What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-28 compared with 2023-02-22 · 282 added, 389 removed, 688 unchanged (49% of the section changed)

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When used in this report the words or phrases “may,” “could,” “should,” “hope,” “might,” “believe,” “expect,” “plan,” “assume,” “intend,” “estimate,” “anticipate,” “project,” “likely,” or similar expressions are intended to identify “forward-looking statements.” Such statements are subject to risks and uncertainties, including among other things:

• Adverse changes in the economy or business conditions, either nationally or in our markets, including, without limitation, inflation, supply chain issues, labor shortages, wage pressures, and the adverse effects of the COVID-19 pandemic on the global, national, and local economy.

• Adverse changes in the economy or business conditions, either nationally or in our markets, including, without limitation, inflation, supply chain issues, economic downturn, labor shortages, wage pressures, and the adverse effects of public health events on the global, national, and local economy.

• Competitive pressures among depository and other financial institutions nationally and in our markets.

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In early 2019, management finalized the development of its five year strategic plan and began the implementation of strategies and initiatives that drive successful execution.

Management’s objective over this five year period is to excel by building an expert team with diverse experiences who work together to impact client success more than any other financial partner.

Management’s objective over this five year period was to excel by building an expert team with diverse experiences who work together to impact client success more than any other financial partner.

To meet this objective, we identified four key strategies which are linked to corporate financial goals, all business lines, and centralized administration functions to ensure communication and execution are consistent at all levels of the Corporation.

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• We will optimize our business lines for diversification and performance.

Throughout 2023, the last year of the existing plan, management intends to undertake an extensive process to reassess its key strategies and performance indicators to create a new long-term strategic plan.

The table below shows the Corporation’s performance for the years ended December 31, 2023, 2022, and 2021 in comparison to the key performance indicators included in the Corporation’s 2019 strategic plan.

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Key Performance Indicators 2021 2022 2023 Strategic Plan

Return on average common equity (“ROACE”) 8.64% 16.21% 16.79% 13.50%

Return on average equity (“ROAE”) 16.21% 16.79% 13.79% 13.50%

Return on average assets (“ROAA”) 1.37% 1.46% 1.13% 1.15%

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(1) Anonymous surveys conducted annually

Throughout 2023, the last year of the existing plan, management undertook an extensive process to reassess its key strategies and performance indicators to create a new long-term strategic plan.

The Corporation intends to disclose information about the key terms of the new strategic plan later in 2024 after it is finalized.

Financial Performance Summary

Results as of and for the year ended December 31, 2023 include:

• Net income available to common shareholders for the year ended December 31, 2022 was $40.2 million, increasing 12.4% compared to $35.8 million for the year ended December 31, 2021.

• Diluted earnings per common share were $4.75 for the year ended December 31, 2022, increasing 13.9% compared to $4.17 in the prior year.

• Return on average assets (“ROA”) for the year ended December 31, 2022 was 1.46% compared to 1.37% for 2021.

• Net income available to common shareholders for the year ended December 31, 2023 was $36.2 million, decreasing 10.0% compared to $40.2 million for the year ended December 31, 2022.

• Diluted earnings per common share were $4.33 for the year ended December 31, 2023, decreasing 8.8% compared to $4.75 in the prior year.

• Return on average assets (“ROAA”) for the year ended December 31, 2023 was 1.13%, compared to 1.46% for 2022.

• Return on average common equity (“ROACE”), which is defined as net income available to common shareholders divided by average equity reduced by average preferred stock, if any.

ROACE was 13.79% for the year ended December 31, 2023, compared to 16.79% for the year ended December 31, 2022.

• Pre-tax, pre-provision (“PTPP”) adjusted earnings, which excludes certain one-time and discrete items, and PTPP ROA were $47.9 million and 1.74%, respectively, for the year ended December 31, 2022, increasing $6.7 million and 16 bps, from year ended December 31, 2021.

Excluding PPP interest and fee income, PTPP adjusted earnings and ROA were $47.3 million and 1.72%, respectively, for the year ended December 31, 2022, increasing $15.0 million and 40 bps from December 31, 2021.

• Pre-tax, pre-provision (“PTPP”) adjusted earnings, which excludes certain one-time and discrete items, and PTPP ROAA were $56.2 million and 1.75%, respectively, for the year ended December 31, 2023, increasing $8.3 million, or 17.3%, and 1 bp, from year ended December 31, 2022.

• Fees in lieu of interest, defined as prepayment fees, asset-based loan fees, non-accrual interest, and loan fee amortization, totaled $3.2 million for the year ended December 31, 2023, decreasing 38.6% compared to $5.3 million for the year ended December 31, 2022.

PPP fee income, included in loan fee amortization, was $509,000 and $7.3 million for the years ended December 31, 2022 and December 31, 2021, respectively.

• Net interest margin was 3.82% for the year ended December 31, 2022, increasing 38 bps from 3.44% for the year ended December 31, 2021.

Adjusted net interest margin, which excludes certain one-time and discrete items, was 3.64% for the year ended December 31, 2022, increasing 43 bps from 3.21% for the year ended December 31, 2021.

• Net interest margin was 3.78% for the year ended December 31, 2023, declining 4 bps from 3.82% for the year ended December 31, 2022.

Adjusted net interest margin, which excludes certain one-time and discrete items, was 3.63% for the year ended December 31, 2023 and December 31, 2022.

• Top line revenue, defined as net interest income plus non-interest income, grew 12.6% to $143.9 million for the year ended December 31, 2023, compared to $127.9 million for the year ended December 31, 2022.

Excluding PPP interest income and fees, top line revenue increased 22.4% to $127.2 million for the year ended December 31, 2022, compared to $103.9 million for the year ended December 31, 2021.

• Effective tax rate was 21.45% for the year ended December 31, 2023 compared to 21.79% for the year ended December 31, 2022.

• Provision for loan and lease losses was a net benefit of $3.9 million for the year ended December 31, 2022, compared to a net provision benefit of $5.8 million for the year ended December 31, 2021.

Net recoveries as a percentage of average loans and leases were 0.16% for the year ended December 31, 2022, compared to net recoveries of 0.07% for the year ended December 31, 2021.

• Provision for credit losses was $8.2 million for the year ended December 31, 2023, compared to a net provision benefit of $3.9 million for the year ended December 31, 2022.

Net charge-offs as a percentage of average loans and leases were 0.05% for the year ended December 31, 2023, compared to net recoveries of 0.16% for the year ended December 31, 2022.

• Total assets at December 31, 2023 increased $531.2 million, or 17.8%, to $3.508 billion from $2.977 billion at December 31, 2022.

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Average gross loans and leases of $2.648 billion increased $342.9 million, or 14.9% for the year ended December 31, 2023, compared to $2.305 billion for the same period in 2022.

• Period-end gross loans and leases receivable, excluding net PPP loans, at December 31, 2022 increased $230.4 million, or 10.42%, to $2.443 billion from $2.212 billion as of December 31, 2021.

Average gross loans and leases, excluding net PPP loans, of $2.295 billion increased $268.4 million, or 13.2% for the year ended December 31, 2022, compared to $2.027 billion for the same period in 2021.

• PPP loans and PPP deferred processing fees were $554,000 and $48,000, respectively, at December 31, 2022, compared to $27.9 million and $557,000, respectively, at December 31, 2021.

Average PPP loans, net of deferred processing fees, were $9.7 million and $152.3 million for the year ended December 31, 2022 and 2021, respectively.

• Non-performing assets decreased to $3.8 million as of December 31, 2022, compared to $6.5 million as of December 31, 2021.

Non-performing assets to total assets, both including and excluding net PPP loans, improved to 0.13% as of December 31, 2022, from 0.25% as of December 31, 2021.

• The allowance for loan and lease losses as of December 31, 2022 decreased $106,000, or 0.4%, to $24.2 million, compared to $24.3 million as of December 31, 2021.

The allowance for loan and lease losses was 0.99% of total loans as of December 31, 2022, compared to 1.09% as of December 31, 2021.

• Non-performing assets increased to $20.8 million as of December 31, 2023, compared to $3.8 million as of December 31, 2022.

Non-performing assets to total assets increased to 0.59% as of December 31, 2023, from 0.13% as of December 31, 2022.

• The allowance for credit losses as of December 31, 2023 increased $7.0 million, or 29.1%, to $31.3 million, compared to $24.2 million as of December 31, 2022.

The allowance for credit losses was 1.16% of total loans as of December 31, 2023, compared to 0.99% as of December 31, 2022.

• Period-end in-market deposits at December 31, 2023 increased $373.1 million, or 19.0%, to $2.339 billion from $1.966 billion as of December 31, 2022.

Average in-market deposits of $2.098 billion increased $169.3 million, or 8.8%, for the year ended December 31, 2023, compared to $1.929 billion for the same period in 2022.

• Private wealth and trust assets under management and administration decreased by $260.7 million, or 8.9%, to $2.660 billion at December 31, 2022, compared to $2.921 billion at December 31, 2021.

Private wealth management service

fees increased $97,000, or 0.90%, for the year ended December 31, 2022, compared to the year ended December 31, 2021.

• Private wealth and trust assets under management and administration increased by $461.5 million, or 17.3%, to $3.122 billion at December 31, 2023, compared to $2.660 billion at December 31, 2022.

Private wealth management service fees increased $544,000, or 5.00%, for the year ended December 31, 2023, compared to the year ended December 31, 2022.

The detailed financial discussion that follows focuses on 2023 results compared to 2022.

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Top line revenue, comprised of net interest income and non-interest income, increased 12.6% for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to a $14.2 million, or 14.4%, increase in net interest income and a $1.9 million, or 6.4%, increase in non-interest income.

The increase in net interest income was driven by net interest margin expansion combined with an increase in average loans and leases outstanding and related interest income, partially offset by a reduction in PPP loan fee income.

The increase in non-interest income was primarily due to a $1.0 million increase in other fee income, a $504,000 increase in loan fee income, and a $425,000 increase in swap fee income.

These favorable variances were partially offset by a $1.5 million decrease in gains on the sale of SBA loans during the year ended December 31, 2022.

The increase in net interest income was driven by an increase in average loans and leases outstanding and related interest income, partially offset by net interest margin compression and a decrease in fees in lieu of interest.

The increase in non-interest income was primarily due to a $1.8 million increase in other fee income, a $1.2 million increase in swap fee income, a $544,000 increase in trust fee income, and a $353,000 increase in loan fee income.

These favorable variances were partially offset by a $733,000 decrease in bank owned life insurance income, a $718,000 decrease in service charge income on deposits, and a $482,000 decrease in gains on the sale of SBA loans during the year ended December 31, 2023.

The components of top line revenue were as follows:

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Return on Average Assets and Return on Average Common Equity

ROAA was 1.46% for the year ended December 31, 2022, compared to 1.37% for the year ended December 31, 2021 principally due to a $13.8 million increase in net interest income partially offset by an increase in operating expenses.

Please refer to the operating results analysis below for further discussion on the reasons driving the increase in profitability.

We consider ROA a critical metric to measure the profitability of our organization and how efficiently our assets are deployed.

ROA also allows us to better benchmark our profitability to our peers without the need to consider different degrees of leverage which can ultimately influence return on equity measures.

ROAA was 1.13% for the year ended December 31, 2023, compared to 1.46% for the year ended December 31, 2022 principally due to a $12.1 million increase in provision for credit losses and an $8.6 million increase in operating expenses, partially offset by a $14.2 million increase in net interest income.

We consider ROAA a critical metric to measure the profitability of our organization and how efficiently our assets are deployed.

ROAA also allows us to better benchmark our profitability to our peers without the need to consider different degrees of leverage which can ultimately influence return on equity measures.

ROACE for the year ended December 31, 2023 was 13.79% compared to 16.79% for the year ended December 31, 2022.

The primary reason for the change in ROACE is consistent with the net income variance explanation as discussed under Return on Average Assets above.

The primary reason for the change in ROACE is consistent with the change in ROAA discussed above.

We view ROACE as an important measurement for monitoring profitability and continue to focus on improving our return to our shareholders by enhancing the overall profitability of our client relationships, controlling our expenses, and minimizing our costs of credit.

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In the judgment of the Corporation’s management, the adjustments made to non-interest expense and non-interest income allow investors and analysts to better assess the Corporation’s operating expenses in relation to its core operating revenue by removing the volatility associated with certain one-time items and other discrete items.

PTPP adjusted earnings allows management to benchmark performance of our model to our peers without the influence of the loan loss provision and

tax considerations, which will ultimately influence other traditional financial measurements, including ROA and ROACE.

PTPP adjusted earnings allows management to benchmark performance of our model to our peers without the influence of the loan loss provision and tax considerations, which will ultimately influence other traditional financial measurements, including ROA and ROAE.

The information provided below reconciles the efficiency ratio to its most comparable GAAP measure.

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Total non-interest expense $ 88,575 $ 79,474 $ 71,535 $ 9,101 11.5 % $ 7,939 11.1 %

Net loss on repossessed assets 49 15 383 34 NM (368) (96.1)

Amortization of other intangible assets — 25 35 (25) NM (10) (28.6)

SBA recourse benefit (188) (76) (278) (112) NM 202 (72.7)

Contribution to First Business Charitable Foundation 809 — — 809 NM — NM

Impairment of tax credit investments (351) — 2,395 (351) NM (2,395) NM

Loss on early extinguishment of debt — — 744 — NM (744) NM

Total operating expense (a) $ 79,155 $ 71,571 $ 65,619 $ 7,584 10.6 $ 5,952 9.1

Net interest income $ 98,422 $ 84,662 $ 77,071 $ 13,760 16.3 7,591 9.8

Total non-interest income 29,428 28,100 26,940 1,328 4.7 1,160 4.3

Bank-owned life insurance claim 809 — — 809 NM — NM

Net gain (loss) on sale of securities — 29 (4) (29) NM 33 NM

Adjusted non-interest income 28,619 28,071 26,944 548 2.0 1,127 4.2

Total operating revenue (b) $ 127,041 $ 112,733 $ 104,015 $ 14,308 12.7 $ 8,718 8.4

Efficiency ratio

Net loss on repossessed assets 12 49 15 (37) (75.5) 34 226.7

Amortization of other intangible assets — — 25 — NM (25) NM

SBA recourse expense (benefit)

775 (188) (76) 963 (512.2) (112) 147.4

Pre-tax, pre-provision adjusted earnings (b-a) $ 47,886 $ 41,162 $ 38,396 $ 6,724 16.3 $ 2,766 7.2

Average total assets 2,752,916 2,605,008 2,419,616 147,908 5.7 185,392 7.7

Pre-tax, pre-provision adjusted return on average assets 1.74 % 1.58 % 1.59 %

NM = Not meaningful

PPP loans, related fees, and interest income had a material impact on the prior period comparisons in the table above.

As this economic stimulus was non-recurring, we believe these key performance indicators are a better indicator of current operating performance of the Corporation, excluding PPP loans and related fee and interest income.

The table below includes the efficiency ratio, and PTPP adjusted earnings and return on average assets, excluding average net PPP loans, fee income, and interest income.

For the Year Ended December 31, Change From Prior Year

2022 2021 2020 $ Change 2022 % Change 2022 $ Change 2021 % Change 2021

(Dollars in Thousands)

Total non-interest expense $ 79,474 $ 71,535 $ 68,898 $ 7,939 11.1 % $ 2,637 3.8 %

Net loss on repossessed assets 49 15 383 34 NM (368) (96.1)

Amortization of other intangible assets — 25 35 (25) NM (10) (28.6)

SBA recourse benefit (188) (76) (278) (112) NM 202 (72.7)

Contribution to First Business Charitable Foundation 809 — — 809 NM — NM

Contribution to First Business Charitable Foundation

— 809 — (809) NM 809 NM

Impairment of tax credit investments — (351) — 351 NM (351) NM

Loss on early extinguishment of debt — — 744 — NM (744) NM

Total operating expense (a) $ 87,788 $ 79,155 $ 71,571 $ 8,633 10.9 $ 7,584 10.6

Net interest income $ 112,588 $ 98,422 $ 84,662 $ 14,166 14.4 13,760 16.3

PPP interest income 97 1,524 2,198 (1,427) (93.6) (674) (30.7)

PPP loan fee amortization 509 7,312 5,283 (6,803) (93.0) 2,029 38.4

Adjusted net interest income 97,816 75,826 69,590 21,990 29.0 6,236 9.0

Total non-interest income 31,308 29,428 28,100 1,880 6.4 1,328 4.7

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Average total assets 3,212,149 2,752,916 2,605,008 459,233 16.7 147,908 5.7

Average PPP loans, net 9,740 152,264 215,025 (142,524) (93.6) (62,761) (29.2)

Adjusted average total assets $ 2,743,176 $ 2,452,744 $ 2,204,591 $ 290,432 11.8 $ 248,153 11.3

Pre-tax, pre-provision adjusted return on average assets 1.75 % 1.74 % 1.58 %

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1,013,866 81,963 8.08 % 771,056 46,575 6.04 % 747,514 38,342 5.13 %

Direct financing leases (1)

15,219 682 4.48 % 19,591 872 4.45 % 26,564 1,039 3.91 %

Consumer and other loans (1)

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Junior subordinated notes (4)

— — — % 2,429 504 20.75 % 10,068 1,113 11.05 %

Total interest-bearing liabilities 2,381,389 82,340 3.46 % 1,871,848 22,949 1.23 % 1,785,936 11,333 0.63 %

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(3) Yields on tax-exempt municipal securities are not presented on a tax-equivalent basis in this table.

(4) 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.

The following table provides information with respect to:

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18,329 17,059 35,388 6,993 1,240 8,233

Direct financing leases (1)

6 (196) (190) 130 (297) (167)

Consumer and other loans (1)

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FHLB advances 3,033 (1,176) 1,857 1,593 523 2,116

Federal reserve PPPLF — — — — (54) (54)

Other borrowings 56 (258) (202) (131) 615 484

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Net interest margin (g)/(i)

Adjusted net interest margin (h)/(i)

(1.20) % 23.60 %

NM = Not meaningful

Adjusted net interest margin (h)/(i)

(1) Excluding average net PPP loans, PPP loan interest income, and fees in lieu of interest.

(2) Total bank funding represents total deposits, plus FHLB advances, and Federal Reserve PPPLF advances.

(2) Board of Governors of the Federal Reserve System (US), Effective Federal Funds Rates [DFF].

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Net interest income increased by $14.2 million, or 14.4%, for the year ended December 31, 2023, compared to the year ended December 31, 2022.

The increase was principally due to net interest margin expansion combined with an increase in average loans and leases outstanding, which was partially offset by a decrease in PPP loan processing fees.

The increase was principally due to an increase in average loans and leases outstanding, partially offset by net interest margin compression and a decrease in fees in lieu of interest.

Average gross loans and leases of $2.648 billion increased by $342.9 million, or 14.9% for the year ended December 31, 2023, compared to $2.305 billion for the same period in 2022.

Excluding net PPP loans, average gross loans and leases for the year ended December 31, 2022 increased $268.4 million, or 13.2%, compared to the year ended December 31, 2021.

Loan fees collected in lieu of interest decreased 38.6% to $3.2 million, compared to $5.3 million during the same period of comparison.

Excluding PPP fee amortization, loan fees collected in lieu of interest increased 24.1% to $4.8 million, compared to $3.8 million during the same period of comparison.

Excluding fees in lieu of interest and interest income from PPP loans, net interest income increased $21.1 million, or 29.3%.

The yield on average earning assets for the year ended December 31, 2023 was 6.54%, an increase of 183 basis points compared to 4.71% for the year ended December 31, 2022.

This increase was principally due to the rising interest rates on variable-rate loans and investment in securities at higher interest rates.

These increases were partially offset by the decrease in PPP loan processing fees.

Excluding the impact of recurring loan fees in lieu of interest and PPP fees in both 2022 and 2021, the yield on average earning assets for the year ended December 31, 2022 was 4.52%, an increase of 91 basis points compared to 3.61% for the year ended December 31, 2021.

Excluding the impact of recurring loan fees in lieu of interest in both 2023 and 2022, the yield on average earning assets for the year ended December 31, 2023 was 6.43%, an increase of 193 basis points compared to 4.50% for the year ended December 31, 2022.

The average rate paid on interest-bearing liabilities was 3.46% for the year ended December 31, 2023, an increase of 223 basis points from 1.23% for the year ended December 31, 2022.

The average rate paid increased as the Corporation increased deposit rates and secured wholesale funding, which consists of wholesale deposits and FHLB advances, at elevated fixed rates.

Partially offset the increase in deposit and wholesale funding rates, average wholesale funding decreased $33.6 million, or 6.8%, which is typically a higher cost funding source than in-market deposits, .

Net interest margin increased 38 basis points to 3.82% for the year ended December 31, 2022, compared to 3.44% for the year ended December 31, 2021.

Adjusted net interest margin measured 3.64% for the year ended December 31, 2022, compared to 3.21% for the year ended December 31, 2021.

Adjusted net interest margin is a non-GAAP measure representing net interest income excluding the fees in lieu of interest and other recurring but volatile components of net interest margin divided by average interest-earning assets less average net PPP loans, if any, and other recurring but volatile components of average interest-earning assets.

The increase in adjusted net interest margin was primarily due to the increase in average yield on loans and leases receivable and investment securities, partially offset by an increase in the average rate paid total bank funding.

For the Year Ended

(Dollars in thousands) December 31,

2022 December 31,

2021 December 31,

Interest income $ 121,371 $ 95,995 $ 94,179

Interest expense 22,949 11,333 17,108

Net interest income (a)

98,422 84,662 77,071

Fees in lieu of interest 5,283 11,160 9,315

PPP loan interest income 97 1,524 2,198

FRB interest income and FHLB dividend income 1,525 741 789

FRB PPPLF interest expense — — 54

Adjusted net interest income (b)

$ 91,517 $ 71,237 $ 64,823

Average interest-earning assets (c)

$ 2,577,492 $ 2,460,509 $ 2,265,105

Average net PPP loans 9,740 152,264 215,025

Average FRB cash and FHLB stock 46,708 76,880 46,595

Average non-accrual loans and leases 5,011 14,172 27,656

Adjusted average interest-earning assets (d)

$ 2,516,033 $ 2,217,193 $ 1,975,829

Net interest margin (a / c)

3.82 % 3.44 % 3.40 %

Adjusted net interest margin (b / d)

3.64 % 3.21 % 3.28 %

Net interest margin decreased four basis points to 3.78% for the year ended December 31, 2023, compared to 3.82% for the year ended December 31, 2022.

Adjusted net interest margin measured 3.63% for the years ended December 31, 2023 and December 31, 2022.

Adjusted net interest margin is a non-GAAP measure representing net interest income excluding the fees in lieu of interest and other recurring, but volatile, components of net interest margin divided by average interest-earning assets less other recurring, but volatile, components of average interest-earning assets.

Management believes its success in growing in-market deposits, disciplined loan pricing, and increased production in existing higher-yielding commercial lending products will allow the Corporation to achieve a net interest margin that supports our long-term profitability goals.

However, the collection of loan fees in lieu of interest is an expected source of volatility to quarterly net interest income and net interest margin.

In addition, net interest margin may also experience volatility due to events such as the collection of interest on loans previously in non-accrual status or the accumulation of significant short-term deposit inflows.

Provision for Loan and Lease Losses

We determined our provision for loan and lease losses pursuant to our allowance for loan and lease loss methodology, which is based on the magnitude of current and historical net charge-offs recorded throughout the established look-back period, the evaluation of several qualitative factors for each portfolio category, and the amount of specific reserves established for impaired loans that present collateral shortfall positions.

Refer to Allowance for Loan and Lease Losses , below, for further information regarding our allowance for loan and lease loss methodology.

The Corporation recognized a $3.9 million provision benefit for the year ended December 31, 2022, compared to $5.8 million provision benefit for the year ended December 31, 2021.

The provision benefit for the year ended December 31, 2022 was primarily due to a net recovery of $3.8 million and a $2.0 million reduction in the general reserve from improving historical loss rates.

These decreases were partially offset by a $2.1 million increase in the general reserve due to loan growth.

The net recovery for the year ended December 31, 2022 included a $4.1 million principal recovery relating to a legacy SBA relationship originated in May 2016 and fully charged-off in December 2020.

The following table shows the components of the provision for loan and lease losses.

The collection of loan fees in lieu of interest is an expected source of volatility to quarterly net

interest income and net interest margin.

Net interest margin may also experience volatility due to events such as the collection of interest on loans previously in non-accrual status or the accumulation of significant short-term deposit inflows.

Provision for Credit Losses

We determined our provision for credit losses pursuant to our allowance for credit loss methodology, which is based on the magnitude of current and historical net charge-offs recorded throughout the established look-back period, the evaluation of several qualitative factors for each portfolio category, and the amount of specific reserves established for non-performing loans that present collateral shortfall positions.

Refer to Allowance for Credit Losses in the Critical Accounting Policy section , for further information regarding our allowance for credit loss methodology.

The following table shows the components of the provision for credit losses.

For the Year Ended December 31,

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Change in general reserve due to subjective factor changes $ 33 $ (384) $ (426)

Change in general reserve due to historical loss factor changes (2,012) (4,456) 949

Change in general reserve due to quantitative factor changes (1,453) (2,012) (4,456)

Charge-offs 1,781 979 3,508

Recoveries (548) (4,741) (5,126)

Change in specific reserves on impaired loans, net 146 (2,175) 316

Change in specific reserves on individually evaluated loans, net 4,330 146 (2,175)

Change due to loan growth, net 3,652 2,144 2,872

Total provision for loan and lease losses $ (3,868) $ (5,803) $ 16,808

The addition of specific reserves on impaired loans represents new specific reserves established when collateral shortfalls or government guaranty deficiencies are present, while conversely the release of specific reserves represents the reduction of previously established reserves that are no longer required.

Changes in the allowance for loan and lease losses due to subjective factor changes reflect management’s evaluation of the level of risk within the portfolio based upon several factors for each portfolio segment.

Charge-offs in excess of previously established specific reserves require an additional provision for loan and lease losses to maintain the allowance for loan and lease losses at a level deemed appropriate by management.

This amount is net of the release of any specific reserve that may have already been provided.

Change in the inherent risk of the portfolio is primarily influenced by the overall growth in gross loans and leases and an analysis of loans previously charged off, as well as movement of existing loans and leases in and out of an impaired loan classification where a specific evaluation of a particular credit may be required rather than the application of a general reserve loss rate.

Change in unfunded credit commitment reserve

Total provision for credit losses (a)

$ 8,182 $ (3,868) $ (5,803)

(a) - Management adopted ASC 326 on January 1, 2023.

Prior periods are presented under the incurred loss model.

The Corporation recognized $8.2 million of provision expense for the year ended December 31, 2023, compared to a $3.9 million provision benefit for the year ended December 31, 2022.

The provision expense for the year ended December 31, 2023 was primarily due to a $4.3 million increase in the specific reserves on individually evaluated loans and a $3.7 million increase in the general reserve due to loan growth.

These increases were partially offset by a $1.5 million reduction in the general reserve from quantitative factors, mainly due to an improving economic forecast.

Specific reserves were higher on loans in Equipment Finance and, to a lesser extent SBA, within the Commercial and Industrial portfolio.

Equipment Finance had higher defaults from borrowers in the transportation and logistics industry which management believes is consistent with the cyclical nature of this industry.

Given current economic conditions, the Corporation expects continued stress within this group of borrowers in 2024.

Refer to Asset Quality , below, for further information regarding the overall credit quality of our loan and lease portfolio.

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Total non-interest income accounted for 21.8% of our total revenues in 2023 compared to 23.0% in 2022.

The increase in total non-interest income for the year ended December 31, 2022 primarily reflected an increase in other non-interest income, led by mezzanine fund investment income and gains recognized on end-of-term buyout agreements, an increase in loan fee income, and commercial loan swap fee income.

Additionally, a bank-owned life insurance claim was recognized during the year ended December 31, 2022.

These increases were partially offset by a decrease in gains on the sale of SBA loans.

The increase in total non-interest income for the year ended December 31, 2023 primarily reflected an increase in other non-interest income, led by mezzanine fund investment income, commercial loan swap fee income, and higher private wealth management services income.

These increases were partially offset by a decrease bank owned life insurance income and lower service charge income.

The components of non-interest income were as follows:

8 unchanged sentences

Bank-owned life insurance income 1,494 2,227 1,413 (733) (32.9) 814 57.6

Net gain (loss) on sale of securities — 29 (4) (29) NM 33 (825.0)

Net (loss) gain on sale of securities (45) — 29 (45) NM (29) (100.0)

Swap fees 2,964 1,793 1,368 1,171 65.3 425 31.1

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Private wealth management services fee income increased by $544,000, or 5.0%, to a record $11.4 million for the year ended December 31, 2023 compared to the previous record of $10.9 million for the year ended December 31, 2022.

wealth management services fee income is primarily driven by the amount of trust assets under management and administration, as well as the mix of business at different fee structures, and can be positively or negatively influenced by the timing and magnitude of volatility within the equity and fixed income markets.

This increase was driven by an increase in average trust assets under management and administration, which is attributable to both new client relationships and new money from existing client relationships.

At December 31, 2022, our trust assets under management and administration were $2.660 billion, or 8.9% less than trust assets under management and administration of $2.921 billion at December 31, 2021.

During 2022, the equity and fixed income market values decreased and more than offset the new money received during the year.

We expect to continue to increase our revenue from trust assets under management and administration as we deepen existing and grow new client relationships in our less mature commercial bank markets, but market volatility may also affect the actual change in revenue.

Private wealth management services fee income is primarily driven by the amount of trust assets under management and administration, as well as the mix of business at different fee structures, and can be positively or negatively influenced by the timing and magnitude of volatility within the equity and fixed income markets.

This increase was driven by an increase in average assets under management and administration, which is attributable to market appreciation, new client relationships, and new money from existing client relationships.

At December 31, 2023, our trust assets under management and administration were $3.122 billion, or 17.3% more than trust assets under management and administration of $2.660 billion at December 31, 2022.

Other non-interest income increased by $1.8 million to $6.9 million for the year ended December 31, 2023, compared to $5.1 million for the year ended December 31, 2022.

The increase was primarily due to strong returns from the Corporation’s investments in mezzanine funds and gains recognized on end-of-term buyout agreements related to the Corporation’s equipment financing business line.

Loan fees increased $504,000, or 20.1%, to $3.0 million for the year ended December 31, 2022, compared to $2.5 million for the same period in 2021.

The increase was driven by an increase in equipment finance lending, floorplan finance lending, and conventional lending activity generating additional service fee income.

Bank-owned life insurance income increased by $814,000, or 57.6%, to $2.2 million for the year ended December 31, 2022, compared to $1.4 million for the year ended December 31, 2021.

The increase was due to the recognition of a $809,000 insurance claim.

The increase was primarily due to strong returns from the Corporation’s investments in mezzanine funds.

Commercial loan interest rate swap fee income was $3.0 million for the year ended December 31, 2023, compared to $1.8 million for the year ended December 31, 2022.

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Interest rate swaps can be an attractive product for our commercial borrowers, although associated fee income can be variable from period to period based on client demand and the interest rate environment in any given quarter.

Gain on sale of SBA loans for the year ended December 31, 2022 totaled $2.5 million, a decrease of $1.5 million, or 37.3%, from the same period in 2021.

Reduced premiums was the primary factor for the lower income.

Given current premium levels, the Bank may reduce sales activity and retain the guaranteed portion on the balance sheet.

Loan fees increased $353,000, or 11.7%, to $3.4 million for the year ended December 31, 2023, compared to $3.0 million for the same period in 2022.

The increase was driven by an increase in equipment finance and floorplan finance lending activity generating additional service fee income.

Bank-owned life insurance income decreased by $733,000, or 32.9%, to $1.5 million for the year ended December 31, 2023, compared to $2.2 million for the year ended December 31, 2022.

The decrease was due to the recognition of a $809,000 insurance claim in the year ended December 31, 2022.

Service charges on deposits for the year ended December 31, 2023 totaled $3.1 million, a decrease of $718,000, or 18.7%, from the same period in 2022.

The decrease was due to higher earnings credit rates commensurate with the higher interest rate environment partially offset by an increase in additional product sales to new and existing clients.

Gain on sale of SBA loans for the year ended December 31, 2023 totaled $2.1 million, a decrease of $482,000, or 19.0%, from the same period in 2022.

The decrease is mainly due to a reduction in total loans sold resulting from lighter production in the first half of 2023.

Non-Interest Expense

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Operating expense, which excludes certain one-time and discrete items as defined in the Efficiency Ratio table above, increased $8.6 million, or 10.9%, to $87.8 million for the year ended December 31, 2023 compared to $79.2 million for the year ended December 31, 2022.

The increase in operating expense was primarily due to an increase in compensation, professional fees, marketing, and occupancy.

The increase in operating expense was due to an increase in all expense categories, led by compensation, FDIC insurance, and other non-interest expense.

The components of non-interest expense were as follows:

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Compensation expense increased by $3.3 million, or 5.7%, to $61.1 million for the year ended December 31, 2023 from $57.7 million for the year ended December 31, 2022 principally due to an increase in average FTEs, annual merit increases, growth in employee benefit costs, and increase in incentive compensation.

The increase reflects a $3.4 million, or 10.7%, increase in employee salaries and a $1.4 million, or 16.3%, increase in individual and corporate performance-based incentive compensation accruals reflecting strong company performance relative to bonus criteria.

The increase reflects a $2.5 million, or 7.1%, increase in employee salaries and a $908,000, or 25.6% increase in incentive compensation due to exceptional loan and deposit growth.

These increases were partially offset by a $1.5 million, or 22.6% decrease in estimated annual cash bonuses compared to a record year for 2022.

The Bank’s compensation philosophy is to provide base salaries competitive with the market.

Average FTEs were 325 for the year ended December 31, 2022, increasing by 18, or 5.9%, from 307 for the year ended December 31, 2021.

Performance-based incentive compensation accruals will reset to target performance at the start of 2023 and will be evaluated quarterly and increased or decreased based on management’s forecast of full year performance for the Corporation.

Professional fees increased $1.1 million, or 30.6%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase was primarily due to an increase in recruiting expense, audit expenses, legal expense, and a general increase in other professional consulting services for various projects.

Marketing expense increased by $332,000, or 16.4%, to $2.4 million for the year ended December 31, 2022 from $2.0 million for the year ended December 31, 2021.

The increase was primarily due to an increase in business development efforts as the Corporation returns to pre-pandemic activity levels.

Occupancy expense increased by $178,000, or 8.2%, to $2.4 million for the year ended December 31, 2022 from $2.2 million for the year ended December 31, 2021.

During November 2022, the Corporation relocated the Southeast Wisconsin office location to accommodate growth in the number of employees.

Given the competitive job market and the critical importance to the Corporation of retaining employees, annual base salaries were increased an additional $1.5 million, or approximately 4.1%, in the aggregate for 2024.

Average FTEs were 343 for the year ended December 31, 2023, increased by 18, or 5.5%, from 325 for the year ended December 31, 2022.

Other non-interest expense increased $2.1 million, or 89.4%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

The increase was primarily due to a $985,000 increase in liquidation expense related to an Asset-Based Lending client, a $963,000 increase in SBA recourse provision, a $232,000 increase in expense from swap credit valuation changes, increase in travel expense, and an increase in loan related expenses.

These increases were partially offset by a decrease in charitable donations due to a non-recurring contribution to First Business Charitable foundation totaling $809,000 in the prior year.

FDIC Insurance increased $1.2 million, or 114.8%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

The increase was primarily due to an increase in the assessment rate and the Corporation’s assessable base.

Data processing fees increased $629,000, or 19.7%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

The increase was primarily due to an increase in core processing costs commensurate with loan and deposit account growth, as well as various project implementations.

Computer software expense increased by $569,000, or 12.9%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

The increase was primarily due to continued investment in technology to support the Corporation’s growth.

Marketing expense increased by $535,000, or 22.7%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

The increase was primarily due to an increase in business development efforts and advertising projects commensurate with our expanding sales force.

Professional fees increased $444,000, or 9.1%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

The increase was primarily due to an increase in recruiting expense and a general increase in other professional consulting services for various projects.

Income tax expense was $10.1 million for the year ended December 31, 2023, compared to $11.4 million for the year ended December 31, 2022.

The income tax expense included a $338,000 net benefit from tax credit investments.

The income tax expense included a $1.2 million and $635,000 net benefit from tax credit investments in 2023 and 2022, respectively.

The effective tax rate for the year ended December 31, 2023 was 21.5% compared to 21.8% for the year ended December 31, 2022.

For 2023, the Corporation expects to report an effective tax rate of 21%-22% as management anticipates increased tax credit activity.

Management completed its analysis of the Wisconsin State Budget 2023, which included language that provides an exemption for state tax on certain loan income for loans to Wisconsin small businesses.

Management estimates this law will eliminate the Bank’s Wisconsin state income tax in 2023 and the foreseeable future.

This conclusion results in a 2023 state income tax benefit of $2.8 million offset by a one-time $2.8 million charge to state income tax expense to recognize a valuation allowance on deferred state income taxes.

Based on expected earnings, reduction in state tax, and future tax credit investments, the Corporation expects to report an effective tax rate between 18% and 19% for 2024.

FINANCIAL CONDITION

Total assets increased by $531.2 million, or 17.8%, to $3.508 billion as of December 31, 2023 compared to $2.977 billion at December 31, 2022.

The increase in total assets was primarily driven by an increase in loans and leases receivable, cash and cash equivalents, derivatives, and other assets.

The increase in total assets was primarily driven by an increase in loans and leases receivable, cash and cash equivalents, securities, and other assets.

Total liabilities increased by $502.3 million, or 18.5%, to $3.218 billion as of December 31, 2023 compared to $2.716 billion at December 31, 2022.

The increase in total liabilities was principally due to an increase in deposits, FHLB advances, and interest rate swap derivatives.

The increase in total liabilities was principally due to an increase in deposits.

Cash and cash equivalents

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Please refer to the section entitled Liquidity and Capital Resources for further discussion.

Total securities, including available-for-sale and held-to-maturity, decreased by $789,000 to $224.7 million at December 31, 2022 from $225.4 million at December 31, 2021.

As of December 31, 2022 and 2021, our total securities portfolio had a weighted average estimated maturity of approximately 6.3 years and 5.7 years, respectively.

Total securities, including available-for-sale and held-to-maturity, increased by $80.9 million to $305.5 million at December 31, 2023 from $224.7 million at December 31, 2022.

As of December 31, 2023 and 2022, our total securities portfolio had a weighted average estimated remaining maturity of approximately 5.6 years and 6.3 years, respectively.

The investment portfolio primarily consists of mortgage-backed securities and is used to provide a source of liquidity, including the ability to pledge securities for possible future cash advances, while contributing to the earnings potential of the Bank.

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In addition, we will purchase investment securities to utilize our cash position effectively within appropriate policy guidelines and estimates of future cash demands.

While mortgage-backed securities present prepayment risk and extension risk, we believe the overall credit risk associated with these investments is minimal, as the majority of the securities we hold are guaranteed by the United States Treasury, the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”), or the Government National Mortgage Association (“GNMA”), a U.S.

While mortgage-backed securities present prepayment risk and extension risk, we believe the overall credit risk associated with these investments is minimal, as all of the securities we hold are guaranteed by the United States Treasury, the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”), or the Government National Mortgage Association (“GNMA”), a U.S.

government agency.

The estimated repayment streams associated with this portfolio also allow us to better match short-term liabilities.

The estimated repayment streams associated with this portfolio also allow

us to better match short-term liabilities.

The Bank’s investment policies allow for various types of investments, including tax-exempt municipal securities.

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A securities portfolio with a longer average duration will exhibit greater market price volatility than a securities portfolio with a shorter average duration in a changing rate environment.

During the year ended December 31, 2022, we recognized unrealized holding losses of $27.7 million before income taxes through other comprehensive income.

These losses were the result of an increase in interest rates.

No securities within our portfolio were deemed to be other-than-temporarily impaired as of December 31, 2022, and we sold no securities during the year ended December 31, 2022.

During the year ended December 31, 2023, we recognized unrealized holding gains of $5.6 million before income taxes through other comprehensive income.

These gains were the result of an increase in interest rates.

No securities within our portfolio were deemed to require an allowance for credit losses as of December 31, 2023.

We sold approximately $5.1 million of securities during the year ended December 31, 2023 to proactively manage our securities portfolio and meet our long-term investment objectives.

As of December 31, 2023 no securities were classified as trading securities.

12 unchanged sentences

Commercial mortgage-backed securities - government-sponsored enterprises 32,774 28,369 31,515 26,377

Other securities — — 2,205 2,228

$ 319,082 $ 297,006 $ 239,751 $ 212,024

29 unchanged sentences

Municipal securities — — 6,992 1.42 10,570 1.86 18,319 2.05 35,881

Residential mortgage-backed securities - government issued

22,569 17,646 11,915 25,093 77,223

Residential mortgage-backed securities - government-sponsored enterprises

102 2.55 1,739 2.39 15,592 1.94 88,890 2.52 106,323

Commercial mortgage-backed securities - government issued

— — — — — — 2,932 1.58 2,932

Commercial mortgage-backed securities - government-sponsored enterprises

— — 401 2.25 20,376 1.68 5,600 1.65 26,377

Residential mortgage-backed securities 188,889

Commercial mortgage-backed securities 30,894

$ 22,569 $ 17,646 $ 11,915 $ 25,093 $ 297,006

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Municipal securities $ 1,060 2.40 % $ 3,150 2.76 % $ — — % $ — — % $ 4,210

Residential mortgage-backed securities - government issued

1,060 3,150 — — 4,210

Residential mortgage-backed securities - government-sponsored enterprises

— — 308 1.49 899 1.78 330 3.35 1,537

Commercial mortgage-backed securities - government-sponsored enterprises

— — — — 2,006 3.29 — — 2,006

Residential mortgage-backed securities 2,289

Commercial mortgage-backed securities 2,004

$ 1,060 $ 3,150 $ — $ — $ 8,503

4 unchanged sentences

We receive fixed rates and pay floating rates based upon designated benchmark interest rates on the swaps with commercial borrowers.

These swaps mature between May 2024 and June 2039.

These swaps mature between May 2024 and July 2040.

Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements.

As of December 31, 2022, the commercial borrower swaps were reported on the Consolidated Balance Sheet as a derivative liability and asset of $61.4 million and $1.0 million, respectively, compared to a derivative asset and liability of $26.3 million and $6.6 million, respectively, as of December 31, 2021.

As of December 31, 2023, the commercial borrower swaps were reported on the Consolidated Balance Sheet as a derivative liability and asset of $51.1 million and $7.9 million, respectively, compared to a derivative liability and asset of $61.4 million and $1.0 million, respectively, as of December 31, 2022.

On the offsetting swap contracts with dealer counterparties, we pay fixed rates and receive floating rates based upon designated benchmark interest rates.

These interest rate swaps also have maturity dates between May 2024 and June 2039.

Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and were reported on the Consolidated Balance Sheet as a net derivative asset of $60.4 million as of December 31, 2022, compared to a net derivative liability of $19.7 million as of December 31, 2021.

The gross amount of dealer counterparty swaps as of December 31, 2022, without regard to the enforceable master netting agreement, was a gross derivative asset and liability of $61.4 million and $1.0 million, compared to a gross derivative liability of $26.3 million and gross derivative asset of $6.6 million as of December 31, 2021.

These interest rate swaps also have maturity dates between May 2024 and July 2040.

Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and were reported on the Consolidated Balance Sheet as a net derivative asset of $43.2 million as of December 31, 2023, compared to a net derivative asset of $60.4 million as of December 31, 2022.

The gross amount of dealer counterparty swaps as of December 31, 2023, without regard to the enforceable master netting agreement, was a gross derivative asset and liability of $51.1 million and $7.9 million, respectively, compared to a gross derivative asset and liability of $61.4 million and $1.0 million, respectively, as of December 31, 2022.

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.

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

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

As of December 31, 2022, the aggregate notional value of interest rate swaps designated as cash flow hedges was $116.4 million compared to $106.0 million as of December 31, 2021.

As of December 31, 2023, the aggregate notional value of interest rate swaps designated as cash flow hedges was $402.7 million.

These interest rate swaps mature between December 2023 and March 2034.

As of December 31, 2022, the interest rate swaps were reported on the Consolidated Balance Sheet as a derivative asset of $6.6 million, compared to a derivative liability of $1.9 million as of December 31, 2021.Pre-tax unrealized gains of $8.5 million and $3.6 million were recognized in other comprehensive income for the years ended December 31, 2022 and 2021, respectively, and there were no ineffective portion of these hedges.

A pre-tax unrealized loss of $3.5 million was recognized in other comprehensive income for the year ended December 31, 2023, while a pre-tax unrealized gain of $8.5 million and $3.6 million were recognized in other comprehensive income for the years ended December 31, 2022 and 2021, respectively, and there were no ineffective portion of these hedges.

The Corporation also enters into interest rate swaps to mitigate market value volatility on certain long-term fixed-rate securities.

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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.

As of December 31, 2022, the aggregate notional value of interest rate swaps designated as fair value hedges was $12.5 million and there were no fair value hedges as of December 31, 2021.

As of December 31, 2023, the aggregate notional value of interest rate swaps designated as fair value hedges was $12.5 million.

These interest rate swaps mature between February 2031 and October 2034.

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

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

A pre-tax unrealized gain of $22,000 and $602,000 was recognized in other comprehensive income for the year ended December 31, 2023 and 2022, respectively, and there was no ineffective portion of these hedges.

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

For further information and discussion of our derivatives, see Note 17 — Derivative Financial Instruments of the Consolidated Financial Statements.

Loans and Leases Receivable

Loans and leases receivable, net of allowance for loan and lease losses, increased by $203.8 million, or 9.2%, to $2.419 billion at December 31, 2022 from $2.215 billion at December 31, 2021.

Excluding net PPP loans, loans and leases receivable, net of allowance for loan and lease losses, increased by $230.6 million, or 10.5%, to $2.418 billion at December 31,

2022 from $2.188 billion at December 31, 2021.

Excluding PPP loans, loan growth was across all categories with the highest growth in commercial and industrial (“C&I”) loans increasing $137.2 million from December 31, 2021.

There continues to be a concentration in CRE loans which represented 63.1% and 65.7% of our total loans, excluding net PPP loans, as of December 31, 2022 and December 31, 2021, respectively.

As of December 31, 2022, approximately 17.4% of the CRE loans were owner-occupied CRE, compared to 16.2% as of December 31, 2021.

Loans and leases receivable, net of allowance for credit losses, increased by $400.2 million, or 16.5%, to $2.819 billion at December 31, 2023 from $2.419 billion at December 31, 2022.

There continues to be a concentration in CRE loans which represented 59.6% and 63.1% of our total loans, as of December 31, 2023 and December 31, 2022, respectively.

As of December 31, 2023, approximately 15.1% of the CRE loans

were owner-occupied CRE, compared to 17.4% as of December 31, 2022.

We consider owner-occupied CRE more characteristic of the Corporation’s C&I portfolio as, in general, the client’s primary source of repayment is the cash flow from the operating entity occupying the commercial real estate property.

Our C&I portfolio increased $110.4 million, or 15.1%, to $841.2 million at December 31, 2022 from $730.8 million at December 31, 2021.

Excluding net PPP loans, C&I loans increased $137.2 million, or 19.5%, to $840.7 million from $703.5 million at December 31, 2021.

Our C&I portfolio increased $252.5 million, or 29.6%, to $1.106 billion at December 31, 2023 from $853.3 million at December 31, 2022.

The Corporation experienced significant C&I loan growth in 2023, due to growth across products and geographies.

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Underwriting of new credit is primarily through approval from a serial sign-off or committee process and is a key component of our operating philosophy.

Business development officers have no individual lending authority limits, and thus, a significant portion of our new credit extensions require approval from a loan approval committee regardless of the type of loan or lease, amount of the credit, or the related complexities of each proposal.

To monitor the ongoing credit quality of our loans and leases, each credit is evaluated for proper risk rating using a nine grade risk rating system at the time of origination, subsequent renewal, evaluation of updated financial information from our borrowers, or as other circumstances dictate.

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773,494 27.1 687,091 28.1

Land development

50,803 2.1 42,792 1.9

167,948 6.9 179,841 8.0

Construction 193,080 6.8 218,751 9.0

450,529 15.8 350,026 14.3

4 unchanged sentences

1,105,835 38.8 853,327 34.9

Direct financing leases, net

12,149 0.5 15,743 0.7

Consumer and other 44,312 1.6 47,938 2.0

Home equity and second mortgage

6,761 0.3 4,223 0.2

41,177 1.7 35,518 1.6

Total consumer and other

47,938 2.0 39,741 1.8

Total gross loans and leases receivable

2,850,018 100.0 % 2,443,215 100.0 %

Allowance for loan and lease losses

24,230 24,336

Deferred loan fees

Allowance for credit losses 31,275 24,230

Deferred loan fees and costs, net (243) 149

Loans and leases receivable, net

$ 2,818,986 $ 2,418,836

Below is a view of selected loan portfolios disaggregated by North American Industry Classification (“NAICs”) code as of December 31, 2023:

Wholesale and Manufacturing

Retail and Hospitality

Transportation and Warehousing

Commercial real estate — owner occupied 4% 27% 18% 17% 34% 100%

Commercial real estate — non-owner occupied 75% (1)

1% 10% 2% 12% 100%

Commercial and industrial

4% 26% 21% 12% 37% 100%

( 1) Includes approximately $252.9 million of office real estate, or 10% of gross loans.

See Asset Quality for further discussion of industry-specific risks.

The following table shows the scheduled contractual maturities of the Bank’s consolidated gross loans and leases receivable, as well as the dollar amount of such loans and leases which are scheduled to mature after one year and have fixed or adjustable interest rates, as of December 31, 2023.

7 unchanged sentences

Non-owner occupied 96,300 364,249 312,945 773,494 325,712 351,483

Land development 34,245 16,250 308 50,803 8,521 8,037

Construction 48,652 77,203 67,225 193,080 22,604 121,825

2 unchanged sentences

Commercial and industrial 306,864 665,954 133,017 1,105,835 241,606 557,364

Direct financing leases 2,462 7,808 1,879 12,149 9,687 —

Consumer and other 9,992 33,886 434 44,312 28,452 5,868

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In the event that the cash flow from the property is reduced, the borrower’s ability to repay the loan could be negatively impacted.

The deterioration of one or a few of these loans could cause a material increase in our level of nonperforming loans, which would result in a loss of revenue from these loans and could result in an increase in the provision for loan and lease losses and an increase in charge-offs, all of which could have a material adverse impact on our net income.

The deterioration of one or a few of these loans could cause a material increase in our level of nonperforming loans, which would result in a loss of revenue from these loans and could result in an increase in the provision for credit losses and an increase in charge-offs, all of which could have a material adverse impact on our net income.

Additionally, many of these loans have real estate as a primary or secondary component of collateral.

1 unchanged sentence

Adverse developments affecting real estate values in one or more of our markets could impact collateral coverage associated with the commercial real estate segment of our portfolio, possibly leading to increased specific reserves or charge-offs, which would adversely affect profitability.

Of the $1.542 billion of commercial real estate loans outstanding as of December 31, 2022, $26.8 million were originated by the FBSF subsidiary, as part of a larger asset-based lending relationship.

Commercial and Industrial.

1 unchanged sentence

The majority of such loans are secured and typically backed by personal guarantees of the owners of the borrowing business.

Of the $841.2 million of C&I loans outstanding as of December 31, 2022, $373.6 million were conventional C&I loans and $467.6 million were originated by the FBSF subsidiary.

FBSF products consists of equipment financing, asset-based lending, accounts receivable financing, SBA lending, and floorplan financing.

Direct Financing Leases.

Direct financing leases initiated through FBSF are originated with a fixed implicit rate and typically a term of seven years or less.

It is customary in the leasing industry to provide 100% financing;

however, FBSF will, from time-to-time, require a down payment or lease deposit to provide a credit enhancement.

As of December 31, 2022, the Bank had $12.1 million in net direct financing receivables outstanding.

FBSF leases machinery and equipment to clients under leases which qualify as direct financing leases for financial reporting and as operating leases for income tax purposes.

Under the direct financing method of accounting, the minimum lease payments to be received under the lease contract, together with the estimated unguaranteed residual value (approximating 3% to 20% of the cost of the related equipment), are recorded as lease receivables when the lease is signed and the lease property is delivered to the client.

The excess of the minimum lease payments and residual values over the cost of the equipment is recorded as unearned lease income.

Unearned lease income is recognized over the term of the lease on a basis which results in a level rate of return on the unrecovered lease investment.

Lease payments are recorded when due under the lease contract.

Residual value is the estimated fair market value of the equipment on lease at lease termination and was estimated to be $2.8 million as of December 31, 2022.

In estimating the equipment’s fair value, FBSF relies on historical experience by equipment type and manufacturer, published sources of used equipment pricing, internal evaluations and, when available, valuations by independent appraisers, adjusted for known trends.

Of the $1.106 billion of C&I loans outstanding as of December 31, 2023, $464.3 million were conventional C&I loans and $728.0 million were originated by the FBSF subsidiary.

FBSF products consists of equipment financing, asset-based lending, accounts receivable financing, and floorplan financing.

Consumer and Other.

1 unchanged sentence

Asset Quality

Non-accrual loans and leases decreased $2.7 million, or 42.5%, to $3.7 million at December 31, 2022 compared to $6.4 million at December 31, 2021.

Our total impaired assets consisted of the following:

Non-performing loans and leases increased $16.9 million, or 462.9%, to $20.6 million at December 31, 2023 compared to $3.7 million at December 31, 2022.

Our total non-performing assets consisted of the following:

As of December 31,

(Dollars in Thousands)

Non-accrual loans and leases

Non-performing loans and leases

Commercial real estate:

1 unchanged sentence

Commercial real estate – non-owner occupied — —

Land development — —

Construction — —

1 unchanged sentence

1-4 family 22 30

Total non-accrual commercial real estate 30 687

Total non-performing commercial real estate

Commercial and industrial 20,575 3,629

Direct financing leases, net — 99

Consumer and other — —

Home equity and second mortgage — —

Total non-accrual consumer and other loans — —

Total non-accrual loans and leases 20,597 3,659

1 unchanged sentence

Total non-performing assets $ 20,844 $ 3,754

Performing troubled debt restructurings 156 217

Total impaired assets $ 3,910 $ 6,739

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

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

Total non-performing assets to total assets 0.13 % 0.25 %

Allowance for loan and lease losses to gross loans and leases 0.99 % 1.09 %

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

Total non-performing loans and leases to gross loans and leases

0.72 % 0.15 %

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

As noted in the table above, non-performing assets consisted of non-accrual loans and leases and repossessed assets totaling $3.8 million, or 0.13% of total assets, as of December 31, 2022, a decrease in non-performing assets

of $2.8 million, or 42.4%, from December 31, 2021.

Impaired loans and leases as of December 31, 2022 and 2021 also included $156,000 and $217,000, respectively, of loans classified as performing troubled debt restructurings, which are considered impaired due to the concession in terms, but are meeting the restructured payment terms and therefore are not on non-accrual status.

The following asset quality ratios exclude net PPP loans as they are fully guaranteed by the SBA:

As of December 31,

(In Thousands)

Total non-accrual loans and leases to gross loans and leases 0.15 % 0.29 %

Total non-performing assets to gross loans and leases plus repossessed assets, net 0.73 % 0.15 %

Total non-performing assets to total assets 0.59 % 0.13 %

Allowance for loan and lease losses to gross loans and leases 0.99 1.10

Allowance for credit losses to gross loans and leases 1.16 % 0.99 %

Allowance for credit losses to non-performing loans and leases

160.21 % 662.20 %

As noted in the table above, non-performing assets consisted of non-performing loans and leases and repossessed assets totaling $20.8 million, or 0.59% of total assets, as of December 31, 2023, an increase in non-performing assets of $17.1 million, or 455.2%, from December 31, 2022.

As of December 31, 2023 and 2022, our allowance for credit losses to total non-performing loans and leases was 160.21% and 662.20%, respectively.

The increase in non-performing assets was primarily due to one fully-collateralized, $8.8 million ABL loan which defaulted in the second quarter 2023.

Excluding the ABL loan, non-performing assets totaled $12.0 million, or 0.34% of total assets.

The liquidation process has transitioned into Chapter 7 bankruptcy, likely delaying final resolution until the second half of 2024.

The Corporation’s ABL loans are rigorously underwritten and fully collateralized, historically resulting in no losses in the event of a default.

Another driver in non-performing assets, is an increase in defaults in Equipment Finance driven by transportation and logistics borrowers, which management believes is consistent with the cyclical nature of this industry.

We use a wide variety of available metrics to assess the overall asset quality of the portfolio and no one metric is used independently to make a final conclusion as to the asset quality of the portfolio.

Non-performing assets as a percentage of total assets decreased to 0.13% at December 31, 2022 from 0.25% at December 31, 2021.

As of December 31, 2022, the payment performance of our loans and leases did not point to any new areas of concern, as approximately 99.8% of the total portfolio was in a current payment status, similar to December 31, 2021.

We also monitor asset quality through our established categories as defined in Note 4 – Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses of the Consolidated Financial Statements.

Non-performing assets as a percentage of total assets increased to 0.59% at December 31, 2023 from 0.13% at December 31, 2022.

As of December 31, 2023, 99.20% of loans were current compared to 99.8% as of December 31, 2022.

The decrease in current status is primarily driven by higher past-due Equipment Finance borrowers.

We reviewed loans and leases with exposure to certain industries:

• Transportation and Logistics, Equipment Finance - 2% of total loans - Management considered the following:

7% of Equipment Finance Transportation loans are rated Category IV and defaults from these borrowers are driving an increase in charge-offs and new reserves.

Based on our reserve methodology for individually and collectively evaluated loans, we believe our reserves related to this industry to be appropriate

• Transportation and Logistics, other than Equipment Finance - 4% of total loans - Management considered the following:

Less than 1% of the Transportation loans outside of Equipment Finance are rated Category IV.

Collateral on these loans includes commercial real estate, business assets, and equipment.

Based on these and other borrower-specific considerations, no additional reserve requirements were identified.

• Office, Commercial Real Estate - 10% of total loans - Management considered the following:

office exposure is concentrated in the Wisconsin markets where local market vacancy rates are below national rates, a majority of the loan maturity dates are beyond 2031 with the borrower paying a fixed rate, either directly or through an interest rate swap, and there are no non-performing loans in the portfolio.

Based on these and other borrower-specific considerations, no additional reserve requirements were identified.

• Multifamily, Commercial Real Estate - 16% of total loans - Management considered the following:

multifamily exposure is concentrated in the Wisconsin markets where local market vacancy rates are below national rates, a majority of the loan maturity dates are beyond 2029 with the borrower paying a fixed rate, either directly or through an interest rate swap, and there are no non-performing loans in the portfolio.

Based on these and other borrower-specific considerations, no additional reserve requirements were identified.

We also monitor asset quality through our established categories as defined in Note 4 – Loans, Leases Receivable, and Allowance for Credit Losses of the Consolidated Financial Statements.

As we continue to actively monitor the credit quality of our loan and lease portfolios, we may identify additional loans and leases for which the borrowers or lessees are having difficulties making the required principal and interest payments based upon factors including, but not limited to, the inability to sell the underlying collateral, inadequate cash flow from the operations of the underlying businesses, liquidation events, or bankruptcy filings.

We are proactively working with our impaired loan borrowers to find meaningful solutions to difficult situations that are in the best interests of the Bank.

In 2022, as well as in all previous reporting periods, there were no loans over 90 days past due and still accruing interest.

Loans and leases greater than 90 days past due are considered impaired and are placed on non-accrual status.

Cash received while a loan or a lease is on non-accrual status is generally applied solely against the outstanding principal.

If collectability of the contractual principal and interest is not in doubt, payments received may be applied to both interest due on a cash basis and principal.

Additional information about impaired loans is as follows:

We are proactively working with our non-performing loan borrowers to find meaningful solutions to difficult situations that are in the best interests of the Bank.

Additional information about non-performing loans is as follows:

As of December 31,

(In Thousands)

Impaired loans and leases with no impairment reserves $ 1,223 $ 4,419

Impaired loans and leases with impairment reserves required 2,592 2,156

Total impaired loans and leases 3,815 6,575

Impairment reserve (included in allowance for loan and lease losses)

Net impaired loans and leases $ 2,165 $ 5,070

Average impaired loans and leases $ 5,084 $ 14,260

Individually evaluated loans and leases with no specific reserves required $ 9,691 $ 1,067

Individually evaluated loans and leases with specific reserves required 10,906 2,592

Total individually evaluated loans and leases 20,597 3,659

Specific reserve (included in allowance for credit losses) 5,990 1,650

Net non-performing loans and leases $ 14,607 $ 2,009

Average non-performing loans and leases $ 10,450 $ 4,899

For the years ended December 31,

(In Thousands)

Interest income attributable to impaired loans and leases $ 400 $ 1,104

Interest income recognized on impaired loans and leases

Net foregone interest income on impaired loans and leases $ (1,036) $ 650

Loans and leases with no impairment reserves represent impaired loans where the collateral, based upon current information, is deemed to be sufficient or that have been partially charged-off to reflect our net realizable value of the loan.

When analyzing the adequacy of collateral, we obtain external appraisals as appropriate.

Our policy regarding commercial real estate appraisals requires the utilization of appraisers from our approved list, the performance of independent reviews to monitor the quality of such appraisals, and receipt of new appraisals for impaired loans at least annually, or more frequently as circumstances warrant.

We make adjustments to the appraised values for appropriate selling costs.

In addition, the ordering of appraisals and review of the appraisals are performed by individuals who are independent of the business development process.

Based on the specific evaluation of the collateral of each impaired loan, we believe the reserve for impaired loans was appropriate at December 31, 2022.

However, we cannot provide assurance that the facts and circumstances surrounding each individual impaired loan will not change and that the specific reserve or current carrying value will not be different in the future, which may require additional charge-offs or specific reserves to be recorded.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses decreased $106,000, or 0.4%, to $24.2 million as of December 31, 2022 from $24.3 million as of December 31, 2021.

The allowance for loan and lease losses as a percentage of gross loans and leases also decreased to 0.99% as of December 31, 2022 from 1.09% as of December 31, 2021.

The allowance for loan and lease losses as a percentage of gross loans and leases, excluding net PPP loans, was 0.99% as of December 31, 2022 from 1.10% as of December 31, 2021.

The decrease in allowance for loan and lease losses as a percent of gross loans and leases was principally driven by significant commercial real estate loan recoveries, and the related impact it had on our commercial real estate historical loss factors.

In addition to the commercial real estate recovery, all other loan segments experienced a reduction in historical loss factors as the look-back period began to roll off the Corporation’s higher loss rates from the Great Recession.

These general releases were partially offset by an increase in general reserve commensurate with loan growth.

The Corporation will adopt ASU No.

2016-13, “ Financial Instruments- Credit Losses (Topic 326)”, on January 1st, 2023 and anticipates an initial increase in reserves, including unfunded commitments reserves, of approximately $1.0 million to $4.0 million.

During the year ended December 31, 2022, we recorded net recoveries on impaired loans and leases of approximately $3.8 million, which included $979,000 of charge-offs and $4.7 million of recoveries.

During the year ended December 31, 2021, we recorded net recoveries on impaired loans and leases of approximately $1.6 million, which included $3.5 million of charge-offs and $5.1 million of recoveries.

As of December 31, 2022 and 2021, our allowance for loan and lease losses to total non-accrual loans and leases was 662.20% and 382.76%, respectively.

This ratio increased primarily due to the substantial decrease in non-accrual loans and leases discussed above, in comparison to the decrease in the allowance for loan and leases losses.

Impaired loans and leases exhibit weaknesses that inhibit repayment in compliance with the original terms of the note or lease.

However, the measurement of impairment on loans and leases may not always result in a specific reserve included in the allowance for loan and lease losses.

As part of the underwriting process, as well as our ongoing monitoring efforts, we try to ensure that we have sufficient collateral to protect our interest in the related loan or lease.

Foregone interest income attributable to non-performing loans and leases $ 1,431 $ 400

Interest income recognized on non-performing loans and leases

Net foregone interest income on non-performing loans and leases $ 1,165 $ (1,036)

Loans and leases with no specific reserves represent non-performing loans where the collateral, less cost to sell, equals or exceeds the net realizable value of the loan.

As part of the underwriting process, as well as our ongoing monitoring efforts, we evaluate sufficiency of collateral to protect our interest in the related loan or lease.

As a result of this practice, a significant portion of our outstanding balance of non-performing loans or leases may not require additional specific reserves or require only a minimal amount of required specific reserve.

Management is proactive in recording charge-offs to bring loans to their net realizable value in situations where it is determined with certainty that we will not recover the entire amount of our principal.

This practice may lead to a lower allowance for loan and lease loss to non-accrual loans and leases ratio as compared to our peers or industry expectations.

As asset quality strengthens, our allowance for loan and lease losses is measured more through general characteristics, including historical loss experience, of our portfolio rather than through specific identification and we would therefore expect this ratio to rise.

Conversely, if we identify further impaired loans, this ratio could fall if the impaired loans are adequately collateralized and therefore require no specific or general reserve.

Given our business practices and evaluation of our existing loan and lease portfolio, we believe this coverage ratio is appropriate for the probable losses inherent in our loan and lease portfolio as of December 31, 2022.

To determine the level and composition of the allowance for loan and lease losses, we break out the portfolio by segments with similar risk characteristics.

First, we evaluate loans and leases for potential impairment classification.

We analyze each loan and lease identified as impaired on an individual basis to determine a specific reserve based upon the estimated value of the underlying collateral for collateral-dependent loans, or alternatively, the present value of expected cash flows.

For each segment of loans and leases that has not been individually evaluated, management segregates the Bank’s loss factors into a quantitative general reserve component based on historical loss rates throughout the defined look back period.

The quantitative general reserve component also considers an estimate of the historical loss emergence period, which is the period of time between the event that triggers the loss to the charge-off of that loss.

The methodology also focuses on evaluation of several qualitative factors for each portfolio category, including but not limited to:

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

When it is determined that we will not receive our entire contractual principal or the loss is confirmed, we record a charge against the allowance for loan and lease loss reserve to bring the loan or lease to its net realizable value.

Many of the impaired loans as of December 31, 2022 are collateral dependent.

It is typically part of our process to obtain appraisals on impaired loans and leases that are primarily secured by real estate or equipment annually, or more frequently as circumstances warrant.

As we have completed new appraisals and/or market evaluations, in specific situations current fair values collateralizing certain impaired loans were inadequate to support the entire amount of the outstanding debt.

As a result of our review process, we have concluded an appropriate allowance for loan and lease losses for the existing loan and lease portfolio was $24.2 million, or 0.99% of gross loans and leases, at December 31, 2022.

However, given ongoing complexities with current workout situations and the uncertainty surrounding future economic conditions, further charge-offs, and increased provisions for loan and lease losses may be recorded if additional facts and circumstances lead us to a different conclusion.

In addition, various federal and state regulatory agencies review the allowance for loan and lease losses.

These agencies could require certain loan and lease balances to be classified differently or charged off when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination.

A summary of the activity in the allowance for loan and lease losses follows:

This practice may lead to a lower allowance for credit loss to non-performing loans and leases ratio as compared to our peers or industry expectations.

In 2023, as well as in all previous reporting periods, there were no loans over 90 days past due and still accruing interest.

Loans and leases greater than 90 days past due are considered non-performing and are placed on non-accrual status.

Cash received while a loan or a lease is on non-accrual status is generally applied solely against the outstanding principal.

If collectability of the contractual principal and interest is not in doubt, payments received may be applied to both interest due on a cash basis and principal.

Allowance for Credit Losses

The allowance for credit losses (“ACL”) increased $7.0 million, or 29.1%, to $31.3 million as of December 31, 2023 from $24.2 million as of December 31, 2022.

A summary of the activity in the ACL, inclusive of reserves for unfunded credit commitments, follows:

Year Ended December 31,

1 unchanged sentence

Allowance at beginning of period $ 24,230 $ 24,336

Impact of adoption of ASC 326

Commercial real estate

1 unchanged sentence

Commercial real estate — non-owner occupied — —

Construction and land development — —

Construction — —

Multi-family — —

1 unchanged sentence

Commercial and industrial (1,781) (909)

Direct financing leases (49) —

Consumer and other — (70)

Home equity and second mortgage — —

Other (21) (25)

Total charge-offs (1,781) (979)

2 unchanged sentences

Commercial real estate — non-owner occupied 1 2

Construction and land development — 2,078

Construction — —

Multi-family — —

1 unchanged sentence

Commercial and industrial 479 437

Direct financing leases — —

Consumer and other 20 42

Home equity and second mortgage — 2

Total recoveries 548 4,741

Net charge-offs (1,233) 3,762

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

Provision for credit losses 8,182 (3,868)

Allowance at end of period $ 32,997 $ 24,230

Net charge-offs as a percent of average gross loans and leases 0.05 % (0.16) %

We review our methodology and periodically adjust allocation percentages of the allowance by segment, as reflected in the following table.

Within the specific categories, certain loans or leases have been identified for specific reserve allocations as well as the whole category of that loan type or lease being reviewed for a general reserve based on the foregoing analysis of trends and overall balance growth within that category.

The table below shows our allocation of the allowance for loan and lease losses by loan portfolio segments.

The allocation of the allowance by segment is management’s best estimate of the inherent risk in the respective loan segments.

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.

In addition to the adoption of ASU 2016-13, the increase in ACL as a percent of gross loans and leases was principally due to increase in specific reserves and changes to quantitative and qualitative model factors.

During the year ended December 31, 2023, the Corporation recorded net charge-offs on non-performing loans and leases of approximately $1.2 million, which included $1.8 million of charge-offs and $548,000 of recoveries.

During the year ended December 31, 2022, we recorded net recoveries on non-performing loans and leases of approximately $3.8 million, which included $979,000 of charge-offs and $4.7 million of recoveries.

The Corporation recognized $8.2 million provision expense for the year ended December 31, 2023, compared to $3.9 million provision benefit for the year ended December 31, 2022.

These increases were partially offset by a $1.5 million reduction in the general reserve from improving historical loss rates.

The increase in ACL was primarily driven by loan growth and net increase in specific reserves on loans in Equipment Finance and SBA within the Commercial and Industrial portfolio.

Equipment Finance had higher defaults from borrowers in the

transportation and logistics industry which management believes is consistent with the cyclical nature of this industry.

Given current economic conditions, the Corporation expects continued stress within this group of borrowers in 2024.

As a result of our review process, we have concluded an appropriate ACL for the loan and lease portfolio is $33.0 million, or 1.16% of gross loans and leases, at December 31, 2023.

However, given ongoing complexities with current workout situations and the uncertainty surrounding future economic conditions, further charge-offs, and increased provisions for credit losses may be recorded if additional facts and circumstances lead us to a different conclusion.

The table below shows our allocation of the allowance for loan losses by loan portfolio segments.

The allocation of the allowance by segment is management’s best estimate of the inherent risk in the respective loan portfolio as described in Allowance for Credit Losses in the Critical Accounting Policies and Estimates section.

Despite the specific allocation noted in the table below, the entire allowance is available to cover any loss.

2 unchanged sentences

(Dollars in Thousands)

Loan and lease segments:

Loan and lease portfolios:

Commercial real estate $ 12,170 0.72 % $ 12,560 0.81 %

2 unchanged sentences

Consumer and other 395 0.89 542 1.13

Total allowance for loan and lease losses $ 24,230 0.99 % $ 24,336 1.09 %

(a) Allowance for loan losses category as a percentage of total loans by category.

Although we believe the allowance for loan and lease losses was appropriate based on the current level of loan and lease delinquencies, non-accrual loans and leases, trends in charge-offs, economic conditions, and other factors as of December 31, 2022, there can be no assurance that future adjustments to the allowance will not be necessary.

Total allowance for loan losses

$ 31,275 1.10 % $ 24,230 0.99 %

Reserve for unfunded credit commitments (b)

Total allowance for credit losses

$ 32,997 1.16 % $ 24,230 0.99 %

(a) Allowance for credit losses category as a percentage of total loans by category.

(b) Not required prior to adoption of ASC 326 on January 1, 2023

The change in ACL as a percentage of gross loans and leases for the portfolios was due to additional specific reserves in Commercial and industrial and change in quantitative factors in all portfolios in the adoption of ASC 326.

Although we believe the ACL was appropriate based on the current level of loan and lease delinquencies, non-accrual loans and leases, trends in charge-offs, economic conditions, and other factors as of December 31, 2023, there can be no assurance that future adjustments to the allowance will not be necessary.

As of December 31, 2023, deposits increased by $628.6 million to $2.797 billion from $2.168 billion at December 31, 2022.

The increase in deposits was primarily due to an increase in wholesale deposits and certificates of deposit of $172.6 million and $99.7 million, respectively, partially offset by a decrease of $55.9 million and $6.1 million in money market accounts and transaction accounts, respectively.

The increase in deposits was primarily due to increases in wholesale deposits and transaction accounts of $255.5 million and $227.0 million, respectively.

The large increase in wholesale deposits is primarily driven by a shift from FHLB advances to wholesale deposits to manage interest rate risk and liquidity by utilizing the most efficient and cost-effective source of wholesale funds to match-fund our fixed-rate loan portfolio.

Additionally, certificate of deposit accounts saw an increase primarily due to an increase in interest rates.

In addition, certificates of deposit and money market accounts increased by $133.4 million and $12.7 million, respectively.

Both transaction and money market accounts increased due to the successful execution of client deposits initiatives and change in client preferences.

Additionally, certificate of deposit accounts saw an increase primarily due to a change in client interest rate expectations.

The following table presents the composition of the Bank’s consolidated deposits.

13 unchanged sentences

$ 2,796,779 100.0 % $ 2,168,206 100.0 %

Uninsured deposits 994,687 967,465

uninsured deposits collateralized by pledged assets 17,051 14,326

Total uninsured, net of collateralized deposits

$ 977,636 35.0 % $ 953,139 44.0 %

Period-end deposit balances associated with in-market relationships will fluctuate based upon maturity of time deposits, client demands for the use of their cash, and our ability to service and maintain existing and new client relationships.

4 unchanged sentences

Our Bank’s in-market deposits are obtained primarily from the South Central, Northeast and Southeast regions of Wisconsin and the greater Kansas City Metro.

We measure the success of in-market deposit gathering efforts based on the average balances of our deposit accounts as compared to ending balances due to the volatility of some of our larger relationships.

Average in-market deposits for the year

ended December 31, 2022 were approximately $1.929 billion, or 80.6% of total bank funding.

We measure the success of in-market deposit gathering efforts based on the average balances of our deposit accounts rather than ending balances due to the volatility of some of our larger relationships.

Average in-market deposits for the year ended December 31, 2023 were approximately $2.098 billion, or 75.0% of total bank funding.

Total bank funding is defined as total deposits plus FHLB advances.

9 unchanged sentences

4.00% to 4.99% 110,400 17,120 13,181 116,131 256,832

5.00% and greater 317,805 21,005 33,226 — 372,036

$ 441,434 $ 40,808 $ 54,403 $ 158,194 $ 694,839

3 unchanged sentences

As of December 31, 2023, we have no wholesale certificates of deposit which the Bank has the right to call prior to the scheduled maturity.

We had total borrowings of $456.8 million as of December 31, 2022, an increase of $43.3 million, or 10.5%, from $413.5 million at December 31, 2021.

Total wholesale funding as a percentage of total bank funding has increased due to significant wholesale deposit growth as part of the Bank’s strategy to mitigate interest rate risk by match-funding fixed rate loans with the most cost effective form of wholesale funding.

We had total borrowings of $330.9 million as of December 31, 2023, a decrease of $125.9 million, or 27.6%, from $456.8 million at December 31, 2022.

The Bank utilized more wholesale deposits in lieu of FHLB advances to manage interest rate risk and liquidity by utilizing the most efficient and cost-effective source of wholesale funds to match-fund our fixed-rate loan portfolio.

Total wholesale funding as a percentage of total bank funding was 25.2% as of December 31, 2023 compared to 25.1% as of December 31, 2022.

Total bank funding is defined as total deposits plus FHLB advances.

As of December 31, 2022 and December 31, 2021, the Corporation had other borrowings of $6.1 million and $10.4 million, respectively, which consisted of sold loans accounted for as secured borrowings because they did not qualify for true sale accounting, as well as borrowings associated with our investment in a community development entity.

As of December 31, 2023, the Corporation had $20,000 of other borrowings, which consisted of sold tax credit investments accounted for as secured borrowings because they did not qualify for true sale accounting.

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.

Consistent with our funding philosophy to manage interest rate risk, we will use the most efficient and cost effective source of wholesale funds.

24 unchanged sentences

Thereafter 69,396

On March 4, 2022, the Corporation completed a private placement of $20.0 million in new subordinated debt to one institutional investor.

Management used a portion of the proceeds during the second quarter of 2022 to redeem $9.1 million of subordinated notes bearing a fixed interest rate of 6.00%.

The remainder of the proceeds were designed to be used for general corporate purposes, including to support the Bank’s growth strategy, and to fund share repurchases.

The subordinated note bears a fixed interest rate of 3.50% with a maturity date of March 15, 2032 and has certain financial performance covenants

with which the Corporation was in compliance as of September 30, 2022.

The Corporation may, at its option, redeem the note, in whole or part, after the fifth anniversary of issuance.

Additionally, at December 31, 2022, subordinated notes included a $15.0 million note which bore a fixed interest rate of 5.50% with a maturity date of August 15, 2029.

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

The 5.50% notes will begin to lose Tier II capital treatment at a rate of 20% per year effective August 15, 2024.

Refer to Note 10 – FHLB Advances, Other Borrowings and Junior Subordinated Notes in the Consolidated Financial Statements for additional information on the terms of Corporation’s current debt instruments.

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.

Refer to Note 10 – FHLB Advances, Other Borrowings and Subordinated Notes and Debentures in the Consolidated Financial Statements for additional information on the terms of Corporation’s current debt instruments.

Stockholders’ Equity

As of December 31, 2023, stockholders’ equity was $289.6 million, or 8.26% of total assets, compared to stockholders’ equity of $260.6 million, or 8.76% of total assets, as of December 31, 2022.

Stockholders’ equity increased by $28.2 million during the year ended December 31, 2022 attributable to net income of $40.9 million for the year ended December 31, 2022, partially offset by preferred and common stock dividend declarations of $683,000 and $6.7 million, respectively, and stock repurchases of $5.0 million authorized under the repurchase program discussed below.

Stockholders’ equity increased by $28.9 million during the year ended December 31, 2023 attributable to net income of $37.0 million for the year ended December 31, 2023, partially offset by preferred and common stock dividend declarations of $875,000 and $7.6 million, respectively, and stock repurchases of $2.0 million of the $5.0 million authorized under the repurchase program discussed below.

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 proceeds were used to redeem $10.1 million of junior subordinated notes in the first quarter of 2022.

The Corporation expects to pay dividends on the Series A Preferred Stock when and if declared by its 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.

3 unchanged sentences

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.

On March 4, 2022, the Corporation’s Board approved a share repurchase program.

The program authorized the repurchase by the Corporation of up to $5 million of its total outstanding shares of common stock over a period of approximately twelve months, ending March 4, 2023.

As of December 16, 2022, the Corporation had completed the share repurchase program, purchasing a total of 142,074 shares for approximately $5.0 million at an average cost of $35.14 per share.

On January 27, 2023, the Board of Directors of the Corporation approved a new share repurchase program.

On January 27, 2023, the Board of Directors of the Corporation approved a share repurchase program.

The program authorized the repurchase by the Corporation of up to $5 million of its total outstanding shares of common stock over a period of approximately twelve months, ending January 31, 2024.

Under the new share repurchase program, shares are repurchased from time to time in the open market or negotiated transactions at prevailing market rates, or by other means in accordance with federal securities laws.

In connection with the share repurchase program, the Corporation has implemented a trading plan intended to satisfy the affirmative defense conditions of Rule 10b5-1 under the Securities Exchange Act.

The trading plan allows the Corporation to repurchase shares of its common stock at times when it otherwise might have been prevented from doing so under insider trading laws by requiring that an agent selected by the Corporation repurchase shares of common stock on the Corporation’s behalf on pre-determined terms.

As of December 31, 2023, the Corporation had repurchased a total of 65,112 shares for approximately $2.0 million at an average cost of $30.72 per share.

At this time, the Corporation does not expect to adopt a new plan to replace the recently expired plan due to strong balance sheet growth.

Under the recently expired share repurchase program, authorized the repurchase of shares from time to time in the open market or negotiated transactions at prevailing market rates, or by other means in accordance with federal securities laws.

LIQUIDITY AND CAPITAL RESOURCES

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Period-end in-market deposits increased $373.1 million, or 19.0%, to $2.339 billion at December 31, 2023 from $1.966 billion at December 31, 2022 as in-market deposit balances increased due to successful business development efforts, partially offset by deposit movement from money market accounts to, alternative investment options, and clients funding their normal course of business.

In addition, in-market deposit balances were negatively impacted by the outflow of client funds previously accumulated as part of their participation in the Paycheck Protection Program.

Our in-market relationships continue to grow;

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Nonetheless, we will continue to use wholesale funds in specific maturity periods, typically three to five years, needed to effectively mitigate the interest rate risk measured through our asset/liability management process or in shorter time periods if in-market deposit balances decline.

In order to provide for ongoing liquidity and funding, all of our wholesale funds are certificates of deposit which do not allow for withdrawal at the option of the depositor before the stated maturity (with the exception of deposits accumulated through the internet listing service which have the same early withdrawal privileges and fees as do our other in-market deposits) and FHLB advances with contractual maturity terms and no call provisions.

In order to provide for ongoing liquidity and funding, substantially all of our wholesale funds are certificates of deposit which do not allow for withdrawal at the option of the depositor before the stated maturity (with the exception of deposits accumulated through the internet listing service which have the same early withdrawal privileges and fees as do our other in-market deposits) and FHLB advances with contractual maturity terms and no call provisions.

The Bank limits the percentage of wholesale funds to total bank funds in accordance with liquidity policies approved by its Board.

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The Bank was able to access the wholesale funding market as needed at rates and terms comparable to market standards during the year ended December 31, 2023.

In the event that there is a disruption in the availability of wholesale funds

at maturity, the Bank has managed the maturity structure, in compliance with our approved liquidity policy, so at least one year of maturities could be funded through readily available liquidity.

These potential funding sources include deposits maintained at the FRB or Federal Reserve Discount Window utilizing currently unencumbered securities and acceptable loans as collateral.

In the event that there is a disruption in the availability of wholesale funds at maturity, the Bank has managed the maturity structure, in compliance with our approved liquidity policy, so at least one year of maturities could be funded through readily available liquidity.

These potential funding sources include deposits maintained at

the FRB or Federal Reserve Discount Window utilizing currently unencumbered securities and acceptable loans as collateral.

As of December 31, 2023, the available liquidity was in excess of the stated policy minimum.

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The Bank also has the ability to raise local market deposits by offering attractive rates to generate the level required to fulfill its liquidity needs.

The Corporation has filed a shelf registration with the Securities and Exchange Commission that would allow the Corporation to offer and sell, from time to time and in one or more offerings, up to $75.0 million in aggregate initial offering price of common and preferred stock, debt securities, warrants, subscription rights, units, or depository shares, or any combination thereof.

The Corporation maintains a shelf registration with the Securities and Exchange Commission that would allow the Corporation to offer and sell, from time to time and in one or more offerings, up to $75.0 million in aggregate initial offering price of common and preferred stock, debt securities, warrants, subscription rights, units, or depository shares, or any combination thereof.

The Bank is required by federal regulation to maintain sufficient liquidity to ensure safe and sound operations.

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Net cash provided by financing activities for the year ended December 31, 2023 was $491.4 million.

Financing cash flows included a $210.3 million net increase in deposits and a $47.6 million net increase in FHLB advances, partially offset by cash dividends paid of $6.7 million, and authorized share repurchases of $5.0 million, respectively.

Financing cash flows included a $628.6 million net increase in deposits and a $134.9 million net increase in FHLB advances, partially offset by cash dividends paid of $7.6 million, and share repurchases of $3.0 million, respectively.

Refer to Note 12 - Regulatory Capital for additional information regarding the Corporation’s and the Bank’s capital ratios and the ratios required by their federal regulators at December 31, 2023 and 2022.

2021 COMPARED TO 2020

Information pertaining to 2021 in comparison to 2020 was included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021 on page 30 under Part II, Item 7, “Management’s Discussion and Analysis of Financial and Results of Operations,” which was filed with the SEC on February 23, 2022.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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We view critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements.

Allowance for Loan and Lease Losses.

The allowance for loan and lease losses represents our recognition of the risks of extending credit and our evaluation of the quality of the loan and lease portfolio and as such, requires the use of judgment as well as other systematic objective and quantitative methods which may include additional assumptions and estimates.

The risks of extending credit and the accuracy of our evaluation of the quality of the loan and lease portfolio are neither static nor mutually exclusive and could result in a material impact on our Consolidated Financial Statements.

We may over-estimate the quality of the loan and lease portfolio, resulting in a lower allowance for loan and lease losses than necessary, overstating net income and equity.

Conversely, we may under-estimate the quality of the loan and lease portfolio, resulting in a higher allowance for loan and lease losses than necessary, understating net income and equity.

The allowance for loan and lease losses is a valuation allowance for probable credit losses, increased by the provision for loan and lease losses and decreased by charge-offs, net of recoveries.

We estimate the allowance reserve balance required and the related provision for loan and lease losses based on quarterly evaluations of the loan and lease portfolio, with particular attention paid to loans and leases that have been specifically identified as needing additional management analysis because of the potential for further problems.

During these evaluations, consideration is also given to such factors as the level and composition of impaired and other non-performing loans and leases, historical loss experience, results of examinations by regulatory agencies, independent loan and lease reviews, our

estimate of the fair value of the underlying collateral taking into consideration various valuation techniques and qualitative adjustments to inputs to those estimates of fair value, the strength and availability of guarantees, concentration of credits, and other factors.

Allocations of the allowance may be made for specific loans or leases, but the entire allowance is available for any loan or lease that, in our judgment, should be charged off.

Loan and lease losses are charged against the allowance when we believe that the uncollectability of a loan or lease balance is confirmed.

See Note 1 – Nature of Operations and Summary of Significant Accounting Policies and Note 4 – Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses in the Consolidated Financial Statements for further discussion of the allowance for loan and lease losses.

Allowance for Credit Losses.

Management believes the determination of the ACL involves a high degree of judgment and complexity than its other significant accounting policies.

The ACL is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated credit losses over the life of an asset or an off-balance sheet credit exposure.

Management’s determination of the adequacy of the ACL is based on periodic evaluations of 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.

However, this evaluation has subjective components requiring material estimates, including expected default probabilities, the expected loss given default, the amounts and timing of expected future cash flows, and estimated losses based on historical loss experience and forecasted economic conditions.

All of these factors may be susceptible to significant change.

To the extent that actual results differ from management estimates, additional provisions for credit losses may be required that would adversely impact earnings in future periods.

The ACL represents our recognition of the risks of extending credit and our evaluation of the quality of the loan and lease portfolio and as such, requires the use of judgment as well as other systematic objective and quantitative methods which may include additional assumptions and estimates.

One of the most significant judgments impacting the ACL estimate is the economic forecast for United States national unemployment and United States national GDP.

Changes in the economic forecast could significantly affect the estimated credit losses which could potentially lead to materially different allowance levels from one reporting period to the next.

Loans that no longer conform to the risk characteristics of any pool are evaluated individually.

This includes all non-performing loans and may also include other loans that management identifies as non-conforming.

Reserves on individually-evaluated loans are estimated based on one or a combination of estimates of fair value of the underlying collateral less cost to sell, seniority of the Bank’s claim, and borrower repayment forecasts.

For loans and leases less than $1,000,000 in the Equipment Finance pool, the recovery value is based on historical experience rather than specific asset appraisals.

Management also evaluates debt securities for credit losses when a default or decline in fair value is identified.

See Note 1 – Nature of Operations and Summary of Significant Accounting Policies, Note 3 Securities, and Note 4 – Loans, Leases Receivable, and Allowance for Credit Losses in the Consolidated Financial Statements for further discussion of the ACL.

We also continue to exercise our legal rights and remedies as appropriate in the collection and disposal of non-performing assets, and adhere to rigorous underwriting standards in our origination process in order to achieve strong asset quality.

Although we believe that the allowance for loan and lease losses was appropriate as of December 31, 2022 based upon the evaluation of loan and lease delinquencies, non-performing assets, charge-off trends, economic conditions, and other factors, there can be no assurance that future adjustments to the allowance will not be necessary.

If the quality of loans or leases deteriorates, then the allowance for loan and lease losses would generally be expected to increase relative to total loans and leases.

If loan or lease quality improves, then the allowance would generally be expected to decrease relative to total loans and leases.

Although we believe that the ACL was appropriate as of December 31, 2023 based upon the evaluation of loan and lease delinquencies, non-performing assets, charge-off trends, economic conditions, and other factors, there can be no assurance that future adjustments to the allowance will not be necessary.

Goodwill Impairment Assessment.

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Although no goodwill impairment was noted, there can be no assurances that future goodwill impairment will not occur.

See Note 1 – Nature of Operations and Summary of Significant Accounting Policies for the Corporation's accounting policy on goodwill and see Note 7 – Goodwill and Other Intangible Assets in the Consolidated Financial Statements for a detailed discussion of the factors considered by management in the assessment.

See Note 1 – Nature of Operations and Summary of Significant Accounting Policies for the Corporation's accounting policy on goodwill and see Note 7 – Goodwill and Intangible Assets in the Consolidated Financial Statements for a detailed discussion of the factors considered by management in the assessment.

Income Taxes.

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What changed 10-K

Item 7. Management’s Discussion and Analysis