What changed in this filing

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Item 1. Business

2024-02-28 compared with 2023-02-22 · 185 added, 186 removed, 368 unchanged (50% of the section changed)

First Business Financial Services, Inc.

(together with all of its subsidiaries, collectively referred to as the “Corporation,” “FBFS,” “we,” “us,” or “our”) is a registered bank holding company originally incorporated in 1986 under the laws of the State of Wisconsin and is engaged in the commercial banking business through its wholly-owned bank subsidiary, First Business Bank (“FBB” or the “Bank”), headquartered in Madison, Wisconsin.

(together with all of its subsidiaries, collectively referred to as the “Corporation,” “FBFS,” “we,” “us,” or “our”) is a registered bank holding company originally incorporated in 1986 under the laws of the State of Wisconsin and is engaged in the commercial banking business through its wholly-owned bank subsidiary, First Business Bank (collectively with its subsidiaries “FBB” or the “Bank”), headquartered in Madison, Wisconsin.

All of our operations are conducted through FBB and its wholly-owned subsidiary First Business Specialty Finance, LLC (“FBSF”).

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Our products and services are focused on business banking, private wealth, and bank consulting.

Within business banking, we offer commercial lending, asset-based lending, accounts receivable financing, equipment financing, floorplan financing, vendor financing, Small Business Administration (“SBA”) lending and servicing, treasury management solutions, and company retirement services.

Our private wealth management services include trust and estate administration, financial planning, investment management, and private banking for executives and owners of our business banking clients and others.

Our bank consulting experts provide investment portfolio administrative services, asset liability management services, and asset liability management process validation for other financial institutions.

Within business banking, we offer commercial real estate lending, commercial and industrial lending, asset-based lending, accounts receivable financing, equipment financing, floorplan financing, vendor financing, Small Business Administration (“SBA”) lending and servicing, treasury management solutions, and company retirement services.

Our private wealth management services include trust and estate administration, financial planning, investment management, and private banking.

Our bank consulting experts provide investment portfolio administrative services, and asset liability management services.

We do not utilize a branch network to attract retail clients.

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Commercial Banking Products and Services

Commercial Lending

We strive to meet the specific commercial lending needs of small- to medium-sized companies in our primary markets in Wisconsin, Kansas, and Missouri, predominantly through lines of credit and term loans to businesses with annual sales of up to $150 million.

Through FBB, we service South Central Wisconsin, Southeast Wisconsin, Northeast Wisconsin, and the greater Kansas City Metro.

Our commercial loans are typically secured by various types of business assets, including inventory, receivables, and equipment.

We also originate loans secured by commercial real estate, including owner-occupied and non owner-occupied facilities.

As of December 31, 2022, our conventional commercial real estate and commercial loans – excluding consumer lending, asset-based lending, accounts receivable financing, equipment financing, floorplan financing, and SBA lending described below – represented approximately 75% of our total gross loans and leases receivable.

Asset-Based Lending

FBB, through its wholly-owned subsidiary FBSF, provides asset-based lending to small- to medium-sized companies.

With business development officers located in several states, our asset-based lending team serves clients nationwide.

Through FBB, we service South Central Wisconsin, Southeast Wisconsin, Northeast Wisconsin, the greater Kansas City Metro, and other borrowers through products with national channels.

Commercial Real Estate Lending We originate loans secured by commercial real estate, including owner-occupied, non owner-occupied facilities, primarily market-rent multifamily developments, 1-4 family residential developments, and construction loans for these types of buildings.

As of December 31, 2023, our commercial real estate portfolio (“CRE”) represented approximately 60% of our total gross loans and leases receivable.

Commercial and Industrial Lending Our commercial loans are typically secured by various types of business assets, including inventory, receivables, and equipment.

As of December 31, 2023, our commercial and industrial portfolio (“C&I”) represented approximately 39% of our total gross loans and leases receivable.

The C&I portfolio includes conventional commercial and industrial loans as well as asset-based lending, accounts receivable financing, equipment financing, floorplan financing, and SBA lending.

These C&I lending niches are described below.

C&I Lending - Asset-Based Lending

We provide asset-based lending to small- to medium-sized companies.

Our asset-based lending team serves clients on a nationwide basis through business development officers located in several states.

We primarily provide revolving lines of credit and term loans for financial and strategic acquisitions, capital expenditures, working capital to support rapid growth, bank debt refinancing, debt restructuring, and corporate turnaround strategies.

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As of December 31, 2023, asset-based lending represented approximately 8% of our total gross loans and leases receivable.

Accounts Receivable Financing

FBB, through its wholly-owned subsidiary FBSF, provides funding to clients by purchasing accounts receivable primarily on a full recourse basis.

With business development officers located in several states, our accounts receivable financing team serves clients nationwide.

Our accounts receivable financing team provides working capital to support growth and other cash flow needs.

C&I Lending - Accounts Receivable Financing

Our Accounts Receivable Financing team, with business development officers located in several states, serves clients nationwide by purchasing accounts receivable primarily on a full recourse basis.

This offering provides working capital to support client growth and other client cash flow needs.

Accounts receivable financing typically generates higher yields than traditional commercial lending and complements our traditional commercial portfolio.

As of December 31, 2023, accounts receivable financing represented approximately 3% of our total gross loans and leases receivable.

Equipment Financing

FBB, through its wholly-owned subsidiary FBSF, finances a broad range of equipment, through loans and leases, to address the financing needs of commercial clients in a variety of industries.

Our focus in this financing vertical includes manufacturing equipment, industrial assets, construction and transportation equipment, and a wide variety of other commercial equipment.

C&I Lending - Equipment Financing

The Bank finances a broad range of equipment, through loans and leases, to address the financing needs of commercial clients in a variety of industries.

Our Equipment Finance team, with business development officers located in several states, provides financing solutions for manufacturing equipment, industrial assets, construction and transportation equipment, agriculture equipment, medical equipment, and a variety of other commercial equipment.

These financings generally range between $25,000 and $1 million with terms of 36 to 84 months.

FBSF also delivers small ticket vendor equipment financing via an online application and proprietary credit scoring architecture.

Through this nationwide distribution channel, FBSF provides financing solutions for equipment vendors and their end users.

These equipment vendors specialize primarily in healthcare, manufacturing, technology equipment, and specialty vehicles.

The end users (i.e., our lessees and borrowers) are primarily industrial transportation users, physician groups, veterinarians, and hospitals.

These financings generally range between $25,000 and $500,000 with terms of 36 to 84 months.

Our Equipment Finance team seeks to position itself as the preferred point of sale financing choice utilized by equipment vendors and their purchasing customers.

Our online application and proprietary credit scoring architecture enable us to provide small ticket vendor equipment financings through a nationwide distribution channel.

These equipment vendors specialize primarily in healthcare, manufacturing, technology equipment, agriculture, construction, and specialty vehicles.

Small ticket vendor equipment financing typically generates higher yields than traditional commercial lending.

As of December 31, 2023, equipment financing represented approximately 10% of our total gross loans and leases receivable.

Floorplan Financing

FBB, through its wholly-owned subsidiary FBSF, offers floorplan financing for independent car dealerships nationwide.

C&I Lending - Floorplan Financing

We offer floorplan financing for independent car dealerships nationwide.

These floorplan programs generally range from $500,000 to $10 million for larger, well-established independent car dealers.

Floorplan financing typically generates higher yields than traditional commercial lending.

As of December 31, 2023, floorplan financing represented approximately 3% of our total gross loans and leases receivable.

SBA Lending and Servicing

C&I Lending - SBA Lending and Servicing

SBA loans are made through programs designed by the federal government to assist the small business community in obtaining financing.

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We leverage this program authority and capacity to package, underwrite, process, service, and liquidate, if necessary, SBA loans nationwide.

Excluding Paycheck Protection Program (“PPP”) loans, our SBA loans fall into three categories:

Our SBA loans fall into three categories:

loans originated under the SBA’s 7(a) term loan program;

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however, all loans must be underwritten, originated, monitored, and serviced according to the SBA’s Standard Operating Procedures in order to maintain the guaranty, if any, under the SBA program.

Except for loans originated under the SBA’s 504 program, the SBA generally provides a guaranty to the lender ranging from 50% to 90% of principal and interest as an inducement to the lender to originate the loan.

Except for loans originated under the SBA’s 504 program, the SBA generally provides a guaranty to the lender ranging from 50% to 90% of loan the balance as an inducement to the lender to originate the loan.

The majority of our SBA loans are originated using the 7(a) term loan program.

This program typically provides a guaranty of 75% of principal and interest.

This program typically provides a guaranty of 75% of loan the balance.

In the event of default on the loan, the lender may request that the SBA purchase the guaranteed portion of the loan for an amount equal to outstanding principal plus accrued interest permissible under SBA guidelines.

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We earn interest income from these loans, generally at variable rates higher than those of our traditional commercial loans.

We also obtain funding and treasury management fee income by gathering deposits from these clients.

Our SBA strategy generates non-interest income from two primary sources.

First, we often choose to sell the guaranteed portions of the SBA loans to aggregators who securitize the assets for sale in the secondary market.

We receive a premium on each loan sold, resulting in the recognition of a gain in the period of sale.

Second, we receive servicing income from the holder of the securitized asset over the life of the loan.

We have a history of recognizing gains on the sale of the guaranteed portion of the loans.

We also regularly earn treasury management fee income from the borrower and servicing income from the owner of the sold portion of these loans.

As of December 31, 2023, the on-balance sheet portion of SBA loans represented approximately 2% of our total gross loans and leases receivable.

Treasury Management Services

FBB provides comprehensive treasury management services for commercial banking and specialized lending clients to manage their cash and liquidity, including lockbox, accounts receivable collection services, electronic payment solutions, fraud detection and protection, information reporting, reconciliation, and data integration solutions.

FBB provides comprehensive treasury management services for commercial banking and specialized lending clients to manage their cash and liquidity, including a variety of deposit accounts, accounts receivable collection services, electronic

payment solutions, fraud detection and protection, information reporting, reconciliation, data integration solutions, and account balance optimization solutions.

For our clients involved in international trade, the Bank offers international payment services, foreign exchange, and trade letters of credit.

The Bank also offers a variety of deposit accounts and balance optimization solutions.

Company Retirement Plan Services

FBB acts as fiduciary and investment manager for corporate clients, creating and executing asset allocation strategies tailored to each corporation’s unique situation.

FBB acts as a discretionary trustee and investment fiduciary, sharing responsibility for monitoring assets to match the client’s specifications.

FBB also acts as a discretionary trustee and investment fiduciary, sharing responsibility for monitoring assets to match the client’s specifications.

Offering only non-proprietary funds removes conflict of interest while designing cost-effective company retirement plans which provide a competitive return.

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FBB has full fiduciary powers and offers trust and estate administration, financial planning, and investment management, acting in a trustee or agent capacity.

FBB also provides brokerage and custody-only services, for which we administer and safeguard assets, but do not provide investment advice.

FBB also provides access to brokerage and custody-only services, for which it administers and safeguards assets.

As of December 31, 2023, FBB had $2.726 billion of private wealth assets under management and administration.

The Bank also offers private banking to its Private Wealth Management clients.

As of December 31, 2022, our private wealth loans represented approximately 2% of our total gross loans and leases receivable.

As of December 31, 2023, private wealth loans represented approximately 2% of total gross loans and leases receivable.

Bank Consulting Services

FBB provides outsourced treasury services to assist banks and other financial institutions with balance sheet management.

These services include investment portfolio management and administrative services, asset liability management services, and asset liability process validations required by regulators.

These services include investment portfolio management and administrative services, and asset liability management services.

FBB encounters strong competition across all of our commercial banking products and services.

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Human Capital Management

At December 31, 2022, we had 345 employees which equated to approximately 337 full-time equivalent employees (“FTE”).

None of our employees are represented by a union or subject to a collective bargaining agreement.

The Corporation believes achieving strong financial results begins with its employees.

In 2023, the workforce grew to 349 employees.

While the majority of employees are located in the primary banking markets, the Corporation has employees in over 27 states.

This geographic expansion allows the Corporation to continue to diversify the workforce and add producers and specialists as the business lines grow.

The Corporation’s culture is critical and is rooted in our founding beliefs and guided by our cultural competencies.

The Corporation’s leaders and employees are expected to treat everyone with the highest respect.

The clarity of the Corporation’s core values creates a special and committed team atmosphere.

This increases productivity, reduces turnover, attracts motivated employees, and cultivates an inclusive atmosphere.

The Corporation’s culture creates engaged employees, who, in turn, generate satisfied clients.

The Corporation is in a people-differentiated business and attracting and retaining the best talent possible is critical to our success.

The strength of our culture and core values is demonstrated in a number of ways:

• In 2023, the Corporation was named to the national list of Top Workplaces USA for the second year in a row and to the regional list of Wisconsin State Journal Top Workplaces for the South Central Wisconsin area and Milwaukee

Journal Sentinel for the Milwaukee/Southeast Wisconsin area.

Top Workplaces awards are based solely on feedback captured through a third-party administered employee engagement survey and provide regional and national level programs plus industry and culture excellence awards.

Being part of the highly regarded Top Workplaces list is a tangible indicator how well the Corporation is navigating its culture in today’s world of work.

◦ In 2022, as part of the Top Workplaces Survey, the Corporation was awarded the Top Workplaces Culture Excellence recognition across nine categories.

These awards celebrate companies that excel in specific areas of workplace culture.

The Corporation's Culture Excellence Awards include:

Leadership, Innovation, Compensation & Benefits, Work-Life Flexibility, Purpose & Values, DEI Practices, Employee Appreciation, Employee Well-Being, and Professional Development.

• The Corporation has been successful in rehiring former employees ("boomerangs").

The special culture and character and caliber of coworkers are the boomerangs' top reasons for returning.

Eighteen employees have rejoined the Corporation which represents approximately 5% of the workforce.

• In 2022, the Corporation achieved an employee engagement rating of 87% with a 92% participation rate – both are well above the finance and insurance industry norm of 76% and 70%, respectively.

Employee engagement is a key business driver for organizational success.

Engaged employees work harder, are more loyal and are more likely to go the extra mile for the organization and our clients.

• Employee turnover was 11.02% across the Corporation in 2022 – well below the employee turnover average of 20.3% in the banking industry, as reported in a survey conducted by Aon in 2022.

The Corporation is committed to expanding its talent pool and leadership pipeline to include more individuals from underrepresented groups and recognizes how important it is for employees to develop and progress in their careers.

To support this development, the Corporation provides a variety of resources to help employees grow in their current roles and build new skills, including a learning management system, tuition reimbursement, commercial banking development program, and manager effectiveness programs.

The Corporation has an interactive talent management platform which enables more effective talent management, increases engagement and accountability, and supports performance management, goal planning, career pathing and succession management.

• The Corporation continues to make progress with multi-year strategic succession planning goals.

On January 3, 2023, the Corporation announced a number of executive-level promotions and appointments.

In addition, we invest in all our people and have succession planning and talent development goals that go beyond the executive level.

In 2022, the Corporation made progress with the successful recruitment of females in leadership roles in multiple regions.

• A Professional Development check-in was conducted with all employees to encourage goal setting that could potentially lead to a promotion, an internal transfer, or being more effective in their current role.

In 2022, 100% of the workforce established performance goals and nearly 20% of the workforce progressed along their career path into new roles within the Corporation.

The Corporation recognizes the value different perspectives, experiences, and cultures bring to our organization.

To deliver the client-centered solutions for which the Corporation is known, it is important to fully embrace and welcome the dynamic and vibrant backgrounds of our ever-growing workforce and community.

Leaders and managers are committed to fostering a culture of belonging, broadening perspectives, and deepening relationships.

• Throughout 2022, the Corporation furthered its DEI efforts by introducing leaders and all employees to foundational DEI concepts, establishing a shared understanding of why they matter and equipping leaders and managers to demonstrate their commitment to DEI to motivate employee engagement.

◦ 100% of the Corporation's leaders completed a multi-session DEI course curated by our external DEI consultant, an inclusive leadership self-assessment, and participated in all or most of the learning sessions offered throughout the year.

◦ All employees were invited to participate in the multi-session DEI course and learning sessions on a voluntary basis.

Approximately 65% of employees participated in one or more learning courses throughout the year.

• A Belonging Index is measured as part of the Corporation’s engagement survey.

The Belonging Index measures a feeling of security and support, and a sense of acceptance and inclusion as a member of the team and employee of the Corporation.

The Corporation's Belonging Index was 91% in our 2022 engagement survey.

The Corporation continues to evaluate where and how employees work.

As hybrid work has evolved, so has the Corporation.

The Corporation’s leaders and managers have learned to be more flexible and enable employees to do their jobs with more autonomy and in new ways.

This has also enabled the Corporation to expand talent pools and grow the depth and

diversity of its workforce.

In 2022, the Corporation had approximately 75% of its employees working a hybrid or remote work schedule.

The Corporation is committed to paying an attractive, equitable, and competitive wage based on market rates for the employees' roles, experience and how they perform.

To ensure pay is competitive, the Corporation regularly benchmarks against other companies both within and outside our industry.

The Corporation is additionally committed to supporting employees’ and their families’ well-being by offering a very comprehensive total rewards package.

The Corporation’s Wellness Committee assists in prioritizing how to best support employees’ physical, emotional, and financial wellness.

Given the competitive job market and the critical importance of retaining employees, annual base salaries were increased by an additional $650,000 or approximately 2% more in 2023 (and in 2022) than the Corporation’s historical average annual merit increase.

While the majority of employees are located in the primary banking markets, the Corporation has employees working onsite, hybrid, and remote in over 20 states.

This geographic expansion allows the Corporation to continue to diversify the workforce, compete in an increasingly challenging talent landscape, and add producers and specialists as business lines and needs grow.

The Corporation’s culture is critical to success and is rooted in a set of founding beliefs and guided by a core cultural competency framework.

The clarity of the Corporation’s core values creates a special and committed team atmosphere, which increases productivity, reduces turnover, attracts motivated employees, and cultivates a culture of belonging.

The Corporation is in a people-differentiated business and attracting and retaining the best talent possible is critical to our success and financial performance.

The strength of our culture and core values was demonstrated as follows throughout 2023:

The Corporation was named to the national list of Top Workplaces USA for the second year in a row and to the regional list of Wisconsin State Journal Top Workplaces for the South Central Wisconsin area and Milwaukee Journal Sentinel for the Milwaukee/Southeast Wisconsin area.

As part of the Top Workplaces Survey, the Corporation was also awarded the Top Workplaces Culture Excellence recognition across nine categories for a second year.

The Corporation achieved an Employee Engagement rating of 90% with an 88% participation rate – both well above the finance and insurance industry norm of 78% and 80%, respectively.

Employee Turnover was 9.33% – well below the employee turnover average of 17.7% in the banking industry, as reported in a survey conducted by Aon in 2023.

The Career Path Ratio for employees was 14%, above our 10% goal, indicating the prioritization of internal transfers and promotions throughout the organization to fill open positions, recognize strong employee performance and career progression.

Managerial Effectiveness, as measured in the engagement survey, was 86%, well above our goal of 80%.

Managers and employees meet regularly to set and track progress on goals, have 1:1 conversations, complete check-ins focused on professional development, and track activity related to overall performance management.

A Culture Check-In was conducted with all employees to encourage open discussion and feedback between managers and employees.

100% of employees participated in the check-in.

A Rising Professionals Development Series was launched providing employee opportunities to grow, connect, and share ideas with peers and leadership within the organization.

A Leadership Challenge group was created comprised of emerging leaders and key employees from across the organization.

The goal was to provide these emerging leaders with development opportunities and exposure to the strategic planning process to better prepare them to lead future planning cycles.

The Corporation provided ongoing diversity, equity, and inclusion education opportunities to all employees.

In addition, workplace culture interviews were held with approximately 60% of our employees who identify as racially/ethnically diverse.

The continued emphasis on an inclusive culture resulted in a Belonging rating of 90%, well above the 83% benchmark, in the 2023 employee engagement survey.

The Corporation is committed to paying an attractive, equitable, and competitive wage based on market rates for the employees' roles, experience, and performance.

To ensure pay is competitive, the Corporation regularly benchmarks against other companies both within and outside the banking industry.

The Corporation is committed to supporting employees’ and their families’ well-being by offering a comprehensive total rewards package.

The Corporation prioritizes supporting an employee’s physical, emotional, and financial wellness.

From the Corporation’s inception, the commitment to and investment in our employees and the communities we serve has been the foundation of the Corporation’s long-term success for the benefit of our shareholders.

The Corporation’s commitment is best expressed in the words of our Belief Statement:

At First Business Bank, we believe visionary, determined entrepreneurs and investors create a thriving economy and, in turn, social and economic advancement for their employees, investors, families, and communities.

Built by driven entrepreneurs, First Business Bank has the experience to create both wealth, and a wealth of good in the world.

First Business Bank

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In 1990, FBB relocated its home office to Madison, Wisconsin, and began focusing on providing high-quality banking services to small- to medium-sized businesses located in Madison and the surrounding area.

FBB’s business lines include commercial loans, commercial real estate loans, asset-based loans, accounts receivable financing, SBA lending and servicing, floorplan financing, equipment loans and leases, commercial deposit accounts, company retirement solutions, and treasury management services.

FBB’s commercial banking products and services include commercial loans, commercial real estate loans, asset-based loans, accounts receivable financing, SBA lending and servicing, floorplan financing, equipment loans and leases, commercial deposit accounts, company retirement solutions, and treasury management services.

FBB offers a variety of deposit accounts and personal loans to business owners, executives, professionals, and high net worth individuals.

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As of December 31, 2023, FBB had six wholly-owned subsidiaries and total gross loans and leases receivable of $2.850 billion, total deposits of $2.799 billion, and total stockholders’ equity of $339.9 million.

FBFS Statutory Trust II

In September 2008, FBFS formed FBFS Statutory Trust II (“Trust II”), a Delaware business trust wholly-owned by FBFS to facilitate the sale of trust preferred securities by Trust II and Trust II’s purchase of junior subordinated notes issued by FBFS.

FBFS’s ownership interest in Trust II has not been consolidated into the financial statements.

As of March 30, 2022, the junior subordinated notes and preferred securities were redeemed and Trust II was dissolved.

Corporate Information

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Specifically, our three markets in Wisconsin consist of South Central Wisconsin, Southeast Wisconsin, and Northeast Wisconsin.

We serve these markets primarily through our offices in Madison, Brookfield, and Appleton, respectively.

We serve the greater Kansas City Metro through our Leawood, Kansas office, which is located in the Kansas City metropolitan area.

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Southeast Wisconsin

Southeast Wisconsin provides a diverse economic base with a highly skilled labor force and strong manufacturing industry.

The Milwaukee metropolitan area has a diverse economic base with a highly skilled labor force and strong manufacturing sector.

The most prominent economic sectors include manufacturing, financial services, health care, diversified service companies, and education.

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Geographically located in the center of the U.S., the greater Kansas City Metro includes 15 counties and more than 50 communities in Missouri and Kansas, including a central business district located in Kansas City, Missouri and communities on both sides of the state line.

The area is known for the diversity of its economic base, with major employers in manufacturing and distribution, architecture and engineering, technology, telecommunications, financial services, and bioscience, as well as local government and higher education.

EXECUTIVE OFFICERS OF THE REGISTRANT

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Chambas has over 35 years of commercial banking experience.

Prior to joining FBFS in 1993, he was a Vice President of Commercial Lending with M&I Bank, now known as BMO Harris Bank, N.A.

(“BMO Harris Bank”), in Madison, Wisconsin.

Sloane, Jr., age 62, has served as Chief Financial Officer of FBFS since January 2016.

Sloane also serves as the Chief Financial Officer of the Bank.

Sloane has over 35 years of financial services experience including mergers and acquisitions, strategic planning and financial reporting and analysis.

On May 18, 2022, Mr.

Sloane notified the Corporation that he intends to retire on March 31, 2023.

The Corporation plans to appoint Brian D.

Spielmann to succeed Mr.

Sloane as the Corporation’s Chief Financial Officer upon Mr.

Sloane’s retirement.

Spielmann is currently serving as Deputy Chief Financial Officer and Chief Accounting Officer of the Corporation.

Conley, age 69 , has served as FBFS’s General Counsel since June 2008.

Conley also serves as General Counsel of the Bank.

She has over 35 years of experience in commercial banking.

Immediately prior to joining FBFS in 2007, Ms.

Conley was a Senior Vice President in Corporate Banking with Associated Bank, National Association.

She had been employed at Associated Bank since May 1976.

Chandler, age 58 , has served as Chief Human Resources Officer of FBFS since January 2010.

Prior to that, she held the position of Senior Vice President-Human Resources for several years.

She has been an employee of FBFS for over 25 years.

Meloy, age 61, was promoted to Executive Vice President of FBFS in January 2023..

Prior to joining FBFS in 1993, he was a Vice President of Commercial Lending with M&I Bank, now known as BMO Bank, N.A.

, in Madison, Wisconsin.

Spielmann, age 41, has served as Chief Financial Officer of FBFS since April 2023.

Spielmann also serves as the Chief Financial Officer of the Bank.

He also currently serves as a director of our FBSF subsidiary.

Spielmann had been serving as the Corporation’s Deputy Chief Financial Officer and Chief Accounting Officer since May 2022.

Spielmann joined FBFS in 2006 and has held various positions including Chief Accounting Officer, Director of Finance, Financial Reporting Manager, and Senior Financial Accountant.

Seiler, age 59 , has served as Chief Operating Officer of FBFS since April 2016 and as President of FBFS since January 2023.

He also currently serves as a director for our subsidiary FBSF.

Seiler has over 25 years of financial services experience including his previous position as Managing Director (formerly Senior Vice President/Manager) of the Correspondent Banking Division with BMO Bank, N.A.

in Milwaukee, Wisconsin which he held from 2007 to 2016.

Prior to that, he held the position of Senior Vice President/Team Leader, Correspondent Real Estate Division from 2005 to 2007 and Vice President, Relationship Manager, Commercial Real Estate from 2002 to 2005.

Meloy, age 62, has served as Executive Vice President of FBFS since January 2023.

Meloy joined FBFS in 2000 and has held various positions including Chief Executive Officer of FBB, Executive Vice President of FBB, and President and Chief Executive Officer of FBB-Milwaukee.

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Bank, working in their financial institutions group with mergers and acquisition financing.

Ovokaitys, age 49 , has served as Chief Information Officer since June 2014.

Prior to joining FBFS, Mr.

Ovokaitys held the position of Head of Corporate IT (North/South America) for Merz Pharmaceuticals, located in Frankfurt, Germany, from 2010 to 2014.

He also served as Director of IT for Aurora Health Care from 2006 to 2010 and Manager of IT for the American Transmission Company from 2000 to 2006.

Seiler, age 58 , has served as Chief Operating Officer of FBFS since April 2016 and was promoted to President of FBFS in January 2023.

He also currently serves as a director for our subsidiary FBSF.

Quade, age 58 , has served as Chief Credit Officer of FBFS since April 2020.

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Prior to joining FBFS, Mr.

Quade held the position of Senior Vice President with Johnson Bank in Milwaukee, Wisconsin which he held from 2008 to 2019.

Hartlieb , age 52, has served as President of FBB since 2015 and was promoted to Chief Executive Officer and concurrently elected a director of FBB in January 2023.

Quade held the position of Senior Vice President with Johnson Bank in Milwaukee, Wisconsin.

Chandler, age 59 , has served as Chief Human Resources Officer of FBFS since January 2010.

Prior to that, she held the position of Senior Vice President-Human Resources for several years.

She has been an employee of FBFS for over 30 years.

Garcia , age 51, has served as Chief Risk Officer for FBFS since March 2022.

Prior to joining FBFS, she held the position of Head of North American Risk and Compliance, Managing Director for BMO Bank, N.A.

in Chicago, Illinois, from 2018 to 2022.

Garcia has over 30 years of experience in the financial services industry, centered in commercial banking, credit, compliance, and risk management.

Hartlieb , age 53, has served as President of FBB since 2015 and as Chief Executive Officer of FBB and a director of FBB since January 2023.

Hartlieb joined FBB in 2009 as Senior Vice President of Greater Dane County.

He also currently serves as a director of our FBSF subsidiary.

Hartlieb has over 25 years of financial services experience.

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Hartlieb held the position of Regional President with AMCORE Bank in Madison, Wisconsin, which he held from 1998 to 2009.

Ovokaitys, age 50 , has served as Chief Information Officer since June 2014.

Prior to joining FBFS, Mr.

Ovokaitys held the position of Head of Corporate IT (North/South America) for Merz Pharmaceuticals, located in Frankfurt, Germany, from 2010 to 2014.

He also served as Director of IT for Aurora Health Care from 2006 to 2010 and Manager of IT for the American Transmission Company from 2000 to 2006.

SUPERVISION AND REGULATION

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Federal Deposit Insurance Corporation (“FDIC”)-insured institutions, like the Bank, their holding companies, and their affiliates are extensively regulated under federal and state law.

As a result, our growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including our primary regulator, the Board of Governors of the Federal Reserve System (“Federal Reserve”), the Bank’s state regulator, the Wisconsin Department of Financial Institutions (“WDFI”), and its primary federal regulator, the FDIC.

Furthermore, taxation laws administered by the Internal Revenue Service (“IRS”) and state taxing authorities, accounting rules developed by the Financial Accounting Standards Board (“FASB”), securities laws administered by the SEC and state securities authorities, and anti-money laundering laws enforced by the U.S.

As a result, our growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including our primary regulators, the Board of Governors of the Federal Reserve System (“Federal Reserve”), the Bank’s state regulator, the Wisconsin Department of Financial Institutions (“WDFI”), and its primary federal regulator, the FDIC.

laws enforced by the U.S.

Department of the Treasury (“Treasury”) have an impact on our business.

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These laws, and the regulations of the bank regulatory agencies issued under them, affect, among other things, the scope of our business, the kinds and amounts of investments the Corporation and the Bank may make, limits on the Bank’s loans to any one borrower, reserve requirements, required capital levels relative to assets, the nature and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire, dealings with the Corporation’s and the Bank’s insiders and affiliates, and payment of dividends.

In reaction to the global financial crisis beginning in 2008 (the “global financial crisis”), and particularly following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), we experienced

heightened regulatory requirements and scrutiny.

Although the reforms primarily targeted systemically important financial service providers, their influence filtered down in varying degrees to community banks over time and caused our compliance and risk management processes, and the costs thereof, to increase.

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A result of this change is that the proceeds of hybrid instruments, such as trust preferred securities, were excluded from capital over a phase-out period.

However, if such securities were issued prior to May 19, 2010 by bank holding companies with less than $15 billion of assets, they may be retained, subject to certain restrictions.

if such securities were issued prior to May 19, 2010 by bank holding companies with less than $15 billion of assets, they may be retained, subject to certain restrictions.

The Basel III Rule .

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The Basel III Rule is applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies” who are relieved from compliance with the Basel III Rule.

While holding companies with consolidated assets of less than $3 billion, like us, are considered small bank holding companies for this purpose, we have securities registered with the SEC and that disqualifies us from taking advantage of the relief.

Historically we have been disqualified from taking advantage of the relief since we have securities registered with the SEC.

Moreover, our asset size now exceeds the small bank holding company threshold.

Banking organizations became subject to the Basel III Rule on January 1, 2015, and its requirements were fully phased-in as of January 1, 2019.

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• A minimum leverage ratio of Tier 1 Capital to total quarterly average assets equal to 4% in all circumstances.

In addition, institutions that seek the freedom to make capital distributions (including for dividends and repurchases of stock) and pay discretionary bonuses to executive officers without restriction must also maintain 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation buffer (fully phased-in as of January 1, 2019).

The purpose of the conservation buffer is to ensure that banking institutions maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress.

Factoring in the conservation buffer increases the minimum ratios depicted above to 7% for Common Equity Tier 1 Capital, 8.5% for Tier 1 Capital and 10.5% for Total Capital.

Through subsequent rulemaking, the federal banking agencies provided certain forms of relief to banking organizations that are not subject to the capital regulation's advanced approaches, such as the Corporation.

For instance, non-advanced approaches institutions are subject to simpler regulatory capital requirements for Mortgage Servicing Assets (“MSA”), certain Deferred Tax Assets (“DTA”) arising from temporary differences, investments in the capital of unconsolidated financial institutions, and requirements for the amount of capital issued by a consolidated subsidiary of a banking organization and held by third parties (sometimes referred to as a minority interest) that is includable in regulatory capital.

Specifically, such institutions may deduct from Common Equity Tier 1 Capital any amount of MSAs, temporary difference DTAs, and investments in the capital of unconsolidated financial institutions that individually exceeds 25 percent of Common Equity Tier 1 Capital.

On July 27, 2023, the federal banking agencies issued a proposed rule to implement the final components of the Basel III standards set by the Basel Committee on Banking Supervision in 2017.

The proposed rule, which would not apply to the Corporation and the Bank as proposed, would substantially revise the existing regulatory capital framework for institutions with $100 billion or more of assets.

Well-Capitalized Requirements .

The ratios described above are minimum standards in order for banking organizations to be considered “adequately capitalized.” Bank regulatory agencies uniformly encourage banks to hold more capital and be “well-capitalized” and, to that end, federal law and regulations provide various incentives for banking organizations to maintain regulatory capital at levels in excess of minimum regulatory requirements.

“well-capitalized” and, to that end, federal law and regulations provide various incentives for banking organizations to maintain regulatory capital at levels in excess of minimum regulatory requirements.

For example, a banking organization that is well-capitalized may:

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(i) requiring the institution to submit a capital restoration plan;

(ii) limiting

the institution’s asset growth and restricting its activities;

(ii) limiting the institution’s asset growth and restricting its activities;

(iii) requiring the institution to issue additional capital stock (including additional voting stock) or to sell itself;

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The BHCA does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies.

activities, including securities and insurance underwriting and sales, merchant banking, and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of FDIC-insured institutions or the financial system generally.

Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of non-banking activities, including securities and insurance underwriting and sales, merchant banking, and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of FDIC-insured institutions or the financial system generally.

The Corporation has not elected to operate as a financial holding company.

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In particular, the final rule is intended to provide a better understanding of the facts and circumstances that the Federal Reserve considers most relevant when assessing whether control exists.

On March 31, 2020, the final rule’s original effective date was delayed and became effective on September 30, 2020.

Dividend Payments.

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(i) the company’s net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends;

(ii) the prospective rate of earnings retention is inconsistent with the company’s capital needs and overall current and prospective financial condition;

prospective rate of earnings retention is inconsistent with the company’s capital needs and overall current and prospective financial condition;

or (iii) the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.

The Federal Reserve also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations.

Moreover, under the Dodd-Frank Act and the requirements of the Federal Reserve, the Corporation, as a bank holding company, is required to serve as a source of financial strength to the Bank and to commit resources to support the Bank.

In addition, consistent with its “source of strength” policy, the Federal Reserve has stated that, as a matter of prudent banking, a bank holding company should not maintain a level of cash dividends to its shareholders that places undue pressure on the capital of its bank subsidiaries, or that can be funded only through additional borrowings or other arrangements that may undermine the bank holding company’s ability to serve as a source of strength.

The appropriate federal regulatory authorities have indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings.

The Federal Reserve possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations.

Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.

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The Bank is a Wisconsin state-chartered bank.

The deposit accounts of the Bank are insured by the FDIC’s Deposit Insurance Fund (“DIF”) to the maximum extent provided under federal law and FDIC regulations, currently $250,000 per insured depositor category.

The deposit accounts of the Bank are insured by the FDIC’s Deposit Insurance Fund (“DIF”) to the maximum extent provided under federal law and FDIC regulations.

As a Wisconsin-chartered FDIC-insured bank, the Bank is subject to the examination, supervision, reporting, and enforcement requirements of the WDFI, the chartering authority for Wisconsin banks, and the FDIC, designated by federal law as the primary federal regulator of insured state banks that, like the Bank, are not members of the Federal Reserve System (nonmember banks).

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As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC.

Deposits are insured up to applicable limits by the FDIC and such insurance is backed by the full faith and credit of the United States Government.

Under the Dodd-Frank Act, a permanent increase in deposit insurance was authorized to $250,000 per depositor, per insured depository institution for each account ownership category.

The FDIC has adopted a risk-based assessment system whereby FDIC-insured institutions pay insurance premiums at rates based on their risk classification.

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This method shifted the burden of deposit insurance premiums toward those large depository institutions that rely on funding sources other than U.S.

The reserve ratio is the FDIC insurance fund balance divided by estimated insured deposits.

The reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends to FDIC-insured institutions when the reserve ratio exceeds certain thresholds.

The reserve ratio was 1.26% as of June 30, 2022, which is less than the statutory minimum reserve ratio of 1.35% to be achieved by September 30, 2028.

Accordingly, on June 1, 2022, the FDIC adopted a final rule increasing the initial base deposit insurance rate schedules by 2 basis points, beginning with the first quarterly assessment period of 2023.

The Dodd-Frank Act set the minimum DIF reserve ratio at 1.35% of the estimated amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends to FDIC-insured institutions when the reserve ratio exceeds

certain thresholds.

On October 18, 2022, the FDIC adopted a final rule increasing the initial base deposit insurance rate schedules by 2 basis points, beginning with the first quarterly assessment period of 2023.

Starting January 1, 2023, the total base assessment rates for small banks, such as the Bank, ranged from 2.5 basis points to 32 basis points.

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Progressively lower assessment rate schedules will take effect when the reserve ratio reaches 2.00%, and again when it reaches 2.50%.

The Bank’s assessment rate for deposit insurance was approximately 8 basis points for 2023.

The DIF reserve ratio was 1.10% as of June 30, 2023, which is less than the statutory minimum reserve ratio of 1.35%, which is required to be achieved by September 30, 2028.

There was a sharp decline in the DIF in 2023 following the failures of Silicon Valley Bank, Signature Bank and First Republic Bank in the first half of 2023, coupled with strong insured deposit growth.

On November 16, 2023, the FDIC issued a final rule to implement a special assessment to recover the loss DIF associated with protecting uninsured depositors following these bank failures.

Under the final rule, the assessment base for an insured depository institution will be equal to the institution’s estimated uninsured deposits as of December 31, 2022, adjusted to exclude the first $5 billion in estimated uninsured deposits.

Under the final rule, the FDIC will collect the special assessment at an annual rate of 13.4 basis points beginning with the first quarterly assessment period of 2024 and will continue to collect special assessments for an anticipated total of eight quarterly assessment periods.

At December 31, 2023, our estimated level of uninsured deposits was below this threshold, and therefore, the Bank is not subject to this special assessment.

The FDIC is authorized to conduct examinations of and require reporting by FDIC-insured institutions.

It is also authorized to terminate a depository bank’s deposit insurance upon a finding by the FDIC that the bank’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the bank’s regulatory agency.

The termination of deposit insurance for the Bank would have a material adverse effect on our earnings, operations and financial condition.

Supervisory Assessments.

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Because the global financial crisis was in part a liquidity crisis, Basel III also includes a liquidity framework that requires FDIC-insured institutions to measure their liquidity against specific liquidity tests.

One test, referred to as the Liquidity Coverage Ratio (“LCR”), is designed to ensure that the banking entity has an adequate stock of unencumbered high-quality liquid assets that can be converted easily and immediately in private markets into cash to meet liquidity needs for a 30-calendar day liquidity stress scenario.

The other test, known as the Net Stable Funding Ratio (“NSFR”), is designed to promote more medium- and long-term funding of the assets and activities of FDIC-insured institutions over a one-year horizon.

One test, referred to as the Liquidity Coverage Ratio, is designed to ensure that the banking entity has an adequate stock of unencumbered high-quality liquid assets that can be converted easily and immediately in private markets into cash to meet liquidity needs for a 30-calendar day liquidity stress scenario.

The other test, known as the Net Stable Funding Ratio, is designed to promote more medium- and long-term funding of the assets and activities of FDIC-insured institutions over a one-year horizon.

These tests provide an incentive for banks and holding companies to increase their holdings in Treasury securities and other sovereign debt as a component of assets, increase the use of long-term debt as a funding source, and rely on stable funding like core deposits (in lieu of brokered deposits).

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The Bank is permitted to make investments and engage in activities directly or through subsidiaries as authorized by Wisconsin law.

However, under federal law and FDIC regulations, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank.

Federal law and FDIC regulations also prohibit FDIC-insured state banks and their

subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines that the activity would not pose a significant risk to the DIF.

Federal law and FDIC regulations also prohibit FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines that the activity would not pose a significant risk to the DIF.

These restrictions have not had, and are not currently expected to have, a material impact on the operations of the Bank.

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On December 19, 2018, the FDIC adopted a final rule on the treatment of reciprocal deposits pursuant to the Regulatory Relief Act.

The final rule, effective March 6, 2019, exempts certain reciprocal deposits from being

considered as brokered deposits for certain insured institutions.

The final rule, effective March 6, 2019, exempts certain reciprocal deposits from being considered as brokered deposits for certain insured institutions.

In particular, well-capitalized and well-rated institutions are not required to treat reciprocal deposits as brokered deposits up to the lesser of 20% of their total liabilities or $5 billion.

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The rule also establishes a transparent application process for entities that seek a “primary purpose” exception but do not meet one of the “designated exceptions.” The new rule also reflects technological changes across the banking industry and removes regulatory disincentives that limit banks’ ability to serve their customers.

Full compliance with the amended brokered deposits regulation was required by January 1, 2022.

The FDIC staff continues to implement the final rule through the issuance of interpretative guidance and other administrative actions.

Community Reinvestment Act (“CRA”) Requirements.

The CRA requires the Bank to have a continuing and affirmative obligation in a safe and sound manner to help meet the credit needs of the entire community, including low- and moderate-income neighborhoods.

Federal regulators regularly assess the Bank’s record of meeting the credit needs of its communities.

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An unsatisfactory rating may be used as a basis for denial of such an application.

On December 14, 2021, the Office of the Comptroller of the Currency (“OCC”) issued a final rule to rescind the June 2020 Community Reinvestment Act (“CRA”) rule and replace it with a rule based on the rules adopted jointly by the federal banking agencies in 1995, as amended.

The final rule aligns the OCC’s CRA rules with the current Federal Reserve and FDIC rules and thereby facilitates the ongoing interagency work to modernize the CRA regulatory framework and create consistency for all insured depository institutions.

On October 24, 2023, the federal banking agencies jointly issued a final rule to strengthen and modernize the existing CRA regulations.

Under the final rule, the agencies will evaluate a bank’s CRA performance based upon the varied activities that it conducts and the communities in which it operates.

CRA evaluations and data collection requirements will be tailored based on bank size and type.

The Bank would be considered a large bank with assets of greater than $2 billion under the final rule and therefore will be evaluated under new lending, retail services and products, community development financing, and community development services tests.

The final rule includes CRA assessment areas associated with mobile and online banking, and new metrics and benchmarks to assess retail lending performance.

In addition, the final rule emphasizes smaller loans and investments that can have a high impact and be more responsive to the needs of LMI communities.

The final rule will take effect on April 1, 2024;

however, compliance with the majority of the final rule's provisions will not be required until January 1, 2026, and the data reporting requirements of the final rule will not take effect until January 1, 2027.

Anti-Money Laundering.

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Depository institutions are required by their respective federal regulators to maintain policies and procedures in order to ensure compliance with the above obligations.

Federal regulators regularly examine BSA/Anti–Money Laundering (“AML”) and sanctions compliance programs to ensure their adequacy and effectiveness, and the frequency and extent of such examinations and the remedial actions resulting therefrom have been increasing.

Federal regulators regularly examine BSA/AML and sanctions compliance programs to ensure their adequacy and effectiveness, and the frequency and extent of such examinations and the remedial actions resulting therefrom have been increasing.

Non–compliance with sanctions laws and/or AML laws or failure to maintain an adequate BSA/AML compliance program can lead to significant monetary penalties and reputational damage, and federal regulators evaluate the effectiveness of an applicant in combating money laundering when determining whether to approve a proposed bank merger, acquisition, restructuring, or other expansionary activity.

On January 1, 2021, the National Defense Authorization Act was enacted by Congress.

On January 1, 2021, the National Defense Authorization Act (“NDAA”) was enacted by Congress.

The new law establishes the most significant overhaul of BSA and AML since the USA PATRIOT Act of 2001, including:

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and (iv) provisions emphasizing the importance of risk-based approaches to AML program requirements.

Many of the changes to the BSA and AML require the Department of Treasury and FinCEN to

promulgate rules.

On September 29, 2022, FinCEN issued a final regulation implementing the BSA amendments included in the NDAA with respect to beneficial ownership.

Privacy and Cybersecurity.

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federal and state laws and regulations governing requirements for maintaining policies and procedures to protect non-public personal information of their consumers.

require the Bank to periodically disclose their privacy policies and practices relating to sharing such information and permit consumers to opt out of their ability to share information with unaffiliated third parties under certain circumstances.

These laws require the Bank to periodically disclose their privacy policies and practices relating to sharing such information and permit consumers to opt out of their ability to share information with unaffiliated third parties under certain circumstances.

They also impact the Bank’s ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to contact clients with marketing offers.

In addition, the Bank is required to implement a comprehensive information security program that includes administrative, technical, and physical safeguards to ensure the security and confidentiality of customer records and information.

These security and privacy policies and procedures, for the protection of personal and confidential information, are in effect across the Bank and its subsidiaries.

Moreover, given the increased focus on privacy and data security in the United States and internationally, laws and regulations related to the same are evolving.

Multiple states and Congress are considering additional laws or regulations that could create or alter individual privacy rights and impose additional obligations on banks and related financial services companies in possession of or with access to personal data.

The Bank is required to implement a comprehensive information security program that includes administrative, technical, and physical safeguards to ensure the security and confidentiality of customer records and information.

These security and privacy policies and procedures, for the protection of personal and confidential information, are in effect across the Bank and its subsidiaries.

On November 18, 2021, the FDIC, the Federal Reserve System, and the OCC (collectively, the agencies) issued a joint final rule, to establish computer-security incident notification requirements for banking organizations and their bank service providers.

The rule will provide the agencies with early awareness of emerging threats to banking organizations and the broader financial system, including potentially systemic cyber events.

The final rule took effect on April 1, 2022, with full compliance extended to May 1, 2022.

Specifically, the rule requires banking organizations to notify their primary federal regulator as soon as possible and no later than 36 hours after the discovery of a “computer-security incident” that rises to the level of a "notification incident," as those terms are defined under the final rule.

Banks’ service providers are required under the rule to notify any affected bank to or on behalf of which the service provider provides services "as soon as possible" after determining that it has experienced an incident that materially disrupts or degrades, or is reasonably likely to materially disrupt or degrade, covered services provided to such bank for as much as four hours.

The federal banking agencies have also adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of the board of directors.

These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial services.

Moreover, recent cyberattacks against banks and other financial institutions that resulted in unauthorized access to confidential customer information have prompted the federal banking regulators to issue more extensive guidance on cybersecurity risk management.

Among other things, financial institutions are expected to design multiple layers of security controls to establish lines of defense and ensure that their risk management processes address the risks posed by compromised customer credentials, including security measures to authenticate customers accessing internet-based services.

A financial institution also should have a robust business continuity program to recover from a cyberattack and procedures for monitoring the security of third-party service providers that may have access to nonpublic data at the institution.

Concentrations in Commercial Real Estate .

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Consumer Financial Services.

The historical structure of federal consumer protection regulation applicable to all providers of consumer financial products and services changed significantly on July 21, 2011, when the Consumer Financial Protection Bureau (“CFPB”) commenced operations to supervise and enforce consumer protection laws.

The CFPB has broad rulemaking authority for a wide range of consumer protection laws that apply to all providers of consumer products and services, including the Bank, as well as the authority to prohibit “unfair, deceptive or abusive” acts and practices.

“unfair, deceptive or abusive” acts and practices.

The CFPB has examination and enforcement authority over providers with more than $10 billion in assets.

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In June 2016, the FASB issued an accounting standard update, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the CECL model.

Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected.

The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

Under the CECL model, we are required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected.

The measurement of expected credit losses is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

On December 21, 2018, the federal banking agencies issued a joint final rule revising their regulatory capital rules to (i) address the impending implementation of the CECL accounting standard under GAAP;

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We elected to use the 2020 Capital Transition Relief as permitted under the applicable regulations.

Legislation and Regulation Addressing the COVID-19 Pandemic

The COVID-19 pandemic created unprecedented health and economic uncertainty in the United States and internationally and has prompted federal, state, and local legislative and regulatory action designed to address the pandemic’s challenges.

Beginning in March 2020, the federal bank regulatory agencies began issuing various rulemakings and interagency statements providing temporary resources, flexibility and relief for financial institutions.

These rulemakings and statements related to, among other things, deferrals for certain borrowers and compliance with capital adequacy guidelines.

In addition, on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), a $2.2 trillion economic stimulus law, was enacted.

The CARES Act and various regulations promulgated thereunder contain many provisions that impact financial institutions, including, among others, forbearance protections for certain borrowers, relief from characterizing loan modifications as “troubled debt restrictions, a new Paycheck Protection Program (“PPP”) available in the form of Small Business Administration 7(a) loans made by financial institutions to eligible borrowers, and various liquidity facilities to fund the PPP and other pandemic-related financing programs.

After the initial fund for PPP loans was exhausted, the PPP was extended multiple times until expiring on August 8, 2020.

In January 2021, the SBA reopened the PPP for eligible borrowers that did not receive a PPP loan during the initial PPP phase, as well as for a certain subset of borrowers who had received an initial PPP loan previously.

The PPP expired for any new applicants on May 31, 2021 .

As a result, the three-year phase-out period described above commenced in 2023.

Digital Asset Regulation.

The federal banking agencies have issued interpretive guidance and statements regarding the engagement by banking organizations in certain digital asset activities.

On August 16, 2022, the Federal Reserve released supervisory guidance encouraging all banking organizations supervised by the agency to notify its lead supervisory point of contact at the Federal Reserve prior to engaging in any digital asset-related activity.

Prior to engaging in any such activities, banking organizations are expected to ensure their proposed activities are legally permissible under relevant state and federal laws, and ensure they have implemented adequate systems, risk management, and internal controls to ensure that the activities are conducted in a safe and sound manner consistent with applicable laws, including consumer protection laws.

On April 7, 2022, the FDIC issued a financial institution letter also requiring its supervised institutions to provide notice and obtain supervisory feedback prior to engaging in any crypto-related activities.

On January 3, 2023, the federal banking agencies issued additional guidance in the form of a joint statement addressing digital asset-related risks to banking organizations.

That statement noted the recent volatility and exposure of vulnerabilities in the digital asset sector and indicated that the agencies are continuing to assess whether or how the digital asset-related activities of banking organizations can be conducted in a safe and sound manner and in compliance with all applicable laws and regulations.

The statement stressed that each agency has developed, and expects banking organizations to follow, supervisory processes for evaluating proposed and existing digital asset activities.

On February 23, 2023, the federal banking agencies issued a joint statement addressing liquidity risks to banking organizations resulting from crypto-asset market vulnerabilities.

The joint statement noted that deposits placed by a crypto-asset-related entity and deposits that constitute stablecoin-related reserves may pose heightened liquidity risks to banking organizations due to the unpredictability of the scale and timing of deposit inflows and outflows.

The statement stressed that banking organizations should establish and maintain effective risk management and controls commensurate with the level of liquidity risks from such funding sources.

Further, on August 8, 2023, the Federal Reserve announced the establishment of a Novel Activities Supervision Program, which is designed in part to enhance the Federal Reserve’s supervision processes in respect of banking organizations’ crypto-asset related activities and use of distributed ledger technologies and other novel technologies in the delivery of financial products and services.

Although the federal banking agencies have not developed formal regulations governing the digital asset activities of banking organizations, the supervisory framework summarized above dictates that, in order to effectively identify and manage digital asset-related risks and obtain supervisory non-objection to the proposed engagement in digital asset activities, banking organizations must implement appropriate risk management practices, including with respect to board and management oversight, policies and procedures, risk assessments, internal controls and monitoring.

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

What changed 10-K

Item 1. Business