What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-02-28 compared with 2023-02-22 · 614 added, 537 removed, 1524 unchanged (43% of the section changed)

19 unchanged sentences

Securities held-to-maturity, at amortized cost

12,635 19,746

Loans held for sale

Loans and leases receivable, net of allowance for loan and lease losses of $ 24,230 and $ 24,336 , respectively

Loans and leases receivable, net of allowance for credit losses of $ 31,275 and $ 24,230 , respectively

2,818,986 2,418,836

11 unchanged sentences

Federal Home Loan Bank advances and other borrowings 330,916 456,808

Junior subordinated notes — 10,076

Lease liabilities 8,954 10,175

4 unchanged sentences

Stockholders’ equity:

Preferred stock, Series A;

$ 0.01 par value, 7 % non-cumulative perpetual preferred stock liquidation preference $ 1,000 per share, 2,500,000 shares authorized, 12,500 and no shares issued or outstanding at December 31, 2022 and 2021, respectively

Preferred stock, $ 0.01 par value, 2,500,000 shares authorized, 12,500 shares of 7 % non-cumulative perpetual preferred stock, Series A, outstanding at December 31, 2023 and 2022, respectively

11,992 11,992

Common stock, $ 0.01 par value, 25,000,000 shares authorized, 9,418,463 and 9,371,078 shares issued, 8,314,778 and 8,362,085 shares outstanding at December 31, 2023 and 2022, respectively

25 unchanged sentences

Net interest income 112,588 98,422 84,662

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

Net interest income after provision for loan and lease losses 102,290 90,465 60,263

Provision for credit losses 8,182 ( 3,868 ) ( 5,803 )

Net interest income after provision for credit losses 104,406 102,290 90,465

Non-interest income

4 unchanged sentences

Bank-owned life insurance income 1,494 2,227 1,413

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

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

Swap fees 2,964 1,793 1,368

10 unchanged sentences

FDIC insurance 2,238 1,042 1,143

Impairment of tax credit investments — — 2,395

Other non-interest expense 4,532 2,393 2,407

16 unchanged sentences

Net income $ 37,027 $ 40,858 $ 35,755

Other comprehensive (loss) income

Other comprehensive income (loss)

Securities available-for-sale:

Unrealized securities (losses) gains arising during the period ( 27,730 ) ( 4,312 ) 3,526

Reclassification adjustment for net (gain) loss realized in net income — ( 29 ) 4

Unrealized securities gains (losses) arising during the period 5,606 ( 27,730 ) ( 4,312 )

Reclassification adjustment for net losses (gains) realized in net income 45 — ( 29 )

Securities held-to-maturity:

1 unchanged sentence

Interest rate swaps:

Unrealized gains (losses) on interest rate swaps arising during the period 9,102 3,610 ( 3,011 )

Income tax benefit (expense) 4,761 181 ( 143 )

Total other comprehensive (loss) income ( 13,853 ) ( 524 ) 415

Unrealized (losses) gains on interest rate swaps arising during the period ( 3,514 ) 9,102 3,610

Income tax (expense) benefit ( 548 ) 4,761 181

Total other comprehensive income (loss) 1,593 ( 13,853 ) ( 524 )

Comprehensive income

12 unchanged sentences

Net income — — — — 35,755 — — 35,755

Other comprehensive income — — — — — 415 — 415

Other comprehensive loss

— — — — — ( 524 ) — ( 524 )

Share-based compensation - restricted shares and employee stock purchase plan 85,370 — 1 2,512 — — — 2,513

6 unchanged sentences

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

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

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

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

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

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

Cash dividends ($ 0.79 per share)

2 unchanged sentences

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

Cumulative change in accounting principle — — — — ( 1,353 ) — — ( 1,353 )

Balance at January 1, 2023 8,362,085 11,992 94 87,512 202,154 ( 15,310 ) ( 27,155 ) 259,287

Net income — — — — 37,027 — — 37,027

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

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

Other comprehensive income

— — — — — 1,593 — 1,593

Share-based compensation - restricted shares and employee stock purchase plan 43,057 — 1 2,976 — — — 2,977

Issuance of common stock under the employee stock purchase plan 4,328 — — 128 — — — 128

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

Preferred stock dividends — — — — ( 875 ) — — ( 875 )

13 unchanged sentences

Deferred income taxes, net 2,120 ( 775 ) 1,223

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

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

Tax credit investments recovery — ( 351 ) —

Provision for credit losses 8,182 ( 3,868 ) ( 5,803 )

Depreciation, amortization and accretion, net 3,636 4,066 3,554

1 unchanged sentence

Net loss on disposal of fixed assets 73 — 78

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

Amortization of tax credit investments 4,053 1,035 —

Gain on sale of tax credits — — ( 275 )

Bank-owned life insurance policy income ( 1,494 ) ( 2,227 ) ( 1,413 )

Origination of loans for sale ( 149,669 ) ( 124,915 ) ( 99,266 )

Sale of SBA loans originated for sale 128,391 108,435 81,018

Sale of loans originated for sale 149,767 128,391 108,435

Gain on sale of loans originated for sale ( 2,055 ) ( 2,537 ) ( 4,044 )

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

Net loss (gain) on repossessed assets 13 ( 429 ) 15

Return on investment in limited partnerships 4,922 721 371

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

Excess tax benefit from share-based compensation 194 264 48

Net payments on operating lease liabilities ( 1,425 ) ( 1,470 ) ( 1,431 )

13 unchanged sentences

Distribution from tax credit investments 101 474 57

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

Investment in Federal Home Loan Bank and Federal Reserve Bank Stock ( 32,069 ) ( 45,660 ) ( 7,439 )

2 unchanged sentences

Proceeds from sale of leasehold improvements and equipment, net — — 44

Purchases of bank owned life insurance policies — — ( 8,000 )

Premium payment on bank owned life insurance policies ( 24 ) ( 50 ) —

6 unchanged sentences

Proceeds from Federal Home Loan Bank advances 1,563,851 2,422,429 788,300

Loss on early extinguishment of debt — — 744

For the Year Ended December 31,

2022 2021 2020

(In Thousands)

Proceeds from issuance of subordinated notes payable 15,000 20,000 —

1 unchanged sentence

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

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

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

Net (decrease) increase in long-term borrowed funds ( 6,013 ) ( 5,132 ) 9,998

Cash dividends paid ( 7,578 ) ( 6,688 ) ( 6,166 )

For the Year Ended December 31,

2023 2022 2021

(In Thousands)

Preferred stock dividends paid ( 875 ) ( 683 ) —

3 unchanged sentences

Net cash provided by financing activities 491,385 252,194 75,221

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

Net increase in cash and cash equivalents 36,828 45,572 201

Cash and cash equivalents at the beginning of the period 102,682 57,110 56,909

17 unchanged sentences

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

FBB also offers bank consulting services to community banks.

FBB also offers bank consulting services to community financial institutions.

The Bank is subject to competition from other financial institutions and service providers, and is also subject to state and federal regulations.

5 unchanged sentences

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

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

As of March 30, 2022, the Bank’s trust preferred securities were redeemed and Trust II was subsequently dissolved.

Use of Estimates.

Management of the Corporation is required to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period.

Actual results could differ significantly from those estimates.

Material estimates that could significantly change in the near-term include the value of securities and interest rate swaps, level of the allowance for loan and lease losses, lease residuals, property under operating leases, goodwill, and income taxes.

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

Material estimates that could significantly change in the near-term include the value of securities and interest rate swaps, level of the allowance for credit losses, lease residuals, property under operating leases, goodwill, and income taxes.

Subsequent Events.

Subsequent events have been evaluated through the date of the issuance of the Consolidated Financial Statements.

7 unchanged sentences

Available-for-sale securities are measured at fair value with unrealized gains and losses reported as a separate component of stockholders’ equity, net of tax.

Realized gains and losses, and declines in value deemed to be other than temporary, are included in the Consolidated Statements of Income as a component of non-interest income.

Realized gains and losses are included in the Consolidated Statements of Income as a component of non-interest income.

Credit losses for securities are recorded as an allowance for credit losses through the provision for credit losses.

The cost of securities sold is based on the specific identification method.

1 unchanged sentence

Discounts and premiums on securities are accreted and amortized into interest income using the effective yield method over the estimated life (based on maturity date, call date, or weighted average life) of the related security.

Declines in the fair value of investment securities (with certain exceptions for debt securities noted below) that are deemed to be other-than-temporary are charged to earnings as a realized loss and a new cost basis for the securities is established.

In evaluating other-than-temporary impairment, management considers the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value in the near term.

Declines in the fair value of debt securities below amortized cost are deemed to be other-than-temporary in circumstances where:

(1) the Corporation has the intent to sell a security;

(2) it is more likely than not that the Corporation will be required to sell the security before recovery of its amortized cost basis;

or (3) the Corporation does not expect to recover the entire amortized cost basis of the security.

If the Corporation intends to sell a security or if it is more likely than not that the Corporation will be required to sell the security before recovery, an other-than-temporary impairment write-down is recognized in earnings equal to the difference between the security’s amortized cost basis and its fair value.

If the Corporation does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the other-than-temporary impairment write-down is separated into an amount representing credit loss, which is recognized in earnings, and an amount related to all other factors, which is recognized in other comprehensive income.

Allowance for Credit Loss (“ACL”) - Available For Sale (“AFS”) Debt Securities.

For AFS debt securities in an unrealized loss position, the Corporation first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income.

For AFS debt securities that do not meet the aforementioned criteria, the Corporation evaluates whether the decline in fair value has resulted from credit losses or other factors.

In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors.

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.

If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.

Any decline in fair value that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes.

Changes in the ACL are recorded as a provision for (or recovery of) credit loss expense.

Losses are charged against allowance when management believes that uncollectibility of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable on AFS debt securities totaled $ 1.3 million at December 31, 2023 and is excluded from the estimate of credit losses.

ACL - Held To Maturity (“HTM”) Debt Securities.

Management measures expected credit losses on HTM debt securities on a collective basis by major security type.

Accrued interest receivable on HTM debt securities totaled $ 38,000 at December 31, 2023 and is excluded from the estimate of credit losses.

The HTM securities portfolio includes residential mortgage backed securities (“MBS”) commercial MBS, and municipal securities.

All residential and commercial MBS are U.S.

government issued or U.S.

government sponsored and substantially all municipal bonds are rated A or above.

Loans Held for Sale.

5 unchanged sentences

Fees received from the borrower and direct costs to originate the loans are deferred and recognized as part of the gain or loss on sale.

There was $ 2.6 million and $ 3.6 million in loans held for sale outstanding at December 31, 2022 and 2021, respectively.

There were $ 4.6 million and $ 2.6 million in loans held for sale outstanding at December 31, 2023 and 2022, respectively.

Loans and Leases.

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

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

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

Restructured loans can involve loans remaining on non-accrual, moving to non-accrual, or continuing on accrual status, depending on individual facts and circumstances.

Non-accrual restructured loans are included and treated with all other non-accrual loans.

In addition, all accruing restructured loans are reported as troubled debt restructurings which are considered and accounted for as impaired loans.

Generally, restructured loans remain on non-accrual until the borrower has attained a sustained period of repayment performance under the modified loan terms (generally a minimum of six months).

However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms and whether the loan should be returned to or maintained on accrual status.

If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains on non-accrual.

The CARES Act (as modified by the Consolidated Appropriations Act, 2021) permitted banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs if the loan was not more than 30 days delinquent as of December 31, 2019 and the modification was made before January 1, 2022.

Interagency guidance from the federal bank regulatory agencies regarding TDRs has also been issued in response to COVID-19 and is generally consistent with the relief granted under the CARES Act.

The Corporation is applying this statutory and regulatory guidance to qualifying loan modifications.

Interest on non-impaired loans and leases is accrued and credited to income on a daily basis based on the unpaid principal balance and is calculated using the effective interest method.

Per policy, a loan or a lease is considered impaired and placed on non-accrual status when it becomes 90 days past due or it is doubtful that contractual principal and interest will be collected in accordance with the terms of the contract.

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

Occasionally, the Corporation modifies loans or leases to borrowers in financial distress by providing principal forgiveness, term extension, an other-than-significant payment delay or interest rate reduction.

When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit loss.

Interest on non-performing loans and leases is accrued and credited to income on a daily basis based on the unpaid principal balance and is calculated using the effective interest method.

Per policy, a loan or a lease is considered non-performing and placed on non-accrual status when it becomes 90 days past due or it is doubtful that contractual principal and interest will be collected in accordance with the terms of the contract.

A loan or lease is determined to be past due if the borrower fails to meet a contractual payment and will continue to be considered past due until all contractual payments are received.

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

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

If collectability of the contractual principal and interest is in doubt, payments received are first applied to reduce the loan principal.

If collectability of the contractual payments is not in doubt, payments may be applied to interest for interest amounts due on a cash basis.

As soon as it is determined with certainty that the principal of an impaired loan or lease is uncollectable, either through collections from the borrower or disposition of the underlying collateral, the portion of the carrying balance that exceeds the estimated measurement value of the loan or lease is charged off.

As soon as it is determined with certainty that the principal of a non-performing loan or lease is uncollectible, either through collections from the borrower or disposition of the underlying collateral, the portion of the carrying balance that exceeds the estimated measurement value of the loan or lease is charged off.

Loans or leases are returned to accrual status when they are brought current in terms of both principal and accrued interest due, have performed in accordance with contractual terms for a reasonable period of time, and when the ultimate collectability of total contractual principal and interest is no longer doubtful.

1 unchanged sentence

Transfers of assets that upon completion of the transfer do not meet the conditions of a sale are recorded on a gross basis with a secured borrowing identified to reflect the amount of the transferred interest.

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

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

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

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

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

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

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

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

Allowance for Loan and Lease Losses.

The allowance for loan and lease losses is maintained at a level that management deems appropriate to absorb probable and estimable losses inherent in the loan and lease portfolios.

The methodology applied for determining inherent losses stems from current risk characteristics of the loan and lease portfolio, an assessment of individual impaired loans and leases, actual loss experience, and adverse situations that may affect the borrower’s ability to repay.

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

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

Impaired and other loans and leases have risk characteristics that are unique to an individual borrower and the loss must be estimated on an individual basis.

Loans and leases that are not individually reviewed and measured for impairment are aggregated and historical loss statistics are primarily used to determine the risk of loss.

The measurement of the estimate of loss is reliant upon historical experience, information about the ability of the individual debtor to pay, and the appraisal of loan collateral in light of current economic conditions.

An estimate of loss is an approximation of what portion of all amounts receivable, according to the contractual terms of that receivable, is deemed uncollectible.

Determination of the allowance is inherently subjective because it requires estimation of amounts and timing of expected future cash flows on impaired loans and leases, estimation of losses on types of loans and leases based on historical losses, and consideration of current economic trends, both local and national.

Based on management’s periodic review using all previously mentioned pertinent factors, a provision for loan and lease losses is charged to expense when it is determined an increase in the allowance for loan and lease losses is appropriate.

A negative provision for loan and lease losses may be recognized if management determines a reduction in the level of allowance for loan and lease losses is appropriate.

Loan and lease losses are charged against the allowance and recoveries are credited to the allowance.

The allowance for loan and lease losses contains specific allowances established for expected losses on impaired loans and leases.

Impaired loans and leases are defined as loans and leases for which, based on current information and events, it is probable that the Corporation will be unable to collect scheduled principal and interest payments according to the contractual terms of the loan or lease agreement.

Loans and leases subject to impairment are defined as non-accrual and restructured loans and leases.

Impaired loans and leases are evaluated on an individual basis to determine the amount of specific reserve or charge-off required, if any.

The measurement value of impaired loans and leases is determined based on the present value of expected future cash flows discounted at the loan’s effective interest rate (the contractual interest rate adjusted for any net deferred loan fees or costs, premium or discount existing at the origination or acquisition of the loan), the market price of the loan or lease, or the fair value of the underlying collateral less costs to sell, if the loan or lease is collateral dependent.

A loan or lease is collateral dependent if repayment is expected to be provided principally by the underlying collateral.

A loan’s effective interest rate may change over the life of the loan based on subsequent changes in rates or indices, or may be fixed at the rate in effect at the date the loan was determined to be impaired.

Subsequent to the initial impairment, any significant change in the amount or timing of an impaired loan or lease’s future cash flows will result in a reassessment of the valuation allowance to determine if an adjustment is necessary.

Measurements based on observable market price or fair value of the collateral may change over time and require a reassessment of the allowance if there is a significant change in either measurement base.

Any increase in the present value of expected future cash flows attributable to the passage of time is recorded as interest income accrued on the net carrying amount of the loan or lease at the effective interest rate used to discount the impaired loan or lease’s estimated future cash flows.

Any change in present value attributable to changes in the amount or timing of expected future cash flows is recorded as loan loss expense in the same manner in which impairment was initially recognized or as a reduction of loan loss expense that otherwise would be reported.

Where the level of loan or lease impairment is measured using observable market price or fair value of collateral, any decrease in the observable market price of an impaired loan or lease or fair value of the collateral of an impaired collateral-dependent loan or lease is recorded as loan loss expense in the same manner in which impairment was initially recognized.

Any increase in the observable market value of the impaired loan or lease or fair value of the collateral of an impaired collateral-dependent loan or lease is recorded as a reduction in the amount of loan loss expense that otherwise would be reported.

Net Investment in Direct Financing Leases.

The net investment in direct financing lease agreements represents total undiscounted payments plus estimated unguaranteed residual value (approximating 3 % to 20 % of the cost of the related equipment) and is recorded as lease receivables when the lease is signed and the leased property is delivered to the client.

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

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

Lease payments are recorded when due under the lease contract.

Residual values are established at lease inception equal to the estimated value to be received from the equipment following termination of the initial lease and such estimated value considers all relevant information and circumstances regarding the equipment.

In estimating the equipment’s fair value at lease termination, the Corporation relies on internally or externally prepared appraisals, published sources of used equipment prices, and historical experience adjusted for known current industry and economic trends.

The Corporation’s estimates are periodically reviewed to ensure reasonableness;

however, the amounts the Corporation will ultimately realize could differ from the estimated amounts.

When there are other than temporary declines in the Corporation’s carrying amount of the unguaranteed residual value, the carrying value is reduced and charged to non-interest expense.

Unamortized net loan or lease fees or costs for loans and leases that result from a refinance or restructure with only minor modifications to the original loan or lease contract are carried forward as a part of the net investment in the new loan.

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

The ACL is a valuation account that is deducted from the loans' amortized cost basis to present the net amounts expected to be collected on the loans.

Loans are charged off against the allowance when management believes that the uncollectibility of a loan balance is confirmed.

Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

Historical credit loss experience provides the basis for the estimation of expected credit losses.

Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as changes in external conditions, such as changes in unemployment rates, property values, or other relevant factors.

Accrued interest receivable on loans totaled $ 11.1 million at December 31, 2023 and is excluded from the estimate of credit losses.

ACL - Loans - Collectively Evaluated.

The ACL is measured on a collective pool basis when similar risk characteristics exist.

The Corporation has identified the following portfolio segments:

Commercial Real Estate:

Commercial real estate portfolio segments utilize substantially similar processes and controls.

Due to the collateral types, availability of data, and results of the Loss Driver Analysis (“LDA”), management utilizes a unique forecast model for each portfolio segment along with a separate analysis of subjective factors.

• Construction - Loans secured by real estate used to finance land development or construction.

• 1-4 Family - Loans secured by 1-4 family residential property

• Multi-family - Loans secured by multi-family residential property

• Owner Occupied - Loans secured by nonfarm, nonresidential owner-occupied property

• Non-owner Occupied - Loans secured by other nonfarm, nonresidential property

Commercial and Industrial Lending:

Commercial and industrial lending is a portfolio segment where management uses a common forecast due to common risk management, similarity in collateral types, availability of data, and results of the LDA.

Management has distinct processes, controls, and procedures which enable more precise development of subjective factors at the pool level.

• Commercial - Loans to small- to medium-sized companies in our primary markets in Wisconsin, Kansas, and Missouri, predominantly through lines of credit and term loans to businesses with annual sales of up to $150 million.

• Asset Based Lending - Products include revolving lines of credit and term loans for strategic acquisitions, capital expenditures, working capital, bank debt refinancing, debt restructuring, and corporate turnaround strategies.

• Floorplan - Floor plan financing for independent auto dealerships nationwide.

• SBA - Loans originated in accordance with the guidelines of the Small Business Administration (“SBA”).

As the Corporation prefers to sell the guaranteed portion, the on-balance sheet loans are primarily unguaranteed.

• Equipment finance - Loans and leases secured by a broad range of equipment to commercial clients in a variety of industries.

Consumer and other:

Consumer loans consisted of marketable security loans and other personal loans for executives and high net-worth individuals.

The Corporation uses a unique forecast model and subjective factors for this portfolio segment due to the client type and data availability.

Measures of the ACL are as follows:

Portfolio Segment Pool Measurement Method Loss Driver

Commercial real estate

Owner occupied Discounted Cash Flow National unemployment, National GDP

Non-owner occupied Discounted Cash Flow National unemployment, National GDP

Construction Discounted Cash Flow National unemployment, National GDP

Multi-family Discounted Cash Flow National unemployment, National GDP

1-4 Family Discounted Cash Flow National unemployment, National GDP

Commercial and industrial

Commercial Discounted Cash Flow National unemployment, National GDP

ABL Discounted Cash Flow National unemployment, National GDP

Floorplan Discounted Cash Flow National unemployment, National GDP

SBA Weighted Average Remaining Maturity N/A

Equipment Finance Discounted Cash Flow National unemployment, National GDP

Consumer and other Discounted Cash Flow National unemployment, National GDP

The Corporation utilized a discounted cash flow (DCF) or Weighted Average Remaining Maturity (WARM) method to estimate the quantitative portion of the allowance for credit losses for loans evaluated on a collective pooled basis.

For each segment, a LDA was performed in order to identify loss drivers and create a regression model for use in forecasting cash flows.

For all DCF-based pools, the LDA analyses utilized the Corporation’s and peer data from the Federal Financial Institutions Examination Council's (“FFIEC”) Call Report filings.

In creating the DCF model, the Corporation has established a one-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average.

Due to the infrequency of losses, the Corporation elected to use peer data for a more statistically sound calculation.

Key inputs into the DCF model include loan-level detail, including the amortized cost basis of individual loans, payment structure, loss history, and forecasted loss drivers.

The Corporation utilizes a third party to provide economic forecasts under various scenarios, which are assessed quarterly considering the scenarios in the context of the current economic environment and presumed risk of loss.

Expected credit losses are estimated over the contractual term of the loans, adjusted for prepayments when appropriate.

The contractual term excludes extensions, renewals, and modifications unless the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Corporation.

Additional key assumptions in the DCF model include the probability of default (“PD”), loss given default (“LGD”), and prepayment/curtailment rates.

The Corporation utilizes the model-driven PD and a LGD derived using a method referred to as Frye Jacobs.

The Frye Jacobs method is a mathematical formula that traces the relationship between LGD and PD over time and projects the LGD based on the level of PD forecasted.

In all cases, the Frye Jacobs method is utilized to calculate LGDs during the forecast period, reversion period and long-term historical average.

Prepayment and curtailment rates were calculated through third party studies of the Corporation’s own data.

When the DCF method is used to determine the allowance for credit losses, management adjusts the effective interest rate used to discount expected cash flows to incorporate expected prepayments.

For the WARM-based SBA pool, Corporation-specific data was used to develop the model assumptions.

The Corporation developed a reasonable and supportable estimate for the remaining maturity and estimated loss through analysis of historical data.

The remaining maturity calculation excludes loans originated under the Paycheck Protection Program as such loans are inconsistent with the current portfolio composition.

The quarterly loss rate data includes 2017 to current as the SBA lending policies and procedures were realigned in 2016 following the acquisition of Alterra Bank.

Only the unguaranteed portion of the SBA loans are assessed via WARM.

The risk of a failed guarantee claim is captured under ASC 450 contingency accounting.

Qualitative factors for DCF and WARM methodologies include the following:

• The Corporation’s lending policies and procedures, including changes in lending strategies, underwriting standards and practices for collections, write-offs, and recoveries;

• Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the Corporation operates that affect the collectability of financial assets;

• The experience, ability, and depth of the Corporation’s lending, investment, collection, and other relevant management and staff;

• The volume of past due financial assets, the volume of non-performing assets, and the volume and severity of adversely classified or graded assets;

• The existence and effect of industry concentrations of credit;

• The nature and volume of the portfolio segment or class;

• The quality of the Corporation’s credit review function and;

• The effect of other external factors such as the regulatory, legal and technological environments, competition, and events such as natural disasters or pandemics

ACL - Loans - Individually Evaluated.

Loans that do not share risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation.

The Corporation has determined that all loans which have been placed on non-performing status and other performing loans that have been identified due to non-conforming characteristics will be individually evaluated.

Individual analysis will evaluate the required specific reserve for loans in scope.

Specific reserves on non-performing loans are typically based on management’s best estimate of the fair value of collateral securing these loans, adjusted for selling costs as appropriate.

ACL - Off-Balance Sheet Credit Exposures.

The Corporation estimates expected credit losses over the contractual period in which the Corporation is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Corporation.

The allowance for credit losses on off-balance sheet credit exposure is adjusted as a provision for credit loss expense.

The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.

Funding rates are based on a historical analysis of the Corporation’s portfolio, while estimates of credit losses are determined using the same loss rates as funded loans.

Premises and Equipment, net.

The cost of capitalized leasehold improvements is amortized on the straight-line method over the lesser of the term of the respective lease or estimated economic life.

Equipment is stated at cost less accumulated depreciation and amortization which is calculated by the straight-line method over the estimated useful lives of three to ten years.

Equipment is stated at cost less accumulated depreciation and amortization which is calculated by the straight-line method over the estimated useful lives of 3 to 10 years.

Maintenance and repair costs are charged to expense as incurred.

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

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

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

Any subsequent write-downs to reflect current fair value, as well as gains and losses on disposition and revenues are recorded in non-interest expense.

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

Any required or prudent costs incurred relating to the development and improvement of the property are capitalized while holding period costs are charged to other non-interest expense.

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

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Therefore, it is less liquid than other marketable equity securities and the fair value is equal to cost.

At December 31, 2022 and 2021, the Bank had FHLB stock of $ 17.8 million and $ 13.3 million, respectively.

The Corporation periodically evaluates its holding in FHLB stock for impairment.

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An initial qualitative evaluation is made to assess the likelihood of impairment and determine whether further quantitative testing to calculate the fair value is necessary.

When the qualitative evaluation indicates that impairment is

more likely than not, quantitative testing is required whereby the fair value of each reporting unit is calculated and compared to the recorded book value.

When the qualitative evaluation indicates that impairment is more likely than not, quantitative testing is required whereby the fair value of each reporting unit is calculated and compared to the recorded book value.

If the calculated fair value of the reporting unit exceeds its carrying value, goodwill is not considered impaired.

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The derivative contracts have mirror-image terms, which results in the positions’ changes in fair value offsetting through earnings each period.

The credit risk and risk of non-performance embedded in the fair value calculations is different between the dealer counterparties and the commercial borrowers which may result in a difference in the changes in the fair value of the mirror-image swaps.

The credit risk and risk of non-performance embedded in the fair value calculations is different between the dealer

counterparties and the commercial borrowers which may result in a difference in the changes in the fair value of the mirror-image swaps.

The Corporation incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the counterparty’s risk in the fair value measurements.

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

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

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

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

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

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When necessary, valuation allowances are established to reduce deferred tax assets to the realizable amount.

Management believes it is more likely than not that the Corporation will realize the benefits of these deductible differences, net of the existing valuation allowances.

In July 2023, the state of Wisconsin incorporated a Commercial loan interest exemption (2023 Wis.

19 - Section 71.26(1)(i)) into its tax law.

The exemption applies to the income of a financial institution including interest, fees ,and penalties, derived from a commercial loan of $5 million or less provided to borrowers residing or located in the state and used primarily for a business or agricultural purposes.

The addition of the new state commercial income exclusion is expected to result in a taxable loss at the state level considering pre-tax book income and expected permanent adjustments to state income.

This state taxable loss is expected to produce state net operating losses that will not be realizable in the future barring any further state tax law change, or a change in the Corporation’s mix of products.

The Corporation also does not expect its deferred tax liabilities to be a substantial source of taxable income at the state level.

The Corporation does not currently have a tax planning technique in process to generate Wisconsin taxable income to overcome the losses.

Therefore, management recorded a valuation allowance against the Corporation’s Wisconsin deferred tax assets as of December 31, 2023.

Income tax expense or benefit represents the tax payable or tax refundable for a period, adjusted by the applicable change in deferred tax assets and liabilities for that period.

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

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

For the year ended December 31, 2023, $ 45,000 of realized securities losses were

recognized and reclassified out of accumulated other comprehensive loss.

For the year ended December 31, 2022, no realized securities gains or losses were recognized.

Earnings Per Common Share.

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The Corporation accounts for forfeitures as they occur.

While restricted stock is subject to forfeiture, restricted stock award participants may exercise full voting rights and will receive all dividends and other

distributions paid with respect to the restricted shares.

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

While restricted stock is subject to forfeiture, restricted stock award participants may exercise full voting rights and will receive all dividends and other distributions paid with respect to the restricted shares.

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

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

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The Corporation issues a combination of performance-based restricted stock units and restricted stock awards to plan participants.

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

Vesting of the performance-based restricted stock units will be measured on Total Shareholder Return (“TSR”) and Return on Average Equity (“ROAE”) prior to 2023 or Return on Average Common Equity (“ROACE”) for issuances after 2022, and will cliff-vest after a three-year measurement period based on the Corporation’s performance relative to a custom peer group.

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

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

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

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

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

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Under the ESPP, eligible employees may enroll in a three month offer period that begins January, April, July, and October of each year.

Employees may purchase a limited number of shares on the Corporation’s common stock at 90% of the fair market value on the last day of the offering period.

Employees may purchase a limited number of shares of the Corporation’s common stock at 90% of the fair market value on the last day of the offering period.

The ESPP is treated as a compensatory plan for purposes of share-based compensation expense.

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In November 2019, the FASB issued ASU No.

2019-10, “ Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842).

” The ASU delays the effective date for the credit losses standard from January 1, 2020 to January 1, 2023 for certain entities, including certain Securities and Exchange Commission filers, public business entities, and private companies.

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

2019-10, “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842).” The ASU delays the effective date for the credit losses standard from January 1, 2020 to January 1, 2023 for certain entities, including certain Securities and Exchange Commission filers, public business entities, and private companies.

As a smaller reporting company, the Corporation elected to defer

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

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

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

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

On January 1,2023, the Corporation adopted ASC 326 using the modified retrospective method for all financial assets measuring at amortized cost and off-balance sheet credit exposures.

Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable U.S.

The Corporation recorded a net decrease to retained earnings of $ 1.4 million as of January 1, 2023 for the cumulative effect of adopting ASC 326.

The transition adjustment to allowance for credit losses (“ACL”) includes $ 1.3 million related to off-balance sheet credit exposures and $ 484,000 related to loans.

In March 2020, the FASB issued ASU No.

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

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

In March 2022, the FASB issued ASU 2022-02 "Financial Instruments-Credit Losses (Topic 326):

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

In March 2022, the FASB issued ASU No.

2022-02 "Financial Instruments-Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures." The amendments in this update eliminate the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty.

Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance in paragraphs 310-20-35-9 through 35-11 to determine whether a modification results in a new loan or a

continuation of an existing loan.

Additionally, for public business entities, the amendments in this update require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost in the vintage disclosures required by paragraph 326-20-50-6.

The guidance is effective for the Corporation upon the adoption of ASU 2016-13, January 1, 2023.

The Corporation is currently assessing the impact of ASU 2022-02 on its disclosures and control structure;

however, the Corporation does not expect the adoption of this standard to have a material impact on the consolidated financial statements.

The Corporation adopted this standard in the first quarter 2023.

The adoption did not have a material impact on the consolidated financial statements.

In March 2023, the FASB issued ASU No.

2023-02 “Investments-Equity Method and Joint Ventures (Topic 323):

Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force).” The amendments in this Update permit reporting entities to elect to account for their tax equity investments, regardless of the program from which the income tax credits are received, using the proportional amortization method if certain conditions are met.

A reporting entity may make an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis rather than electing to apply the proportional amortization method at the reporting entity level or to individual investments.

This update is effective for fiscal years beginning after December 15, 2023.

We are currently assessing the impact of the standard.

In December 2023, the FASB issued ASU No.

2023-09, “Income Taxes (Topic 740):

Improvements to Income Tax Disclosures.” This update enhances the transparency and decision usefulness of income tax disclosures by providing better information regarding exposure to potential changes in jurisdictional tax legislation and related forecasting and cash flow opportunities.

This update is effective for fiscal years beginning after December 15, 2024.

We are currently assessing the impact of the standard.

In October 2023, the FASB issued ASU No.

2023-06, “Disclosure Improvements:

Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative.” This update is intended to improve the relevance and usefulness of financial information for investors and other users by incorporating certain SEC disclosure requirements into the FASB Accounting Standards Codification.

This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023.

We are currently assessing the impact of the standard.

In November 2023 the FASB issued ASU No.

2023-07, “Segment Reporting (Topic 820):

Improvements to Reportable Segment Disclosures.” This update is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses.

This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2024.

We are currently assessing the impact of the standard.

Reclassifications.

Certain amounts in the 2022 consolidated financial statements have been reclassified to conform to the 2023 presentation.

These reclassifications were not material and did not impact previously reported net income or comprehensive income.

Note 2 – Cash and Cash Equivalents

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Commercial mortgage-backed securities - government-sponsored enterprises 32,774 65 ( 4,470 ) 28,369

Other securities

$ 319,082 $ 1,388 $ ( 23,464 ) $ 297,006

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Commercial mortgage-backed securities - government-sponsored enterprises 31,515 — ( 5,138 ) 26,377

Other securities 2,205 23 — 2,228

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

The amortized cost and fair value of securities held-to-maturity and the corresponding amounts of gross unrealized gains and losses were as follows:

The amortized cost and fair value of securities held-to-maturity and the corresponding amounts of gross unrecognized gains and losses were as follows:

As of December 31, 2023

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$ 12,635 $ 7 $ ( 372 ) $ 12,270

Treasuries contains treasury bonds issued by the United States Treasury.

Treasuries contain treasury bonds issued by the United States Treasury.

government agency securities - government-sponsored enterprises represent securities issued by Federal National Mortgage Association (“FNMA”) and the SBA.

Municipal securities include securities issued by various municipalities located primarily within Wisconsin and are primarily general obligation bonds that are tax-exempt in nature.

Residential and commercial mortgage-backed securities - government issued

represent securities guaranteed by the Government National Mortgage Association.

Residential and commercial mortgage-backed securities - government issued represent securities guaranteed by the Government National Mortgage Association.

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

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

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

There were 16 and seven sales of available-for-sale securities that occurred during the years ended December 31, 2023 and 2021, respectively.

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

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Gross losses ( 113 ) — ( 63 )

Net gains (losses) on sale of available-for-sale securities $ — $ 29 $ ( 4 )

Net (losses) gains on sale of available-for-sale securities $ ( 45 ) $ — $ 29

Proceeds from sale of available-for-sale securities $ 5,085 $ — $ 14,955

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82,551 77,223 4,210 4,173

Residential mortgage-backed securities 200,762 188,889 2,289 2,160

Commercial mortgage-backed securities 35,769 30,894 2,004 1,922

$ 319,082 $ 297,006 $ 8,503 $ 8,255

The tables below show the Corporation’s gross unrealized losses and fair value of available-for-sale investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at December 31, 2023 and 2022.

At December 31, 2022, the Corporation held 175 available-for-sale securities that were in an unrealized loss position.

Such securities have not experienced credit rating downgrades;

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

At December 31, 2022, the Corporation held 45 available-for-sale securities that have been in a continuous unrealized loss position for twelve months or greater.

The Corporation also has not specifically identified available-for-sale securities in a loss position that it intends to sell in the near term and does not believe that it will be required to sell any such securities.

The Corporation reviews its securities on a quarterly basis to monitor its exposure to other-than-temporary impairment.

Consideration is given to such factors as the length of time and extent to which the security has been in an unrealized loss position, changes in security ratings, and an evaluation of the present value of expected future cash flows, if necessary.

Based on the Corporation’s evaluation, it is expected that the Corporation will recover the entire amortized cost basis of each security.

Accordingly, no other-than-temporary impairment was recorded in the Consolidated Statements of Income for the years ended December 31, 2022 and 2021.

The Corporation reviews its securities on a quarterly basis to assess declines in fair value for credit losses.

Consideration is given to such factors as the credit rating of the borrower, market conditions such as current interest rates, any adverse conditions specific to the security and delinquency status on contractual payments.

For the years ended December 31, 2023 and 2022, management concluded that in all instances securities with fair value less than carrying value was due to market and other factors;

thus no credit loss provision was required.

A summary of unrealized loss information for securities available-for-sale, categorized by security type and length of time for which the security has been in a continuous unrealized loss position, follows:

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The tables below show the Corporation’s gross unrealized losses and fair value of held-to-maturity investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at December 31, 2023 and 2022.

At December 31, 2022, the Corporation held 40 held-to-maturity securities that were in an unrealized loss position.

Such securities have not experienced credit rating downgrades;

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

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

It is expected that the Corporation will recover the entire amortized cost basis of each held-to-maturity security based upon an evaluation of aforementioned factors.

Accordingly, no other-than-temporary impairment was recorded in the Consolidated Statements of Income for the years ended December 31, 2022 and 2021.

A summary of unrealized loss information for securities held-to-maturity, categorized by security type and length of time for which the security has been in a continuous unrealized loss position, follows:

At December 31, 2023, the Corporation held 29 held-to-maturity securities that were in an unrealized loss position, 24 of which have been in a continuous loss position for twelve months or greater.

Management assesses held-to-maturity securities for credit losses on a quarterly basis.

The assessment includes review of credit ratings, identification of delinquency and evaluation of market factors.

Based on this analysis, management concludes the decline in fair value is due to market factors, specifically changes in interest rates.

Accordingly, no credit loss provision was recorded in the Consolidated Statements of Income for the years ended December 31, 2023, 2022, and 2021.

A summary of unrecognized loss information for securities held-to-maturity, categorized by security type and length of time for which the security has been in a continuous unrealized loss position, follows:

December 31, 2023

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

Residential mortgage-backed securities - government issued

1,518 107 — — 1,518 107

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

Loan and lease receivables consist of the following:

Residential mortgage-backed securities - government-sponsored enterprises

1,444 93 — — 1,444 93

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

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

On January 1, 2023, the Corporation adopted ASU 2016-13, which replaced the legacy GAAP other-than-temporary impairment (“OTTI”) model with a credit loss model.

ASU 2016-13 requires an allowance on lifetime expected credit losses on held to maturity debt securities.

As of January 1, 2023 and December 31, 2023, the Corporation estimated the expected credit losses to be immaterial based on the composition of the securities portfolio.

Note 4 – Loans, Leases Receivable, and Allowance for Credit Losses

Loan and leases receivable consist of the following:

2023 December 31,

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773,494 687,091

Land development

50,803 42,792

167,948 179,841

Construction 193,080 218,751

450,529 350,026

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Commercial and industrial 1,105,835 853,327

Direct financing leases, net 12,149 15,743

Consumer and other 44,312 47,938

Home equity and second mortgages 6,761 4,223

Other 41,177 35,518

Total consumer and other

47,938 39,741

Total gross loans and leases receivable

2,850,018 2,443,215

Allowance for loan and lease losses

Allowance for loan losses

31,275 24,230

Deferred loan fees

Deferred loan fees and costs, net ( 243 ) 149

Loans and leases receivable, net $ 2,818,986 $ 2,418,836

As of December 31, 2022 and 2021, the Corporation had $ 554,000 and $ 27.9 million, respectively, in gross PPP loans outstanding included in the commercial and industrial loan category and deferred processing fees outstanding of $ 48,000 and $ 557,000 , respectively, included in deferred loan fees.

The processing fees are deferred and recognized over the contractual life of the loan, or accelerated at forgiveness, as an adjustment of yield using the interest method.

The SBA provides a guaranty to the lender of 100% of principal and interest, unless the lender violated an obligation under the agreement.

As loan losses are expected to be immaterial, if any at all, due to the guaranty, management excluded the PPP loans from the allowance for loan and lease losses calculation.

Management funded these short-term loans primarily through a combination of excess cash held at the Federal Reserve and from an increase in in-market deposits.

The total amount of the Corporation’s ownership of SBA loans on-balance sheet is comprised of the following:

2022 December 31,

(In Thousands)

SBA 7(a) loans $ 36,047 $ 33,223

SBA 504 loans 25,098 41,394

SBA Express loans and lines of credit 130 387

SBA PPP loans 554 27,854

Total SBA loans $ 61,829 $ 102,858

As of December 31, 2022 and 2021, $ 1.1 million and $ 1.7 million of SBA loans were considered impaired, respectively.

Loans transferred to third parties consist of the guaranteed portions of SBA loans which the Corporation sold in the secondary market and participation interests in other, non-SBA originated loans.

The total principal amount of the guaranteed portions of SBA loans sold during the year ended December 31, 2023 and 2022 was $ 23.6 million and $ 29.9 million, respectively.

the transfers of these financial assets met the qualifications for sale accounting, and therefore, all of the loans transferred during the year ended December 31, 2022 and 2021 have been derecognized in the Consolidated Financial Statements.

Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore, all of the loans transferred during the year ended December 31, 2023 and 2022 have been derecognized in the Consolidated Financial Statements.

The guaranteed portions of SBA loans were transferred at their fair value and the related gain was recognized upon the transfer as non-interest income in the Consolidated Financial Statements.

The total outstanding balance of sold SBA loans at December 31, 2023 and 2022 was $ 84.2 million and $ 88.5 million, respectively.

The total principal amount of transferred participation interests in other, non-SBA originated loans during the year ended December 31, 2022 and 2021 was $ 96.0 million and $ 70.9 million, respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer.

The total principal amount of transferred participation interests in other, non-SBA originated loans during the year ended December 31, 2023 and 2022 was $ 120.0 million and $ 96.0 million, respectively, all of which were treated as sales and

derecognized under the applicable accounting guidance at the time of transfer.

No gain or loss was recognized on participation interests in other, non-SBA originated loans as they were transferred at or near the date of loan origination and the payments received for servicing the portion of the loans participated represents adequate compensation.

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As of December 31, 2023 and 2022, the total amount of the Corporation’s partial ownership of these transferred loans on the Consolidated Balance Sheets was $ 367.4 million and $ 339.0 million, respectively.

As of December 31, 2022 and 2021, the non-SBA originated participation portfolio contained no impaired loans.

As of December 31, 2023 and 2022, the non-SBA originated participation portfolio contained no non-performing loans.

The Corporation does not share in the participant’s portion of any potential charge-offs.

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

There were no loans purchased on the Consolidated Balance Sheets as of December 31, 2023 and 2022.

The following table presents loans and loan participations sold during the year by portfolio segment:

December 31, 2023 Owner Occupied

Non-Owner Occupied

Commercial and Industrial

Consumer and Other

(In Thousands)

$ 17,390 $ — $ 75,532 $ 11,382 $ — $ 39,290 $ — $ 143,594

December 31, 2022 Owner Occupied

Non-Owner Occupied

Commercial and Industrial

Consumer and Other

(In Thousands)

$ — $ 5,000 $ 58,586 $ 3,184 $ — $ 59,085 $ — $ 125,855

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

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Balance at end of year $ 263 $ 224

The following tables illustrate ending balances of the Corporation’s loan and lease portfolio, including impaired loans by class of receivable, and considering certain credit quality indicators:

The Corporation’s net investment in direct financing leases consists of the following:

2023 December 31,

I II III IV Total

(Dollars in Thousands)

Commercial real estate:

(In Thousands)

Minimum lease payments receivable $ 9,660 $ 10,673

Estimated unguaranteed residual values in leased property 1,468 2,776

Unearned lease and residual income ( 1,362 ) ( 1,300 )

Investment in commercial direct financing leases $ 9,766 $ 12,149

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

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

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

(In Thousands)

Maturities during year ended December 31,

Thereafter 252

The following tables illustrate ending balances of the Corporation’s loan and lease portfolio, including non-performing loans by class of receivable, and considering certain credit quality indicators:

December 31, 2023 Term Loans Amortized Cost Basis by Origination Year

(In Thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total

Commercial real estate — owner occupied

I $ 31,637 $ 43,156 $ 38,803 $ 44,704 $ 22,078 $ 72,774 $ 451 $ 253,603

II — — — 260 — — — 260

III — — — — — 2,616 — 2,616

IV — — — — — — — —

Total $ 31,637 $ 43,156 $ 38,803 $ 44,964 $ 22,078 $ 75,390 $ 451 $ 256,479

Commercial real estate — non-owner occupied

Land development 50,803 — — — 50,803

Construction 157,157 — 10,791 — 167,948

Multi-family 342,030 7,996 — — 350,026

1-4 family 17,600 98 — 30 17,728

Total commercial real estate 1,454,228 44,718 42,974 30 1,541,950

I $ 71,857 $ 76,689 $ 72,660 $ 78,212 $ 66,262 $ 314,970 $ 32,478 $ 713,128

II — — 2,302 2,252 19,838 16,274 — 40,666

III — — — — — 19,700 — 19,700

IV — — — — — — — —

Total $ 71,857 $ 76,689 $ 74,962 $ 80,464 $ 86,100 $ 350,944 $ 32,478 $ 773,494

I $ 63,660 $ 83,161 $ 8,542 $ 744 $ 433 $ 6,528 $ 15,011 $ 178,079

II — — 9,289 5,712 — — — 15,001

III — — — — — — — —

IV — — — — — — — —

Total $ 63,660 $ 83,161 $ 17,831 $ 6,456 $ 433 $ 6,528 $ 15,011 $ 193,080

December 31, 2023 Term Loans Amortized Cost Basis by Origination Year

(In Thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total

I $ 84,932 $ 41,068 $ 70,054 $ 113,294 $ 22,925 $ 115,243 $ 3,013 $ 450,529

II — — — — — — — —

III — — — — — — — —

IV — — — — — — — —

Total $ 84,932 $ 41,068 $ 70,054 $ 113,294 $ 22,925 $ 115,243 $ 3,013 $ 450,529

I $ 4,242 $ 7,684 $ 2,672 $ 2,359 $ 443 $ 2,805 $ 6,062 $ 26,267

II — — — — — — — —

III — — — — — — — —

IV — — — — — 22 — 22

Total $ 4,242 $ 7,684 $ 2,672 $ 2,359 $ 443 $ 2,827 $ 6,062 $ 26,289

Commercial and industrial

Direct financing leases, net 10,490 365 1,294 — 12,149

I $ 302,612 $ 144,167 $ 85,504 $ 38,164 $ 20,151 $ 26,490 $ 415,301 $ 1,032,389

II 1,496 5,280 785 353 94 219 5,706 13,933

III 1,093 7,168 1,882 5,919 3,861 3,957 15,058 38,938

IV 1,482 6,519 1,319 321 133 1,644 9,157 20,575

Total $ 306,683 $ 163,134 $ 89,490 $ 44,757 $ 24,239 $ 32,310 $ 445,222 $ 1,105,835

Consumer and other

Home equity and second mortgages 6,761 — — — 6,761

Other 41,177 — — — 41,177

Total consumer and other 47,938 — — — 47,938

Total gross loans and leases receivable $ 2,295,814 $ 65,037 $ 78,549 $ 3,815 $ 2,443,215

Category as a % of total portfolio 93.97 % 2.66 % 3.21 % 0.16 % 100.00 %

December 31, 2021

I II III IV Total

(Dollars in Thousands)

Commercial real estate:

I $ 5,920 $ 8,786 $ 3,167 $ 12,193 $ 2,049 $ 3,485 $ 8,712 $ 44,312

II — — — — — — — —

III — — — — — — — —

IV — — — — — — — —

Total $ 5,920 $ 8,786 $ 3,167 $ 12,193 $ 2,049 $ 3,485 $ 8,712 $ 44,312

I $ 564,860 $ 404,711 $ 281,402 $ 289,670 $ 134,341 $ 542,295 $ 481,028 $ 2,698,307

II 1,496 5,280 12,376 8,577 19,932 16,493 5,706 69,860

III 1,093 7,168 1,882 5,919 3,861 26,273 15,058 61,254

IV 1,482 6,519 1,319 321 133 1,666 9,157 $ 20,597

Total $ 568,931 $ 423,678 $ 296,979 $ 304,487 $ 158,267 $ 586,727 $ 510,949 $ 2,850,018

December 31, 2022 Term Loans Amortized Cost Basis by Origination Year

(In Thousands) 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total

Commercial real estate — owner occupied

I $ 50,705 $ 34,896 $ 55,096 $ 25,583 $ 15,583 $ 72,091 $ 2,287 $ 256,241

II — 560 300 — 399 1,344 — 2,603

III — 494 5,489 299 417 2,811 — 9,510

IV — — — — — — — —

Total $ 50,705 $ 35,950 $ 60,885 $ 25,882 $ 16,399 $ 76,246 $ 2,287 $ 268,354

Commercial real estate — non-owner occupied

Land development 42,291 501 — — 42,792

Construction 140,181 9,077 30,583 — 179,841

Multi-family 300,589 8,217 11,266 — 320,072

1-4 family 14,012 158 402 339 14,911

Total commercial real estate 1,315,127 53,811 85,003 687 1,454,628

I $ 88,752 $ 74,615 $ 60,216 $ 64,847 $ 84,053 $ 232,405 $ 25,508 $ 630,396

II — — — 15,099 11,390 7,534 — 34,023

III — — 3,891 — — 18,566 215 22,672

IV — — — — — — — —

Total $ 88,752 $ 74,615 $ 64,107 $ 79,946 $ 95,443 $ 258,505 $ 25,723 $ 687,091

I $ 39,942 $ 70,257 $ 39,048 $ 457 $ 8,052 $ 22,603 $ 27,601 $ 207,960

II — — — — — — — —

III — — — 10,791 — — — 10,791

IV — — — — — — — —

Total $ 39,942 $ 70,257 $ 39,048 $ 11,248 $ 8,052 $ 22,603 $ 27,601 $ 218,751

I $ 21,698 $ 46,894 $ 121,199 $ 23,293 $ 32,611 $ 93,723 $ 2,612 $ 342,030

II — — — — — 7,996 — 7,996

III — — — — — — — —

IV — — — — — — — —

Total $ 21,698 $ 46,894 $ 121,199 $ 23,293 $ 32,611 $ 101,719 $ 2,612 $ 350,026

I $ 7,659 $ 3,087 $ 2,525 $ 632 $ 98 $ 2,250 $ 1,447 $ 17,698

II — — — — — — — —

III — — — — — — — —

IV — — — — — 30 — 30

Total $ 7,659 $ 3,087 $ 2,525 $ 632 $ 98 $ 2,280 $ 1,447 $ 17,728

December 31, 2022 Term Loans Amortized Cost Basis by Origination Year

(In Thousands) 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total

Commercial and industrial

Direct financing leases, net 10,892 105 4,647 99 15,743

I $ 199,293 $ 109,901 $ 56,590 $ 30,000 $ 13,838 $ 19,367 $ 364,817 $ 793,806

II 5,499 801 3,021 1,108 92 239 9,846 20,606

III 1,809 5,607 6,691 6,699 133 5,451 8,896 35,286

IV 601 1,015 589 446 102 876 — 3,629

Total $ 207,202 $ 117,324 $ 66,891 $ 38,253 $ 14,165 $ 25,933 $ 383,559 $ 853,327

Consumer and other

Home equity and second mortgages 3,925 231 67 — 4,223

Other 35,385 133 — — 35,518

Total consumer and other 39,310 364 67 — 39,741

Total gross loans and leases receivable $ 2,051,452 $ 60,223 $ 122,681 $ 6,575 $ 2,240,931

Category as a % of total portfolio 91.55 % 2.69 % 5.47 % 0.29 % 100.00 %

I $ 11,086 $ 3,556 $ 13,870 $ 2,433 $ 2,600 $ 4,193 $ 10,200 $ 47,938

II — — — — — — — —

III — — — — — — — —

IV — — — — — — — —

Total $ 11,086 $ 3,556 $ 13,870 $ 2,433 $ 2,600 $ 4,193 $ 10,200 $ 47,938

I $ 419,135 $ 343,206 $ 348,544 $ 147,245 $ 156,835 $ 446,632 $ 434,472 $ 2,296,069

II 5,499 1,361 3,321 16,207 11,881 17,113 9,846 65,228

III 1,809 6,101 16,071 17,789 550 26,828 9,111 78,259

IV 601 1,015 589 446 102 906 — 3,659

Total $ 427,044 $ 351,683 $ 368,525 $ 181,687 $ 169,368 $ 491,479 $ 453,429 $ 2,443,215

Each credit is evaluated for proper risk rating upon origination, at the time of each subsequent renewal, upon receipt and evaluation of updated financial information from the Corporation’s borrowers or as other circumstances dictate.

10 unchanged sentences

However, the balance in this category is not intended to represent the amount of adversely classified assets held by the Bank.

Category III loans and leases generally exhibit undesirable characteristics, such as evidence of adverse financial trends and conditions, managerial problems, deteriorating economic conditions within the related industry or evidence of adverse public filings and may exhibit collateral shortfall positions.

loans and leases generally exhibit undesirable characteristics, such as evidence of adverse financial trends and conditions, managerial problems, deteriorating economic conditions within the related industry or evidence of adverse public filings and may exhibit collateral shortfall positions.

Management continues to believe that it will collect all contractual principal and interest in accordance with the original terms of the contracts relating to the loans and leases in this category, and therefore Category III loans are considered performing with no specific reserves established for this category.

Category III loans are monitored by management and asset quality review committees on a monthly basis.

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

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

Impaired loans are

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

When analyzing the adequacy of collateral, the Corporation obtains external appraisals at least annually for impaired loans and leases.

Category IV — Loans and leases in this category are non-performing loans.

Management has determined that it is unlikely that the Bank will receive the contractual principal and interest in accordance with the original terms of the agreement.

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

When analyzing the adequacy of collateral, the Corporation obtains external appraisals at least annually.

External appraisals are obtained from the Corporation’s approved appraiser listing and are independently reviewed to monitor the quality of such appraisals.

To the extent a collateral shortfall position is present, a specific reserve or charge-off will be recorded to reflect the magnitude of the impairment.

To the extent a collateral shortfall position is present, a specific reserve or charge-off will be recorded.

Loans and leases in this category are monitored by management and asset quality review committees on a monthly basis.

5 unchanged sentences

(Dollars in Thousands)

Accruing loans and leases

Performing loans and leases

Commercial real estate:

1 unchanged sentence

Non-owner occupied — — — — 773,494 773,494

Land development — — — — 50,803 50,803

Construction — — — — 193,080 193,080

2 unchanged sentences

Commercial and industrial 3,026 491 — 3,517 1,081,743 1,085,260

Direct financing leases, net 6 24 — 30 12,119 12,149

Consumer and other — — — — 44,312 44,312

Home equity and second mortgages — — — — 6,761 6,761

Other — — — — 41,177 41,177

Total 3,026 491 — 3,517 2,825,904 2,829,421

Non-accruing loans and leases

Non-performing loans and leases

Commercial real estate:

1 unchanged sentence

Non-owner occupied — — — — — —

Land development — — — — — —

Construction — — — — — —

2 unchanged sentences

Commercial and industrial 404 550 18,347 19,301 1,274 20,575

Direct financing leases, net — — — — — —

Consumer and other — — — — — —

Home equity and second mortgages — — — — — —

Other — — — — — —

Total 404 550 18,347 19,301 1,296 20,597

3 unchanged sentences

Non-owner occupied — — — — 773,494 773,494

Land development — — — — 50,803 50,803

Construction — — — — 193,080 193,080

2 unchanged sentences

Commercial and industrial 3,430 1,041 18,347 22,818 1,083,017 1,105,835

Direct financing leases, net 6 24 — 30 12,119 12,149

Consumer and other — — — — 44,312 44,312

Home equity and second mortgages — — — — 6,761 6,761

Other — — — — 41,177 41,177

Total $ 3,430 $ 1,041 $ 18,347 $ 22,818 $ 2,827,200 $ 2,850,018

5 unchanged sentences

(Dollars in Thousands)

Accruing loans and leases

Performing loans and leases

Commercial real estate:

1 unchanged sentence

Non-owner occupied 215 — — 215 686,876 687,091

Land development — — — — 42,792 42,792

Construction — — — — 218,751 218,751

2 unchanged sentences

Commercial and industrial 1,437 403 — 1,840 847,858 849,698

Direct financing leases, net 281 14 — 295 15,349 15,644

Consumer and other — — — — 47,938 47,938

Home equity and second mortgages — — — — 4,223 4,223

Other — — — — 35,518 35,518

Total 1,652 403 — 2,055 2,437,501 2,439,556

Non-accruing loans and leases

Non-performing loans and leases

Commercial real estate:

1 unchanged sentence

Non-owner occupied — — — — — —

Land development — — — — — —

Construction — — — — — —

2 unchanged sentences

Commercial and industrial 439 126 2,464 3,029 600 3,629

Direct financing leases, net — — 84 84 15 99

Consumer and other — — — — — —

Home equity and second mortgages — — — — — —

Other — — — — — —

Total 439 126 2,464 3,029 630 3,659

3 unchanged sentences

Non-owner occupied 215 — — 215 686,876 687,091

Land development — — — — 42,792 42,792

Construction — — — — 218,751 218,751

2 unchanged sentences

Commercial and industrial 1,876 529 2,464 4,869 848,458 853,327

Direct financing leases, net 281 14 84 379 15,364 15,743

Consumer and other — — — — 47,938 47,938

Home equity and second mortgages — — — — 4,223 4,223

Other — — — — 35,518 35,518

Total $ 2,091 $ 529 $ 2,464 $ 5,084 $ 2,438,131 $ 2,443,215

Percent of portfolio 0.09 % 0.02 % 0.10 % 0.21 % 99.79 % 100.00 %

The Corporation’s total impaired assets consisted of the following:

The Corporation’s total non-performing assets consisted of the following:

2023 December 31,

(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 22 30

Commercial and industrial 20,575 3,629

Direct financing leases, net — 99

Consumer and other — —

Home equity and second mortgages — —

Total non-accrual consumer and other loans — —

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

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

Repossessed assets, net 247 95

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

Performing troubled debt restructurings 156 217

Total impaired assets $ 3,910 $ 6,739

2023 December 31,

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

Total non-performing loans and leases to gross loans and leases 0.72 % 0.15 %

Total non-performing assets to total 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 1.09

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

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

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

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

All loans and leases modified as a TDR are measured for impairment.

The nature and extent of the impairment of restructured loans, including those which have experienced a default, is considered in the determination of an appropriate level of the allowance for loan and lease losses.

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

For the Year Ended December 31,

Number of Loans Pre-Modification

Investment Post-Modification

(Dollars in Thousands)

Commercial and industrial 3 $ 239 $ 217

For the year ended December 31, 2022, no loans were modified as a TDR.

Restructured loan modifications may include payment schedule modifications, interest rate concessions, maturity date extensions, principal reduction, or some combination of these concessions.

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

There were no loans modified as a TDR during the previous 12 months which subsequently defaulted during the year ended December 31, 2022 and one with a recorded investment of $ 280,000 that defaulted during the year ended December 31, 2021.

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

These modifications were excluded from TDR classification under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators.

As of December 31, 2022, the Corporation had no deferrals outstanding.

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

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

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

Non-performing loans, which are collateral dependent, are primarily secured by inventory $ 8.9 million, equipment $ 3.7 million, and accounts receivable and other assets $ 1.7 million.

Occasionally, the Corporation modifies loans to borrowers in financial distress.

There were three commercial and industrial loans for a total of $ 882,000 modified during the year ended December 31, 2023.

The modifications consisted of payment deferrals.

These loans are included in total non-performing loans and are currently between zero and 209 days past due as of December 31, 2023.

No loans were modified during the year ended December 31, 2022.

There was one commercial and industrial loan to a borrower experiencing financial distress for a total of $ 382,000 that was modified during the previous 12 months and which subsequently defaulted during the year ended December 31, 2023.

There were no loans to borrowers experiencing financial distress that were modified during the previous 12 months and which subsequently defaulted during the year ended December 31, 2022.

There were no unfunded commitments associated with loans modified for borrowers experiencing financial distress as of December 31, 2023.

The following represents additional information regarding the Corporation’s non-accrual loans and leases, by portfolio segment:

As of and for the Year Ended December 31, 2023

Investment (1)

Balance Impairment

Amortized Cost (1)

Balance Individual

Reserve Average

3 unchanged sentences

(In Thousands)

With no impairment reserve recorded:

With no individual reserve recorded:

Commercial real estate:

1 unchanged sentence

Non-owner occupied — — — — — — —

Land development — — — — — — —

Construction — — — — — — —

2 unchanged sentences

Commercial and industrial 9,691 9,695 — 4,989 786 214 572

Direct financing leases, net — — — 67 2 2 —

Consumer and other — — — — — — —

Home equity and second mortgages

— — — — — — —

Other — — — — — — —

Total 9,691 9,695 — 4,993 786 237 549

With impairment reserve recorded:

With individual reserve recorded:

Commercial real estate:

1 unchanged sentence

Non-owner occupied — — — — — — —

Land development — — — — — — —

Construction — — — — — — —

2 unchanged sentences

Commercial and industrial 10,884 10,890 5,968 5,435 641 29 612

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

Consumer and other — — — — — — —

Home equity and second mortgages

— — — — — — —

Other — — — — — — —

Total 10,906 10,917 5,990 5,457 645 29 616

2 unchanged sentences

Non-owner occupied — — — — — — —

Land development — — — — — — —

Construction — — — — — — —

2 unchanged sentences

Commercial and industrial 20,575 20,585 5,968 10,424 1,427 243 1,184

Direct financing leases, net — — — 67 2 2 —

Consumer and other — — — — — — —

Home equity and second mortgages

— — — — — — —

Other — — — — — — —

Grand total $ 20,597 $ 20,612 $ 5,990 $ 10,450 $ 1,431 $ 266 $ 1,165

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

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

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

1 unchanged sentence

Investment (1)

Balance Impairment

Balance Individual

Reserve Average

3 unchanged sentences

(In Thousands)

With no impairment reserve recorded:

With no individual reserve recorded:

Commercial real estate:

1 unchanged sentence

Non-owner occupied — — — — — 1 ( 1 )

Land development — — — 7 — — —

Construction — — — — — 47 ( 47 )

2 unchanged sentences

Commercial and industrial 1,037 1,037 — 3,153 277 587 ( 310 )

Direct financing leases, net 15 15 — 2 1 — 1

Consumer and other — — — — — — —

Home equity and second mortgages

— — — 40 7 9 ( 2 )

Other — — — 8 23 — 23

Total 1,067 1,072 — 3,445 299 1,435 ( 1,136 )

With impairment reserve recorded:

With individual reserve recorded:

Commercial real estate:

1 unchanged sentence

Non-owner occupied — — — — — — —

Land development — — — — — — —

Construction — — — — — — —

2 unchanged sentences

Commercial and industrial 2,592 2,612 1,650 1,454 101 1 100

Direct financing leases, net 84 84 66 50 4 — 4

Consumer and other — — — — — — —

Home equity and second mortgages

— — — — — — —

Other — — — — — — —

Total 2,592 2,612 1,650 1,454 101 1 100

2 unchanged sentences

Non-owner occupied — — — — — 1 ( 1 )

Land development — — — 7 — — —

Construction — — — — — 47 ( 47 )

2 unchanged sentences

Commercial and industrial 3,629 3,649 1,650 4,607 378 588 ( 210 )

Direct financing leases, net 99 99 66 52 5 — 5

Consumer and other — — — — — — —

Home equity and second mortgages — — — 40 7 9 ( 2 )

Other — — — 8 23 — 23

Grand total $ 3,659 $ 3,684 $ 1,650 $ 4,899 $ 400 $ 1,436 $ ( 1,036 )

3 unchanged sentences

Investment (1)

Balance Impairment

Balance Individual

Reserve Average

3 unchanged sentences

(In Thousands)

With no impairment reserve recorded:

With no individual reserve recorded:

Commercial real estate:

1 unchanged sentence

Non-owner occupied — — — 2,281 233 16 217

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

Construction — — — 7 — — —

2 unchanged sentences

Commercial and industrial 3,732 3,834 — 7,916 523 179 344

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

Consumer and other — — — 48 30 9 21

Home equity and second mortgages

— — — 1 — — —

Other 21 688 — 85 41 — 41

Total 4,419 4,564 — 12,754 991 446 545

With impairment reserve recorded:

With individual reserve recorded:

Commercial real estate:

1 unchanged sentence

Non-owner occupied — — — — — — —

Land development — — — — — — —

Construction — — — — — — —

2 unchanged sentences

Commercial and industrial 2,156 2,156 1,505 1,506 113 8 105

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

Consumer and other — — — — — — —

Home equity and second mortgages

40 40 7 — 1 — 1

Other — — — — — — —

Total 2,156 2,156 1,505 1,506 113 8 105

2 unchanged sentences

Non-owner occupied — — — 2,281 233 16 217

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

Construction — — — 7 — — —

2 unchanged sentences

Commercial and industrial 5,888 5,990 1,505 9,422 636 187 449

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

Consumer and other — — — 48 30 9 21

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

Other 21 688 — 85 41 — 41

Grand total $ 6,575 $ 6,720 $ 1,505 $ 14,260 $ 1,104 $ 454 $ 650

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

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

The difference between the recorded investment of loans and leases and the unpaid principal balance of $ 26,000 and $ 145,000 as of December 31, 2022 and 2021, respectively, represents partial charge-offs of loans and leases resulting from losses due to the appraised value of the collateral securing the loans and leases being below the carrying values of the loans and leases.

Impaired loans and leases also included $ 156,000 and $ 217,000 of loans as of December 31, 2022 and 2021, respectively, that were performing TDRs, and although not on non-accrual, were reported as impaired due to the concession in terms.

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

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

The difference between the recorded investment of loans and leases and the unpaid principal balance of $ 15,000 and $ 26,000 as of December 31, 2023 and 2022, respectively, represents partial charge-offs of loans and leases resulting from losses due to the value of the collateral securing the loans and leases being below the carrying values of the loans and leases.

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

Cash payments collected on non-accrual loans are first applied to such loan’s principal.

Foregone interest represents the interest that was contractually due on the loan but not received or recorded.

No principal has been forgiven on modified loans during the years ended December 31, 2023 and 2022.

To the extent the amount of principal on a non-accrual loan is fully collected and additional cash is received, the Corporation will recognize interest income.

To determine the level and composition of the allowance for loan and lease losses, the Corporation categorizes the portfolio into segments with similar risk characteristics.

First, the Corporation evaluates loans and leases for potential impairment classification.

The Corporation analyzes each loan and lease determined to be impaired on an individual basis to determine a specific reserve based upon the estimated value of the underlying collateral for collateral-dependent loans, or alternatively, the present value of expected cash flows.

The Corporation applies historical trends from established risk factors to each category of loans and leases that has not been individually evaluated for the purpose of establishing the general portion of the allowance.

A summary of the activity in the allowance for loan and lease losses by portfolio segment is as follows:

Allowance for Credit Losses

The ACL is an estimate of the expected credit losses on financial assets measured at amortized cost, which is measured using relevant information about past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets.

During the first quarter of 2023, the Corporation adopted ASU 2016-13, including the CECL methodology for estimating the ACL.

This standard was adopted using a modified retrospective approach on January 1, 2023, resulting in a $ 484,000 increase to the ACL and a $ 1.3 million increase to the unfunded credit commitments reserve.

A cumulative effect adjustment resulting in

an $ 1.4 million decrease to retained earnings and a $ 465,000 increase to deferred tax assets was also recorded as of the adoption of ASU 2016-13.

Quantitative Considerations

The ACL is primarily calculated utilizing a discounted cash flow (“DCF”) model.

Key inputs and assumptions used in this model are discussed below:

• Forecast model - For each portfolio segment, a loss driver analysis (“LDA”) was performed in order to identify appropriate loss drivers and create a regression model for use in forecasting cash flows.

The LDA analysis utilized peer FFIEC Call Report data for all pools.

The Corporation plans to update the LDA annually.

• Probability of default – PD is the probability that an asset will be in default within a given time frame.

The Corporation has defined default as when a charge-off has occurred, a loan goes to non-accrual status, or a loan is greater than 90 days past due.

The forecast model is utilized to estimate PDs.

• Loss given default – LGD is the percentage of the asset not expected to be collected due to default.

The LGD is derived from using a method referred to as Frye Jacobs which uses industry data.

• Prepayments and curtailments – Prepayments and curtailments are calculated based on the Corporation’s own data.

This analysis is updated annually.

• Forecast and reversion – the Corporation has established a one-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average.

• Economic forecast – the Corporation utilizes a third party to provide economic forecasts under various scenarios, which are assessed against economic indicators and management’s observations in the market.

As of December 31, 2023, the Corporation selected a forecast which forecasts unemployment between 3.89% and 4.04% and GDP growth change between 1.29% and 2.32% over the next four quarters.

Following the forecast period, the model reverts to long-term averages over four quarters.

Management believes that the resulting quantitative reserve appropriately balances economic indicators with identified risks.

Qualitative Considerations

In addition to the quantitative model, management considers the need for qualitative adjustment for risks not considered in the DCF.

Factors that are considered by management in determining loan collectability and the appropriate level of the ACL are listed below:

• The Corporation’s lending policies and procedures, including changes in lending strategies, underwriting standards and practices for collections, write-offs, and recoveries;

• The experience, ability, and depth of the Corporation’s lending, investment, collection, and other relevant management and staff;

• The volume of past due financial assets, the volume of non-performing assets, and the volume and severity of adversely classified or graded assets;

• The existence and effect of industry concentrations of credit;

• The nature and volume of the portfolio segment or class;

• The quality of the Corporation’s credit review function;

• The effect of other external factors such as the regulatory, legal and technological environments, competition, and events such as natural disasters or pandemics.

A summary of the activity in the allowance for credit losses by portfolio segment is as follows:

As of and for the Year Ended December 31, 2023

Real Estate Commercial

Owner Occupied Non-Owner Occupied Construction Multi-Family 1-4 Family Commercial

Industrial Consumer

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Beginning balance $ 1,766 $ 5,108 $ 1,646 $ 2,634 $ 207 $ 12,403 $ 466 $ 24,230

Impact of adopting ASC 326 ( 204 ) ( 242 ) 796 ( 386 ) ( 45 ) 1,873 26 1,818

Charge-offs — — — — — ( 1,781 ) — ( 1,781 )

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Net recoveries (charge-offs) 9 1 — — 40 ( 1,303 ) 20 ( 1,233 )

Provision for loan and lease losses ( 6,812 ) 3,236 ( 292 ) ( 3,868 )

Provision for credit losses ( 31 ) 769 ( 317 ) 1,323 64 6,435 ( 61 ) 8,182

Ending balance $ 1,540 $ 5,636 $ 2,125 $ 3,571 $ 266 $ 19,408 $ 451 $ 32,997

Allowance for loan losses 1,525 5,596 1,244 3,562 243 18,710 395 31,275

Allowance for unfunded credit commitments 15 40 881 9 23 698 56 1,722

Total ACL $ 1,540 $ 5,636 $ 2,125 $ 3,571 $ 266 $ 19,408 $ 451 $ 32,997

As of and for the Year Ended December 31, 2022

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Net recoveries (charge-offs) 4,262 ( 521 ) 21 3,762

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

Provision for credit losses ( 6,812 ) 3,236 ( 292 ) ( 3,868 )

Ending balance $ 12,560 $ 11,128 $ 542 $ 24,230

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Recoveries 3,935 1,168 23 5,126

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

Provision for loan and lease losses 12,420 4,197 191 16,808

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

Provision for credit losses ( 5,726 ) ( 121 ) 44 ( 5,803 )

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

The following tables provide information regarding the allowance for loan and lease losses and balances by type of allowance methodology:

Loans collectively evaluated for credit losses in the following tables include all performing loans at December 31, 2023 and 2022.

Loans individually evaluated for credit losses include all non-performing loans.

The following tables provide information regarding the allowance for credit losses and balances by type of allowance methodology:

December 31, 2023

Real Estate Commercial

Owner Occupied Non-Owner Occupied Construction Multi-Family 1-4 Family Commercial

Industrial Consumer

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(In Thousands)

Allowance for loan and lease losses:

Collectively evaluated for impairment $ 12,560 $ 9,478 $ 542 $ 22,580

Individually evaluated for impairment — 1,650 — 1,650

Allowance for credit losses:

Collectively evaluated for credit losses $ 1,525 $ 5,596 $ 1,244 $ 3,562 $ 221 $ 12,743 $ 395 $ 25,286

Individually evaluated for credit loss — — — — 22 5,967 — 5,989

Total $ 1,525 $ 5,596 $ 1,244 $ 3,562 $ 243 $ 18,710 $ 395 $ 31,275

Loans and lease receivables:

Collectively evaluated for impairment $ 1,541,920 $ 849,542 $ 47,938 2,439,400

Individually evaluated for impairment 30 3,785 — 3,815

Collectively evaluated for credit losses $ 256,479 $ 773,494 $ 193,080 $ 450,529 $ 26,267 $ 1,085,260 $ 44,312 $ 2,829,421

Individually evaluated for credit loss — — — — 22 20,575 — 20,597

Total $ 256,479 $ 773,494 $ 193,080 $ 450,529 $ 26,289 $ 1,105,835 $ 44,312 $ 2,850,018

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(In Thousands)

Allowance for loan and lease losses:

Collectively evaluated for impairment $ 15,110 $ 6,908 $ 813 $ 22,831

Individually evaluated for impairment — 1,505 — 1,505

Allowance for credit losses:

Collectively evaluated for credit losses $ 12,560 $ 9,478 $ 542 $ 22,580

Individually evaluated for credit loss — 1,650 — 1,650

Total $ 12,560 $ 11,128 $ 542 $ 24,230

Loans and lease receivables:

Collectively evaluated for impairment $ 1,453,941 $ 740,674 $ 39,741 $ 2,234,356

Individually evaluated for impairment 687 5,888 — 6,575

Collectively evaluated for credit losses $ 1,541,920 $ 849,542 $ 47,938 $ 2,439,400

Individually evaluated for credit loss 30 3,785 — 3,815

Total $ 1,541,950 $ 853,327 $ 47,938 $ 2,443,215

The Corporation’s net investment in direct financing leases consists of the following:

2022 December 31,

(In Thousands)

Minimum lease payments receivable $ 10,673 $ 13,641

Estimated unguaranteed residual values in leased property 2,776 3,564

Unearned lease and residual income ( 1,300 ) ( 1,462 )

Investment in commercial direct financing leases $ 12,149 $ 15,743

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

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

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

(In Thousands)

Maturities during year ended December 31,

Thereafter 514

Note 5 – Premises and Equipment

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Depreciation expense was $ 961,000 , $ 578,000 , and $ 585,000 for the years ended December 31, 2023, 2022, and 2021, respectively.

During 2022, the Corporation relocated its Southeastern Wisconsin office.

During 2023, the Corporation relocated its Kansas City metropolitan office.

This resulted in additional leasehold improvements and equipment of $ 1.3 million and $ 606,000 , respectively.

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

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

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

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

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

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

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

In June 2023, the Corporation relocated its Kansas City metropolitan area office.

This resulted in a $ 2.6 million right-of-use asset and $ 3.7 million lease liability, which was recorded in October 2022.

The Corporation received a $ 1.1 million tenant improvement allowance related to this lease, which was recognized as a lease incentive and deducted from the right-of-use asset.

The components of total lease expense were as follows:

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Note 7 – Goodwill and Other Intangible Assets

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

(including goodwill).

At December 31, 2023 and 2022, the Corporation had goodwill of $ 10.7 million, which was related to the acquisition of Alterra Bank in 2014.

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

The Corporation conducted its annual impairment test on July 1, 2023, utilizing a qualitative assessment, and concluded that it was more likely than not the estimated fair value of the reporting unit exceeded its carrying value, resulting in no impairment.

Other Intangible Assets

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

During the year ended December 31, 2022, the Corporation

recognized $ 1,000 of impairment expense.

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

During the years ended December 31, 2023 and 2022, the Corporation recognized $ 73,000 and $ 1,000 of impairment expense, respectively.

During the year ended December 31, 2021, the Corporation recognized an impairment recovery of $ 63,000 .

Note 8 – Other Assets

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Historic Rehabilitation Tax Credits

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

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

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

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

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

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

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

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

At December 31, 2023 and 2022, the net carrying value of the investments was $ 2.4 million and $ 2.2 million, respectively.

During 2023, the Corporation invested $ 285,000 in these partnerships.

During 2022 and 2021, the Corporation had no activity related to these investments.

Low-Income Housing Tax Credits

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

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

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

At December 31, 2023 and 2022, the net carrying value of the investments were $ 33.3 million and $ 13.5 million, respectively.

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

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

During 2023, 2022, and 2021, the Corporation invested $ 24.0 million, $ 11.5 million, and $ 3.0 million in these partnerships, respectively.

During 2023 and 2022, the Corporation recognized $ 5.3 million and $ 1.4 million in tax benefit, respectively, and $ 4.1 million and $ 1.0 million in amortization, respectively, related to these partnerships.

Amortization is included in income tax expense in the accompanying Consolidated Statements of Income.

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

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

Other Investments

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As of December 31, 2023, the Corporation has $ 5.3 million remaining of the original $ 15.0 million commitment to these partnerships.

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

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

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

The Corporation’s share of these partnerships’ income included in other non-interest income in the Consolidated Statements of Income for the years ended December 31, 2023, 2022, and 2021 was $ 4.8 million, $ 3.0 million, and $ 2.5 million, respectively.

The Corporation’s share of these partnerships’ losses included in other non-interest expense in the Consolidated Statements of Income for the years ended December 31, 2023, 2022 and 2021 was $ 101,000 , $ 0 , and $ 24,000 , respectively.

The Corporation’s equity investment in Dane Workforce Housing Fund LLC, a Wisconsin limited liability company focused on community development by providing affordable workforce housing units in Dane County, Wisconsin, totaled $ 916,000 and $ 653,000 as of December 31, 2023 and 2022, respectively.

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

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

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

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

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

The Corporation had a $ 63,000 commitment remaining of the original $ 1.0 million as of December 31, 2023.

The Corporation’s share of the investment fund’s income included in other non-interest income in the Consolidated Statements of Income for the years ended December 31, 2023, 2022, and 2021 was $ 13,000 , $ 8,000 , and $ 2,000 , respectively.

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

There were no losses related to this investment during the years ended December 31, 2023 and 2022.

The Corporation’s equity investment in BankTech Ventures, LP, a venture capital fund, focused on the community banking industry through strategic investments in growth-stage startups that directly support community banking needs, totaled $ 569,000 and $ 154,000 as of December 31, 2023 and 2022, respectively.

The Corporation had a $ 530,000 commitment remaining of the original $ 1.0 million as of December 31, 2023.

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

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

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

As of March 30, 2022, the Corporation surrendered its common shares for no gain or loss and exited the Trust II entity, which was subsequently dissolved.

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

The purpose of Trust II was to complete the sale of $ 10.0 million of 10.50 % fixed rate preferred securities.

Trust II, a wholly owned subsidiary of the Corporation, is not consolidated into the financial statements of the Corporation.

The investment in Trust II of $ 315,000 as of December 31, 2021 is included in accrued interest receivable and other assets.

The Corporation’s share of the investment fund’s income included in other non-interest income in the Consolidated Statements of Income for the year ended December 31, 2023 was $ 211,000 .

There was no income related to this investment during the years ended December 31, 2022 and 2021.

The Corporation’s share of this partnerships’ losses included in other non-interest expense in the Consolidated Statements of Income for the years ended December 31, 2023 and 2022 was $ 2,000 and $ 21,000 , respectively.

There were no losses related to this investment during the year ended December 31, 2021.

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

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Investment in limited partnerships 15,027 13,599

Investment in Trust II — 315

Prepaid expenses 4,269 3,821

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Wholesale deposits include $ 407.7 million and $ 50.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at December 31, 2023, compared to $ 187.2 million and $ 15.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts at December 31, 2022.

Deposits include $ 81.6 million and $ 7.9 million of certificates of deposit and wholesale deposits which are denominated in amounts greater than $250,000 at December 31, 2022 and 2021, respectively.

Note 10 – FHLB Advances, Other Borrowings and Junior Subordinated Notes

The Corporation has entered into derivative contracts hedging a portion of the certificates of deposit included in the 2024 maturities above.

As of December 31, 2023, the notional amount of derivatives designated as cash flow hedges totaled $ 306.3 million with a weighted average remaining maturity of 3.9 years and a weighted average rate of 3.95 %.

Certificates of deposit and wholesale deposits denominated in amounts greater than $250,000 were $ 120.2 million and $ 81.6 million at December 31, 2023 and 2022, respectively.

Note 10 – FHLB Advances, Other Borrowings and Subordinated Notes and Debentures

The composition of borrowed funds is shown below.

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Other borrowings 20 600 8.33 6,088 8,624 5.23

Subordinated notes payable 34,340 35,095 5.06 23,788 23,766 5.94

Subordinated notes and debentures 49,396 38,250 5.16 34,340 35,095 5.06

Junior subordinated notes (1)

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$ 330,916 $ 390,881 2.79 $ 456,808 $ 460,438 2.12

(1) Weighted average rate of junior subordinated notes reflects the accelerated amortization of subordinated debt issuance costs as a result of the early redemption of the junior subordinated notes during the first quarter of 2022.

(1) Weighted average rate of junior subordinated notes and debentures reflects the accelerated amortization of subordinated debt issuance costs as a result of the early redemption of the junior subordinated notes during the first quarter of 2022.

A summary of annual maturities of borrowings at December 31, 2023 is as follows:

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There were $ 281.5 million of term FHLB advances outstanding at December 31, 2023 with stated fixed interest rates ranging from 0.50 % to 5.58 % compared to $ 416.4 million of term FHLB advances outstanding at December 31, 2022 with stated fixed interest rates ranging from 0.31 % to 4.69 %.

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

The term FHLB advances outstanding at December 31, 2023 are due at various dates through May 2030.

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

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On February 20, 2024, the credit line was renewed for one additional year with pricing terms of 1-month term SOFR + 2.36 % and a maturity date of February 19, 2025.

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

The principal amount of the newly issued subordinated note was $ 20.0 million which qualified as Tier II capital.

The subordinated note bears a fixed interest rate of 3.50 % with a maturity date of March 15, 2032.

The subordinated note payable has certain financial performance covenants, with which the Corporation was in compliance as of December 31, 2022.

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

As of June 16, 2022, the $ 9.1 million subordinated notes

payable that bore a fixed interest rate of 6.00 % were redeemed, and the remaining unamortized debt issuance cost was accelerated due to the early redemption.

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

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

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

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

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

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

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

Securities”).

Trust II also issued common securities of $ 315,000 .

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

The Trust Preferred Securities were mandatorily redeemable upon the maturity of the junior subordinated notes on September 26, 2038.

As of March 30, 2022, the junior subordinated notes were redeemed and the remaining unamortized debt issuance cost was accelerated due to the early redemption.

As of December 31, 2021 the unamortized debt issuance cost included in junior subordinated notes on the Consolidated Balance Sheet was $ 293,000 .

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

The Corporation issued new subordinated debentures as of September 29, 2023.

The aggregate principal amount of the newly issued subordinated debentures was $ 15.0 million which qualified as Tier 2 capital.

The subordinated debentures bear a fixed interest rate of 8.0 % with a maturity date of September 29, 2033.

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

As of December 31, 2023, $ 573,000 of debt issuance costs remain in the subordinated note and debenture payable balance, of which $ 48,000 was related to the recently issued subordinated debentures.

As of December 31, 2023, the Corporation had other borrowings of $ 20,000 , 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.

The Corporation has entered into derivative contracts hedging a portion of the borrowings included in the 2024 maturities above.

As of December 31, 2023, the notional amount of derivatives designated as cash flow hedges totaled $ 96.4 million with a weighted average remaining maturity of 2.5 years and a weighted average rate of 1.78 %.

Note 11 – Preferred Stock

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The Corporation expects to pay dividends on the Series A Preferred Stock when and if declared by the Board, at a fixed rate of 7.0 % per annum, payable quarterly, in arrears, on March 15, June 15, September 15 and December 15 of each year up to, but excluding, March 15, 2027.

For each dividend period from and including March 15, 2027, dividends will be paid at a floating rate of Three-Month Term Secured Overnight Financing Rate (“SOFR”) plus a spread of 539 basis points per annum.

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

For each dividend period from and including March 15, 2027, dividends will be paid at a floating rate of Three-Month Term SOFR plus a spread of 539 basis points per annum.

During the years ended December 31, 2023 and 2022, the Board of Directors declared aggregate preferred stock dividends of $ 875,000 and $ 683,000 , respectively.

The Series A Preferred Stock is perpetual and has no stated maturity.

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The Corporation’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

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

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

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

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

Management intends, when appropriate under regulatory guidelines, to consult with the Federal Reserve Bank of Chicago and provide it with information on the Corporation’s then-current and prospective

earnings and capital position in advance of declaring any cash dividends.

Management intends, when appropriate under regulatory guidelines, to consult with the FRB of Chicago and provide it with information on the Corporation’s then-current and prospective earnings and capital position in advance of declaring any cash dividends.

As a Wisconsin corporation, the Corporation is subject to the limitations of the Wisconsin Business Corporation Law, which prohibit the Corporation from paying dividends if such payment would:

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Future dividend decisions by the Bank and the Corporation will continue to be subject to compliance with various legal, regulatory, and other restrictions as defined from time to time.

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

adjusted total assets.

These risk-based capital requirements presently address credit risk related to both recorded and off-balance sheet commitments and obligations.

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As of December 31, 2023

Actual Minimum Required for Capital Adequacy Purposes For Capital Adequacy Purposes Plus Capital Conservation Buffer Minimum Required to Be Well Capitalized Under Prompt Corrective Action

Minimum Required for Capital Adequacy Purposes For Capital Adequacy Purposes Plus Capital Conservation Buffer Minimum Required to Be Well Capitalized Under Prompt Corrective Action

Amount Ratio Amount Ratio Amount Ratio Amount Ratio

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First Business Bank 343,604 9.87 139,262 4.00 139,262 4.00 $ 174,077 5.00 %

(1) 2023 capital amounts include $1.0 million of additional stockholders’ equity as elected by the Corporation and permitted by federal banking regulatory agencies.

Risk-weighted assets were also adjusted accordingly.

As of December 31, 2022

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Net unrealized and accumulated losses on specific items

13,717 15,310

Disallowed servicing assets ( 614 ) ( 706 )

Disallowed goodwill and other intangibles ( 10,368 ) ( 10,401 )

Junior subordinated notes — 10,076

ASC 326 Phase-in 1,015 —

Tier 1 capital 293,338 264,843

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Note 14 – Share-Based Compensation

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

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

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

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

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

As of December 31, 2023, 328,332 shares were available for future grants under the Plan, as amended.

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

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While restricted stock is subject to forfeiture, RSA participants may exercise full voting rights and will receive all dividends and other distributions paid with respect to the restricted shares.

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

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

RSUs do not have voting rights.

RSUs granted prior to 2023 are provided dividend equivalents concurrent with dividends paid to shareholders while RSUs granted in 2023 and after will accrue dividend equivalents payable upon vesting.

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

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

The Corporation may issue a combination of performance-based restricted stock units (“PRSU”) and time-based restricted stock awards to its plan participants.

Vesting of the PRSU will be measured on the relative Total Shareholder Return (“TSR”) and relative Return on Equity (“ROE”) and will cliff-vest after a three-year measurement period based on the Corporation’s TSR performance and ROE performance compared to a broad peer group of over 100 banks.

The Corporation may also issue performance-based restricted stock units (“PRSU”).

Vesting of the PRSU will be measured on the relative Total Shareholder Return (“TSR”) and relative Return on Average Equity (“ROAE”) for issuances prior to 2023 or Return on Average Common Equity (“ROACE”) for issuances after 2022, and will cliff-vest after a three-year measurement period based on the Corporation’s TSR performance and ROAE or ROACE performance compared to a broad peer group of over 100 banks.

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

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

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

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

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

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

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Employee Stock Purchase Plan

During 2020, an employee stock purchase plan ("ESPP") was approved by the Corporation’s shareholders and is offered to all qualifying employees.

The Corporation is authorized to issue up to 250,000 shares of common stock under the ESPP.

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Under the ESPP, eligible employees may enroll in a three month offer period that begins January, April, July, and October of each year.

Employees may elect to purchase a limited number of shares on the Corporation's common stock at 90 % of the fair market value on the last day of the offering period.

Employees may elect to purchase a limited number of shares of the Corporation's common stock at 90 % of the fair market value on the last day of the offering period.

The ESPP is treated as a compensatory item for purposes of share-based compensation expense.

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

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

The Corporation made a matching contribution of 3 % to all eligible employees which totaled $ 1.2 million, $ 1.1 million, and $ 987,000 for the years ended December 31, 2023, 2022, and 2021, respectively.

Discretionary profit sharing contributions for substantially all employees of 5.9 %, or $ 2.1 million, 5.2 %, or $ 1.6 million, and 4.7 %, or $ 1.3 million, were made in 2023, 2022, and 2021, respectively.

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The expense associated with the deferred compensation plan for the years ended December 31, 2023, 2022, and 2021 was $ 493,000 , $ 382,000 , and $ 237,000 , respectively.

The present value of future payments under the remaining plan of $ 2.3 million and $ 1.9 million at December 31, 2022 and 2021, respectively, is included in accrued interest payable and other liabilities on the Consolidated Balance Sheets.

The deferred compensation liability under the remaining plan of $ 2.8 million and $ 2.3 million at December 31, 2023 and 2022, respectively, is included in accrued interest payable and other liabilities on the Consolidated Balance Sheets.

The Corporation owned life insurance policies on the life of the executive covered by the deferred compensation plan, which had cash surrender values and death benefits of approximately $ 3.1 million and $ 6.2 million, respectively, at December 31, 2023 and cash surrender values and death benefits of approximately $ 2.9 million and $ 6.1 million, respectively, at December 31, 2022.

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State 2,836 ( 42 ) ( 110 )

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

Deferred tax expense (benefit) 2,120 ( 775 ) 1,223

Total income tax expense $ 10,112 $ 11,386 $ 11,275

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Deferred tax assets:

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

Allowance for credit losses $ 8,730 $ 6,267

Deferred compensation 2,094 2,342

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Other 284 125

Total deferred tax assets before valuation allowance 17,613 15,066

Valuation allowance ( 3,339 ) —

Total deferred tax assets 14,274 15,066

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Deferred taxes allocated to other comprehensive income 548 ( 4,761 ) ( 181 )

Cumulative change in accounting principle

Deferred income tax benefit (expense) $ ( 2,120 ) $ 775 $ ( 1,223 )

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In making the determination that the realization of the deferred tax was more likely than not, the Corporation considered several factors including its recent earnings history, its expected earnings in the future, appropriate tax planning strategies, and expiration dates associated with operating loss carryforwards.

The Corporation had state net operating loss carryforwards of approximately $ 6.3 million and $ 7.0 million at December 31, 2022 and 2021, respectively, which can be used to offset future state taxable income.

The Corporation believes it will be able to fully utilize its established deferred tax assets and Wisconsin state net operating losses and therefore no valuation allowance has been established as of December 31, 2022 and 2021.

On July 5, 2023, the Wisconsin legislature enacted 2023 Wisconsin Act 19 (the “Act”).

The Act contains a provision that provides financial institutions with a state tax-exemption for interest, fees, and penalties earned on qualifying loans.

For the exemption to apply, the loan must be $5 million or less, for primarily a business or agricultural purpose, and made to borrowers residing or located in Wisconsin.

The exemption first applies to taxable years beginning after December 31, 2022 and applies to loans on the books as of January 1, 2023 and to new loans made after that meet the qualifications.

The Corporation currently projects that its Wisconsin state taxable income will be significantly reduced and/or eliminated in the future as a result of this provision.

The Corporation reversed $ 2.8 million in income tax expense which had been recorded during 2023 and recognized a date of enactment valuation allowance for Wisconsin deferred tax assets of $ 2.8 million, resulting in a one-time $ 2.8 million increase in tax expense.

Deferred tax assets are deferred tax consequences attributable to deductible temporary differences and carryforwards.

After the deferred tax asset has been measured using the applicable enacted tax rate and provisions of the enacted tax law, it is then necessary to assess the need for a valuation allowance.

A valuation allowance is needed when, based on the weight of the

available evidence, it is more likely than not that some portion of the deferred asset will not be realized.

The realization of deferred tax assets is dependent on the existence of taxable income of the appropriate character (e.g., ordinary or capital) within the carry-back and carry-forward periods available under tax law, which would consider future reversals of existing taxable temporary differences and available tax planning strategies.

As of December 31, 2023, the state deferred tax valuation allowance was $ 3.3 million, reducing our Wisconsin deferred tax assets to $ 0 .

The Corporation had state net operating loss carryforwards of approximately $ 16.4 million and $ 6.3 million at December 31, 2023 and 2022, respectively, which it does not expect to offset due to having no expected future state taxable income.

The Corporation fully utilized its established deferred tax assets and Wisconsin state net operating losses and therefore no valuation allowance established as of December 31, 2022.

The provision for income taxes differs from that computed at the federal statutory corporate tax rate as follows:

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Tax-exempt security and loan income, net of TEFRA adjustments ( 856 ) ( 704 ) ( 710 )

Change in valuation allowance 3,349 — —

Bank-owned life insurance ( 313 ) ( 468 ) ( 297 )

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The Corporation pays fixed rates and receives floating rates based upon designated benchmark interest rates used on the swaps with dealer counterparties.

Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and are reported on the unaudited Consolidated Balance Sheet.

Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and are reported on the Consolidated Balance Sheet.

The gross amount of dealer counterparty swaps, without regard to the enforceable master netting agreement, was a gross derivative asset of $ 51.1 million and gross derivative liability of $ 7.9 million.

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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.

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

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

A pre-tax unrealized gain of $ 8.5 million and $ 3.6 million was recognized in other comprehensive income for the year ended December 31, 2022 and 2021, while a pre-tax unrealized loss of $ 3.0 million was recognized in other comprehensive income for the year ended December 31, 2020, and there were no ineffective portions of these hedges.

The instruments are designated as cash flow hedges as the receipt of floating rate interest from the counterparty is used to manage interest rate risk related to cash outflows attributable to future wholesale deposit or short-term FHLB advance borrowings.

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 was recognized in other comprehensive income for the years ended December 31, 2022 and 2021, respectively, and there were no ineffective portions of these hedges.

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

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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.

Pre-tax unrealized gains of $ 22,000 and $ 602,000 were recognized in other comprehensive income for the years ended December 31, 2023 and 2022, and there were no ineffective portions of these hedges.

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

As of December 31, 2023

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Derivatives not designated as hedging instruments

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

Interest rate swap agreements on loans with commercial loan clients 25 $ 249,454 6.33 $ 7,904

Interest rate swap agreements on loans with third-party counter parties 106 939,156 6.06 43,234

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Interest rate swap related to AFS securities 11 $ 12,500 8.28 $ 624

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

Interest rate swap related to wholesale funding 9 96,400 2.47 3,835

Included in Derivative liabilities

Derivatives not designated as hedging instruments

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

Interest rate swap agreements on loans with commercial loan clients 81 $ 689,702 5.96 $ 51,138

Derivatives designated as hedging instruments

Interest rate swap related to wholesale funding 29 $ 306,255 3.89 $ 811

As of December 31, 2022

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Derivatives not designated as hedging instruments

Interest rate swap agreements on loans with commercial loan customers 41 $ 411,913 8.18 $ 26,343

Included in Derivative liabilities

Derivatives not designated as hedging instruments

Interest rate swap agreements on loans with commercial loan customers 39 $ 228,676 8.70 $ 6,595

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

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

Derivatives designated as hedging instruments

Interest rate swap related to FHLB borrowings 10 $ 106,000 3.17 $ 1,940

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

Interest rate swap related to wholesale funding 11 116,400 2.88 6,560

Included in Derivative liabilities

Derivatives not designated as hedging instruments

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

Note 18 – Commitments and Contingencies

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Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a client to a third party.

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

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

in extending loan facilities to clients.

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

inventory, and commercial properties.

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

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

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Balance at the beginning of the period $ 441 $ 635

SBA recourse benefit ( 188 ) ( 76 )

SBA recourse provision (benefit) 775 ( 188 )

Charge-offs, net ( 261 ) ( 6 )

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

Other securities — 2,228 — 2,228

Interest rate swaps — 68,581 — 68,581

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(In Thousands)

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

Collateral-dependent loans $ — $ — $ 4,917 $ 4,917

Repossessed assets — — 247 247

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Loan servicing rights — — 1,491 1,491

Impaired loans were written down to the fair value of their underlying collateral less costs to sell of $ 1.0 million at December 31, 2022 and 2021 through the establishment of specific reserves or by recording charge-offs when the carrying value exceeded the fair value of the underlying collateral of impaired loans.

Collateral-dependent loans were written down to the fair value of their underlying collateral less costs to sell of $ 4.9 million and $ 1.0 million at December 31, 2023 and 2022, respectively, through the establishment of specific reserves or by recording charge-offs when the carrying value exceeded the fair value of the underlying collateral of impaired loans.

Valuation techniques consistent with the market approach, income approach, or cost approach were used to measure fair value.

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The majority of the impaired loans are considered collateral dependent loans or are supported by an SBA guaranty.

Repossessed assets, upon initial recognition, are remeasured and reported at fair value through a charge-off to the allowance for loan and lease losses, if deemed necessary, based upon the fair value of the repossessed asset.

The fair value of a repossessed asset, upon initial recognition, is estimated using a market approach or based on observable market data, typically a current appraisal, or based upon assumptions specific to the individual property or equipment, such as management applied discounts used to further reduce values to a net realizable value when observable inputs become stale.

Repossessed assets, upon initial recognition, are remeasured and reported at fair value through a charge-off to the allowance for credit losses, if deemed necessary, based upon the fair value of the repossessed asset.

The fair value of a repossessed asset, upon initial recognition, is estimated using a market approach or based on observable market data, such as a current appraisal, recent sale price of similar assets, or based upon assumptions specific to the individual property or equipment, such as management applied discounts used to further reduce values to a net realizable value when observable inputs become stale.

Loan servicing rights represent the asset retained upon sale of the guaranteed portion of certain SBA loans.

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(1) constant prepayment rate (“CPR”) assumptions based on the SBA sold pools historical CPR as quoted in Bloomberg and (2) a discount rate.

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

Due to the nature of the valuation inputs, loan servicing rights are classified in Level 3 of the fair value hierarchy.

Fair Value of Financial Instruments

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

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

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

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Loans Held for Sale:

Loans held for sale, which consist of the guaranteed portions of SBA loans, are carried at the lower of cost or estimated fair value.

Loans held for sale, which consist of the guaranteed portions of SBA 7(a) loans, are carried at the lower of cost or estimated fair value.

The estimated fair value is based on what secondary markets are currently offering for portfolios with similar characteristics.

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This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.

The Corporation incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the

respective counterparty’s nonperformance risk in the fair value measurements.

The Corporation incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.

In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Corporation considers the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

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Share-based compensation 2,977 2,584 2,513

Excess tax (benefit) expense from share-based compensation ( 91 ) ( 27 ) 8

Payments on operating lease liabilities — — ( 560 )

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

Excess tax benefit from share-based compensation ( 91 ) ( 91 ) ( 27 )

Net (decrease) increase in other liabilities

( 1,854 ) 2,592 ( 2,090 )

Other, net 1,207 ( 538 ) 3,413

Net cash used in operating activities 1,869 ( 543 ) ( 3,000 )

Net cash (used in) provided by operating activities

( 1,960 ) 1,869 ( 543 )

Investing activities

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Proceeds from redemption of Trust II stock — 315 —

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

Capital contributions to subsidiaries ( 15,000 ) — —

Net cash (used in) provided by investing activities

( 2,900 ) 2,323 8,534

Financing activities

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

Net increase (decreases) in long-term borrowed funds

54 ( 357 ) 55

Proceeds from issuance of subordinated notes payable 15,000 20,000 —

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Net proceeds from purchases of ESPP shares 128 134 160

Net cash used in financing activities ( 1,394 ) ( 10,928 ) ( 7,203 )

Net cash provided by (used in) financing activities

3,758 ( 1,394 ) ( 10,928 )

Net (decrease) increase in cash and due from banks ( 1,102 ) 2,798 ( 2,937 )

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Net interest income 29,540 28,596 27,747 26,705 27,452 25,884 23,660 21,426

Provision for loan and lease losses

702 12 ( 3,727 ) ( 855 ) ( 508 ) ( 2,269 ) ( 958 ) ( 2,068 )

Provision for credit losses 2,573 1,817 2,231 1,561 702 12 ( 3,727 ) ( 855 )

Non-interest income 7,094 8,430 7,374 8,410 6,973 8,197 6,872 7,386

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Net income 9,770 9,941 8,337 8,979 10,156 10,826 11,204 8,672

Preferred stock dividend 219 218 219 219 219 219 245 —

Income available to common shareholders $ 9,551 $ 9,723 $ 8,118 $ 8,760 $ 9,937 $ 10,607 $ 10,959 $ 8,672

Per common share:

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(2013) issued by COSO.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Corporation has changed its method of accounting for credit losses effective January 1, 2023 due to the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification No.

326, Financial Instruments – Credit Losses (“ASC 326”).

The Corporation adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles.

Basis for Opinions

The Corporation management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting.

The Corporation’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Corporation’s financial statements and an opinion on the Corporation’s internal control over financial reporting based on our audits.

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The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance and Provision for Loan and Lease Losses – Qualitative Factors

As described in Notes 1- Nature of Operations and Summary of Significant Accounting Policies, and 4- Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses to the consolidated financial statements, the Corporation’s allowance for loan and lease losses is an accounting estimate that requires significant management judgment in the evaluation of the quality of the loan and lease portfolio and the application of qualitative factors.

The allowance for loan and lease losses is composed of loans collectively and individually evaluated for impairment.

The specific allowance on loans individually evaluated for impairment relates to non-accrual and restructured loans and leases.

The portion of the allowance for the collectively evaluated loans is reliant upon historical experience, as well as quantitative and qualitative factors.

The calculation of the allowance for loan losses involves significant estimates and subjective assumptions, which require a high degree of judgment.

The collectively evaluated component of the allowance for loan and lease losses utilizes a historical loss rate calculation for each loan and lease category with similar risk characteristics.

The average loss rates are adjusted for qualitative factors and applied to the end of period loan and lease portfolio balances to estimate probable incurred losses in the loan and lease portfolio.

The qualitative factors and measurements used to quantify the risks within each of these categories are subjectively selected by management, using certain objective measurements period over period.

The current period measurements are evaluated and assigned a factor commensurate with the current level of risk within each loan and lease category.

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

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

We identified auditing the estimate of the aggregate effect of the qualitative factors as a critical audit matter as it involved especially subjective auditor judgment.

Auditing management’s determination of qualitative factors involved especially subjective auditor judgment because management’s estimate relies on an inherently subjective analysis to determine the quantitative impact the factors have on the allowance.

Management’s analysis of these factors requires significant judgment.

Allowance and Provision for Credit Losses – Qualitative Factors

The Corporation adopted ASC 326 (“CECL”) as of January 1, 2023 as described in Note 1 of the consolidated financial statements using the modified retrospective method.

ASC 326 requires the Corporation’s loan portfolio, measured at amortized cost, to be presented at the net amount expected to be collected.

The estimates of expected credit losses on loans are based on relevant information about past events, current conditions, and reasonable and supportable forecasts regarding the collectability of the remaining cash flows over the contractual term of the loans.

The Corporation utilized a discounted cash flow model to estimate the quantitative component of the allowance for credit losses for loans using key inputs and assumptions such as probability of default, loss given default, prepayment and curtailment rates, and forecast model.

The quantitative model was adjusted with qualitative factors, including but not limited to:

The determination of qualitative factors involves significant management judgment and the use of subjective assumptions.

We identified auditing the qualitative factors as a critical audit matter because of the high degree of auditor judgment and auditor effort required to evaluate management's judgments in their determination of the qualitative factors.

The primary procedures we performed to address this critical audit matter included:

Testing the effectiveness of controls over the evaluation of the items used to estimate the qualitative factors, including controls addressing:

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

• Management’s judgments related to the assessed level of risk and the qualitative factor used to adjust the average loss rates;

• The mathematical accuracy of the dollar amount applied to the qualitative factor;

• Management’s review of trends and the movement within each qualitative factor and the overall allowance balance.

Testing the effectiveness of controls over the evaluation of the qualitative factors, including controls addressing:

The reliability and relevance of data used as the basis for the adjustments relating to qualitative factors;

The reasonableness of management’s judgments and assumptions related to the assessed level of risk and the ending allocation of the qualitative factors;

The mathematical accuracy of the dollar amount applied to the qualitative factors;

Substantively testing management’s process, including evaluating their judgments and assumptions, for developing the qualitative factors, which included:

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

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

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

• Verifying the mathematical accuracy of the adjustment factors for the qualitative component and the dollar amount of the reserve derived from the qualitative factor assessment;

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

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

Evaluation of the mathematical accuracy of the adjustment factors for the qualitative component and the dollar amount of the reserve derived from the qualitative factor assessment;

Tracing the allowance allocation from the qualitative factor analysis to the overall allowance calculation.

/s/ Crowe LLP

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

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

Oak Brook, Illinois

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data