FIRST BUSINESS FINANCIAL SERVICES, INC. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF FIRST BUSINESS FINANCIAL SERVICES Consolidated Financial Statements Page No. Consolidated Balance Sheets as of December 31, 202 3 and 20 2 2 64 Consolidated Statements of Income for the Years Ended December 31, 202 3 , 202 2 , and 202 1 65 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 202 3 , 202 2 , and 20 21 66 Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 202 3 , 202 2 , and 202 1 67 Consolidated Statements of Cash Flows for the Years Ended December 31, 202 3 , 20 22 , and 202 1 68 Notes to Consolidated Financial Statements 70 Report of Independent Registered Public Accounting Firm (PCAOB ID 173 ) 123 63 Table of Contents First Business Financial Services, Inc. Consolidated Balance Sheets December 31, 2023 December 31, 2022 (In Thousands, Except Share Data) Assets Cash and due from banks $ 32,348 $ 25,811 Short-term investments 107,162 76,871 Cash and cash equivalents 139,510 102,682 Securities available-for-sale, at fair value 297,006 212,024 Securities held-to-maturity, at amortized cost 8,503 12,635 Loans held for sale 4,589 2,632 Loans and leases receivable, net of allowance for credit losses of $ 31,275 and $ 24,230 , respectively 2,818,986 2,418,836 Premises and equipment, net 6,190 4,340 Repossessed assets 247 95 Right-of-use assets, net 6,559 7,690 Bank-owned life insurance 55,536 54,018 Federal Home Loan Bank stock, at cost 12,042 17,812 Goodwill and other intangible assets 12,023 12,159 Derivatives 55,597 68,581 Accrued interest receivable and other assets 91,058 63,107 Total assets $ 3,507,846 $ 2,976,611 Liabilities and Stockholders’ Equity Deposits $ 2,796,779 $ 2,168,206 Federal Home Loan Bank advances and other borrowings 330,916 456,808 Lease liabilities 8,954 10,175 Derivatives 51,949 61,419 Accrued interest payable and other liabilities 29,660 19,363 Total liabilities 3,218,258 2,715,971 Stockholders’ equity: Preferred stock, $ 0.01 par value, 2,500,000 shares authorized, 12,500 shares of 7 % non-cumulative perpetual preferred stock, Series A, outstanding at 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 95 94 Additional paid-in capital 90,616 87,512 Retained earnings 230,728 203,507 Accumulated other comprehensive loss ( 13,717 ) ( 15,310 ) Treasury stock, 1,103,685 and 1,008,993 shares at December 31, 2023 and 2022, respectively, at cost ( 30,126 ) ( 27,155 ) Total stockholders’ equity 289,588 260,640 Total liabilities and stockholders’ equity $ 3,507,846 $ 2,976,611 See accompanying Notes to Consolidated Financial Statements. 64 Table of Contents First Business Financial Services, Inc. Consolidated Statements of Income For the Year Ended December 31, 2023 2022 2021 (In Thousands, Except Share Data) Interest income Loans and leases $ 182,650 $ 115,368 $ 91,844 Securities 8,203 4,472 3,410 Short-term investments 4,075 1,531 741 Total interest income 194,928 121,371 95,995 Interest expense Deposits 71,418 13,178 3,553 Federal Home Loan Bank advances and other borrowings 10,922 9,267 6,667 Junior subordinated notes — 504 1,113 Total interest expense 82,340 22,949 11,333 Net interest income 112,588 98,422 84,662 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 Private wealth management service fees 11,425 10,881 10,784 Gain on sale of Small Business Administration loans 2,055 2,537 4,044 Service charges on deposits 3,131 3,849 3,837 Loan fees 3,363 3,010 2,506 Bank-owned life insurance income 1,494 2,227 1,413 Net (loss) gain on sale of securities ( 45 ) — 29 Swap fees 2,964 1,793 1,368 Other non-interest income 6,921 5,131 4,119 Total non-interest income 31,308 29,428 28,100 Non-interest expense Compensation 61,059 57,742 51,710 Occupancy 2,381 2,358 2,180 Professional fees 5,325 4,881 3,736 Data processing 3,826 3,197 3,087 Marketing 2,889 2,354 2,022 Equipment 1,340 1,091 990 Computer software 4,985 4,416 4,260 FDIC insurance 2,238 1,042 1,143 Other non-interest expense 4,532 2,393 2,407 Total non-interest expense 88,575 79,474 71,535 Income before income tax expense 47,139 52,244 47,030 Income tax expense 10,112 11,386 11,275 Net income $ 37,027 $ 40,858 $ 35,755 Preferred stock dividend 875 683 — Income available to common shareholders $ 36,152 $ 40,175 $ 35,755 Earnings per common share: Basic $ 4.33 $ 4.75 $ 4.17 Diluted 4.33 4.75 4.17 Dividends declared per share 0.91 0.79 0.72 See accompanying Notes to Consolidated Financial Statements. 65 Table of Contents First Business Financial Services, Inc. Consolidated Statements of Comprehensive Income For the Year Ended December 31, 2023 2022 2021 (In Thousands) Net income $ 37,027 $ 40,858 $ 35,755 Other comprehensive income (loss) Securities available-for-sale: 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: Amortization of net unrealized losses transferred from available-for-sale 4 14 26 Interest rate swaps: 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 $ 38,620 $ 27,005 $ 35,231 See accompanying Notes to Consolidated Financial Statements. 66 Table of Contents First Business Financial Services, Inc. Consolidated Statements of Changes in Stockholders’ Equity Common Shares Outstanding Preferred Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total (In Thousands, Except Share Data) Balance at January 1, 2021 8,566,960 $ — $ 92 $ 83,125 $ 140,431 $ ( 933 ) $ ( 16,553 ) $ 206,162 Net income — — — — 35,755 — — 35,755 Other comprehensive loss — — — — — ( 524 ) — ( 524 ) Share-based compensation - restricted shares and employee stock purchase plan 85,370 — 1 2,512 — — — 2,513 Issuance of common stock under the employee stock purchase plan 6,531 — — 160 — — — 160 Cash dividends ($ 0.72 per share) — — — — ( 6,166 ) — — ( 6,166 ) Treasury stock purchased ( 201,297 ) — — — — — ( 5,478 ) ( 5,478 ) Balance at December 31, 2021 8,457,564 — 93 85,797 170,020 ( 1,457 ) ( 22,031 ) 232,422 Net income — — — — 40,858 — — 40,858 Other comprehensive loss — — — — — ( 13,853 ) — ( 13,853 ) Issuance of preferred stock, net of issuance costs — 11,992 — — — — — 11,992 Share-based compensation - restricted shares and employee stock purchase plan 75,564 — 1 2,583 — — — 2,584 Issuance of common stock under the employee stock purchase plan 4,535 — — 134 — — — 134 Treasury stock re-issued — — — ( 1,002 ) — — 1,002 — Preferred stock dividends — — — — ( 683 ) — — ( 683 ) Cash dividends ($ 0.79 per share) — — — — ( 6,688 ) — — ( 6,688 ) Treasury stock purchased ( 175,578 ) — — — — — ( 6,126 ) ( 6,126 ) Balance at December 31, 2022 8,362,085 11,992 94 87,512 203,507 ( 15,310 ) ( 27,155 ) 260,640 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 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 Preferred stock dividends — — — — ( 875 ) — — ( 875 ) Cash dividends ($ 0.91 per share) — — — — ( 7,578 ) — — ( 7,578 ) Treasury stock purchased ( 94,692 ) — — — — ( 2,971 ) ( 2,971 ) Balance at December 31, 2023 8,314,778 $ 11,992 $ 95 $ 90,616 $ 230,728 $ ( 13,717 ) $ ( 30,126 ) $ 289,588 See accompanying Notes to Consolidated Financial Statements. 67 Table of Contents First Business Financial Services, Inc. Consolidated Statements of Cash Flows For the Year Ended December 31, 2023 2022 2021 (In Thousands) Operating activities Net income $ 37,027 $ 40,858 $ 35,755 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes, net 2,120 ( 775 ) 1,223 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 Share-based compensation 2,977 2,584 2,513 Net loss on disposal of fixed assets 73 — 78 Amortization of tax credit investments 4,053 1,035 — 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 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 (gain) on repossessed assets 13 ( 429 ) 15 Return on investment in limited partnerships 4,922 721 371 Excess tax benefit from share-based compensation 194 264 48 Net payments on operating lease liabilities ( 1,425 ) ( 1,470 ) ( 1,431 ) Net increase in accrued interest receivable and other assets ( 21,497 ) ( 7,728 ) ( 6,774 ) Net increase in accrued interest payable and other liabilities 15,468 5,026 2,731 Net cash provided by operating activities 52,292 38,645 35,992 Investing activities Proceeds from maturities, redemptions and paydowns of available-for-sale securities 22,114 40,835 51,166 Proceeds from maturities, redemptions and paydowns of held-to-maturity securities 4,115 7,080 6,586 Proceeds from sale of available-for-sale securities 5,085 — 14,955 Purchases of available-for-sale securities ( 106,967 ) ( 75,740 ) ( 93,019 ) Proceeds from sale of repossessed assets 25 71 — Net increase in loans and leases ( 408,618 ) ( 199,467 ) ( 86,660 ) Investments in limited partnerships ( 1,413 ) ( 1,508 ) ( 1,059 ) Returns of investments in limited partnerships 7 17 32 Investment in tax credit investments ( 24,160 ) ( 11,454 ) ( 2,964 ) Distribution from tax credit investments 101 474 57 Investment in Federal Home Loan Bank and Federal Reserve Bank Stock ( 32,069 ) ( 45,660 ) ( 7,439 ) Proceeds from the sale of Federal Home Loan Bank Stock 37,839 41,184 7,680 Purchases of leasehold improvements and equipment, net ( 2,884 ) ( 3,223 ) ( 391 ) Proceeds from sale of leasehold improvements and equipment, net — — 44 Premium payment on bank owned life insurance policies ( 24 ) ( 50 ) — Proceeds from bank owned life insurance claim — 1,859 — Proceeds from redemption of Trust II stock — 315 — Net cash used in investing activities ( 506,849 ) ( 245,267 ) ( 111,012 ) Financing activities Net increase in deposits 628,573 210,283 102,407 Repayment of Federal Home Loan Bank advances ( 1,698,730 ) ( 2,374,849 ) ( 814,000 ) Proceeds from Federal Home Loan Bank advances 1,563,851 2,422,429 788,300 Proceeds from issuance of subordinated notes payable 15,000 20,000 — Repayment of subordinated notes payable — ( 9,090 ) — Repayment of junior subordinated debt — ( 10,076 ) — Net (decrease) increase in long-term borrowed funds ( 6,013 ) ( 5,132 ) 9,998 Cash dividends paid ( 7,578 ) ( 6,688 ) ( 6,166 ) 68 Table of Contents For the Year Ended December 31, 2023 2022 2021 (In Thousands) Preferred stock dividends paid ( 875 ) ( 683 ) — Proceeds from issuance of common stock under ESPP 128 134 160 Proceeds from issuance of preferred stock — 11,992 — Purchase of treasury stock ( 2,971 ) ( 6,126 ) ( 5,478 ) Net cash provided by financing activities 491,385 252,194 75,221 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 Cash and cash equivalents at the end of the period $ 139,510 $ 102,682 $ 57,110 Supplementary cash flow information Cash paid during the period for: Interest paid on deposits and borrowings $ 75,533 $ 20,110 $ 13,206 Net income taxes paid 7,456 8,038 14,519 Non-cash investing and financing activities: Transfer of loans to repossessed assets 190 50 146 Lease liability in exchange for right-of-use-asset — 6,265 316 See accompanying Notes to Consolidated Financial Statements. 69 Table of Contents First Business Financial Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 – Nature of Operations and Summary of Significant Accounting Policies Nature of Operations. The accounting and reporting practices of First Business Financial Services, Inc. (“FBFS” or the “Corporation”), through our wholly-owned subsidiary, First Business Bank (“FBB” or the “Bank”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). FBB operates as a commercial banking institution primarily in Wisconsin and the greater Kansas City metropolitan area. The Bank provides a full range of financial services to businesses, business owners, executives, professionals, and high net worth individuals. FBB also offers bank consulting services to community financial institutions. The Bank is subject to competition from other financial institutions and service providers, and is also subject to state and federal regulations. As of December 31, 2023, FBB had the following wholly-owned subsidiaries: First Business Specialty Finance, LLC (“FBSF”), First Madison Investment Corp. (“FMIC”), ABKC Real Estate, LLC (“ABKC”), FBB Real Estate 2, LLC (“FBB RE 2”), Mitchell Street Apartments Investment, LLC (“Mitchell Street”), and FBB Tax Credit Investment LLC (“FBB Tax Credit”). Basis of Presentation. The Consolidated Financial Statements include the accounts of the Corporation and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 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 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. No significant subsequent events have occurred through this date requiring adjustment to the financial statements or disclosures. Cash and Cash Equivalents. The Corporation considers federal funds sold, interest-bearing deposits, and short-term investments that have original maturities of three months or less to be cash equivalents. Securities. The Corporation classifies its investment and mortgage-related securities as available-for-sale, held-to-maturity, and trading. Debt securities that the Corporation has the positive intent and ability to hold to maturity are classified as held-to-maturity and are stated at amortized cost. Debt securities bought expressly for the purpose of selling in the near term are classified as trading securities and are measured at fair value with unrealized gains and losses reported in earnings. Debt securities not classified as held-to-maturity or as trading are classified as available-for-sale. Available-for-sale securities are measured at fair value with unrealized gains and losses reported as a separate component of stockholders’ equity, net of tax. Realized gains and losses 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. The Corporation did not hold any trading securities at December 31, 2023 or 2022. 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. 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. 70 Table of Contents 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. The guaranteed portions of SBA loans which are originated and intended for sale in the secondary market are classified as held for sale. These loans are carried at the lower of cost or fair value in the aggregate. Unrealized losses on such loans are recognized through a valuation allowance by a charge to other non-interest income. Gains and losses on the sale of loans are also included in other non-interest income. As assets specifically originated for sale, the origination of, disposition of, and gain/loss on these loans are classified as operating activities in the Consolidated Statement of Cash Flows. Fees received from the borrower and direct costs to originate the loans are deferred and recognized as part of the gain or loss on sale. There 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 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 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 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. Transfers of assets, including but not limited to the guaranteed portions of SBA loans and participation interests in other, non-SBA originated loans, that upon completion of the transfer satisfy the conditions to be reported as a sale, including legal isolation, are derecognized from the Consolidated Financial Statements. Transfers of assets that upon completion of the transfer do not meet the conditions of a sale are recorded on a gross basis with a secured borrowing identified to reflect the amount of the transferred interest. Loan and lease origination fees as well as certain direct origination costs are deferred and amortized as an adjustment to loan yields over the stated term of the loan. 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. 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. ACL - Loans. 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. 71 Table of Contents 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. 72 Table of Contents 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: 73 Table of Contents • 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 3 to 10 years. Maintenance and repair costs are charged to expense as incurred. Improvements which extend the useful life are capitalized and depreciated over the remaining useful life of the assets. Repossessed Assets. Property acquired by repossession, foreclosure, or by deed in lieu of foreclosure is recorded at the fair value of the underlying property, less costs to sell. This fair value becomes the new cost basis for the repossessed asset. Any write-down in the carrying value of a loan or lease at the time of acquisition is charged to the allowance for 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. 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. Leases. At contract inception, the Corporation determines whether the arrangement is or contains a lease and determines the lease classificatio n. The lease term is determined based on the non-cancellable term of the lease adjusted to the extent optional renewal terms and termination rights are reasonably certain. Lease expense is recognized evenly over the lease term. Variable lease payments are recognized as period costs. The present value of remaining lease payments is recognized as a liability on the balance sheet with a corresponding right-of-use asset adjusted for prepaid or accrued lease payments. The Corporation uses t he Federal Home Loan Bank fixed advance rate as of the lease inception date that most closely resembles the remaining term of the lease as the incremental borrowing rate, unless the interest rate implicit in the lease contract is readily determinable. The Corporation has elected to exclude short-term leases as well as all non-lease items, such as common area maintenance, from being included in the lease liability on the Consolidated Balance Sheets. Bank-Owned Life Insurance. Bank-owned life insurance (“BOLI”) is reported at the amount that would be realized if the life insurance policies were surrendered on the balance sheet date. BOLI policies owned by the Bank are purchased with the objective to fund certain future employee benefit costs with the death benefit proceeds. The cash surrender value of such policies is recorded in bank-owned life insurance on the Consolidated Balance Sheets and changes in the value are recorded in non-interest income. The total death benefit of all BOLI policies was $ 133.7 million and $ 133.8 million as of December 31, 2023 and 2022, respectively. There are no restrictions on the use of BOLI proceeds nor are there any contractual restrictions on the ability to surrender the policy. As of December 31, 2023 and 2022, there were no borrowings against the cash surrender value of the BOLI policies. 74 Table of Contents Federal Home Loan Bank Stock. The Bank is required to maintain Federal Home Loan Bank (“FHLB”) stock as members of the FHLB, and in amounts as required by the FHLB. This equity security is “restricted” in that it can only be sold back to the FHLB or another member institution at par. Therefore, it is less liquid than other marketable equity securities and the fair value is equal to cost. The Corporation periodically evaluates its holding in FHLB stock for impairment. Should the stock be impaired, it would be written down to its estimated fair value. There were no impairments recorded on FHLB stock during the years ended December 31, 2023 or 2022. Goodwill and Other Intangible Assets. Goodwill and other intangible assets consist primarily of goodwill and loan servicing rights. Core deposit intangibles have estimated finite lives and are amortized on an accelerated basis to expense over a period of seven years. Loan servicing rights, when originated, are initially recorded at fair value and subsequently amortized in proportion to and over the period of estimated net servicing income. The Corporation reviews other intangible assets for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, in which case an impairment charge would be recorded. Goodwill is not amortized but is subject to impairment tests on at least an annual basis, and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount (including goodwill). An initial qualitative evaluation is made to assess the likelihood of impairment and determine whether further quantitative testing to calculate the fair value is necessary. When the qualitative evaluation indicates that impairment is more likely than not, quantitative testing is required whereby the fair value of each reporting unit is calculated and compared to the recorded book value. If the calculated fair value of the reporting unit exceeds its carrying value, goodwill is not considered impaired. If the carrying value of a reporting unit exceeds its calculated fair value, an impairment charge is recognized in earnings in an amount equal to the difference. Other Investments. The Corporation owns certain equity investments in other corporate organizations which are not consolidated because the Corporation does not own more than a 50 % interest or exercise control over the organization. Investments in corporations representing at least a 20 % interest are generally accounted for using the equity method and investments in corporations representing less than 20 % interest are generally accounted for at cost. Investments in limited partnerships representing from at least a 3 % up to a 50 % interest in the entity are generally accounted for using the equity method and investments in limited partnerships representing less than 3 % are generally accounted for at cost. All of these investments are periodically evaluated for impairment. Should an investment be impaired, it would be written down to its estimated fair value. The equity investments are reported in other assets and the income and expense from such investments, if any, is reported in non-interest income and non-interest expense. Derivative Instruments. The Corporation uses derivative instruments to protect against the risk of adverse price or interest rate movements on the value of certain assets, liabilities, future cash flows, and economic hedges for written client derivative contracts. Derivative instruments represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash to the other party based on a notional amount and an underlying variable, as specified in the contract, and may be subject to master netting agreements. Market risk is the risk of loss arising from an adverse change in interest rates, exchange rates, or equity prices. The Corporation’s primary market risk is interest rate risk. Instruments designed to manage interest rate risk include interest rate swaps, interest rate options, and interest rate caps and floors with indices that relate to the pricing of specific assets and liabilities. The nature and volume of the derivative instruments used to manage interest rate risk depend on the level and type of assets and liabilities on the balance sheet and the risk management strategies for the current and anticipated rate environments. Counterparty risk with respect to derivative instruments occurs when a counterparty to a derivative contract with an unrealized gain fails to perform according to the terms of the agreement. Counterparty risk is managed by limiting the counterparties to highly rated dealers, requiring collateral postings when values are in deficit positions, applying uniform credit standards to all activities with credit risk, and monitoring the size and the maturity structure of the derivative portfolio. All derivative instruments are to be carried at fair value on the Consolidated Balance Sheets. The accounting for the gain or loss due to changes in the fair value of a derivative instrument depends on whether the derivative instrument qualifies as a hedge. If the derivative instrument does not qualify as a hedge, the gains or losses are reported in earnings when they occur. However, if the derivative instrument qualifies as a hedge, the accounting varies based on the type of risk being hedged. The Corporation utilizes interest rate swaps offered directly to qualified commercial borrowers, which do not qualify for hedge accounting, and therefore, all changes in fair value and gains and losses on these instruments are reported in earnings as they occur. The effects of netting arrangements are disclosed within the Notes of the Consolidated Financial Statements. The Corporation offers interest rate swap products directly to qualified commercial borrowers. The Corporation economically hedges client derivative transactions by entering into offsetting interest rate swap contracts executed with a third party. Derivative transactions executed as part of this program are not considered hedging instruments and are marked-to-market through earnings each period. The derivative contracts have mirror-image terms, which results in the positions’ changes in fair value offsetting through earnings each period. The credit risk and risk of non-performance embedded in the fair value calculations is different between the dealer 75 Table of Contents counterparties and the commercial borrowers which may result in a difference in the changes in the fair value of the mirror-image swaps. The Corporation incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the counterparty’s risk in the fair value measurements. When evaluating the fair value of its derivative contracts for the effects of non-performance and credit risk, the Corporation considers the impact of netting and any applicable credit enhancements such as collateral postings, thresholds and guarantees. The Corporation also enters into interest rate swaps to manage interest rate risk and reduce the cost of match-funding certain long-term fixed rate loans. These derivative contracts are designated as a cash flow hedge as the receipt of floating interest from the counterparty is used to manage interest rate risk associated with forecasted issuances of short-term FHLB advances. The change in fair value of the hedging instrument is recorded in accumulated other comprehensive income. SBA Recourse Reserve. The Corporation establishes SBA recourse reserves on the guaranteed portions of sold SBA loans. The recourse reserve is reported in accrued interest payable and other liabilities on the Consolidated Balance Sheets. A reserve is established for loans that present a collateral shortfall and it is probable that the guaranty associated with the sold portion of the SBA loan is ineligible. In the ordinary course of business, the Corporation sells the guaranteed portions of SBA loans to third parties. The Corporation has a continuing involvement in each of the transferred lending arrangements by way of relationship management, servicing the loans, as well as being subject to normal and customary requirements of the SBA loan program; however, there are no further obligations to the third-party participant required of the Corporation, other than standard representations and warranties related to sold amounts. In the event of a loss resulting from default and a determination by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Corporation, the SBA may require the Corporation to repurchase the loan, deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of the principal loss related to the deficiency from the Corporation. The Corporation must comply with applicable SBA regulations in order to maintain the guaranty. In addition, the Corporation retains the option to repurchase the sold guaranteed portion of an SBA loan if the loan defaults. Income Taxes. Deferred income tax assets and liabilities are computed for temporary differences in timing between the financial statement and tax basis of assets and liabilities that result in taxable or deductible amounts in the future based on enacted tax law and rates applicable to periods in which the differences are expected to affect taxable income. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, appropriate tax planning strategies, and projections for future taxable income over the period which the deferred tax assets are deductible. When necessary, valuation allowances are established to reduce deferred tax assets to the realizable amount. In July 2023, the state of Wisconsin incorporated a Commercial loan interest exemption (2023 Wis. Act. 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. The Corporation also invests in certain development entities that generate federal and state historic tax credits. The tax benefits associated with these investments are accounted for under the flow-through method and are recognized when the respective project is placed in service. The Corporation and its subsidiaries file a consolidated federal income tax return and separate state income tax returns. Tax sharing agreements allocate taxes to each legal entity for the settlement of intercompany taxes. The Corporation applies a more likely than not standard to each of its tax positions when determining the amount of tax expense or benefit to record in its financial statements. Unrecognized tax benefits are recorded in other liabilities. The Corporation recognizes accrued interest relating to unrecognized tax benefits in income tax expense and penalties in other non-interest expense. Other Comprehensive Income or Loss. Comprehensive income or loss, shown as a separate financial statement, includes net income or loss, changes in unrealized gains and losses on available-for-sale securities, changes in deferred gains and losses on investment securities transferred from available-for-sale to held-to-maturity, if any, changes in unrealized gains and losses associated with cash flow hedging instruments, if any, and the amortization of deferred gains and losses associated with terminated cash flow hedges, if any. For the year ended December 31, 2023, $ 45,000 of realized securities losses were 76 Table of Contents 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. Earnings per common share (“EPS”) is computed using the two-class method. Basic EPS is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding for the period, excluding any participating securities. Participating securities include unvested restricted shares. Unvested restricted shares are considered participating securities because holders of these securities receive non-forfeitable dividends at the same rate as the holders of the Corporation’s common stock. Diluted EPS is computed by dividing net income allocated to common shares adjusted for reallocation of undistributed earnings of unvested restricted shares by the weighted average number of common shares determined for the basic EPS plus the dilutive effect of common stock equivalents using the treasury stock method based on the average market price for the period. Segments and Related Information. The Corporation is required to report each operating segment based on materiality thresholds of ten percent or more of certain amounts, such as revenue. Additionally, the Corporation is required to report separate operating segments until the revenue attributable to such segments is at least 75 percent of total consolidated revenue. The Corporation provides a broad range of financial services to individuals and companies. These services include demand, time, and savings products, the sale of certain non-deposit financial products, and commercial and retail lending, leasing and private wealth management services. While the Corporation’s chief decision-maker monitors the revenue streams of the various products, services, and locations, operations are managed and financial performance is evaluated on a corporate-wide basis. The Corporation’s business units have similar basic characteristics in the nature of the products, production processes and type or class of client for products or services; therefore, these business units are considered one operating segment. Share-Based Compensation. The Corporation may grant restricted stock awards, restricted stock units, and other stock based awards to plan participants, subject to forfeiture upon the occurrence of certain events until the dates specified in the participant’s award agreement. The Corporation accounts for forfeitures as they occur. While restricted stock is subject to forfeiture, restricted stock award participants may exercise full voting rights and will receive all dividends and other 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. The restricted stock granted under the 2019 Equity Incentive Plan (the “Plan”) is typically subject to a three or four year vesting period. Compensation expense for restricted stock is recognized over the requisite service period of three or four years for the entire award on a straight-line basis. Upon vesting of restricted stock, the benefit of tax deductions in excess of recognized compensation expense is reflected as an income tax benefit in the Consolidated Statements of Income. The Corporation issues a combination of performance-based restricted stock units and restricted stock awards to plan participants. Vesting of the performance-based restricted stock units will be measured on Total Shareholder Return (“TSR”) and Return on Average Equity (“ROAE”) 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 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. The Corporation offers an Employee Stock Purchase Plan (“ESPP”) to all qualifying employees. The plan qualifies as an ESPP under section 423 of the Internal Revenue Code of 1986. Under the ESPP, eligible employees may enroll in a three month offer period that begins January, April, July, and October of each year. Employees may purchase a limited number of shares 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. Recent Accounting Pronouncements. In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments- Credit Losses (Topic 326),” which is often referred to as CECL. The ASU replaces the incurred loss impairment methodology for recognizing credit losses with a methodology that reflects all expected credit losses. Entities will apply the amendments in the ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In November 2019, the FASB issued ASU No. 2019-10, “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842).” The ASU delays the effective date for the credit losses standard from January 1, 2020 to January 1, 2023 for certain entities, including certain Securities and Exchange Commission filers, public business entities, and private companies. As a smaller reporting company, the Corporation elected to defer 77 Table of Contents adoption. The Corporation has established a cross-functional committee and has implemented a third-party software solution to assist with the adoption of the standard. During the fourth quarter of 2022 and first quarter of 2023, management had the model validated by a third party, performed a full parallel run, and finalized the methodology, processes and internal controls. Management’s model utilizes national GDP and unemployment as inputs to the reasonable and supportable forecast. 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. GAAP. 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. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary, optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. In January 2021, the FASB issued ASU 2021-01 which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The Corporation adopted this standard in the fourth quarter 2022. The Corporation utilized available optional expedients to simplify accounting analyses for contract modifications and allow hedging relationships to continue without de-designation where there are qualifying changes in the critical terms. The adoption of this standard did not have 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 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. 78 Table of Contents 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 Cash and due from banks was approximately $ 32.3 million and $ 25.8 million at December 31, 2023 and 2022, respectively. As of March 26, 2020, the Federal Reserve Bank (“FRB”) reduced reserve requirement ratios to zero percent for all depository institutions. FRB balances were $ 106.8 million and $ 76.5 million at December 31, 2023 and 2022, respectively, and are included in short-term investments on the Consolidated Balance Sheets. Short-term investments, considered cash equivalents, were $ 107.2 million and $ 76.9 million at December 31, 2023 and 2022, respectively. Note 3 – Securities The amortized cost and fair value of securities available-for-sale and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows: As of December 31, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In Thousands) Available-for-sale: U.S. treasuries $ 14,158 $ 7 $ ( 389 ) $ 13,776 U.S. government agency securities - government-sponsored enterprises 27,986 35 ( 455 ) 27,566 Municipal securities 40,407 — ( 4,526 ) 35,881 Residential mortgage-backed securities - government issued 69,441 1,000 ( 2,385 ) 68,056 Residential mortgage-backed securities - government-sponsored enterprises 131,321 281 ( 10,769 ) 120,833 Commercial mortgage-backed securities - government issued 2,995 — ( 470 ) 2,525 Commercial mortgage-backed securities - government-sponsored enterprises 32,774 65 ( 4,470 ) 28,369 $ 319,082 $ 1,388 $ ( 23,464 ) $ 297,006 As of December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In Thousands) Available-for-sale: U.S. treasuries $ 4,977 $ — $ ( 532 ) $ 4,445 U.S. government agency securities - government-sponsored enterprises 13,666 70 ( 531 ) 13,205 Municipal securities 45,088 90 ( 5,867 ) 39,311 Residential mortgage-backed securities - government issued 21,790 — ( 2,359 ) 19,431 Residential mortgage-backed securities - government-sponsored enterprises 119,265 — ( 12,942 ) 106,323 Commercial mortgage-backed securities - government issued 3,450 — ( 518 ) 2,932 Commercial mortgage-backed securities - government-sponsored enterprises 31,515 — ( 5,138 ) 26,377 $ 239,751 $ 160 $ ( 27,887 ) $ 212,024 79 Table of Contents The amortized cost and fair value of securities held-to-maturity and the corresponding amounts of gross unrecognized gains and losses were as follows: As of December 31, 2023 Amortized Cost Gross Unrecognized Gains Gross Unrecognized Losses Fair Value (In Thousands) Held-to-maturity: Municipal securities $ 4,210 $ 4 $ ( 41 ) $ 4,173 Residential mortgage-backed securities - government issued 1,211 — ( 76 ) 1,135 Residential mortgage-backed securities - government-sponsored enterprises 1,078 — ( 53 ) 1,025 Commercial mortgage-backed securities - government-sponsored enterprises 2,004 — ( 82 ) 1,922 $ 8,503 $ 4 $ ( 252 ) $ 8,255 As of December 31, 2022 Amortized Cost Gross Unrecognized Gains Gross Unrecognized Losses Fair Value (In Thousands) Held-to-maturity: Municipal securities $ 7,467 $ 7 $ ( 70 ) $ 7,404 Residential mortgage-backed securities - government issued 1,625 — ( 107 ) 1,518 Residential mortgage-backed securities - government-sponsored enterprises 1,537 — ( 93 ) 1,444 Commercial mortgage-backed securities - government-sponsored enterprises 2,006 — ( 102 ) 1,904 $ 12,635 $ 7 $ ( 372 ) $ 12,270 U.S. Treasuries contain treasury bonds issued by the United States Treasury. U.S. government agency securities - government-sponsored enterprises represent securities issued by Federal National Mortgage Association (“FNMA”) and the SBA. Municipal securities include securities issued by various municipalities located primarily within Wisconsin and are primarily general obligation bonds that are tax-exempt in nature. Residential and commercial mortgage-backed securities - government issued represent securities guaranteed by the Government National Mortgage Association. Residential and commercial mortgage-backed securities - government-sponsored enterprises include securities guaranteed by the Federal Home Loan Mortgage Corporation, FNMA, and the FHLB. 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. Total proceeds and gross realized gains and losses from sales of securities available-for-sale were as follows: For the Year Ended December 31, 2023 2022 2021 (In Thousands) Gross gains $ 68 $ — $ 92 Gross losses ( 113 ) — ( 63 ) Net (losses) gains on sale of available-for-sale securities $ ( 45 ) $ — $ 29 Proceeds from sale of available-for-sale securities $ 5,085 $ — $ 14,955 At December 31, 2023 and 2022, securities with a fair value of $ 45.4 million and $ 35.9 million, respectively, were pledged to secure various obligations, including interest rate swap contracts and municipal deposits. 80 Table of Contents The amortized cost and fair value of securities by contractual maturity at December 31, 2023 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations with or without call or prepayment penalties. Available-for-Sale Held-to-Maturity Amortized Cost Fair Value Amortized Cost Fair Value (In Thousands) Due in one year or less $ 22,576 $ 22,569 $ 1,060 $ 1,057 Due in one year through five years 18,970 17,646 3,150 3,116 Due in five through ten years 12,653 11,915 — — Due in over ten years 28,352 25,093 — — 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. The Corporation also has not specifically identified available-for-sale securities in a loss position that it intends to sell in the near term and does not believe that it will be required to sell any such securities. The Corporation reviews its securities on a quarterly basis to assess declines in fair value for credit losses. Consideration is given to such factors as the credit rating of the borrower, market conditions such as current interest rates, any adverse conditions specific to the security and delinquency status on contractual payments. For the 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: December 31, 2023 Less than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (In Thousands) Available-for-sale: U.S. treasuries $ — $ — $ 4,595 $ 389 $ 4,595 $ 389 U.S. government agency securities - government-sponsored enterprises 13,370 30 3,076 425 16,446 455 Municipal securities — — 35,881 4,526 35,881 4,526 Residential mortgage-backed securities - government issued 13,178 160 13,819 2,225 26,997 2,385 Residential mortgage-backed securities - government-sponsored enterprises 19,925 285 78,086 10,484 98,011 10,769 Commercial mortgage-backed securities - government issued — — 2,525 470 2,525 470 Commercial mortgage-backed securities - government-sponsored enterprises 893 20 26,465 4,450 27,358 4,470 $ 47,366 $ 495 $ 164,447 $ 22,969 $ 211,813 $ 23,464 81 Table of Contents December 31, 2022 Less than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (In Thousands) Available-for-sale: U.S. treasuries $ — $ — $ 4,446 $ 532 $ 4,446 $ 532 U.S. government agency obligations - government-sponsored enterprises — — 2,969 531 2,969 531 Municipal securities 26,759 3,132 10,133 2,735 36,892 5,867 Residential mortgage-backed securities - government issued 9,624 436 9,807 1,923 19,431 2,359 Residential mortgage-backed securities - government-sponsored enterprises 71,474 6,433 34,849 6,509 106,323 12,942 Commercial mortgage-backed securities - government issued 1,236 112 1,696 406 2,932 518 Commercial mortgage-backed securities - government-sponsored enterprises 7,758 984 18,619 4,154 26,377 5,138 $ 116,851 $ 11,097 $ 82,519 $ 16,790 $ 199,370 $ 27,887 The tables below show the Corporation’s gross unrealized losses and fair value of held-to-maturity investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at December 31, 2023 and 2022. 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 Less than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (In Thousands) Held-to-maturity: Municipal securities $ 1,424 $ 4 $ 2,234 $ 37 $ 3,658 $ 41 Residential mortgage-backed securities - government issued — — 1,135 76 1,135 76 Residential mortgage-backed securities - government-sponsored enterprises — — 1,025 53 1,025 53 Commercial mortgage backed securities - government-sponsored enterprises — — 1,922 82 1,922 82 $ 1,424 $ 4 $ 6,316 $ 248 $ 7,740 $ 252 82 Table of Contents December 31, 2022 Less than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (In Thousands) Held-to-maturity: Municipal securities $ 6,035 $ 52 $ 267 $ 18 $ 6,302 $ 70 Residential mortgage-backed securities - government issued 1,518 107 — — 1,518 107 Residential mortgage-backed securities - government-sponsored enterprises 1,444 93 — — 1,444 93 Commercial mortgage-backed securities - government-sponsored enterprises 1,904 102 — — 1,904 102 $ 10,901 $ 354 $ 267 $ 18 $ 11,168 $ 372 On January 1, 2023, the Corporation adopted ASU 2016-13, which replaced the legacy GAAP other-than-temporary impairment (“OTTI”) model with a credit loss model. ASU 2016-13 requires an allowance on lifetime expected credit losses on held to maturity debt securities. As of January 1, 2023 and 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: December 31, 2023 December 31, 2022 (In Thousands) Commercial real estate: Commercial real estate — owner occupied $ 256,479 $ 268,354 Commercial real estate — non-owner occupied 773,494 687,091 Construction 193,080 218,751 Multi-family 450,529 350,026 1-4 family 26,289 17,728 Total commercial real estate 1,699,871 1,541,950 Commercial and industrial 1,105,835 853,327 Consumer and other 44,312 47,938 Total gross loans and leases receivable 2,850,018 2,443,215 Less: Allowance for loan losses 31,275 24,230 Deferred loan fees and costs, net ( 243 ) 149 Loans and leases receivable, net $ 2,818,986 $ 2,418,836 Loans transferred to third parties consist of the guaranteed portions of SBA loans which the Corporation sold in the secondary market and participation interests in other, non-SBA originated loans. The total principal amount of the guaranteed portions of SBA loans sold during the year ended December 31, 2023 and 2022 was $ 23.6 million and $ 29.9 million, respectively. Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore, all of the loans transferred during the 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, 2023 and 2022 was $ 120.0 million and $ 96.0 million, respectively, all of which were treated as sales and 83 Table of Contents derecognized under the applicable accounting guidance at the time of transfer. No gain or loss was recognized on participation interests in other, non-SBA originated loans as they were transferred at or near the date of loan origination and the payments received for servicing the portion of the loans participated represents adequate compensation. The total outstanding balance of these transferred loans at December 31, 2023 and 2022 was $ 279.5 million and $ 222.9 million, respectively. 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, 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 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 Construction Multi-Family 1-4 Family Commercial and Industrial Consumer and Other Total (In Thousands) Sales $ 17,390 $ — $ 75,532 $ 11,382 $ — $ 39,290 $ — $ 143,594 December 31, 2022 Owner Occupied Non-Owner Occupied Construction Multi-Family 1-4 Family Commercial and Industrial Consumer and Other Total (In Thousands) Sales $ — $ 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. These loans to related parties are summarized below: December 31, 2023 December 31, 2022 (In Thousands) Balance at beginning of year $ 224 $ 1,288 New loans 349 656 Repayments ( 310 ) ( 1,560 ) Change due to status of executive officers and directors — ( 160 ) Balance at end of year $ 263 $ 224 The Corporation’s net investment in direct financing leases consists of the following: December 31, 2023 December 31, 2022 (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. 84 Table of Contents Future aggregate maturities of minimum lease payments to be received are as follows: (In Thousands) Maturities during year ended December 31, 2024 $ 3,268 2025 2,425 2026 1,788 2027 1,301 2028 626 Thereafter 252 $ 9,660 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 Category 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 Category 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 Construction Category 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 85 Table of Contents 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 Multi-family Category 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 1-4 family Category 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 Category 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 Category 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 Total Loans Category 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 86 Table of Contents 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 Category 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 Category 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 Construction Category 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 Multi-family Category 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 1-4 family Category 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 87 Table of Contents 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 Category 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 Category 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 Total Loans Category 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. The Corporation primarily uses a nine grade risk rating system to monitor the ongoing credit quality of its loans and leases. The risk rating grades follow a consistent definition and are then applied to specific loan types based on the nature of the loan. Each risk rating is subjective and, depending on the size and nature of the credit, subject to various levels of review and concurrence on the stated risk rating. In addition to its nine grade risk rating system, the Corporation groups loans into four loan and related risk categories which determine the level and nature of review by management. Category I — Loans and leases in this category are performing in accordance with the terms of the contract and generally exhibit no immediate concerns regarding the security and viability of the underlying collateral, financial stability of the borrower, integrity or strength of the borrowers’ management team or the industry in which the borrower operates. The Corporation monitors Category I loans and leases through payment performance, continued maintenance of its personal relationships with such borrowers and continued review of such borrowers’ compliance with the terms of their respective agreements. Category II — Loans and leases in this category are beginning to show signs of deterioration in one or more of the Corporation’s core underwriting criteria such as financial stability, management strength, industry trends or collateral values. Management will place credits in this category to allow for proactive monitoring and resolution with the borrower to possibly mitigate the area of concern and prevent further deterioration or risk of loss to the Corporation. Category II loans are considered performing but are monitored frequently by the assigned business development officer and by asset quality review committees. Category III — Loans and leases in this category are identified by management as warranting special attention. However, the balance in this category is not intended to represent the amount of adversely classified assets held by the Bank. Category III 88 Table of Contents loans and leases generally exhibit undesirable characteristics, such as evidence of adverse financial trends and conditions, managerial problems, deteriorating economic conditions within the related industry or evidence of adverse public filings and may exhibit collateral shortfall positions. Management continues to believe that it will collect all contractual principal and interest in accordance with the original terms of the contracts relating to the loans and leases in this category, and therefore Category III loans are considered performing with no specific reserves established for this category. Category III loans are monitored by management and asset quality review committees on a monthly basis. Category IV — Loans and leases in this category are non-performing loans. Management has determined that it is unlikely that the Bank will receive the contractual principal and interest in accordance with the original terms of the agreement. Non-performing loans are individually evaluated to assess the need for the establishment of specific reserves or charge-offs. When analyzing the adequacy of collateral, the Corporation obtains external appraisals at least annually. External appraisals are obtained from the Corporation’s approved appraiser listing and are independently reviewed to monitor the quality of such appraisals. To the extent a collateral shortfall position is present, a specific reserve or charge-off will be recorded. Loans and leases in this category are monitored by management and asset quality review committees on a monthly basis. 89 Table of Contents The delinquency aging of the loan and lease portfolio by class of receivable was as follows: December 31, 2023 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Past Due Total Past Due Current Total Loans and Leases (Dollars in Thousands) Performing loans and leases Commercial real estate: Owner occupied $ — $ — $ — $ — $ 256,479 $ 256,479 Non-owner occupied — — — — 773,494 773,494 Construction — — — — 193,080 193,080 Multi-family — — — — 450,529 450,529 1-4 family — — — — 26,267 26,267 Commercial and industrial 3,026 491 — 3,517 1,081,743 1,085,260 Consumer and other — — — — 44,312 44,312 Total 3,026 491 — 3,517 2,825,904 2,829,421 Non-performing loans and leases Commercial real estate: Owner occupied — — — — — — Non-owner occupied — — — — — — Construction — — — — — — Multi-family — — — — — — 1-4 family — — — — 22 22 Commercial and industrial 404 550 18,347 19,301 1,274 20,575 Consumer and other — — — — — — Total 404 550 18,347 19,301 1,296 20,597 Total loans and leases Commercial real estate: Owner occupied — — — — 256,479 256,479 Non-owner occupied — — — — 773,494 773,494 Construction — — — — 193,080 193,080 Multi-family — — — — 450,529 450,529 1-4 family — — — — 26,289 26,289 Commercial and industrial 3,430 1,041 18,347 22,818 1,083,017 1,105,835 Consumer and other — — — — 44,312 44,312 Total $ 3,430 $ 1,041 $ 18,347 $ 22,818 $ 2,827,200 $ 2,850,018 Percent of portfolio 0.12 % 0.04 % 0.64 % 0.80 % 99.20 % 100.00 % 90 Table of Contents December 31, 2022 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Past Due Total Past Due Current Total Loans and Leases (Dollars in Thousands) Performing loans and leases Commercial real estate: Owner occupied $ — $ — $ — $ — $ 268,354 $ 268,354 Non-owner occupied 215 — — 215 686,876 687,091 Construction — — — — 218,751 218,751 Multi-family — — — — 350,026 350,026 1-4 family — — — — 17,698 17,698 Commercial and industrial 1,437 403 — 1,840 847,858 849,698 Consumer and other — — — — 47,938 47,938 Total 1,652 403 — 2,055 2,437,501 2,439,556 Non-performing loans and leases Commercial real estate: Owner occupied — — — — — — Non-owner occupied — — — — — — Construction — — — — — — Multi-family — — — — — — 1-4 family — — — — 30 30 Commercial and industrial 439 126 2,464 3,029 600 3,629 Consumer and other — — — — — — Total 439 126 2,464 3,029 630 3,659 Total loans and leases Commercial real estate: Owner occupied — — — — 268,354 268,354 Non-owner occupied 215 — — 215 686,876 687,091 Construction — — — — 218,751 218,751 Multi-family — — — — 350,026 350,026 1-4 family — — — — 17,728 17,728 Commercial and industrial 1,876 529 2,464 4,869 848,458 853,327 Consumer and other — — — — 47,938 47,938 Total $ 2,091 $ 529 $ 2,464 $ 5,084 $ 2,438,131 $ 2,443,215 Percent of portfolio 0.09 % 0.02 % 0.10 % 0.21 % 99.79 % 100.00 % 91 Table of Contents The Corporation’s total non-performing assets consisted of the following: December 31, 2023 December 31, 2022 (In Thousands) Non-performing loans and leases Commercial real estate: Commercial real estate — owner occupied $ — $ — Commercial real estate — non-owner occupied — — Construction — — Multi-family — — 1-4 family 22 30 Total non-performing commercial real estate 22 30 Commercial and industrial 20,575 3,629 Consumer and other — — Total non-performing loans and leases 20,597 3,659 Repossessed assets, net 247 95 Total non-performing assets $ 20,844 $ 3,754 December 31, 2023 December 31, 2022 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 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. 92 Table of Contents 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 Amortized Cost (1) Unpaid Principal Balance Individual Reserve Average Recorded Investment (2) Foregone Interest Income Interest Income Recognized Net Foregone Interest Income (In Thousands) With no individual reserve recorded: Commercial real estate: Owner occupied $ — $ — $ — $ — $ — $ — $ — Non-owner occupied — — — — — — — Construction — — — — — — — Multi-family — — — — — — — 1-4 family — — — 4 — 23 ( 23 ) Commercial and industrial 9,691 9,695 — 4,989 786 214 572 Consumer and other — — — — — — — Total 9,691 9,695 — 4,993 786 237 549 With individual reserve recorded: Commercial real estate: Owner occupied — — — — — — — Non-owner occupied — — — — — — — Construction — — — — — — — Multi-family — — — — — — — 1-4 family 22 27 22 22 4 — 4 Commercial and industrial 10,884 10,890 5,968 5,435 641 29 612 Consumer and other — — — — — — — Total 10,906 10,917 5,990 5,457 645 29 616 Total: Commercial real estate: Owner occupied — — — — — — — Non-owner occupied — — — — — — — Construction — — — — — — — Multi-family — — — — — — — 1-4 family 22 27 22 26 4 23 ( 19 ) Commercial and industrial 20,575 20,585 5,968 10,424 1,427 243 1,184 Consumer and other — — — — — — — Grand total $ 20,597 $ 20,612 $ 5,990 $ 10,450 $ 1,431 $ 266 $ 1,165 (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. 93 Table of Contents As of and for the Year Ended December 31, 2022 Recorded Investment (1) Unpaid Principal Balance Individual Reserve Average Recorded Investment (2) Foregone Interest Income Interest Income Recognized Net Foregone Interest Income (In Thousands) With no individual reserve recorded: Commercial real estate: Owner occupied $ — $ — $ — $ 180 $ 14 $ 759 $ ( 745 ) Non-owner occupied — — — — — 1 ( 1 ) Construction — — — — — 47 ( 47 ) Multi-family — — — — — — — 1-4 family 30 35 — 112 8 41 ( 33 ) Commercial and industrial 1,037 1,037 — 3,153 277 587 ( 310 ) Consumer and other — — — — — — — Total 1,067 1,072 — 3,445 299 1,435 ( 1,136 ) With individual reserve recorded: Commercial real estate: Owner occupied — — — — — — — Non-owner occupied — — — — — — — Construction — — — — — — — Multi-family — — — — — — — 1-4 family — — — — — — — Commercial and industrial 2,592 2,612 1,650 1,454 101 1 100 Consumer and other — — — — — — — Total 2,592 2,612 1,650 1,454 101 1 100 Total: Commercial real estate: Owner occupied — — — 180 14 759 ( 745 ) Non-owner occupied — — — — — 1 ( 1 ) Construction — — — — — 47 ( 47 ) Multi-family — — — — — — — 1-4 family 30 35 — 112 8 41 ( 33 ) Commercial and industrial 3,629 3,649 1,650 4,607 378 588 ( 210 ) Consumer and other — — — — — — — Grand total $ 3,659 $ 3,684 $ 1,650 $ 4,899 $ 400 $ 1,436 $ ( 1,036 ) (1) The recorded investment represents the unpaid principal balance net of any partial charge-offs. (2) Average recorded investment is calculated primarily using daily average balances. 94 Table of Contents As of and for the Year Ended December 31, 2021 Recorded Investment (1) Unpaid Principal Balance Individual Reserve Average Recorded Investment (2) Foregone Interest Income Interest Income Recognized Net Foregone Interest Income (In Thousands) With no individual reserve recorded: Commercial real estate: Owner occupied $ 348 $ 386 $ — $ 2,217 $ 145 $ 218 $ ( 73 ) Non-owner occupied — — — 2,281 233 16 217 Construction — — — 7 — — — Multi-family — — — — — — — 1-4 family 339 344 — 285 60 24 36 Commercial and industrial 3,732 3,834 — 7,916 523 179 344 Consumer and other — — — 48 30 9 21 Total 4,419 4,564 — 12,754 991 446 545 With individual reserve recorded: Commercial real estate: Owner occupied — — — — — — — Non-owner occupied — — — — — — — Construction — — — — — — — Multi-family — — — — — — — 1-4 family — — — — — — — Commercial and industrial 2,156 2,156 1,505 1,506 113 8 105 Consumer and other — — — — — — — Total 2,156 2,156 1,505 1,506 113 8 105 Total: Commercial real estate: Owner occupied 348 386 — 2,217 145 218 ( 73 ) Non-owner occupied — — — 2,281 233 16 217 Construction — — — 7 — — — Multi-family — — — — — — — 1-4 family 339 344 — 285 60 24 36 Commercial and industrial 5,888 5,990 1,505 9,422 636 187 449 Consumer and other — — — 48 30 9 21 Grand total $ 6,575 $ 6,720 $ 1,505 $ 14,260 $ 1,104 $ 454 $ 650 (1) The recorded investment represents the unpaid principal balance net of any partial charge-offs. (2) Average recorded investment is calculated primarily using daily average balances. 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. 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 95 Table of Contents 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; • Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the Corporation operates that affect the collectability of financial assets; • The experience, ability, and depth of the Corporation’s lending, investment, collection, and other relevant management and staff; • The volume of past due financial assets, the volume of non-performing assets, and the volume and severity of adversely classified or graded assets; • The existence and effect of industry concentrations of credit; • The nature and volume of the portfolio segment or class; • The quality of the Corporation’s credit review function; • The effect of other external factors such as the regulatory, legal and technological environments, competition, and events such as natural disasters or pandemics. 96 Table of Contents ACL Activity A summary of the activity in the allowance for credit losses by portfolio segment is as follows: As of and for the Year Ended December 31, 2023 Owner Occupied Non-Owner Occupied Construction Multi-Family 1-4 Family Commercial and Industrial Consumer and Other Total (In Thousands) Beginning balance $ 1,766 $ 5,108 $ 1,646 $ 2,634 $ 207 $ 12,403 $ 466 $ 24,230 Impact of adopting ASC 326 ( 204 ) ( 242 ) 796 ( 386 ) ( 45 ) 1,873 26 1,818 Charge-offs — — — — — ( 1,781 ) — ( 1,781 ) Recoveries 9 1 — — 40 478 20 548 Net recoveries (charge-offs) 9 1 — — 40 ( 1,303 ) 20 ( 1,233 ) 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 Components: 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 Commercial Real Estate Commercial and Industrial Consumer and Other Total (In Thousands) Beginning balance $ 15,110 $ 8,413 $ 813 $ 24,336 Charge-offs — ( 958 ) ( 21 ) ( 979 ) Recoveries 4,262 437 42 4,741 Net recoveries (charge-offs) 4,262 ( 521 ) 21 3,762 Provision for credit losses ( 6,812 ) 3,236 ( 292 ) ( 3,868 ) Ending balance $ 12,560 $ 11,128 $ 542 $ 24,230 As of and for the Year Ended December 31, 2021 Commercial Real Estate Commercial and Industrial Consumer and Other Total (In Thousands) Beginning balance $ 17,157 $ 10,593 $ 771 $ 28,521 Charge-offs ( 256 ) ( 3,227 ) ( 25 ) ( 3,508 ) Recoveries 3,935 1,168 23 5,126 Net recoveries (charge-offs) 3,679 ( 2,059 ) ( 2 ) 1,618 Provision for credit losses ( 5,726 ) ( 121 ) 44 ( 5,803 ) Ending balance $ 15,110 $ 8,413 $ 813 $ 24,336 97 Table of Contents ACL Summary 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 Owner Occupied Non-Owner Occupied Construction Multi-Family 1-4 Family Commercial and Industrial Consumer and Other Total (In Thousands) Allowance for credit losses: Collectively evaluated for credit losses $ 1,525 $ 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 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 December 31, 2022 Commercial Real Estate Commercial and Industrial Consumer and Other Total (In Thousands) 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 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 Note 5 – Premises and Equipment A summary of premises and equipment was as follows: As of December 31, 2023 2022 (In Thousands) Leasehold improvements $ 5,557 $ 4,525 Furniture and equipment 9,361 8,250 Total premises and equipment 14,918 12,775 Less: accumulated depreciation ( 8,728 ) ( 8,435 ) Total premises and equipment, net $ 6,190 $ 4,340 98 Table of Contents Depreciation expense was $ 961,000 , $ 578,000 , and $ 585,000 for the years ended December 31, 2023, 2022, and 2021, respectively. 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. Note 6 – Leases The Corporation leases various office spaces and specialized lending production offices under non-cancellable operating leases which expire on various dates through 2033. The Corporation also leases office equipment. The Corporation recognizes a right-of-use asset and an operating lease liability for all leases, with the exception of short-term leases. Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term. In June 2023, the Corporation relocated its Kansas City metropolitan area office. 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: For the Year Ended December 31, 2023 2022 2021 (In Thousands) Operating lease cost $ 1,411 $ 1,544 $ 1,513 Short-term lease cost 200 148 158 Variable lease cost 576 604 492 Less: sublease income ( 75 ) ( 179 ) ( 170 ) Total lease cost, net $ 2,112 $ 2,117 $ 1,993 Quantitative information regarding the Corporation’s operating leases was as follows: December 31, 2023 December 31, 2022 December 31, 2021 Weighted-average remaining lease term (in years) 7.70 8.06 5.05 Weighted-average discount rate 3.61 % 3.40 % 2.51 % The following maturity analysis shows the undiscounted cash flows due on the Corporation’s operating lease liabilities: (In Thousands) 2024 $ 1,514 2025 1,408 2026 1,400 2027 1,427 2028 1,113 Thereafter 3,600 Total undiscounted cash flows 10,462 Discount on cash flows ( 1,508 ) Total lease liability $ 8,954 Note 7 – Goodwill and Other Intangible Assets Goodwill Goodwill is not amortized, but is subject to impairment tests on an annual basis and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount 99 Table of Contents (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 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 The Corporation has intangible assets that are amortized consisting of loan servicing rights. Loan servicing rights are recognized upon sale of the guaranteed portions of SBA loans with servicing rights retained. When SBA loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Loan servicing assets are subsequently measured using the amortization method, which requires servicing rights to be amortized into interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. For the years ended December 31, 2023, 2022, and 2021, loan servicing asset amortization totaled $ 500,000 , $ 634,000 , and $ 412,000 , respectively. The estimated fair value of the Corporation’s loan servicing asset was $ 1.4 million and $ 1.5 million as of December 31, 2023 and 2022, respectively. The Corporation periodically reviews this portfolio for impairment and engages a third-party valuation firm to assess the fair value of the overall servicing rights portfolio. During the 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 The Corporation is a limited partner in several limited partnership investments. The Corporation is not the general partner, does not have controlling ownership, and is not the primary beneficiary in any of these limited partnerships and the limited partnerships have not been consolidated. These investments are accounted for using the equity and proportional amortization method of accounting and are evaluated for impairment at the end of each reporting period. Historic Rehabilitation Tax Credits The Corporation invests in development entities through 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, 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 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. Other Investments The Corporation’s equity investment in mezzanine funds, consisting of Aldine Capital Fund II, LP, Aldine Capital Fund III, LP, and Aldine Capital Fund IV, LP, totaled $ 13.5 million and $ 12.8 million as of December 31, 2023 and 2022, respectively. 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, 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. 100 Table of Contents 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. 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. 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: December 31, 2023 December 31, 2022 (In Thousands) Accrued interest receivable $ 13,275 $ 9,403 Net deferred tax asset 9,508 11,711 Investment in historic development entities 2,393 2,176 Investment in low-income housing development entity 33,303 13,514 Investment in limited partnerships 15,027 13,599 Prepaid expenses 4,269 3,821 Other assets 13,283 8,883 Total accrued interest receivable and other assets $ 91,058 $ 63,107 101 Table of Contents Note 9 – Deposits The composition of deposits is shown below. December 31, 2023 December 31, 2022 Balance Average Balance Average Rate Balance Average Balance Average Rate (Dollars in Thousands) Non-interest-bearing transaction accounts $ 445,376 $ 453,930 — % $ 537,107 $ 566,230 — % Interest-bearing transaction accounts 895,319 689,500 3.44 576,601 503,668 0.79 Money market accounts 711,245 681,336 3.25 698,505 761,469 0.82 Certificates of deposit 287,131 273,387 4.10 153,757 97,448 1.39 Wholesale deposits 457,708 346,285 4.14 202,236 48,825 3.31 Total deposits $ 2,796,779 $ 2,444,438 2.92 $ 2,168,206 $ 1,977,640 0.67 A summary of annual maturities of in-market and wholesale certificates of deposit at December 31, 2023 is as follows: (In Thousands) Maturities during the year ended December 31, 2024 $ 536,645 2025 19,081 2026 50,416 2027 73,804 2028 12,821 Thereafter 2,072 $ 694,839 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. 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. 102 Table of Contents Note 10 – FHLB Advances, Other Borrowings and Subordinated Notes and Debentures The composition of borrowed funds is shown below. December 31, 2023 December 31, 2022 Balance Weighted Average Balance Weighted Average Rate Balance Weighted Average Balance Weighted Average Rate (Dollars in Thousands) Federal funds purchased $ — $ 3 5.37 % $ — $ 14 7.42 % FHLB advances 281,500 351,990 2.52 416,380 414,191 1.70 Line of credit — 38 7.26 — 85 2.78 Other borrowings 20 600 8.33 6,088 8,624 5.23 Subordinated notes and debentures 49,396 38,250 5.16 34,340 35,095 5.06 Junior subordinated notes (1) — — — — 2,429 20.75 $ 330,916 $ 390,881 2.79 $ 456,808 $ 460,438 2.12 (1) Weighted average rate of junior subordinated notes and debentures reflects the accelerated amortization of subordinated debt issuance costs as a result of the early redemption of the junior subordinated notes during the first quarter of 2022. A summary of annual maturities of borrowings at December 31, 2023 is as follows: (In Thousands) Maturities during the year ended December 31, 2024 $ 120,520 2025 48,000 2026 65,000 2027 28,000 2028 — Thereafter 69,396 $ 330,916 The Corporation has a $ 649.0 million FHLB line of credit available for advances which is collateralized as noted below. At December 31, 2023, $ 367.5 million of this line remained unused. 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, 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. Loans totaling approximately $ 1.172 billion and $ 1.059 billion were pledged as collateral at December 31, 2023 and 2022, respectively. The Corporation has a senior line of credit with a third-party financial institution of $ 10.5 million. As of December 31, 2023, the line of credit carried an interest rate of SOFR + 2.36% that matured on February 19, 2024 and had certain performance debt covenants of which the Corporation was in compliance. The Corporation pays a commitment fee on this senior line of credit. For the years ended December 31, 2023, 2022, and 2021 the Corporation incurred $ 13,000 additional interest expense due to this fee. There was no outstanding balance on the line of credit as of December 31, 2023. 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 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 103 Table of Contents 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 On March 4, 2022, the Corporation issued 12,500 shares, or $ 12.5 million in aggregate liquidation preference, of 7.0 % Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A, par value $ 0.01 per share, with a liquidation preference of $ 1,000 per share (the “Series A Preferred Stock”) in a private placement to institutional investors. The net proceeds received from the issuance of the Series A Preferred Stock were $ 12.0 million. The Corporation expects to pay dividends on the Series A Preferred Stock when and if declared by the Board, at a fixed rate of 7.0 % per annum, payable quarterly, in arrears, on March 15, June 15, September 15 and December 15 of each year up to, but excluding, March 15, 2027. For each dividend period from and including March 15, 2027, dividends will be paid at a floating rate of Three-Month Term SOFR plus a spread of 539 basis points per annum. During the 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. The Corporation may redeem the Series A Preferred Stock at its option at a redemption price equal to $ 1,000 per share, plus any declared and unpaid dividends (without regard to any undeclared dividends), subject to regulatory approval, on or after March 15, 2027 or within 90 days following a regulatory capital treatment event, in accordance with the terms of the Series A Preferred Stock. Note 12 – Regulatory Capital The Corporation and the Bank are subject to various regulatory capital requirements administered by Federal and Wisconsin banking agencies. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions on the part of regulators, that if undertaken, could have a direct material effect on the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory practices. The Corporation’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The Corporation regularly reviews and updates, when appropriate, its Capital and Liquidity Action 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. As a bank holding company, the Corporation’s ability to pay dividends is affected by the policies and enforcement powers of the Board of Governors of the Federal Reserve system (the “Federal Reserve”). Federal Reserve guidance urges financial institutions to strongly consider eliminating, deferring, or significantly reducing dividends if: (i) net income available to common shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividend; (ii) the prospective rate of earnings retention is not consistent with the bank holding company’s capital needs and overall current and prospective financial condition; or (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital ratios. Management intends, when appropriate under regulatory guidelines, to consult with the FRB of Chicago and provide it with information on the Corporation’s then-current and prospective earnings and capital position in advance of declaring any cash dividends. As a Wisconsin corporation, the Corporation is subject to the limitations of the Wisconsin Business Corporation Law, which prohibit the Corporation from paying dividends if such payment would: (i) render the Corporation unable to pay its debts as they become due in the usual course of business, or (ii) result in the Corporation’s assets being less than the sum of its total liabilities plus the amount needed to satisfy the preferential rights upon dissolution of any shareholders with preferential rights superior to those shareholders receiving the dividend. The Bank is also subject to certain legal, regulatory, and other restrictions on their ability to pay dividends to the Corporation. As a bank holding company, the payment of dividends by the Bank to the Corporation is one of the sources of funds the Corporation could use to pay dividends, if any, in the future and to make other payments. Future dividend decisions by the Bank and the Corporation will continue to be subject to compliance with various legal, regulatory, and other restrictions as defined from time to time. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of Total Common Equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to 104 Table of Contents adjusted total assets. These risk-based capital requirements presently address credit risk related to both recorded and off-balance sheet commitments and obligations. In July 2013, the FRB and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks. These rules are applicable to all financial institutions that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as bank and savings and loan holding companies other than “small bank holding companies” (generally non-publicly traded bank holding companies with consolidated assets of less than $1 billion). Under the final rules, minimum requirements increased for both the quantity and quality of capital held by the Corporation. The rules include a new Common Equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, require a minimum ratio of Total Capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. The rules also permit banking organizations with less than $15 billion in assets to retain, through a one-time election, the past treatment for accumulated other comprehensive income, which did not affect regulatory capital. The Corporation elected to retain this treatment, which reduces the volatility of regulatory capital ratios. The Corporation also must comply with the 2.5% conservation buffer, which the Corporation met as of December 31, 2023. As of December 31, 2023, the Corporation’s capital levels exceeded the regulatory minimums and the Bank’s capital levels remained characterized as well capitalized under the regulatory framework. The following tables summarize both the Corporation’s and the Bank’s capital ratios and the ratios required by their federal regulators: As of December 31, 2023 Actual (1) Minimum Required for Capital Adequacy Purposes For Capital Adequacy Purposes Plus Capital Conservation Buffer Minimum Required to Be Well Capitalized Under Prompt Corrective Action Requirements Amount Ratio Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) Total capital (to risk-weighted assets) Consolidated $ 375,440 11.19 % $ 268,500 8.00 % $ 352,406 10.50 % N/A N/A First Business Bank 376,310 11.21 268,595 8.00 352,531 10.50 $ 335,744 10.00 % Tier 1 capital (to risk-weighted assets) Consolidated $ 293,338 8.74 % $ 201,375 6.00 % $ 285,281 8.50 % N/A N/A First Business Bank 343,604 10.23 201,446 6.00 285,382 8.50 $ 268,595 8.00 % Common equity tier 1 capital (to risk-weighted assets) Consolidated $ 281,346 8.38 % $ 151,031 4.50 % $ 234,937 7.00 % N/A N/A First Business Bank 343,604 10.23 151,085 4.50 235,021 7.00 $ 218,233 6.50 % Tier 1 leverage capital (to adjusted assets) Consolidated $ 293,338 8.43 % $ 139,145 4.00 % $ 139,145 4.00 % N/A N/A 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. 105 Table of Contents As of December 31, 2022 Actual Minimum Required for Capital Adequacy Purposes For Capital Adequacy Purposes Plus Capital Conservation Buffer Minimum Required to Be Well Capitalized Under Prompt Corrective Action Requirements Amount Ratio Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) Total capital (to risk-weighted assets) Consolidated $ 323,893 11.26 % $ 230,180 8.00 % $ 302,111 10.50 % N/A N/A First Business Bank 323,021 11.22 230,367 8.00 302,357 10.50 $ 287,959 10.00 % Tier 1 capital (to risk-weighted assets) Consolidated $ 264,843 9.20 % $ 172,635 6.00 % $ 244,566 8.50 % N/A N/A First Business Bank 298,312 10.36 172,775 6.00 244,765 8.50 $ 230,367 8.00 % Common equity tier 1 capital (to risk-weighted assets) Consolidated $ 252,851 8.79 % $ 129,476 4.50 % $ 201,407 7.00 % N/A N/A First Business Bank 298,312 10.36 129,581 4.50 201,571 7.00 $ 187,173 6.50 % Tier 1 leverage capital (to adjusted assets) Consolidated $ 264,843 9.17 % $ 115,464 4.00 % $ 115,464 4.00 % N/A N/A First Business Bank 298,312 10.34 115,402 4.00 115,402 4.00 $ 144,252 5.00 % The following table reconciles stockholders’ equity to federal regulatory capital at December 31, 2023 and 2022, respectively: As of December 31, 2023 2022 (In Thousands) Stockholders’ equity of the Corporation $ 289,588 $ 260,640 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 ) ASC 326 Phase-in 1,015 — Tier 1 capital 293,338 264,843 Allowable general valuation allowances and subordinated debt 82,102 59,050 Total capital $ 375,440 $ 323,893 Note 13 – Earnings per Common Share Earnings per common share are computed using the two-class method. Basic earnings per common share are computed by dividing net income allocated to common shares by the weighted average number of shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include unvested restricted shares. Unvested restricted shares are considered participating securities because holders of these securities receive non-forfeitable dividends, or dividend equivalents, at the same rate as holders of the Corporation’s common stock. Diluted earnings per share are computed by dividing net income allocated to common shares adjusted for reallocation of undistributed earnings of unvested restricted shares by the weighted average number of shares determined for the basic earnings per common share computation plus the dilutive effect of common stock equivalents using the treasury stock method. 106 Table of Contents For the Year Ended December 31, 2023 2022 2021 (Dollars in Thousands, Except Share Data) Basic earnings per common share Net income $ 37,027 $ 40,858 $ 35,755 Less: preferred stock dividends 875 683 — Less: earnings allocated to participating securities 938 1,106 1,053 Basic earnings allocated to common shareholders $ 35,214 $ 39,069 $ 34,702 Weighted-average common shares outstanding, excluding participating securities 8,131,251 8,226,943 8,314,921 Basic earnings per common share $ 4.33 $ 4.75 $ 4.17 Diluted earnings per common share Earnings allocated to common shareholders, diluted $ 35,214 $ 39,069 $ 34,702 Weighted-average diluted common shares outstanding, excluding participating securities 8,131,251 8,226,943 8,314,921 Diluted earnings per common share $ 4.33 $ 4.75 $ 4.17 Note 14 – Share-Based Compensation The Corporation initially adopted the 2019 Equity Incentive Plan (the “Plan”) during the quarter ended June 30, 2019. The Plan is administered by the Compensation Committee of the Board of Directors (the “Board”) of the Corporation and provides for the grant of equity ownership opportunities through incentive stock options and nonqualified stock options, restricted stock, restricted stock units, dividend equivalent units, and any other type of award permitted by the Plan. As of 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. Restricted Stock Under the Plan, the Corporation may grant restricted stock awards (“RSA”), restricted stock units (“RSU”), and other stock-based awards to plan participants, subject to forfeiture upon the occurrence of certain events until the dates specified in the participant’s award agreement. While restricted stock is subject to forfeiture, RSA participants may exercise full voting rights and will receive all dividends and other distributions paid with respect to the restricted shares. RSUs do not have voting rights. RSUs granted prior to 2023 are provided dividend equivalents concurrent with dividends paid to shareholders while RSUs granted in 2023 and after will accrue dividend equivalents payable upon vesting. The restricted stock granted under the Plan is typically subject to a vesting period. Compensation expense for restricted stock is recognized over the requisite service period of generally three or four years for the entire award on a straight-line basis. Upon vesting of restricted stock, the benefit of tax deductions in excess of recognized compensation expense is reflected as an income tax benefit in the Consolidated Statements of Income. 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 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. 107 Table of Contents Restricted stock activity for the year ended December 31, 2023, 2022, and 2021 was as follows: RSA Weighted Average Grant Price PRSU Weighted Average Grant Price RSU Weighted Average Grant Price Total Weighted Average Grant Price Nonvested balance as of January 1, 2021 143,246 $ 23.04 39,570 $ 28.85 4,988 $ 24.08 187,804 $ 24.29 Granted (1) 67,515 22.39 23,550 27.12 2,065 21.68 93,130 23.57 Vested ( 61,384 ) 22.26 — — ( 2,001 ) 22.91 ( 63,385 ) 22.28 Forfeited ( 7,760 ) 23.24 — — — — ( 7,760 ) 23.24 Nonvested balance as of December 31, 2021 141,617 23.06 63,120 28.20 5,052 23.56 209,789 24.62 Granted (1) 62,560 34.04 37,335 24.71 3,115 27.95 103,010 30.47 Vested ( 62,353 ) 23.21 ( 43,020 ) 18.91 ( 2,062 ) 23.20 ( 107,435 ) 21.49 Forfeited ( 8,507 ) 26.15 — — — — ( 8,507 ) 26.15 Nonvested balance as of December 31, 2022 133,317 27.95 57,435 32.89 6,105 25.92 196,857 29.32 Granted (1) — — 34,840 35.79 54,955 34.43 89,795 34.96 Vested ( 56,931 ) 27.03 ( 36,120 ) 31.31 ( 3,253 ) 26.06 ( 96,304 ) 28.60 Forfeited ( 4,435 ) 30.20 — — ( 820 ) 36.42 ( 5,255 ) 31.17 Nonvested balance as of December 31, 2023 71,951 $ 28.53 56,155 $ 35.70 56,987 $ 33.97 185,093 $ 32.38 Unrecognized compensation cost (in thousands) $ 1,229 $ 879 $ 1,393 $ 3,501 Weighted average remaining recognition period (in years) 1.80 1.64 2.79 2.15 (1) The number of restricted shares/units shown includes the shares that would be granted if the target level of performance is achieved related to the PRSU. The number of shares actually issued may vary. During the year ended December 31, 2023, an additional 18,060 were issued related to actual performance results of previously granted awards. Employee Stock Purchase Plan The Corporation is authorized to issue up to 250,000 shares of common stock under the ESPP. The plan qualifies as an employee stock purchase plan under section 423 of the Internal Revenue Code of 1986. Under the ESPP, eligible employees may enroll in a three month offer period that begins January, April, July, and October of each year. Employees may elect to purchase a limited number of shares 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. During the year ended December 31, 2023, the Corporation issued 4,328 shares of common stock under the ESPP. At December 31, 2023, 230,638 shares remained available for issuance under the ESPP. Share-based compensation expense related to restricted stock and ESPP included in the Consolidated Statements of Income was as follows: For the Year Ended December 31, 2023 2022 2021 (In Thousands) Share-based compensation expense $ 2,977 $ 2,584 $ 2,513 108 Table of Contents Note 15 – Employee Benefit Plans The Corporation maintains a contributory 401(k) defined contribution plan covering substantially all employees. The Corporation matches 100% of amounts contributed by each participating employee, up to 3 % of the employee’s compensation. The Corporation may also make discretionary profit sharing contributions up to an additional 6 % of salary. Contributions are expensed in the period incurred and recorded in compensation expense in the Consolidated Statements of Income. The Corporation made a matching contribution of 3 % to all eligible employees which totaled $ 1.2 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. As of December 31, 2023, 2022, and 2021, the Corporation had a deferred compensation plan under which it provided contributions to supplement the retirement income of one executive. Under the terms of the plan, benefits to be received are generally payable within six months of the date of the termination of employment with the Corporation. The expense associated with the deferred compensation plan for the years ended December 31, 2023, 2022, and 2021 was $ 493,000 , $ 382,000 , and $ 237,000 , respectively. 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. The remaining balance of the cash surrender value of bank-owned life insurance of $ 52.4 million and $ 51.0 million as of December 31, 2023 and 2022, respectively, is related to policies on a number of then-qualified individuals affiliated with the Bank. Note 16 – Income Taxes Income tax expense consists of the following: For the Year Ended December 31, 2023 2022 2021 (In Thousands) Current: Federal $ 7,759 $ 9,174 $ 6,965 State 233 2,987 3,087 Current tax expense 7,992 12,161 10,052 Deferred: Federal ( 716 ) ( 733 ) 1,333 State 2,836 ( 42 ) ( 110 ) Deferred tax expense (benefit) 2,120 ( 775 ) 1,223 Total income tax expense $ 10,112 $ 11,386 $ 11,275 Deferred income tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax basis. Deferred tax assets and liabilities are measured using enacted tax rates to apply to taxable income in the period in which the temporary differences are expected to be recovered or settled. Net deferred tax assets are included in accrued interest receivable and other assets in the Consolidated Balance Sheets. 109 Table of Contents The significant components of the Corporation’s deferred tax assets and liabilities were as follows: December 31, 2023 December 31, 2022 (In Thousands) Deferred tax assets: Allowance for credit losses $ 8,730 $ 6,267 Deferred compensation 2,094 2,342 State net operating loss carryforwards 875 265 Write-down of repossessed assets 10 11 Non-accrual loan interest 95 47 Capital loss carryforwards 22 21 Unrealized losses on securities 4,715 5,263 Share-based compensation 788 725 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 Deferred tax liabilities: Leasing and fixed asset activities 1,854 2,197 Loan servicing asset 381 393 Other 2,531 765 Total deferred tax liabilities 4,766 3,355 Net deferred tax asset $ 9,508 $ 11,711 The tax effects of unrealized gains and losses on securities are components of other comprehensive income. A reconciliation of the change in net deferred tax assets to deferred tax expense is as follows: December 31, 2023 December 31, 2022 December 31, 2021 (In Thousands) Change in net deferred tax assets $ ( 2,203 ) $ 5,536 $ ( 1,042 ) Deferred taxes allocated to other comprehensive income 548 ( 4,761 ) ( 181 ) Cumulative change in accounting principle ( 465 ) — — Deferred income tax benefit (expense) $ ( 2,120 ) $ 775 $ ( 1,223 ) Realization of the deferred tax asset over time is dependent upon the Corporation generating sufficient taxable earnings in future periods. In making the determination that the realization of the deferred tax was more likely than not, the Corporation considered several factors including its recent earnings history, its expected earnings in the future, appropriate tax planning strategies, and expiration dates associated with operating loss carryforwards. 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 110 Table of Contents 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: Year Ended December 31, 2023 2022 2021 (Dollars in Thousands) Income before income tax expense $ 47,139 $ 52,244 $ 47,030 Tax expense at statutory federal rate of 21% applied to income before income tax expense $ 9,899 $ 10,971 $ 9,876 State income tax, net of federal effect ( 52 ) 2,337 2,351 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 ) Tax credits, net ( 1,045 ) ( 338 ) — Share-based compensation ( 159 ) ( 392 ) — Section 162(m) limitation 123 118 — Other ( 834 ) ( 138 ) 55 Total income tax expense $ 10,112 $ 11,386 $ 11,275 Effective tax rate 21.45 % 21.79 % 23.97 % There were no uncertain tax positions outstanding as of December 31, 2023 and 2022. As of December 31, 2023, tax years remaining open for the State of Wisconsin tax were 2019 through 2022. Federal tax years that remained open were 2020 through 2022. As of December 31, 2023, there were also no unrecognized tax benefits that are expected to significantly increase or decrease within the next twelve months. Note 17 – Derivative Financial Instruments The Corporation offers interest rate swap products directly to qualified commercial borrowers. The Corporation economically hedges client derivative transactions by entering into offsetting interest rate swap contracts executed with a third party. Derivative transactions executed as part of this program are not considered hedging instruments and are marked-to-market through earnings each period. The derivative contracts have mirror-image terms, which results in the positions’ changes in fair value offsetting through earnings each period. The credit risk and risk of non-performance embedded in the fair value calculations is different between the dealer counterparties and the commercial borrowers which may result in a difference in the changes in the fair value of the mirror-image swaps. The Corporation incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the counterparty’s risk in the fair value measurements. When evaluating the fair value of its derivative contracts for the effects of non-performance and credit risk, the Corporation considered the impact of netting and any applicable credit enhancements such as collateral postings, thresholds and guarantees. As of December 31, 2023 and 2022 the credit valuation allowance was $ 117,000 and $ 38,000 , respectively. The Corporation receives fixed rates and pays floating rates based upon designated benchmark interest rates used on the swaps with commercial borrowers. Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements. The Corporation pays fixed rates and receives floating rates based upon designated benchmark interest rates used on the swaps with dealer counterparties. Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and are reported on the 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. No right of offset existed with the dealer counterparty swaps as of December 31, 2023. 111 Table of Contents All changes in fair value of these instruments are recorded in other non-interest income. Given the mirror-image terms of the outstanding derivative portfolio, the change in fair value for the years ended December 31, 2023, 2022, and 2021 had an insignificant impact on the Consolidated Statements of Income. The Corporation also enters into interest rate swaps to manage interest rate risk and reduce the cost of match-funding certain long-term fixed rate loans. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. The instruments are designated as cash flow hedges as the receipt of floating rate interest from the counterparty is used to manage interest rate risk related to cash outflows attributable to future wholesale deposit or short-term FHLB advance borrowings. The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affect earnings. A pre-tax unrealized 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. The objective of the hedge is to protect the Corporation against changes in fair value due to changes in benchmark interest rates. The instruments are designated as fair value hedges as the changes in the fair value of the interest rate swap are expected to offset changes in the fair value of the hedged item attributable to changes in the SOFR swap rate, the designated benchmark interest rate. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affect earnings. 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 Number of Instruments Notional Amount Weighted Average Maturity (In Years) Fair Value (Dollars in Thousands) Included in Derivative assets Derivatives not designated as hedging instruments Interest rate swap agreements on loans with commercial loan clients 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 Derivatives designated as hedging instruments Interest rate swap related to AFS securities 11 $ 12,500 8.28 $ 624 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 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 $ 811 112 Table of Contents As of December 31, 2022 Number of Instruments Notional Amount Weighted Average Maturity (In Years) Fair Value (Dollars in Thousands) Included in Derivative assets Derivatives not designated as hedging instruments Interest rate swap agreements on loans with commercial loan clients 2 $ 65,352 4.83 $ 1,010 Interest rate swap agreements on loans with third-party counter parties 84 744,233 7.37 60,409 Derivatives designated as hedging instruments Interest rate swap related to AFS securities 11 $ 12,500 9.28 $ 602 Interest rate swap related to wholesale funding 11 116,400 2.88 6,560 Included in Derivative liabilities Derivatives not designated as hedging instruments Interest rate swap agreements on loans with commercial loan clients 82 $ 678,881 7.61 $ 61,419 Note 18 – Commitments and Contingencies The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of clients. These financial instruments include commitments to extend credit and standby letters of credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the Consolidated Financial Statements. The contract amounts reflect the extent of involvement the Bank has in these particular classes of financial instruments. In the event of non-performance, the Bank’s exposure to credit loss for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments and conditional obligations as they do for instruments reflected in the Consolidated Financial Statements. An accrual for credit losses on financial instruments with off-balance sheet risk would be recorded separate from any valuation account related to any such recognized financial instrument. As of December 31, 2023 and 2022, there were no accrued credit losses for financial instruments with off-balance sheet risk. Financial instruments whose contract amounts represent potential credit risk were as follows: At December 31, 2023 2022 (In Thousands) Commitments to extend credit, primarily commercial loans $ 1,198,031 $ 913,042 Standby letters of credit 17,938 15,013 Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition in the contract. Commitments generally have fixed expiration dates or other termination clauses and may have a fixed interest rate or a rate which varies with the prime rate or other market indices and may require payment of a fee. Since some commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements of the Bank. The Bank evaluates the creditworthiness of each client on a case-by-case basis and generally extends credit only on a secured basis. Collateral obtained varies but consists primarily of commercial real estate, accounts receivable, inventory, equipment, and securities. There is generally no market for commercial loan commitments, the fair value of which would approximate the present value of any fees expected to be received as a result of the commitment. These are not considered to be material to the financial statements. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a client to a third party. Generally, standby letters of credit expire within one year and are collateralized by accounts receivable, equipment, 113 Table of Contents 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. The fair value has been estimated to approximate the fees received by the Bank for issuance. The fees are recorded into income and the fair value of the guarantee is decreased ratably over the term of the standby letter of credit. The Corporation sells the guaranteed portions of SBA 7(a) and 504 loans, as well as participation interests in other, non-SBA originated, loans to third parties. The Corporation has a continuing involvement in each of the transferred lending arrangements by way of relationship management and servicing the loans, as well as being subject to normal and customary requirements of the SBA loan program and standard representations and warranties related to sold amounts. In the event of a loss resulting from default and a determination by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Corporation, the SBA may require the Corporation to repurchase the loan, deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of the principal loss related to the deficiency from the Corporation. The Corporation must comply with applicable SBA regulations in order to maintain the guaranty. In addition, the Corporation retains the option to repurchase the sold guaranteed portion of an SBA loan if the loan defaults. Management has assessed estimated losses inherent in the outstanding guaranteed portions of SBA loans sold in accordance with ASC 450, Contingencies , and determined a recourse reserve based on the probability of future losses for these loans to be $ 955,000 and $ 441,000 at December 31, 2023 and 2022, respectively, which is reported in accrued interest payable and other liabilities on the Consolidated Balance Sheets. The summary of the activity in the SBA recourse reserve is as follows: As of and For the Year Ended December 31, 2023 2022 (In Thousands) Balance at the beginning of the period $ 441 $ 635 SBA recourse provision (benefit) 775 ( 188 ) Charge-offs, net ( 261 ) ( 6 ) Balance at the end of the period $ 955 $ 441 In the normal course of business, various legal proceedings involving the Corporation are pending. Management, based upon advice from legal counsel, does not anticipate any significant losses as a result of these actions. Management believes that any liability arising from any such proceedings currently existing or threatened will not have a material adverse effect on the Corporation’s financial position, results of operations, and cash flows. Note 19 – Fair Value Disclosures The Corporation determines the fair values of its financial instruments based on the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is defined as the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date and is based on exit prices. Fair value includes assumptions about risk, such as nonperformance risk in liability fair values, and is a market-based measurement, not an entity-specific measurement. The standard describes three levels of inputs that may be used to measure fair value. Level 1 — Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date. Level 2 — Level 2 inputs are inputs, other than quoted prices included with Level 1, that are observable for the asset or liability either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 — Level 3 inputs are supported by little or no market activity and are significant to the fair value of the assets or liabilities. 114 Table of Contents In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Corporation’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Assets and liabilities measured at fair value on a recurring basis, segregated by fair value hierarchy level, are summarized below: December 31, 2023 Fair Value Measurements Using Level 1 Level 2 Level 3 Total (In Thousands) Assets: Securities available-for-sale: U.S. treasuries $ — $ 13,776 $ — $ 13,776 U.S. government agency securities - government-sponsored enterprises — 27,566 — 27,566 Municipal securities — 35,881 — 35,881 Residential mortgage-backed securities - government issued — 68,056 — 68,056 Residential mortgage-backed securities - government-sponsored enterprises — 120,833 — 120,833 Commercial mortgage-backed securities - government issued — 2,525 — 2,525 Commercial mortgage-backed securities - government-sponsored enterprises — 28,369 — 28,369 Interest rate swaps — 55,597 — 55,597 Liabilities: Interest rate swaps — 51,949 — 51,949 December 31, 2022 Fair Value Measurements Using Level 1 Level 2 Level 3 Total (In Thousands) Assets: Securities available-for-sale: U.S. treasuries $ — $ 4,445 $ — $ 4,445 U.S. government agency securities - government-sponsored enterprises — 13,205 — 13,205 Municipal securities — 39,311 — 39,311 Residential mortgage-backed securities - government issued — 19,431 — 19,431 Residential mortgage-backed securities - government-sponsored enterprises — 106,323 — 106,323 Commercial mortgage-backed securities - government issued — 2,932 — 2,932 Commercial mortgage-backed securities - government-sponsored enterprises — 26,377 — 26,377 Interest rate swaps — 68,581 — 68,581 Liabilities: Interest rate swaps — 61,419 — 61,419 For assets and liabilities measured at fair value on a recurring basis, there were no transfers between the levels during the year ended December 31, 2023 or 2022 related to the above measurements. 115 Table of Contents Assets and liabilities measured at fair value on a non-recurring basis, segregated by fair value hierarchy, are summarized below: December 31, 2023 Fair Value Measurements Using Level 1 Level 2 Level 3 Total (In Thousands) Collateral-dependent loans $ — $ — $ 4,917 $ 4,917 Repossessed assets — — 247 247 Loan servicing rights — — 1,356 1,356 December 31, 2022 Fair Value Measurements Using Level 1 Level 2 Level 3 Total (In Thousands) Impaired loans $ — $ — $ 1,022 $ 1,022 Repossessed assets — — 95 95 Loan servicing rights — — 1,491 1,491 Collateral-dependent loans were written down to the fair value of their underlying collateral less costs to sell of $ 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. These techniques included observable inputs for the individual impaired loans being evaluated such as current appraisals, recent sales of similar assets, or other observable market data, and unobservable inputs, typically when discounts are applied to appraisal values to adjust such values to current market conditions or to reflect net realizable values. The quantification of unobservable inputs for Level 3 impaired loan values range from 10 % - 100 % as of the measurement date of December 31, 2023. The weighted average of those unobservable inputs was 57 %. 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 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. When SBA loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. The servicing rights are subsequently measured using the amortization method, which requires amortization into interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. The Corporation periodically reviews this portfolio for impairment and engages a third-party valuation firm to assess the fair value of the overall servicing rights portfolio. Loan servicing rights do not trade in an active, open market with readily observable prices. While sales of loan servicing rights do occur, the precise terms and conditions typically are not readily available to allow for a “quoted price for similar assets” comparison. Accordingly, the Corporation utilizes an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of its loan servicing rights. The valuation model incorporates prepayment assumptions to project loan servicing rights cash flows based on the current interest rate scenario, which is then discounted to estimate an expected fair value of the loan servicing rights. The valuation model considers portfolio characteristics of the underlying serviced portion of the SBA loans and uses the following significant unobservable inputs: (1) constant prepayment rate (“CPR”) assumptions based on the SBA sold pools historical CPR as quoted in Bloomberg and (2) a discount rate. Due to the nature of the valuation inputs, loan servicing rights are classified in Level 3 of the fair value hierarchy. 116 Table of Contents Fair Value of Financial Instruments The Corporation is required to disclose estimated fair values for its financial instruments. Fair value estimates, methods and assumptions, consistent with exit price concepts for fair value measurements, are set forth below: December 31, 2023 Carrying Amount Fair Value Total Level 1 Level 2 Level 3 (In Thousands) Financial assets: Cash and cash equivalents $ 139,510 $ 139,510 $ 139,510 $ — $ — Securities available-for-sale 297,006 297,006 — 297,006 — Securities held-to-maturity 8,503 8,255 — 8,255 — Loans held for sale 4,589 4,956 — 4,956 — Loans and lease receivables, net 2,818,986 2,789,731 — — 2,789,731 Federal Home Loan Bank stock 12,042 N/A N/A N/A N/A Accrued interest receivable 13,275 13,275 13,275 — — Interest rate swaps 55,597 55,597 — 55,597 — Financial liabilities: Deposits 2,796,779 2,795,463 2,101,939 693,524 — Federal Home Loan Bank advances and other borrowings 330,916 320,287 — 320,287 — Accrued interest payable 10,860 10,860 10,860 — — Interest rate swaps 51,949 51,949 — 51,949 — Off-balance sheet items: Standby letters of credit 190 190 — — 190 N/A = The fair value is not applicable due to restrictions placed on transferability 117 Table of Contents December 31, 2022 Carrying Amount Fair Value Total Level 1 Level 2 Level 3 (In Thousands) Financial assets: Cash and cash equivalents $ 102,682 $ 102,682 $ 102,682 $ — $ — Securities available-for-sale 212,024 212,024 — 212,024 — Securities held-to-maturity 12,635 12,270 — 12,270 — Loans held for sale 2,632 2,829 — 2,829 — Loans and lease receivables, net 2,418,836 2,394,702 — — 2,394,702 Federal Home Loan Bank stock 17,812 N/A N/A N/A N/A Accrued interest receivable 9,403 9,403 9,403 — — Interest rate swaps 68,581 68,543 — 68,543 — Financial liabilities: Deposits 2,168,206 2,167,444 1,827,215 340,229 — Federal Home Loan Bank advances and other borrowings 456,808 440,242 — 440,242 — Accrued interest payable 4,053 4,053 4,053 — — Interest rate swaps 61,419 61,419 — 61,419 — Off-balance sheet items: Standby letters of credit 184 184 — — 184 N/A = The fair value is not applicable due to restrictions placed on transferability Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the Consolidated Balance Sheets. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Corporation. Securities: The fair value measurements of investment securities are determined by a third-party pricing service which considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, credit information and the securities’ terms and conditions, among other things. The fair value measurements are subject to independent verification by another pricing source on a quarterly basis to review for reasonableness. Any significant differences in pricing are reviewed with appropriate members of management who have the relevant technical expertise to assess the results. The Corporation has determined that these valuations are classified in Level 2 of the fair value hierarchy. When the independent pricing service does not provide a fair value measurement for a particular security, the Corporation will estimate the fair value based on specific information about each security. Fair values derived in this manner are classified in Level 3 of the fair value hierarchy. Loans Held for Sale: Loans held for sale, which consist of the guaranteed portions of SBA 7(a) loans, are carried at the lower of cost or estimated fair value. The estimated fair value is based on what secondary markets are currently offering for portfolios with similar characteristics. Interest Rate Swaps: The carrying amount and fair value of existing derivative financial instruments are based upon independent valuation models, which use widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative contract. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The Corporation incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative 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. 118 Table of Contents Limitations: Fair value estimates are made at a discrete point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holding of a particular financial instrument. Because no market exists for a significant portion of the Corporation’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and are not considered in the estimates. Note 20 – Condensed Parent Only Financial Information The following represents the condensed financial information of the Corporation only: Condensed Balance Sheets December 31, 2023 December 31, 2022 (In Thousands) Assets Cash and cash equivalents $ 2,027 $ 3,129 Investments in subsidiaries, at equity 339,854 294,109 Premises and equipment, net 51 66 Other assets 697 1,239 Total assets $ 342,629 $ 298,543 Liabilities and Stockholders’ Equity Junior subordinated notes and other borrowings $ 49,396 $ 34,341 Accrued interest payable and other liabilities 3,645 3,562 Total liabilities 53,041 37,903 Stockholders’ equity 289,588 260,640 Total liabilities and stockholders’ equity $ 342,629 $ 298,543 119 Table of Contents Condensed Statements of Income For the Year Ended December 31, 2023 2022 2021 (In Thousands) Net interest expense $ 1,989 $ 2,295 $ 2,539 Non-interest income Consulting and rental income from consolidated subsidiaries 5,644 5,794 2,417 Other non-interest income 43 69 34 Total non-interest income 5,687 5,863 2,451 Non-interest expense 8,234 7,633 5,747 Loss before income tax benefit and equity in undistributed net income of consolidated subsidiaries 4,536 4,065 5,835 Income tax benefit 337 1,387 1,483 Loss before equity in undistributed net income of consolidated subsidiaries 4,199 2,678 4,352 Equity in undistributed net income of consolidated subsidiaries 41,226 43,536 40,107 Net income $ 37,027 $ 40,858 $ 35,755 120 Table of Contents Condensed Statements of Cash Flows For the Year Ended December 31, 2023 2022 2021 (In Thousands) Operating activities Net income $ 37,027 $ 40,858 $ 35,755 Adjustments to reconcile net income to net cash used in operating activities: Equity in undistributed earnings of consolidated subsidiaries ( 41,226 ) ( 43,536 ) ( 40,107 ) Share-based compensation 2,977 2,584 2,513 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) provided by operating activities ( 1,960 ) 1,869 ( 543 ) Investing activities Dividends received from subsidiaries 12,100 2,008 8,534 Proceeds from redemption of Trust II stock — 315 — Capital contributions to subsidiaries ( 15,000 ) — — Net cash (used in) provided by investing activities ( 2,900 ) 2,323 8,534 Financing activities Net increase (decreases) in long-term borrowed funds 54 ( 357 ) 55 Proceeds from issuance of subordinated notes payable 15,000 20,000 — Repayment of subordinated notes payable — ( 9,090 ) — Repayment of junior subordinated debentures — ( 10,076 ) — Proceeds from issuance of preferred stock — 11,992 — Proceeds from purchased funds and other short-term debt — ( 500 ) 500 Purchase of treasury stock ( 2,971 ) ( 6,126 ) ( 5,477 ) Preferred stock dividends paid ( 875 ) ( 683 ) — Cash dividends paid ( 7,578 ) ( 6,688 ) ( 6,166 ) Net proceeds from purchases of ESPP shares 128 134 160 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 ) Cash and cash equivalents at the beginning of the period 3,129 331 3,268 Cash and cash equivalents at the end of the period $ 2,027 $ 3,129 $ 331 121 Table of Contents Note 21 – Condensed Quarterly Earnings (unaudited) 2023 2022 Fourth Quarter Third Quarter Second Quarter First Quarter Fourth Quarter Third Quarter Second Quarter First Quarter (Dollars in Thousands, Except Per Share Data) Interest income $ 54,762 $ 50,941 $ 47,161 $ 42,064 $ 38,319 $ 31,786 $ 27,031 $ 24,235 Interest expense 25,222 22,345 19,414 15,359 10,867 5,902 3,371 2,809 Net interest income 29,540 28,596 27,747 26,705 27,452 25,884 23,660 21,426 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 Non-interest expense 21,588 23,189 22,031 21,767 21,167 20,028 19,456 18,823 Income before income tax expense 12,473 12,020 10,859 11,787 12,556 14,041 14,803 10,844 Income tax expense 2,703 2,079 2,522 2,808 2,400 3,215 3,599 2,172 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: Basic earnings $ 1.15 $ 1.17 $ 0.98 $ 1.05 $ 1.18 $ 1.25 $ 1.29 $ 1.02 Diluted earnings 1.15 1.17 0.98 1.05 1.18 1.25 1.29 1.02 Dividends declared 0.2275 0.2275 0.2275 0.2275 0.1975 0.1975 0.1975 0.1975 122 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Shareholders and the Board of Directors First Business Financial Services, Inc. Madison, Wisconsin Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of First Business Financial Services, Inc. (the "Corporation") as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively referred to as the "financial statements"). We also have audited the Corporation’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Corporation as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework: (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’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. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 123 Table of Contents Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance and Provision for 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: management’s ongoing review and grading of the loan and lease portfolios, consideration of delinquency experience, changes in the size of the loan and lease portfolios, existing economic conditions, level of loans and leases subject to more frequent review by management, changes in underlying collateral, concentrations of loans to specific industries, and other qualitative factors that could affect credit losses. 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 qualitative factors, including controls addressing: a. The reliability and relevance of data used as the basis for the adjustments relating to qualitative factors; b. The reasonableness of management’s judgments and assumptions related to the assessed level of risk and the ending allocation of the qualitative factors; c. 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: 124 Table of Contents a. Evaluation of the reliability and relevance of data used as a basis for the adjustments relating to qualitative factors; b. 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; c. 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; d. 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 was signed for the audit of the 2018 financial statements. Oak Brook, Illinois February 28, 2024 125 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.