair value measurements, are set forth below: September 30, 2023 Carrying Amount Fair Value Total Level 1 Level 2 Level 3 (In Thousands) Financial assets: Cash and cash equivalents $ 132,915 $ 132,915 $ 132,915 $ — $ — Securities available-for-sale 272,163 272,163 — 272,163 — Securities held-to-maturity 8,689 8,213 — 8,213 — Loans held for sale 4,168 4,501 — 4,501 — Loans and lease receivables, net 2,734,683 2,689,337 — — 2,689,337 Federal Home Loan Bank stock 13,528 N/A N/A N/A N/A Accrued interest receivable 12,380 12,380 12,380 — — Interest rate swaps 93,702 93,702 — 93,702 — Financial liabilities: Deposits 2,657,007 2,650,876 2,013,999 636,877 — Federal Home Loan Bank advances and other borrowings 363,891 346,586 — 346,586 — Accrued interest payable 10,079 10,079 10,079 — — Interest rate swaps 78,696 78,696 — 78,696 — Off-balance sheet items: Standby letters of credit 132 132 — — 132 N/A = The fair value is not applicable due to restrictions placed on transferability 33 Table of Contents 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 Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the unaudited Consolidated Balance Sheets. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Corporation. Securities: The fair value measurements of investment securities are determined by a third-party pricing service which considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, credit information, and the securities’ terms and conditions, among other things. The fair value measurements are subject to independent verification by another pricing source on a quarterly basis to review for reasonableness. Any significant differences in pricing are reviewed with appropriate members of management who have the relevant technical expertise to assess the results. The Corporation has determined that these valuations are classified in Level 2 of the fair value hierarchy. When the independent pricing service does not provide a fair value measurement for a particular security, the Corporation will estimate the fair value based on specific information about each security. Fair values derived in this manner are classified in Level 3 of the fair value hierarchy. Loans Held for Sale: Loans held for sale, which consist of the guaranteed portions of SBA 7(a) loans, are carried at the lower of cost or estimated fair value. The estimated fair value is based on what secondary markets are currently offering for portfolios with similar characteristics. Interest Rate Swaps: The carrying amount and fair value of existing derivative financial instruments are based upon independent valuation models, which use widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative contract. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The Corporation incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative 34 Table of Contents contracts for the effect of nonperformance risk, the Corporation considers the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. Limitations: Fair value estimates are made at a discrete point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holding of a particular financial instrument. Because no market exists for a significant portion of the Corporation’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and are not considered in the estimates. Note 13 — Derivative Financial Instruments The Corporation offers interest rate swap products directly to qualified commercial borrowers. The Corporation economically hedges client derivative transactions by entering into offsetting interest rate swap contracts executed with a third party. Derivative transactions executed as part of this program are not considered hedging instruments and are marked-to-market through earnings each period. The derivative contracts have mirror-image terms, which results in the positions’ changes in fair value offsetting through earnings each period. The credit risk and risk of non-performance embedded in the fair value calculations is different between the dealer counterparties and the commercial borrowers which may result in a difference in the changes in the fair value of the mirror-image swaps. The Corporation incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the counterparty’s risk in the fair value measurements. When evaluating the fair value of its derivative contracts for the effects of non-performance and credit risk, the Corporation considered the impact of netting and any applicable credit enhancements such as collateral postings, thresholds, and guarantees. As of September 30, 2023 and December 31, 2022, the credit valuation allowance was $ 38,000 . The Corporation receives fixed rates and pays floating rates based upon designated benchmark interest rates used on the swaps with commercial borrowers. Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements. The Corporation pays fixed rates and receives floating rates based upon designated benchmark interest rates used on the swaps with dealer counterparties. Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and are reported on the unaudited Consolidated Balance Sheet. The gross amount of dealer counterparty swaps, without regard to the enforceable master netting agreement, was a gross derivative asset of $ 78.7 million and gross liability of $ 291,000 as of September 30, 2023. No right of offset existed with the dealer counterparty swaps as of September 30, 2023. All changes in the fair value of these instruments are recorded in other non-interest income. Given the mirror-image terms of the outstanding derivative portfolio, the change in fair value for the three and nine months ended September 30, 2023 and 2022 had an insignificant impact on the unaudited Consolidated Statements of Income. The Corporation also enters into interest rate swaps to manage interest rate risk and reduce the cost of match-funding certain long-term fixed rate loans. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. The instruments are designated as cash flow hedges as the receipt of floating rate interest from the counterparty is used to manage interest rate risk related to cash outflows attributable to future wholesale deposit or short-term FHLB advance borrowings. 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 affect earnings. A pre-tax unrealized gain of $ 5.3 million and $ 7.5 million was recognized in other comprehensive income for the three and nine months ended September 30, 2023 and there were no ineffective portions of the hedges. A pre-tax unrealized gain of $ 3.2 million and $ 8.9 million was recognized in other comprehensive income for the three and nine months ended September 30, 2022 and there were no ineffective portions of the 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 35 Table of Contents 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 affect earnings. A pre-tax unrealized gain of $ 421,000 and $ 353,000 was recognized in other comprehensive income for the three and nine months ended September 30, 2023 and there was no ineffective portion of these hedges. A pre-tax unrealized gain of $ 215,000 and $ 592,000 was recognized in other comprehensive income for the three and nine months ended September 30, 2022 and there was no ineffective portion of these hedges. As of September 30, 2023 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 clients 4 $ 59,167 5.29 $ 291 Interest rate swap agreements on loans with third-party counterparties 99 $ 908,576 6.36 $ 78,405 Derivatives designated as hedging instruments Interest rate swap related to AFS securities 11 $ 12,500 8.53 $ 955 Interest rate swap related to wholesale funding 32 352,655 7.15 14,051 Included in Derivative liabilities Derivatives not designated as hedging instruments Interest rate swap agreements on loans with commercial loan clients 95 $ 849,409 6.44 $ 78,696 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 clients 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 wholesale funding 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 clients 82 $ 678,881 7.61 $ 61,419 Note 14 — Regulatory Capital The Corporation and the Bank are subject to various regulatory capital requirements administered by Federal and Wisconsin banking agencies. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions on the part of regulators, that if undertaken, could have a direct material effect on the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory practices. The Corporation’s and the Bank’s capital 36 Table of Contents 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 (“FRB”) of Chicago and provide it with information on the Corporation’s then-current and prospective earnings and capital position in advance of declaring any cash dividends. As a Wisconsin corporation, the Corporation is subject to the limitations of the Wisconsin Business Corporation Law, which prohibit the Corporation from paying dividends if such payment would: (i) render the Corporation unable to pay its debts as they become due in the usual course of business, or (ii) result in the Corporation’s assets being less than the sum of its total liabilities plus the amount needed to satisfy the preferential rights upon dissolution of any shareholders with preferential rights superior to those shareholders receiving the dividend. The Bank is also subject to certain legal, regulatory, and other restrictions on their ability to pay dividends to the Corporation. As a bank holding company, the payment of dividends by the Bank to the Corporation is one of the sources of funds the Corporation could use to pay dividends, if any, in the future and to make other payments. Future dividend decisions by the Bank and the Corporation will continue to be subject to compliance with various legal, regulatory, and other restrictions as defined from time to time. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of Total Common Equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to adjusted total assets. These risk-based capital requirements presently address credit risk related to both recorded and off-balance sheet commitments and obligations. As of September 30, 2023, 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: 37 Table of Contents As of September 30, 2023 Actual (1) 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 $ 365,058 11.20 % $ 260,796 8.00 % $ 342,295 10.50 % N/A N/A First Business Bank 365,705 11.22 260,850 8.00 342,366 10.50 $ 326,063 10.00 % Tier 1 capital (to risk-weighted assets) Consolidated $ 284,974 8.74 % $ 195,597 6.00 % $ 277,096 8.50 % N/A N/A First Business Bank 335,012 10.27 195,638 6.00 277,154 8.50 $ 260,850 8.00 % Common equity tier 1 capital (to risk-weighted assets) Consolidated $ 272,982 8.37 % $ 146,698 4.50 % $ 228,197 7.00 % N/A N/A First Business Bank 335,012 10.27 146,728 4.50 228,244 7.00 $ 211,941 6.50 % Tier 1 leverage capital (to adjusted assets) Consolidated $ 284,974 8.65 % $ 131,840 4.00 % $ 131,840 4.00 % N/A N/A First Business Bank 335,012 10.16 131,845 4.00 131,845 4.00 $ 164,807 5.00 % (1) 2023 capital amounts include $1.0 million of additional stockholders’ equity as elected by the Corporation and permitted by federal banking regulatory agencies. Risk-weighted assets were also adjusted accordingly. 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 % 38 Table of Contents