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First Business Financial Services, Inc. (together with all of its subsidiaries, collectively referred to as the “Corporation,” “FBFS,” “we,” “us,” or “our”) is a registered bank holding company originally incorporated in 1986 under the laws of the State of Wisconsin and is engaged in the commercial banking business through its wholly-owned bank subsidiary, First Business Bank (collectively with its subsidiaries “FBB” or the “Bank”), headquartered in Madison, Wisconsin. All of our operations are conducted through FBB and its wholly-owned subsidiary First Business Specialty Finance, LLC (“FBSF”). The Bank operates as a business bank, delivering a full line of commercial banking products and services tailored to meet the specific needs of small and medium-sized businesses, business owners, executives, professionals, and high net worth individuals. Our products and services are focused on business banking, private wealth, and bank consulting. Within business banking, we offer commercial real estate lending, commercial and industrial lending, asset-based lending, accounts receivable financing, equipment financing, floorplan financing, vendor financing, Small Business Administration (“SBA”) lending and servicing, treasury management solutions, and company retirement services. Our private wealth management services include trust and estate administration, financial planning, investment management, and private banking. Our bank consulting experts provide investment portfolio administrative services, and asset liability management services. We do not utilize a branch network to attract retail clients. Our operating model is predicated on deep client relationships, financial expertise, and an efficient, centralized administration function delivering best in class client satisfaction. Our focused model allows experienced staff to provide the level of financial expertise needed to develop and maintain long-term relationships with our clients. We conduct our commercial banking operations through one operating segment.

We provide asset-based lending to small- to medium-sized companies. Our asset-based lending team serves clients on a nationwide basis through business development officers located in several states. We primarily provide revolving lines of credit and term loans for financial and strategic acquisitions, capital expenditures, working capital to support rapid growth, bank debt refinancing, debt restructuring, and corporate turnaround strategies. As a bank-owned, asset-based lender with strong underwriting standards, our team is positioned to provide cost-effective financing solutions to companies which do not have the established, stable cash flows necessary to qualify for traditional commercial lending products. These borrowing relationships generally range between $2 million and $18 million with terms of 24 to 60 months. Asset-based lending typically generates higher yields than traditional commercial lending. This line of business complements our traditional commercial loan portfolio and provides us with more diverse income opportunities. As of December 31, 2023, asset-based lending represented approximately 8% of our total gross loans and leases receivable.

Our Equipment Finance team seeks to position itself as the preferred point of sale financing choice utilized by equipment vendors and their purchasing customers. Our online application and proprietary credit scoring architecture enable us to provide small ticket vendor equipment financings through a nationwide distribution channel. These equipment vendors specialize primarily in healthcare, manufacturing, technology equipment, agriculture, construction, and specialty vehicles. Small ticket vendor equipment financing typically generates higher yields than traditional commercial lending. As of December 31, 2023, equipment financing represented approximately 10% of our total gross loans and leases receivable.

SBA loans are made through programs designed by the federal government to assist the small business community in obtaining financing. We are an approved participant in the SBA’s Preferred Lender Program (“PLP”). The PLP is part of the SBA's effort to streamline the procedures necessary to provide financial assistance to the small business community. Under this program, the SBA delegates the final credit decision, most servicing, liquidation authority and responsibility to PLP lenders. We leverage this program authority and capacity to package, underwrite, process, service, and liquidate, if necessary, SBA loans nationwide.

Our SBA loans fall into three categories: loans originated under the SBA’s 7(a) term loan program; loans originated under the SBA’s 504 program; and SBA Express loans and lines of credit. Specific program guidelines vary based on the SBA loan program; however, all loans must be underwritten, originated, monitored, and serviced according to the SBA’s Standard Operating Procedures in order to maintain the guaranty, if any, under the SBA program. Except for loans originated under the SBA’s 504 program, the SBA generally provides a guaranty to the lender ranging from 50% to 90% of loan the balance as an inducement to the lender to originate the loan.

SBA lending is designed to generate new business opportunities for the Bank by meeting the needs of clients that cannot be met with conventional bank loans. We earn interest income from these loans, generally at variable rates higher than those of our traditional commercial loans. We have a history of recognizing gains on the sale of the guaranteed portion of the loans. We also regularly earn treasury management fee income from the borrower and servicing income from the owner of the sold portion of these loans. As of December 31, 2023, the on-balance sheet portion of SBA loans represented approximately 2% of our total gross loans and leases receivable.

FBB encounters strong competition across all of our commercial banking products and services. Such competition includes banks, savings institutions, mortgage banking companies, credit unions, finance companies, equipment finance companies, mutual funds, insurance companies, brokerage firms, investment banking firms, and FinTech companies. The Bank also competes with regional and national financial institutions, many of which have greater liquidity, higher lending limits, greater access to capital, more established market recognition, and more resources than the Bank. We believe the experience, expertise, and responsiveness of our banking professionals, as well as our focus on fostering long-lasting relationships, sets us apart from our competitors.

From the Corporation’s inception, the commitment to and investment in our employees and the communities we serve has been the foundation of the Corporation’s long-term success for the benefit of our shareholders. The Corporation’s commitment is best expressed in the words of our Belief Statement: At First Business Bank, we believe visionary, determined entrepreneurs and investors create a thriving economy and, in turn, social and economic advancement for their employees, investors, families, and communities. Built by driven entrepreneurs, First Business Bank has the experience to create both wealth, and a wealth of good in the world.

FBB is a state bank chartered in 1909 in Wisconsin under the name Kingston State Bank. In 1990, FBB relocated its home office to Madison, Wisconsin, and began focusing on providing high-quality banking services to small- to medium-sized businesses located in Madison and the surrounding area. FBB’s commercial banking products and services include commercial loans, commercial real estate loans, asset-based loans, accounts receivable financing, SBA lending and servicing, floorplan financing, equipment loans and leases, commercial deposit accounts, company retirement solutions, and treasury management services. FBB offers a variety of deposit accounts and personal loans to business owners, executives, professionals, and high net worth individuals. FBB also offers private wealth management services and bank consulting services. FBB has four full-service banking locations in Madison, Brookfield, and Appleton, Wisconsin, and Leawood, Kansas.

Our principal executive offices are located at 401 Charmany Drive, Madison, Wisconsin 53719 and our telephone number is (608) 238-8008. The contents of our website are not incorporated by reference into this Form 10-K. We maintain an Internet website at www.firstbusiness.bank. This Form 10-K and all of our other filings under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available free of charge through that website, including copies of our proxy statement, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we file those materials with, or furnish them to, the Securities and Exchange Commission (“SEC”).

Although certain of our commercial banking products and services are marketed throughout the Midwest and beyond, our primary markets lie in Wisconsin, Kansas, and Missouri. Specifically, our three markets in Wisconsin consist of South Central Wisconsin, Southeast Wisconsin, and Northeast Wisconsin. We serve these markets primarily through our offices in Madison, Brookfield, and Appleton, respectively. We serve the greater Kansas City Metro through our Leawood, Kansas office, which is located in the Kansas City metropolitan area. Each of our primary markets provides a unique set of economic and demographic characteristics which provide us with a variety of strategic opportunities. A brief description of each of our primary markets is as follows:

As the capital of Wisconsin and home of the University of Wisconsin-Madison, the greater Madison area, specifically Dane County and surrounding counties, offers an appealing economic environment populated by a highly educated workforce. While the economy of the South Central Wisconsin is driven in large part by the government and education sectors, there is also a diverse array of industries outside of these segments. South Central Wisconsin is also home to technology and research and development related companies, which benefit from the area’s strong governmental and academic ties, as well as several major health care systems and hospitals, which provides healthcare services to South Central Wisconsin.

Corey A. Chambas, age 61, has served as a director of FBFS since July 2002, as Chief Executive Officer since December 2006 and as President from February 2005 until January 2023. He served as Chief Operating Officer of FBFS from February 2005 to September 2006 and as Executive Vice President from July 2002 to February 2005. He served as Chief Executive Officer of FBB from July 1999 to September 2006 and as President of FBB from July 1999 to February 2005. Mr. Chambas has over 35 years of commercial banking experience. Prior to joining FBFS in 1993, he was a Vice President of Commercial Lending with M&I Bank, now known as BMO Bank, N.A. , in Madison, Wisconsin.

David R. Seiler, age 59, has served as Chief Operating Officer of FBFS since April 2016 and as President of FBFS since January 2023. He also currently serves as a director for our subsidiary FBSF. Mr. Seiler has over 25 years of financial services experience including his previous position as Managing Director (formerly Senior Vice President/Manager) of the Correspondent Banking Division with BMO Bank, N.A. in Milwaukee, Wisconsin which he held from 2007 to 2016. Prior to that, he held the position of Senior Vice President/Team Leader, Correspondent Real Estate Division from 2005 to 2007 and Vice President, Relationship Manager, Commercial Real Estate from 2002 to 2005.

Mark J. Meloy, age 62, has served as Executive Vice President of FBFS since January 2023. Mr. Meloy joined FBFS in 2000 and has held various positions including Chief Executive Officer of FBB, Executive Vice President of FBB, and President and Chief Executive Officer of FBB-Milwaukee. He also currently serves as a director of our FBSF subsidiary. Mr. Meloy has over 35 years of commercial lending experience. Prior to joining FBFS, Mr. Meloy was a Vice President and Senior Relationship Manager with Firstar Bank, NA, in Cedar Rapids, Iowa and Milwaukee, Wisconsin, now known as U.S. Bank, working in their financial institutions group with mergers and acquisition financing.

Federal Deposit Insurance Corporation (“FDIC”)-insured institutions, like the Bank, their holding companies, and their affiliates are extensively regulated under federal and state law. As a result, our growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including our primary regulators, the Board of Governors of the Federal Reserve System (“Federal Reserve”), the Bank’s state regulator, the Wisconsin Department of Financial Institutions (“WDFI”), and its primary federal regulator, the FDIC. Furthermore, taxation laws administered by the Internal Revenue Service (“IRS”) and state taxing authorities, accounting rules developed by the Financial Accounting Standards Board (“FASB”), securities laws administered by the SEC and state securities authorities, and anti-money laundering

Federal and state banking laws impose a comprehensive system of supervision, regulation, and enforcement on the operations of FDIC-insured institutions, their holding companies, and affiliates that is intended primarily for the protection of the FDIC-insured deposits and depositors of banks, rather than shareholders. These laws, and the regulations of the bank regulatory agencies issued under them, affect, among other things, the scope of our business, the kinds and amounts of investments the Corporation and the Bank may make, limits on the Bank’s loans to any one borrower, reserve requirements, required capital levels relative to assets, the nature and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire, dealings with the Corporation’s and the Bank’s insiders and affiliates, and payment of dividends. In reaction to the global financial crisis beginning in 2008 (the “global financial crisis”), and particularly following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), we experienced heightened regulatory requirements and scrutiny. Although the reforms primarily targeted systemically important financial service providers, their influence filtered down in varying degrees to community banks over time and caused our compliance and risk management processes, and the costs thereof, to increase. After the 2016 federal elections, momentum to decrease the regulatory burden on community banks gathered strength. In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Regulatory Relief Act”) was enacted to modify or remove certain financial reform rules and regulations. While the Regulatory Relief Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion, like us, and for large banks with assets of more than $50 billion that were considered systemically important under the Dodd-Frank Act solely because of size. Many of these changes were intended to result in meaningful regulatory relief for community banks and their holding companies, including new rules that may make the capital requirements less complex. For a discussion of capital requirements, see The Role of Capital below. The Regulatory Relief Act also eliminated questions about the applicability of certain Dodd-Frank Act reforms to community bank systems, including relieving the Bank of any requirement to engage in mandatory stress tests, name a risk committee, or comply with the Volcker Rule’s complicated prohibitions on proprietary trading and ownership of private funds. The Corporation believes these reforms are generally favorable to its operations.

The supervisory framework for U.S. banking organizations subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that are not publicly available and can impact the conduct and growth of their business. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, information technology, and various other factors. The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law, or are otherwise inconsistent with laws and regulations.

Regulatory capital represents the net assets of a banking organization available to absorb losses. Because of the risks attendant to their business, FDIC-insured institutions are generally required to hold more capital than other businesses, which directly affects our earnings capabilities. While capital has historically been one of the key measures of the financial health of both bank holding companies and banks, its role became fundamentally more important in the wake of the global financial crisis, as the banking regulators recognized that the amount and quality of capital held by banks prior to the crisis was insufficient to absorb losses during periods of severe stress. Certain provisions of the Dodd-Frank Act and Basel III, discussed below, establish capital standards for banks and bank holding companies that are meaningfully more stringent than those in place previously.

Minimum Required Capital Levels. Banks have been required to hold minimum levels of capital based on guidelines established by the bank regulatory agencies since 1983. The minimums have been expressed in terms of ratios of “capital” divided by “total assets.” As discussed below, bank capital measures have become more sophisticated over the years and have focused more on the quality of capital and the risk of assets. Bank holding companies have historically had to comply with less stringent capital standards than their bank subsidiaries and have been able to raise capital with hybrid instruments such as trust preferred securities. The Dodd-Frank Act mandated the Federal Reserve to establish minimum capital levels for holding companies on a consolidated basis as stringent as those required for FDIC-insured institutions. A result of this change is that the proceeds of hybrid instruments, such as trust preferred securities, were excluded from capital over a phase-out period. However,

The Basel III Rule. In July 2013, the U.S. federal banking agencies approved the implementation of the Basel III regulatory capital reforms in pertinent part, and, at the same time, promulgated rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rule”). In contrast to capital requirements historically, which were in the form of guidelines, Basel III was released in the form of enforceable regulations by each of the regulatory agencies. The Basel III Rule is applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies” who are relieved from compliance with the Basel III Rule. Historically we have been disqualified from taking advantage of the relief since we have securities registered with the SEC. Moreover, our asset size now exceeds the small bank holding company threshold. Banking organizations became subject to the Basel III Rule on January 1, 2015, and its requirements were fully phased-in as of January 1, 2019.

Not only did the Basel III Rule increase most of the required minimum capital ratios in effect prior to January 1, 2015, but it introduced the concept of Common Equity Tier 1 Capital, which consists primarily of common stock, related surplus (net of treasury stock), retained earnings, and Common Equity Tier 1 minority interests subject to certain regulatory adjustments. The Basel III Rule also changed the definition of capital by establishing more stringent criteria that instruments must meet to be considered Additional Tier 1 Capital (primarily non-cumulative perpetual preferred stock that meets certain requirements) and Tier 2 Capital (primarily other types of preferred stock and subordinated debt, subject to limitations). A number of instruments that historically qualified as Tier 1 Capital under Basel I do not qualify, or their qualifications changed. For example, noncumulative perpetual preferred stock, which qualified as simple Tier 1 Capital, does not qualify as Common Equity Tier 1 Capital, but qualifies as Additional Tier 1 Capital. The Basel III Rule also constrained the inclusion of minority interests, mortgage-servicing assets, and deferred tax assets in capital and requires deductions from Common Equity Tier 1 Capital in the event that such assets exceed a certain percentage of a banking institution’s Common Equity Tier 1 Capital.

In addition, institutions that seek the freedom to make capital distributions (including for dividends and repurchases of stock) and pay discretionary bonuses to executive officers without restriction must also maintain 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation buffer. The purpose of the conservation buffer is to ensure that banking institutions maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. Factoring in the conservation buffer increases the minimum ratios depicted above to 7% for Common Equity Tier 1 Capital, 8.5% for Tier 1 Capital and 10.5% for Total Capital.

Through subsequent rulemaking, the federal banking agencies provided certain forms of relief to banking organizations that are not subject to the capital regulation's advanced approaches, such as the Corporation. For instance, non-advanced approaches institutions are subject to simpler regulatory capital requirements for Mortgage Servicing Assets (“MSA”), certain Deferred Tax Assets (“DTA”) arising from temporary differences, investments in the capital of unconsolidated financial institutions, and requirements for the amount of capital issued by a consolidated subsidiary of a banking organization and held by third parties (sometimes referred to as a minority interest) that is includable in regulatory capital. Specifically, such institutions may deduct from Common Equity Tier 1 Capital any amount of MSAs, temporary difference DTAs, and investments in the capital of unconsolidated financial institutions that individually exceeds 25 percent of Common Equity Tier 1 Capital.

“well-capitalized” and, to that end, federal law and regulations provide various incentives for banking organizations to maintain regulatory capital at levels in excess of minimum regulatory requirements. For example, a banking organization that is well-capitalized may: (i) qualify for exemptions from prior notice or application requirements otherwise applicable to certain types of activities; (ii) qualify for expedited processing of other required notices or applications; and (iii) accept, roll-over, or renew brokered deposits. Higher capital levels could also be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities, or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 Capital less all intangible assets), well above the minimum levels.

Prompt Corrective Action. The concept of an institution being “well-capitalized” is part of a regulatory enforcement regime that provides the federal banking regulators with broad power to take “prompt corrective action” to resolve the problems of institutions based on the capital level of each particular institution. The extent of the regulators’ powers depends on whether the institution in question is “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution’s asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to sell itself; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate that the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution.

Community Bank Capital Simplification. Community banks have long raised concerns with bank regulators about the regulatory burden, complexity, and costs associated with certain provisions of the Basel III Rule. In response, Congress provided a potential Basel III “off-ramp” for certain institutions, like us, under Section 201 of the Regulatory Relief Act. Pursuant to authority granted thereunder, on September 17, 2019, the agencies adopted a final rule, effective on January 1, 2020, providing that banks and bank holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a “Community Bank Leverage Ratio” (“CBLR”) calculated by dividing Tier 1 capital by average total consolidated assets of greater than 9%, will be eligible to opt into the CBLR framework. By opting into the framework, qualifying banks and bank holding companies maintaining a CBLR greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the agencies’ capital rules and, if applicable, will be considered to have met the well-capitalized ratio requirements for purposes of section 38 of the Federal Deposit Insurance Act. In addition to the consolidated assets and CBLR requirements described above, a qualifying bank or bank holding company must also have (i) total off-balance sheet exposures (excluding derivatives other than sold credit derivatives and unconditionally cancellable commitments) of 25% or less of total consolidated assets, and (ii) the sum of total trading assets and trading liabilities of 5% or less of total consolidated assets.

General. As the sole shareholder of the Bank, we are a bank holding company. As a bank holding company, we are registered with, and subject to regulation, supervision, and enforcement by, the Federal Reserve under the Bank Holding Company Act of 1956, as amended (“BHCA”). We are legally obligated to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where we might not otherwise do so. Under the BHCA, we are subject to periodic examination by the Federal Reserve. We are required to file with the Federal Reserve periodic reports of our operations and such additional information regarding the Corporation and our subsidiaries as the Federal Reserve may require.

Acquisitions and Activities. The primary purpose of a bank holding company is to control and manage banks. The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding company or any acquisition by a bank holding company of another bank or bank holding company. Subject to certain conditions (including deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States. In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its FDIC-insured institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state institutions or their holding companies) and state laws that require that the target bank has been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. Furthermore, in accordance with the Dodd-Frank Act, bank holding companies must be well-capitalized and well-managed in order to effect interstate mergers or acquisitions. For a discussion of the capital requirements, see The Role of Capital above.

The BHCA generally prohibits the Corporation from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve prior to November 11, 1999 to be “so closely related to banking ... as to be a proper incident thereto.” This authority permits the Corporation to engage in a variety of banking-related businesses, including the ownership and operation of a savings association, or any entity engaged in consumer finance, equipment leasing, the operation of a computer service bureau (including software development), and mortgage banking and brokerage services. The BHCA does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies.

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

Change in Control. Federal law also prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator. “Control” is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company but may arise under certain circumstances between 10% and 24.99% ownership. On January 30, 2020, the Federal Reserve issued a final rule clarifying and expanding upon the Federal Reserve’s position on determinations of whether a company has the ability to exercise a controlling influence over another company. In particular, the final rule is intended to provide a better understanding of the facts and circumstances that the Federal Reserve considers most relevant when assessing whether control exists.

Dividend Payments. Our ability to pay dividends to our shareholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. As a Wisconsin corporation, we are subject to the limitations of Wisconsin law, which allows us to pay dividends unless, after giving effect to a dividend, any of the following would occur: (i) we would not be able to pay our debts as they become due in the usual course of business or (ii) the total assets would be less than the sum of its total liabilities plus any amount that would be needed if we were to be dissolved at the time of the dividend payment, to satisfy the preferential rights upon dissolution of shareholders whose rights are superior to the rights of the shareholders receiving the distribution.

prospective rate of earnings retention is inconsistent with the company’s capital needs and overall current and prospective financial condition; or (iii) the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. Moreover, under the Dodd-Frank Act and the requirements of the Federal Reserve, the Corporation, as a bank holding company, is required to serve as a source of financial strength to the Bank and to commit resources to support the Bank. In addition, consistent with its “source of strength” policy, the Federal Reserve has stated that, as a matter of prudent banking, a bank holding company should not maintain a level of cash dividends to its shareholders that places undue pressure on the capital of its bank subsidiaries, or that can be funded only through additional borrowings or other arrangements that may undermine the bank holding company’s ability to serve as a source of strength. The appropriate federal regulatory authorities have indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings.

Monetary Policy. The monetary policy of the Federal Reserve has a significant effect on the operating results of financial or bank holding companies and their subsidiaries. Among the tools available to the Federal Reserve to affect the money supply are open market transactions in U.S. government securities, changes in the discount rate on bank borrowings, and changes in reserve requirements against bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits.

Corporate Governance. The Dodd-Frank Act addressed many investor protection, corporate governance, and executive compensation matters that affect most U.S. publicly traded companies. The Dodd-Frank Act increased shareholder influence over boards of directors by requiring companies to give shareholders a nonbinding vote on executive compensation and so-called “golden parachute” payments, and by authorizing the SEC to promulgate rules that would allow shareholders to nominate and solicit voters for their own candidates using a company’s proxy materials. The legislation also directed the Federal Reserve to promulgate rules prohibiting excessive compensation paid to executives of bank holding companies, regardless of whether such companies are publicly traded.

The FDIC has adopted a risk-based assessment system whereby FDIC-insured institutions pay insurance premiums at rates based on their risk classification. For institutions like the Bank that are not considered large and highly complex banking organizations, assessments are now based on examination ratings and financial ratios. At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, increases or decreases the assessment rates, following notice and comment on proposed rulemaking. The assessment base against which an FDIC-insured institution’s deposit insurance premiums paid to the DIF has been calculated since effectiveness of the Dodd-Frank Act is based on its average consolidated total assets less its average tangible equity. This method shifted the burden of deposit insurance premiums toward those large depository institutions that rely on funding sources other than U.S. deposits.

certain thresholds. On October 18, 2022, the FDIC adopted a final rule increasing the initial base deposit insurance rate schedules by 2 basis points, beginning with the first quarterly assessment period of 2023. Starting January 1, 2023, the total base assessment rates for small banks, such as the Bank, ranged from 2.5 basis points to 32 basis points. This new assessment rate schedule will remain in effect unless and until the reserve ratio meets or exceeds 2.00%. Progressively lower assessment rate schedules will take effect when the reserve ratio reaches 2.00%, and again when it reaches 2.50%. The Bank’s assessment rate for deposit insurance was approximately 8 basis points for 2023.

The DIF reserve ratio was 1.10% as of June 30, 2023, which is less than the statutory minimum reserve ratio of 1.35%, which is required to be achieved by September 30, 2028. There was a sharp decline in the DIF in 2023 following the failures of Silicon Valley Bank, Signature Bank and First Republic Bank in the first half of 2023, coupled with strong insured deposit growth. On November 16, 2023, the FDIC issued a final rule to implement a special assessment to recover the loss DIF associated with protecting uninsured depositors following these bank failures. Under the final rule, the assessment base for an insured depository institution will be equal to the institution’s estimated uninsured deposits as of December 31, 2022, adjusted to exclude the first $5 billion in estimated uninsured deposits. Under the final rule, the FDIC will collect the special assessment at an annual rate of 13.4 basis points beginning with the first quarterly assessment period of 2024 and will continue to collect special assessments for an anticipated total of eight quarterly assessment periods. At December 31, 2023, our estimated level of uninsured deposits was below this threshold, and therefore, the Bank is not subject to this special assessment.

Liquidity Requirements. Liquidity is a measure of the ability and ease with which bank assets may be converted to cash. Liquid assets are those that can be converted to cash quickly if needed to meet financial obligations. To remain viable, FDIC-insured institutions must have enough liquid assets to meet their near-term obligations, such as withdrawals by depositors. Because the global financial crisis was in part a liquidity crisis, Basel III also includes a liquidity framework that requires FDIC-insured institutions to measure their liquidity against specific liquidity tests. One test, referred to as the Liquidity Coverage Ratio, is designed to ensure that the banking entity has an adequate stock of unencumbered high-quality liquid assets that can be converted easily and immediately in private markets into cash to meet liquidity needs for a 30-calendar day liquidity stress scenario. The other test, known as the Net Stable Funding Ratio, is designed to promote more medium- and long-term funding of the assets and activities of FDIC-insured institutions over a one-year horizon. These tests provide an incentive for banks and holding companies to increase their holdings in Treasury securities and other sovereign debt as a component of assets, increase the use of long-term debt as a funding source, and rely on stable funding like core deposits (in lieu of brokered deposits).

Dividend Payments. The primary source of funds for the Corporation is dividends from the Bank. Under Wisconsin law, the board of directors of a bank may declare and pay a dividend from its undivided profits in an amount it considers expedient. The board of directors must provide for the payment of all expenses, losses, required reserves, taxes, and interest accrued or due from the bank before the declaration of dividends from undivided profits. If dividends declared and paid in either of the two immediately preceding years exceeded net income for either of those two years respectively, the bank may not declare or pay any dividend in the current year that exceeds year-to-date net income except with the written consent of the WDFI. The FDIC and the WDFI may prohibit the payment of dividends by the Bank if either or both determine such payment would constitute an unsafe or unsound practice. In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends will have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer. See The Role of Capital above.

State Bank Investments and Activities. The Bank is permitted to make investments and engage in activities directly or through subsidiaries as authorized by Wisconsin law. However, under federal law and FDIC regulations, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, which are not permissible for a national bank. Federal law and FDIC regulations also prohibit FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines that the activity would not pose a significant risk to the DIF. These restrictions have not had, and are not currently expected to have, a material impact on the operations of the Bank.

Insider Transactions. The Bank is subject to certain restrictions imposed by federal law on “covered transactions” between the Bank and its “affiliates.” We are an affiliate of the Bank for purposes of these restrictions, and covered transactions subject to the restrictions include extensions of credit to the Corporation, investments in the stock or other securities of the Corporation, and the acceptance of the stock or other securities of the Corporation as collateral for loans made by the Bank. The Dodd-Frank Act enhanced the requirements for certain transactions with affiliates, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered transactions must be maintained.

In general, the safety and soundness standards prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. While regulatory standards do not have the force of law, if an institution operates in an unsafe and unsound manner, the FDIC-insured institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If an FDIC-insured institution fails to submit an acceptable compliance plan or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the FDIC-insured institution’s rate of growth, require the FDIC-insured institution to increase its capital, restrict the rates the institution pays on deposits, or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with safety and soundness may also constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments.

During the past several years, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating the activities of the FDIC-insured institutions they supervise. Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product innovation, and the size and speed of financial transactions have changed the nature of banking markets. The agencies have identified a spectrum of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational, compliance, and reputational risk. In particular, recent regulatory pronouncements have focused on operational risk, which arises from the potential that inadequate information systems, operational problems, breaches in internal controls, fraud, or unforeseen catastrophes will result in unexpected losses. New products and services, third-party risk, incentive compensation, and cybersecurity are critical sources of risk that FDIC-insured institutions are expected to address in the current environment. The Bank is expected to have active board and senior management oversight; adequate policies, procedures, and limits; adequate risk measurement, monitoring, and management information systems; and comprehensive internal controls.

Branching Authority. Wisconsin banks, such as the Bank, have the authority under Wisconsin law to establish branches anywhere in the State of Wisconsin, subject to receipt of all required regulatory approvals. The establishment of new interstate branches has historically been permitted only in those states the laws of which expressly authorize such expansion. The Dodd-Frank Act permits well-capitalized and well-managed banks to establish new interstate branches or acquire individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) without impediments. Federal law permits state and national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal and state deposit concentration limits; and (iii) state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger.

Brokered Deposits. On December 19, 2018, the FDIC adopted a final rule on the treatment of reciprocal deposits pursuant to the Regulatory Relief Act. The final rule, effective March 6, 2019, exempts certain reciprocal deposits from being considered as brokered deposits for certain insured institutions. In particular, well-capitalized and well-rated institutions are not required to treat reciprocal deposits as brokered deposits up to the lesser of 20% of their total liabilities or $5 billion. Institutions that are not both well-capitalized and well-rated may also exclude reciprocal deposits from their brokered deposits under certain circumstances.

On December 15, 2020, the FDIC issued a final rule on brokered deposits. The rule aims to clarify and modernize the FDIC’s existing regulatory framework for brokered deposits. Among other things, the rule establishes bright-line standards for determining whether an entity meets the definition of a “deposit broker,” and identifies a number of business relationships (or “designated exceptions”) that automatically meet the “primary purpose” exception. The rule also establishes a transparent application process for entities that seek a “primary purpose” exception but do not meet one of the “designated exceptions.” The new rule also reflects technological changes across the banking industry and removes regulatory disincentives that limit banks’ ability to serve their customers. Full compliance with the amended brokered deposits regulation was required by January 1, 2022. The FDIC staff continues to implement the final rule through the issuance of interpretative guidance and other administrative actions.

Community Reinvestment Act (“CRA”) Requirements. The CRA requires the Bank to have a continuing and affirmative obligation in a safe and sound manner to help meet the credit needs of the entire community, including low- and moderate-income (“LMI”) neighborhoods. Federal regulators regularly assess the Bank’s record of meeting the credit needs of its communities. An institution’s CRA assessment may be used by its regulators in their evaluation of certain applications, including a merger, acquisition, or the establishment of a branch office. An unsatisfactory rating may be used as a basis for denial of such an application.

On October 24, 2023, the federal banking agencies jointly issued a final rule to strengthen and modernize the existing CRA regulations. Under the final rule, the agencies will evaluate a bank’s CRA performance based upon the varied activities that it conducts and the communities in which it operates. CRA evaluations and data collection requirements will be tailored based on bank size and type. The Bank would be considered a large bank with assets of greater than $2 billion under the final rule and therefore will be evaluated under new lending, retail services and products, community development financing, and community development services tests. The final rule includes CRA assessment areas associated with mobile and online banking, and new metrics and benchmarks to assess retail lending performance. In addition, the final rule emphasizes smaller loans and investments that can have a high impact and be more responsive to the needs of LMI communities. The final rule will take effect on April 1, 2024; however, compliance with the majority of the final rule's provisions will not be required until January 1, 2026, and the data reporting requirements of the final rule will not take effect until January 1, 2027.

As implemented by federal banking and securities regulators and the Department of the Treasury, AML laws obligate depository institutions to verify their customers’ identity, conduct customer due diligence, report on suspicious activity, file reports of transactions in currency, and conduct enhanced due diligence on certain accounts. In addition, the Financial Crimes Enforcement Network (“FinCEN”) promulgated customer due diligence and customer identification rules that required banks to identify and verify the identity of beneficial owners of all legal entity customers (with certain exclusions) at the time a new account is opened (subject to certain exemptions). Sanctions laws prohibit persons of the United States from engaging in any transaction with a restricted person or restricted country. Depository institutions are required by their respective federal regulators to maintain policies and procedures in order to ensure compliance with the above obligations. Federal regulators regularly examine BSA/AML and sanctions compliance programs to ensure their adequacy and effectiveness, and the frequency and extent of such examinations and the remedial actions resulting therefrom have been increasing. Non–compliance with sanctions laws and/or AML laws or failure to maintain an adequate BSA/AML compliance program can lead to significant monetary penalties and reputational damage, and federal regulators evaluate the effectiveness of an applicant in combating money laundering when determining whether to approve a proposed bank merger, acquisition, restructuring, or other expansionary activity.

On January 1, 2021, the National Defense Authorization Act (“NDAA”) was enacted by Congress. The new law establishes the most significant overhaul of BSA and AML since the USA PATRIOT Act of 2001, including: (i) new beneficial ownership information and the establishment of a beneficial ownership registry, which requires corporate entities (generally any corporation, limited liability company or similar entity with 20 or fewer employees and annual gross income of $5 million or less) to report beneficial ownership information to FinCEN (which information will be maintained by FinCEN and made available upon request to financial institutions); (ii) whistleblower and penalty enhancements; (iii) improvements to existing information sharing provisions that permit financial institutions to share information relating to suspicious activity reports for purposes of combating illicit finance risks; and (iv) provisions emphasizing the importance of risk-based approaches to AML program requirements. Many of the changes to the BSA and AML require the Department of Treasury and FinCEN to

Privacy and Cybersecurity. The Bank is subject to many U.S. federal and state laws and regulations governing requirements for maintaining policies and procedures to protect non-public personal information of their consumers. These laws require the Bank to periodically disclose their privacy policies and practices relating to sharing such information and permit consumers to opt out of their ability to share information with unaffiliated third parties under certain circumstances. They also impact the Bank’s ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to contact clients with marketing offers.

The Bank is required to implement a comprehensive information security program that includes administrative, technical, and physical safeguards to ensure the security and confidentiality of customer records and information. These security and privacy policies and procedures, for the protection of personal and confidential information, are in effect across the Bank and its subsidiaries. On November 18, 2021, the FDIC, the Federal Reserve System, and the OCC (collectively, the agencies) issued a joint final rule, to establish computer-security incident notification requirements for banking organizations and their bank service providers.

Specifically, the rule requires banking organizations to notify their primary federal regulator as soon as possible and no later than 36 hours after the discovery of a “computer-security incident” that rises to the level of a "notification incident," as those terms are defined under the final rule. Banks’ service providers are required under the rule to notify any affected bank to or on behalf of which the service provider provides services "as soon as possible" after determining that it has experienced an incident that materially disrupts or degrades, or is reasonably likely to materially disrupt or degrade, covered services provided to such bank for as much as four hours.

The federal banking agencies have also adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of the board of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial services. Moreover, recent cyberattacks against banks and other financial institutions that resulted in unauthorized access to confidential customer information have prompted the federal banking regulators to issue more extensive guidance on cybersecurity risk management. Among other things, financial institutions are expected to design multiple layers of security controls to establish lines of defense and ensure that their risk management processes address the risks posed by compromised customer credentials, including security measures to authenticate customers accessing internet-based services. A financial institution also should have a robust business continuity program to recover from a cyberattack and procedures for monitoring the security of third-party service providers that may have access to nonpublic data at the institution.

Concentrations in Commercial Real Estate. Concentration risk exists when FDIC-insured institutions deploy too many assets to any one industry or segment. A concentration in commercial real estate is one example of regulatory concern. The interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance (“CRE Guidance”) provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (i) commercial real estate loans exceeding 300% of capital and increasing 50% or more in the preceding three years; or (ii) construction and land development loans exceeding 100% of capital. The CRE Guidance does not limit banks’ levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. On December 18, 2015, the federal banking agencies issued a statement to reinforce prudent risk-management practices related to CRE lending, having observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting standards. The federal bank agencies reminded FDIC-insured institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor, and manage the risks arising from CRE lending. In addition, FDIC-insured institutions must maintain capital commensurate with the level and nature of their CRE concentration risk.

Because abuses in connection with residential mortgages were a significant factor contributing to the financial crisis, many new rules issued by the CFPB and required by the Dodd-Frank Act addressed mortgage and mortgage-related products, their underwriting, origination, servicing, and sales. The Dodd-Frank Act significantly expanded underwriting requirements applicable to loans secured by 1-4 family residential real property and augmented federal law combating predatory lending practices. In addition to numerous disclosure requirements, the Dodd‑Frank Act imposed new standards for mortgage loan originations on all lenders, including banks and savings associations, in an effort to strongly encourage lenders to verify a borrower’s ability to repay, while also establishing a presumption of compliance for certain “qualified mortgages.” The Regulatory Relief Act provided relief in connection with mortgages for banks with assets of less than $10 billion, and, as a result, mortgages the Bank makes are now considered to be qualified mortgages if they are held in portfolio for the life of the loan.

Current Expected Credit Loss (“CECL”) Treatment. In June 2016, the FASB issued an accounting standard update, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the CECL model. Under the CECL model, we are required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

On December 21, 2018, the federal banking agencies issued a joint final rule revising their regulatory capital rules to (i) address the impending implementation of the CECL accounting standard under GAAP; (ii) provide an optional three-year phase-in period for the day-one adverse regulatory capital effects that banking organizations were expected to experience upon enacting CECL; and (iii) require the use of CECL in stress tests beginning with the 2020 capital planning and stress testing cycle for certain banking organizations. The final rule took effect on April 1, 2019; however, on August 26, 2020, the federal bank regulatory agencies issued a final rule allowing institutions that adopted the CECL accounting standard in 2020 the option to mitigate the estimated capital effects of CECL for two years, followed by the three-year transition period already provided by the joint final rule. We elected to use the 2020 Capital Transition Relief as permitted under the applicable regulations. As a result, the three-year phase-out period described above commenced in 2023.

Digital Asset Regulation. The federal banking agencies have issued interpretive guidance and statements regarding the engagement by banking organizations in certain digital asset activities. On August 16, 2022, the Federal Reserve released supervisory guidance encouraging all banking organizations supervised by the agency to notify its lead supervisory point of contact at the Federal Reserve prior to engaging in any digital asset-related activity. Prior to engaging in any such activities, banking organizations are expected to ensure their proposed activities are legally permissible under relevant state and federal laws, and ensure they have implemented adequate systems, risk management, and internal controls to ensure that the activities are conducted in a safe and sound manner consistent with applicable laws, including consumer protection laws. On April 7, 2022, the FDIC issued a financial institution letter also requiring its supervised institutions to provide notice and obtain supervisory feedback prior to engaging in any crypto-related activities.

On January 3, 2023, the federal banking agencies issued additional guidance in the form of a joint statement addressing digital asset-related risks to banking organizations. That statement noted the recent volatility and exposure of vulnerabilities in the digital asset sector and indicated that the agencies are continuing to assess whether or how the digital asset-related activities of banking organizations can be conducted in a safe and sound manner and in compliance with all applicable laws and regulations. The statement stressed that each agency has developed, and expects banking organizations to follow, supervisory processes for evaluating proposed and existing digital asset activities.

On February 23, 2023, the federal banking agencies issued a joint statement addressing liquidity risks to banking organizations resulting from crypto-asset market vulnerabilities. The joint statement noted that deposits placed by a crypto-asset-related entity and deposits that constitute stablecoin-related reserves may pose heightened liquidity risks to banking organizations due to the unpredictability of the scale and timing of deposit inflows and outflows. The statement stressed that banking organizations should establish and maintain effective risk management and controls commensurate with the level of liquidity risks from such funding sources. Further, on August 8, 2023, the Federal Reserve announced the establishment of a Novel Activities Supervision Program, which is designed in part to enhance the Federal Reserve’s supervision processes in respect of banking organizations’ crypto-asset related activities and use of distributed ledger technologies and other novel technologies in the delivery of financial products and services.

There are risks inherent in making any loan or lease, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and cash flows available to service debt, and risks resulting from changes in economic and market conditions. Our credit risk approval and monitoring procedures may not have identified or will identify all of these credit risks, and they cannot be expected to completely eliminate our credit risks. If the overall economic climate in the U.S., generally, or in our markets, specifically, deteriorates, or if the financial condition of our borrowers otherwise declines, then our borrowers may experience difficulties in repaying their loans and leases, and the level of non-performing loans and leases, charge-offs, and delinquencies could rise. This would, in turn, require increases in the provision for credit losses, which may adversely affect our business, results of operations, and financial condition.

We establish our allowance for credit losses (“ACL”) and maintain it at a level considered appropriate by management based on an analysis of our portfolio and market environment. The ACL represents our estimate of probable losses inherent in the portfolio at each balance sheet date and is based upon relevant information available to us. The allowance contains provisions for probable losses that have been identified relating to specific relationships, as well as probable losses inherent in our loan and lease portfolio that are not specifically identified. Additions to the ACL, which are charged to earnings through the provision for credit losses, are determined based on a variety of factors, including an analysis of our loan and lease portfolio by segment, historical loss experience, subjective factors, and an evaluation of current economic conditions in our markets. The actual amount of credit losses is affected by changes in economic, operating, and other conditions within our markets, which may be beyond our control, and such losses may exceed current estimates.

At December 31, 2023, our ACL as a percentage of total loans and leases was 1.16% and as a percentage of total non-performing loans and leases was 160.21%. Although management believes the ACL is appropriate, we may be required to take additional provisions for losses in the future to further supplement the allowance, either due to management’s assessment of credit conditions, or requirements by our banking regulators. In addition, bank regulatory agencies will periodically review our ACL and the value attributed to non-performing loans and leases. Such regulatory agencies may require us to adjust our determination of the value for these items. Any significant increases to the ACL may materially decrease our net income, which may adversely affect our business, results of operations, and financial condition.

At December 31, 2023 we had $1.700 billion of commercial real estate loans, which represented 59.6% of our total loan and lease portfolio. Payments on such loans are often dependent on the successful operation or development of the property or business involved; therefore, repayment of such loans is sensitive to conditions in the real estate market or the general economy, which are outside the borrower’s control. In the event that the cash flow from the property is reduced, the borrower’s ability to repay the loan could be negatively impacted. The deterioration of one or a few of these loans could cause a material increase in our level of non-performing loans, which would result in a loss of revenue from these loans and could result in an increase in the provision for credit losses and an increase in charge-offs, all of which could have a material adverse impact on our net income. Many of these loans have real estate as a primary or secondary component of collateral. The market value of real estate can fluctuate significantly in a short period of time as a result of economic conditions. Adverse developments affecting real estate values in one or more of our markets could impact the collateral coverage associated with the commercial real estate segment of our portfolio, possibly leading to increased specific reserves or charge-offs, which may adversely affect our business, results of operations, and financial condition.

Commercial real estate markets have been facing downward pressure since 2022 due in large part to increasing interest rates and declining property values. Accordingly, the federal banking agencies have expressed concerns about weaknesses in the current commercial real estate market and have applied increased regulatory scrutiny to institutions with commercial real estate loan portfolios that are fast growing or large relative to the institutions' total capital. To address supervisory expectations with respect to financial institutions’ handling of commercial real estate borrowers who are experiencing financial difficulty, in June of 2023, the federal banking agencies, including the FDIC, issued an interagency policy statement addressing prudent commercial real estate loan accommodations and workouts. Our failure to adequately implement enhanced risk management policies, procedures and controls could adversely affect our ability to increase this portfolio going forward and could result in an increased rate of delinquencies in, and increased losses from, this portfolio.

Real estate construction loans, a subset of commercial real estate loans, comprised approximately $193.1 million, or 6.8%, of our gross loan and lease portfolio, respectively, as of December 31, 2023. Such lending involves additional risks as these loans are underwritten using the as-completed value of the project, which is uncertain prior to its completion, and costs may exceed realizable values in declining real estate markets. Because of the uncertainties inherent in estimating construction costs and the realizable market value of the completed project, it can be relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest. If the appraisal of the completed project’s value proves to be overstated or market values decline, we may have inadequate security for the repayment of the loan upon completion of construction of the project. If we are forced to foreclose on a project prior to or at completion due to a default, we may not be able to recover all of the unpaid balance of, and accrued interest on, the loan and may incur related foreclosure and holding costs. In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time while we attempt to dispose of it.

At December 31, 2023, approximately $1.106 billion, or 38.8%, of our loan portfolio was comprised of commercial loans to businesses collateralized by general business assets, including accounts receivable, inventory, and equipment. Our commercial loans are typically larger in amount than loans to individual consumers and therefore, have the potential for larger losses on an individual loan basis. Additionally, some of our niche commercial lending clients are highly leveraged and/or have inconsistent historical earnings. Significant adverse changes in various industries could cause rapid declines in values and collectability associated with those business assets resulting in inadequate collateral coverage that may expose us to future losses. An increase in specific reserves and charge-offs may adversely affect our business, results of operations, and financial condition.

As an SBA Preferred Lender, we enable our clients to obtain SBA loans without being subject to the potentially lengthy SBA approval process necessary for lenders that are not SBA Preferred Lenders. The SBA periodically reviews the lending operations of participating lenders to assess, among other things, whether the lender exhibits prudent risk management. When weaknesses are identified, the SBA may request corrective actions or impose other restrictions, including revocation of the lender’s Preferred Lender status. If we lose our status as a Preferred Lender, we may lose our ability to compete effectively with other SBA Preferred Lenders, and as a result we could experience a material adverse effect to our financial results. Any changes to the SBA program, including changes to the level of guaranty provided by the federal government on SBA loans or changes to the level of funds appropriated by the federal government to the various SBA programs, may also have an adverse effect on our business, results of operations, and financial condition.

We often choose to sell the guaranteed portions of our SBA 7(a) loans in the secondary market. These sales result in earning premium income and create a stream of future servicing income. There can be no assurance that we will be able to continue originating these loans, that a secondary market will exist, or that we will continue to realize premiums upon the sale of the guaranteed portions of these loans. Whether or not we sell the guaranteed portion of an SBA loan, we retain credit risk on the non-guaranteed portion of the loan. We also have credit risk on the guaranteed portion if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank. The total outstanding balance of sold SBA loans as of December 31, 2023 was $84.2 million.

In order for a borrower to be eligible to receive an SBA loan, it must be established that the borrower would not be able to secure a bank loan without the credit enhancements provided by a guaranty under the SBA program. Accordingly, the SBA loans in our portfolio generally have weaker credit characteristics than the rest of our portfolio and may be at greater risk of default. 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 Bank, the SBA may require the Bank to repurchase the previously sold portion of 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 Bank. Management has estimated losses in the outstanding guaranteed portions of SBA loans and recorded an ACL and a SBA recourse reserve at a level determined to be appropriate. Significant increases to the ACL and the recourse reserve may materially decrease our net income, which may adversely affect our business, results of operations, and financial condition.

At December 31, 2023, our non-performing loans totaled $20.6 million, or 0.72% of our gross loan and lease portfolio, and our non-performing assets (which include non-performing loans and repossessed assets) totaled $20.8 million, or 0.59% of total assets. Our non-performing assets adversely affect our net income in various ways. We do not record interest income on non-accrual loans, thereby adversely affecting our net income and returns on assets and equity, increasing our loan administration costs, and adversely affecting our efficiency ratio. When we take collateral in repossession and similar proceedings, we are required to mark the collateral to its then net realizable value, less estimated selling costs, which may result in a loss. These non-performing loans and repossessed assets also increase our risk profile and the capital our regulators believe is appropriate in light of such risks. The resolution of non-performing assets requires significant time commitments from management and can be detrimental to the performance of their other responsibilities. If we experience increases in non-performing loans and non-performing assets, our net interest income may be negatively impacted and our loan administration costs could increase, each of which may adversely affect our business, results of operations, and financial condition.

Our ability to implement our business strategy will depend on our liquidity and ability to obtain funding for loan originations, working capital, and other general purposes. An inability to raise funds through deposits, borrowings, the sale of loans, and other sources could have a substantial negative effect on our liquidity. Our preferred source of funding consists of client deposits, which we supplement with other sources, such as wholesale deposits made up of brokered deposits and deposits gathered through internet listing services. Such account and deposit balances can decrease when clients perceive alternative investments as providing a better risk/return profile. If clients move money out of bank deposits and into other investments, we may increase our utilization of wholesale deposits, FHLB advances, and other wholesale funding sources necessary to fund desired growth levels. In addition, the use of brokered deposits without regulatory approval is limited to banks that are “well capitalized” according to regulation. If the Bank is unable to maintain its capital levels at “well capitalized” minimums, we could lose a significant source of funding, which would force us to utilize different wholesale funding or potentially sell assets at a time when pricing may be unfavorable, increasing our funding costs and reducing our net interest income and net income.

Our access to funding sources could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets, credit quality, capital adequacy, or negative views and expectations about the prospects for the financial services industry. Regional and community banks generally have less access to the capital markets than do national and super-regional banks because of their smaller size and limited analyst coverage. During periods of economic turmoil or decline, the financial services industry and the credit markets generally may be materially and adversely affected by declines in asset values and by diminished liquidity. Under such circumstances, the liquidity issues are often particularly acute for regional and community banks, as larger financial institutions may curtail their lending to regional and community banks to reduce their exposure to the risks of other banks. Correspondent lenders may also reduce or even eliminate federal funds lines for their correspondent clients in difficult economic times.

The Corporation is a bank holding company and its operations are primarily conducted by the Bank, which is subject to significant federal and state regulation. Cash available to pay dividends to our shareholders, pay our obligations, and meet our debt service requirements is derived primarily from our existing cash flow sources, our third party line of credit, dividends received from the Bank, or a combination thereof. Future dividend payments by the Bank will require the generation of future earnings by the Bank and are subject to certain regulatory guidelines. If the Bank is unable to pay dividends, we may not have the resources or cash flow to pay or meet all of our obligations.

Shifts in short-term interest rates may reduce net interest income, which is the principal component of our earnings. Net interest income is the difference between the amounts we receive on our interest-bearing assets and the amounts we pay on our interest-bearing liabilities. In certain scenarios, when interest rates rise, the rate of interest we pay on our liabilities may rise more quickly than the rate of interest that we receive on our interest-bearing assets, which could cause our profits to decrease. Similarly, when interest rates fall, the rate of interest we pay on our liabilities may not decrease as quickly as the rate of interest we receive on our interest-bearing assets, which could cause our profits to decrease. The structure of our balance sheet and resultant sensitivity to interest rates in various scenarios may change in the future.

Changes in interest rates also can affect the value of loans. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in non-performing assets and a reduction of income recognized, which could have an adverse effect on our results of operations and cash flows. Further, when we place a loan on non-accrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income. Subsequently, we continue to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated funding expense. Thus, an increase in the amount of non-performing assets would have an adverse impact on net interest income.

There is growing consensus that the proportion of the deposits that exceeded FDIC insurance limits at Silicon Valley Bank, Signature Bank, and First Republic Bank was a significant factor in the failure of these institutions in the first half of 2023. In response, many large depositors across the industry withdrew deposits in excess of applicable deposit insurance limits and deposited these funds in other financial institutions and low-risk securities accounts in an effort to mitigate the risk of potential further bank failures. While the Bank has not experienced significant withdrawal activity in connection with the recent bank failures, if a significant portion of the Bank’s deposits were to be withdrawn within a short period of time in connection with a similar future crisis, additional sources of funding may be required to meet withdrawal demands. The Corporation may be unable to obtain sufficient funding on favorable terms, which may have an adverse effect on the Corporation’s net interest margin. In addition, funding deposit obligations may be more difficult in a high interest rate environment. Because the Corporation’s available-for-sale investment securities may lose value when interest rates rise, proceeds from the sale of such assets may be diminished during periods of elevated interest rates. Under such circumstances, the Corporation may be required to access funding from sources such as the Federal Reserve Discount Window or other alternative liquidity sources in order to manage our liquidity risk.

Uninsured deposits historically have been viewed by the regulators as less stable than insured deposits. According to statements made by the regulators, clients with larger uninsured deposit account balances often are small- and mid-sized businesses that rely upon deposit funds for payment of operational expenses and, as a result, are more likely to closely monitor the financial condition and performance of their depository institutions. As a result, in the event of financial distress, uninsured depositors historically have been more likely to withdraw their deposits. To that end, the federal banking agencies issued an interagency policy statement in July 2023 to underscore the importance of robust liquidity risk management and contingency funding planning. In the policy statement, the regulators noted that banks should maintain actionable contingency funding plans that take into account a range of possible stress scenarios, assess the stability of their funding and maintain a broad range of funding sources, ensure that collateral is available for borrowing, and review and revise contingency funding plans periodically and more frequently as market conditions and strategic initiatives change.

Information security risks for financial institutions like us continue to increase in part because of new technologies, the increased use of the internet and telecommunications technologies (including mobile devices and cloud computing) to conduct financial and other business transactions, political activism, and the increased sophistication and activities of organized crime, terrorist, hackers, and perpetrators of fraud. A successful cyber-attack or other breach of our information systems could adversely affect the Corporation’s business, financial condition or results of operations and damage its reputation.

The methods of cyber-attacks change frequently or, in some cases, are not recognized until launch, we are not able to anticipate or implement effective preventive measures against all possible security breaches and the probability of a successful attack cannot be predicted. Although we employ detection and response mechanisms designed to detect and mitigate security incidents, early detection may be thwarted by persistent sophisticated attacks and malware designed to avoid detection. We train employees and our business and consumer clients on fraud risks and mitigation strategies. We face risks related to cyber-attacks and other security breaches that typically involve the transmission of sensitive information regarding our clients and monetary transactions through various third parties. Some of these parties have in the past been the target of security breaches and cyber-attacks. Because the transactions involve third parties and environments that we do not control or secure, future security breaches or cyber-attacks affecting any of these third parties could impact us through no fault of our own, and in some cases, we may suffer losses for breaches or attacks relating to them. We also rely on numerous other third-party service providers to conduct other aspects of our business operations and face similar risks relating to them. While we conduct security assessments on our high risk third party service providers, we cannot be sure that their information security protocols are sufficient to withstand a cyber-attack or other security breach.

As with many other companies, we outsource certain information systems, data management, and processing functions to third-party providers, including key components of our business infrastructure like internet and network access, and core application processing. While we have selected these third-party vendors carefully, we do not control their actions, nor is any vendor due diligence perfect. These third-party service providers are sources of operational and informational security risk to us, including risks associated with operational errors, information system interruptions or outages, unauthorized access or disclosure of sensitive or confidential information. If our third-party service providers encounter any of these issues, or if we have difficulty exchanging information with or receiving services from them, we could be exposed to disruption of operations, an inability to provide products and services to our clients, a loss of service or connectivity, reputational damage, and litigation risk that could have a material adverse effect on our business, results of operations, and financial condition.

We rely heavily on communications and information systems to conduct our business and our operations are dependent on our ability to protect our systems against damage from fire, power loss, telecommunication failure, or other emergencies. The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. These problems may arise in both our internally developed systems and the systems of our third-party service providers. Any failure or interruption of these systems could result in failures or disruptions in general ledger, core bank processing systems, client relationship management, and other systems. While we have a business continuity plan and other policies and procedures designed to prevent or limit the impact of a failure, interruption or security breach of our information systems, there can be no assurance that any of those events will not occur or, if they do occur, that they will be adequately remediated. The occurrence of any failure, interruption, or security breach of our information systems could damage our reputation, result in a loss of clients, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, results of operations, and financial condition.

Periodically, we implement new lines of business and/or offer new products and services within existing lines of business. There can be substantial risks and uncertainties associated with these efforts, particularly in instances where the markets for such services are still developing or due diligence is not fully vetted. In developing and marketing new lines of business and/or new products or services, we invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved, and price and profitability targets may not prove feasible. New technologies needed to support the new line of business or product may result in incremental operating costs and system defects. Compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. In instances of new lines of businesses offering credit services, weaknesses relating to underwriting and operations may impact credit and capital. Delinquency may negatively affect non-performing assets and increase the provision for credit losses.

Our risk management framework seeks to mitigate risk and loss to us. We have established processes and procedures intended to identify, measure, monitor, control, and analyze the types of risk to which we are subject, including liquidity risk, credit risk, market risk, interest rate risk, operational risk, information and cyber security risk, compensation risk, legal and compliance risk, and reputational risk, among others. As with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. Our ability to successfully identify and manage risks facing us is an important factor that can significantly impact our results. If our risk management framework proves ineffective, we could suffer unexpected losses which could adversely affect our business, results of operations, and financial condition.

Our financial performance is impacted by accounting principles, policies, and guidelines. Some of these policies require the use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. Some of our accounting policies are critical because they require management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. If such estimates or assumptions underlying our financial statements are incorrect, we may experience material losses.

Management regularly reviews and updates its internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the controls are met. In addition, as we continue to grow the Corporation, our controls need to be updated to keep up with such growth. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could cause us to report a material weakness in internal control over financial reporting and conclude that our controls and procedures are not effective, which could have a material adverse effect on our business, results of operations, and financial condition.

The COVID-19 pandemic negatively impacted the global economy, disrupted global supply chains and equity markets and created significant volatility and disruption in financial and labor markets. In addition, the pandemic resulted in temporary closures of many businesses and the institution of social distancing and stay-at-home requirements in many states and communities, including Wisconsin, Kansas, and Missouri. The COVID-19 pandemic, including, in part, supply chain disruption and the effects of the extensive pandemic-related government stimulus, played a significant role in recent inflationary pressure in the U.S. economy.

We cannot predict how further outbreaks, new variants, the efficacy of vaccines or future widespread public health epidemics, should they occur, might impact our financial condition and results of operation. The extent to which any future pandemic impacts the Corporation’s business, results of operations, and financial condition, as well as the Corporation’s regulatory capital, liquidity ratios, and stock price, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and any responsive actions taken by governmental authorities and other third parties.

Our operations and profitability are impacted by general business and economic conditions in the U.S. and, to some extent, abroad. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity markets, broad trends in industry and finance, the strength of the U.S. economy and uncertainty in financial markets globally, all of which are beyond our control. A deterioration in economic conditions could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values, and a decrease in demand for our products and services, among other things, any of which could have a material adverse effect on our business, results of operations, and financial condition.

Our operations are heavily concentrated in southern Wisconsin and, to a lesser extent, the Northeast regions of Wisconsin and the greater Kansas City Metro and, as a result, our financial condition, results of operations, and cash flows are significantly impacted by changes in the economic conditions in those areas. Our success depends to a significant extent upon the business activity, population, income levels, deposits, and real estate activity in these markets. Although our clients’ business and financial interests may extend well beyond these markets, adverse economic conditions that affect these markets, including, without limitation, could reduce our growth rate, affect the ability of our clients to repay their loans to us, affect the value of collateral underlying loans, and generally affect our financial condition and results of operations. Because of our geographic concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets.

Although we do not have any current definitive plans to do so, we may expand into additional communities or attempt to strengthen our position in our current markets through opportunistic acquisitions of similar or complementary financial services organizations. To the extent that we do so, we may experience higher operating expenses relative to operating income from the new operations or certain one-time expenses associated with the closure of offices, all of which may have an adverse effect on our business, results of operations, and financial condition. Other effects of engaging in such strategies may include potential diversion of our management’s time and attention and general disruption to our business. To the extent that we grow through new locations, we cannot ensure that we will be able to adequately and profitably manage this growth. Acquiring other banks and businesses would involve similar risks to those commonly associated with branching, but may also involve additional risks, including potential exposure to unknown or contingent liabilities of banks and businesses we acquire and exposure to potential asset quality issues of the acquired bank or related business.

As of December 31, 2023, the fair value of our securities portfolio was approximately $305.3 million. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. For example, fixed-rate securities acquired by us are generally subject to decreases in market value when interest rates rise. Additional factors include, but are not limited to, rating agency downgrades of the securities, defaults by the issuer or individual mortgagors with respect to the underlying securities, and instability in the credit markets. Any of the foregoing factors could cause credit losses and result in a provision for credit losses. The process for determining whether impairment is other-than-temporary usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, we may recognize realized and/or unrealized losses in future periods, which could have an adverse effect on our business, results of operations, and financial condition.

As of December 31, 2023, the Corporation had goodwill of $10.7 million. Goodwill is not amortized but, instead, 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 a reporting unit below its carrying amount. A decline in our stock price, decline in the performance of our acquired operations, or the occurrence of another triggering event could, under certain circumstances, result in an impairment charge being recorded. During 2023, our annual impairment test conducted July 1, 2023 indicated that the estimated fair value of the reporting unit exceeded the carrying value (including goodwill). Depending on market conditions, economic forecasts, results of operations, additional adverse circumstances or other factors, the goodwill

Deferred tax assets are reported as assets on our balance sheet and represent the decrease in taxes expected to be paid in the future in connection with our ACL and other matters. If it becomes more likely than not that some portion or the entire deferred tax asset will not be realized, a valuation allowance must be recognized. As a result of a Wisconsin state tax law change in 2023, the Corporation has recorded a valuation allowance of $2.8 million against related state deferred tax assets. The Corporation believes it will fully realize its Federal and non-Wisconsin deferred tax assets. These determinations were based on the evaluation of several factors, including relevant tax law changes, our recent earnings history, expected future taxable earnings, and appropriate tax planning strategies. A decrease in taxable earnings could adversely impact our ability to fully utilize our remaining deferred tax assets. If we determine that it is more likely than not that some portion or all of the remaining deferred tax assets will not be realized, a valuation allowance will need to be recognized and this would result in a corresponding charge against our earnings.

Our competition includes banks, savings institutions, mortgage banking companies, credit unions, finance companies, equipment finance companies, mutual funds, insurance companies, brokerage firms, investment banking firms, and financial technology (“FinTech”) companies. We compete with regional and national financial institutions that have a substantial presence in our market areas, many of which have greater liquidity, higher lending limits, greater access to capital, more established market recognition, and more resources and collective experience than we do. Some larger financial institutions that have not historically competed with us directly have substantial excess liquidity and have sought, and may continue to seek, smaller lending relationships in our primary markets. Furthermore, tax-exempt credit unions operate in our market areas and aggressively price their products and services to a large portion of the market. Finally, technology has also lowered the barriers to entry and made it possible for non-bank financial service providers to offer products and services we have traditionally offered, such as automatic funds transfer and automatic payment systems. Our profitability depends, in part, upon our ability to successfully maintain and increase market share.

Technology and other changes are allowing consumers and businesses to complete financial transactions that historically have involved financial institutions through alternative methods. The wide acceptance of Internet-based and person-to-person commerce has resulted in a number of alternative payment processing systems and lending platforms in which banks play only minor roles. Businesses and consumers can now maintain funds in social payment applications, prepaid debit cards or digital currencies, and pay bills and transfer funds directly without the direct assistance of financial institutions. The diminishing role of financial institutions as financial intermediaries has resulted, and could continue to result, in the loss of fee income, as well as the loss of client deposits and the related income generated from those deposits. The loss of these revenue streams and the potential loss of lower cost deposits as a source of funds could have a material adverse effect on our business, financial condition, and results of operations.

The banking industry is constantly subject to technological changes with frequent introductions of new technology-driven products and services. In addition to better serving clients, the effective use of technology increases our efficiency and enables us to reduce costs. Our future success will depend in part on our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands for convenience as well as create additional efficiencies in our operations. A number of our competitors have substantially greater resources to invest in technological improvements, as well as significant economies of scale. There can be no assurance that we will be able to implement and offer new technology-driven products and services to our clients. If we fail to do so, our ability to attract and retain clients may be adversely affected.

Our private wealth management results of operations may be negatively impacted by changes in general economic conditions and the conditions in the financial and securities markets, including the values of assets held under management, which are beyond our control. Our management contracts generally provide for fees payable for services based on the market value of assets under management; therefore, declines in securities prices will generally have an adverse effect on our results of operations from this business. Market declines and reductions in the value of our clients’ private wealth management services accounts could result in us losing private wealth management services clients, including those who are also banking clients, and negatively affect our earnings.

We invest in certain tax-advantaged projects promoting community development. Investments in these projects are designed to generate a return primarily through the realization of federal and state income tax credits, and other tax benefits, over specified time periods. The Corporation is subject to the risk that previously recorded tax credits, which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level, will fail to meet certain government compliance requirements and will not be able to be realized. The possible inability to realize these tax credit and other tax benefits could have a negative impact on the Corporation’s financial results. The risk of not being able to realize the tax credits and other tax benefits depends on many factors outside of the Corporation’s control, including changes in the applicable tax code and the ability of the projects to be completed.

Our results of operations, including revenue, non-interest income, expenses and net interest income, would be adversely affected in the event of widespread financial and business disruption due to a default by the United States on U.S. government obligations or a prolonged failure to maintain significant U.S. government operations. Of particular impact to the Corporation are the operations regulated by the SBA. Any failure to maintain such U.S. government operations, and the after-effects of such shutdown, could impede our ability to originate SBA loans and sell such loans in the secondary market, and would materially adversely affect our business, results of operations, and financial condition.

In addition, many of our investment securities are issued by, and some of our loans are made to, the U.S. government and government agencies and sponsored entities. Uncertain domestic political conditions, including prior federal government shutdowns and potential future federal government shutdowns or other unresolved political issues, may pose credit default and liquidity risks with respect to investments in financial instruments issued or guaranteed by the federal government and loans to the federal government. Any further downgrade in the sovereign credit rating of the United States, as well as sovereign debt issues facing the governments of other countries, could have a material adverse impact on financial markets and economic conditions in the United States and worldwide. Any such adverse impact could have a material adverse effect on our liquidity, financial condition, and results of operations.

We are subject to extensive regulation and supervision that govern almost all aspects of our operations. These laws and regulations, among other matters, prescribe minimum capital requirements, expose us to legal penalties, financial forfeiture and material loss if we fail to act in accordance with bank laws and regulations, impose limitations on our business activities and compensation practices, limit the dividends or distributions that we can pay, restrict the ability to guarantee our debt, and impose certain specific accounting requirements that may be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than generally accepted accounting principles. These regulations affect our lending practices, employment practices, compliance management system, operational controls, tax structure, and growth, among other things. Changes to federal and state laws, income and property tax regulations, or regulatory guidance, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, tax filing requirements, employment practices, and limit the types of financial services and products we may offer, among other things. Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional costs. Further, our failure to comply with these laws and regulations, even if the failure was inadvertent or reflects a difference in interpretation, could subject us to restrictions on our business activities, fines, and other penalties, any of which could adversely affect our business, results of operations, and financial condition.

From time to time, federal and state governments and bank regulatory agencies modify the laws and regulations that govern financial institutions and the financial system generally. These modifications often, but not always, occur in response to crises or significant events, such as the several bank failures in early 2023, the COVID-19 pandemic, or political transitions. Such laws and regulations can affect our operating environment in substantial and unpredictable ways. Among other effects, such laws and regulations can increase or decrease the cost of doing business, limit or expand the scope of permissible activities, or affect the competitive balance among banks and other financial institutions. In addition, any changes in monetary policy, fiscal policy, tax laws, and other policies can affect the broader economic environment, interest rates, and patterns of trade. Any of these changes could affect our company and the banking industry as a whole in ways that are difficult to predict, and could adversely impact our business, financial condition, or results of operations.

AML laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and file suspicious activity and currency transaction reports as appropriate. The Financial Crimes Enforcement Network (“FinCEN”), established by Treasury to administer the BSA, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and IRS. There is also increased scrutiny of compliance with the rules enforced by the FinCEN, Federal, and State regulators. Federal and state bank regulators also focus on compliance with AML laws.

If our policies, procedures, and systems are deemed deficient or the policies, procedures, and systems of the financial institutions that we may acquire in the future are deficient, we would be subject to liability, including fines and regulatory actions, such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan which would adversely affect our business, results of operations, and financial condition. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us.

Federal and state banking agencies periodically conduct examinations of our business, including compliance with applicable laws and regulations. If, as a result of an examination, a federal banking agency was to determine that the financial condition, capital resources, asset quality, asset concentration, earnings prospects, management, liquidity, sensitivity to market risk, or other aspects of any of our operations has become unsatisfactory, or that we or our management is in violation of any law or regulation, it could take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to change the asset composition of our portfolio or balance sheet, to assess civil monetary penalties against our officers

Some of the services we provide, such as private wealth management services, require us to act as fiduciaries for our clients and others. From time to time, third parties could make claims and take legal action against us pertaining to the performance of our fiduciary responsibilities. If fiduciary investment decisions are not appropriately documented to justify action taken or trades are placed incorrectly, among other possible claims, and if these claims and legal actions are not resolved in a manner favorable to us, we may be exposed to significant financial liability and/or our reputation could be damaged. These results may adversely impact demand for our products and services or otherwise have an adverse effect on our business, results of operations, and financial condition.

We are required by regulatory authorities to maintain adequate levels of capital to support our operations. In order to ensure our ability to support the operations of the Bank, we may need to limit or terminate cash dividends that can be paid to our shareholders. In addition, we may need to raise capital in the future. Our ability to raise capital, if needed, will depend in part on our financial performance and conditions in the capital markets at that time, and accordingly, we cannot guarantee our ability to raise capital on terms acceptable to us. If we decide to raise equity capital in the future, the interests of our shareholders could be diluted. Any issuance of common stock would dilute the ownership percentage of our current shareholders and any issuance of common stock at prices below tangible book value would dilute the tangible book value of each existing share of our common stock held by our current shareholders. The market price of our common stock could also decrease as a result of the sale of a large number of shares or similar securities, or the perception that such sales could occur. If we cannot raise capital when needed, our ability to serve as a source of strength to the Bank, pay dividends, maintain adequate capital levels and liquidity, or further expand our operations could be materially impaired.

The trading market for our common stock could be affected by whether equity research analysts publish research or reports about us and our business and what is included in such research or reports. If equity analysts publish research reports about us containing unfavorable commentary, downgrade our stock, or cease publishing reports about our business, the price of our stock could decline. If any analyst electing to cover us downgrades our stock, our stock price could decline rapidly. If any analyst electing to cover us ceases coverage of us, we could lose visibility in the market, which in turn could cause our common stock price or trading volume to decline and our common stock to be less liquid.

The industry in which we compete is diverse, with participants ranging from community-based banks to global financial institutions with assets in the trillions of dollars. In addition, some financial institutions have exposure of an extremely broad range of risks, or outsized exposure to specific industries such as startup and early-stage, pharmaceutical, or oil & gas companies. When volatility, market events or similar issues affect a subset of financial institutions, or when there are news reports or high-profile incidents relating to trends, concerns, and other issues in the banking industry, the ramifications can affect the sector as a whole, regardless of the effect, or lack thereof, on any specific institution. For example, the recent failures of Silicon Valley Bank, Signature Bank and First Republic Bank, which were caused by specific risk management and industry issues, negatively impacted customer, investor and media perception of the entire sector, resulting in declines in depositor confidence and stock prices throughout the industry. Future events of this nature could result in a material adverse effect on our performance and a decline in our stock priced for reasons that would not otherwise affect the Bank or which are outside of our control.

Our success depends on our ability to continue to recruit and retain talented employees. Competition for such employees is intense, which has led to an increase in compensation throughout the labor market, and accordingly, an increase in payroll costs for employers. Prospective employees are also placing an emphasis on flexible, including remote, work arrangements and other considerations, and such arrangements can provide employees with more employment options and mobility, making them more difficult to retain. If we are unable to meet the expectations of employees and prospective employees, and thus, retain or attract employees, it could have a substantial adverse effect on our business.

Our success has been and will be greatly influenced by our continuing ability to retain the services of our existing senior management and to attract and retain additional qualified senior and middle management. The unexpected loss of key management personnel or the inability to recruit and retain qualified personnel in the future could have an adverse effect on our business and financial results. In addition, our failure to develop and/or maintain an effective succession plan will impede our ability to quickly and effectively react to unexpected loss of key management, and in turn, may have an adverse effect on our business, results of operations, and financial condition.

Reputation risk, or the risk to our earnings and capital due to negative publicity, is inherent in our business. Negative publicity can result from our actual or alleged conduct in a number of activities, including lending practices, fraud, information security, management actions, corporate governance, and actions taken by government regulators and community organizations in response to those activities. Negative publicity can adversely affect our ability to keep and attract clients, employees, and shareholders and can expose us to litigation and regulatory action, all of which could have a material adverse effect on our business, financial condition, and results of operations.

Cybersecurity is an important component of our overall approach to Enterprise Risk Management (“ERM”). Our cybersecurity policies, standards, processes and practices are fully integrated in our ERM program which are based on recognized frameworks established by the National Institute of Standards and Technology, the International Organization for Standardization and other applicable industry standards. We seek to address cybersecurity risks through a comprehensive approach that is focused on preserving the confidentiality, security and availability of the information that we collect and store by identifying, preventing and mitigating cybersecurity threats and effectively responding to cybersecurity incidents when they occur.

We engage an independent third party to conduct periodic testing and assessment of our policies, standards, processes, controls and practices that are designed to address cybersecurity threats and incidents. These efforts include audits, assessments, vulnerability and penetration testing and other exercises focused on evaluating the effectiveness of our cybersecurity measures. We also engage independent third parties to complete periodic testing and assessments of our cybersecurity measures. The results of such assessments are reported to the ORC and the Board and we adjust our policies and practices as necessary based on the information provided by these assessments.

It has been our practice to pay a dividend to common shareholders. Dividends historically have been declared in the month following the end of each calendar quarter. However, the timing and amount of future dividends are at the discretion of the Board of Directors of the Corporation (the “Board”) and will depend upon the consolidated earnings, financial condition, liquidity, and capital requirements of the Corporation and the Bank, the amount of cash dividends paid to the Corporation by the Bank, applicable government regulations and policies, supervisory actions, and other factors considered relevant by the Board. Refer to Item 1 - Business - Supervision and Regulation - Regulation and Supervision of the Bank - Dividend Payments for additional discussion regarding the limitations on dividends and other capital contributions by the Bank to the Corporation. The Board anticipates it will continue to declare dividends as appropriate based on the above factors.

The chart shown below depicts total return to shareholders during the period beginning December 31, 2018 and ending December 31, 2023. The total return includes appreciation or depreciation in market value of the Corporation’s common stock as well as actual cash and stock dividends paid to common stockholders. Indices shown below, for comparison purposes only, are the Total Return Index for the Nasdaq Composite, which is a broad nationally recognized index of stock performance by publicly traded companies, and the SNL Bank Nasdaq, which is an index that contains securities of Nasdaq-listed companies classified according to the Industry Classification Benchmark as banks. The chart assumes that the value of the investment in FBIZ common stock and each of the three indices was $100 on December 31, 2018 and that all dividends were reinvested in FBIZ common stock.

Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, we caution that, while our management believes such assumptions or bases are reasonable and are made in good faith, assumed facts or bases can vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. Where, in any forward-looking statement, an expectation or belief is expressed as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be achieved or accomplished.

We are a registered bank holding company incorporated under the laws of the State of Wisconsin and are engaged in the commercial banking business through our wholly-owned banking subsidiary, FBB. All of our operations are conducted through FBB and First Business Specialty Finance, LLC (“FBSF”), a wholly-owned subsidiary of FBB. FBB operates as a business bank, delivering a full line of commercial banking products and services tailored to meet the specific needs of small and medium-sized businesses, business owners, executives, professionals, and high net worth individuals. Our products and services are focused on business banking, private wealth, and bank consulting. Within business banking, we offer commercial lending, asset-based lending, accounts receivable financing, equipment financing, floorplan financing, vendor financing, Small Business Administration (“SBA”) lending and servicing, treasury management solutions, and company retirement services. Our private wealth management services include trust and estate administration, financial planning, investment management, and private banking for executives and owners of our business banking clients and others. Our bank consulting experts provide investment portfolio administrative services, asset liability management services, and asset liability management process validation for other financial institutions. We do not utilize a branch network to attract retail clients. Our operating model is predicated on deep client relationships, financial expertise, and an efficient, centralized administration function delivering best in class client satisfaction. Our focused model allows experienced staff to provide the level of financial expertise needed to develop and maintain long-term relationships with our clients.

In early 2019, management finalized the development of its five year strategic plan and began the implementation of strategies and initiatives that drive successful execution. Management’s objective over this five year period was to excel by building an expert team with diverse experiences who work together to impact client success more than any other financial partner. To meet this objective, we identified four key strategies which are linked to corporate financial goals, all business lines, and centralized administration functions to ensure communication and execution are consistent at all levels of the Corporation.

Top line revenue, comprised of net interest income and non-interest income, increased 12.6% for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to a $14.2 million, or 14.4%, increase in net interest income and a $1.9 million, or 6.4%, increase in non-interest income. The increase in net interest income was driven by an increase in average loans and leases outstanding and related interest income, partially offset by net interest margin compression and a decrease in fees in lieu of interest. The increase in non-interest income was primarily due to a $1.8 million increase in other fee income, a $1.2 million increase in swap fee income, a $544,000 increase in trust fee income, and a $353,000 increase in loan fee income. These favorable variances were partially offset by a $733,000 decrease in bank owned life insurance income, a $718,000 decrease in service charge income on deposits, and a $482,000 decrease in gains on the sale of SBA loans during the year ended December 31, 2023.

ROAA was 1.13% for the year ended December 31, 2023, compared to 1.46% for the year ended December 31, 2022 principally due to a $12.1 million increase in provision for credit losses and an $8.6 million increase in operating expenses, partially offset by a $14.2 million increase in net interest income. We consider ROAA a critical metric to measure the profitability of our organization and how efficiently our assets are deployed. ROAA also allows us to better benchmark our profitability to our peers without the need to consider different degrees of leverage which can ultimately influence return on equity measures.

Efficiency ratio measured 60.99% and 62.31% for the years ended December 31, 2023 and 2022, respectively. Efficiency ratio is a non-GAAP measure representing operating expense divided by operating revenue. Operating expense is defined as non-interest expense excluding the effects of the SBA recourse benefit or provision, impairment of tax credit investments, net gains or losses on repossessed assets, amortization of other intangible assets, and other discrete items, if any. Operating revenue is defined as net interest income plus non-interest income less realized net gains or losses on securities, if any, and other discrete items.

PTPP adjusted earnings for the year ended December 31, 2023 was $56.2 million, compared to $47.9 million for the year ended December 31, 2022. PTPP adjusted earnings is a non-GAAP measure defined as operating revenue less operating expense. In the judgment of the Corporation’s management, the adjustments made to non-interest expense and non-interest income allow investors and analysts to better assess the Corporation’s operating expenses in relation to its core operating revenue by removing the volatility associated with certain one-time items and other discrete items. PTPP adjusted earnings allows management to benchmark performance of our model to our peers without the influence of the loan loss provision and tax considerations, which will ultimately influence other traditional financial measurements, including ROA and ROAE. The information provided below reconciles the efficiency ratio to its most comparable GAAP measure.


	For the Year Ended December 31,									Change From Prior Year
	2023			2022			2021			$ Change 2023		% Change 2023		$ Change 2022		% Change 2022
	(Dollars in Thousands)
Total non-interest expense	$	88,575		$	79,474		$	71,535		$	9,101	11.5	%	$	7,939	11.1	%
Less:
Net loss on repossessed assets	12			49			15			(37)		(75.5)		34		226.7
Amortization of other intangible assets	—			—			25			—		NM		(25)		NM
SBA recourse expense (benefit)	775			(188)			(76)			963		(512.2)		(112)		147.4
Contribution to First Business Charitable Foundation	—			809			—			(809)		NM		809		NM
Impairment of tax credit investments	—			(351)			—			351		NM		(351)		NM

Total operating expense (a)	$	87,788		$	79,155		$	71,571		$	8,633	10.9		$	7,584	10.6
Net interest income	$	112,588		$	98,422		$	84,662		$	14,166	14.4		13,760		16.3
Total non-interest income	31,308			29,428			28,100			1,880		6.4		1,328		4.7
Less:
Bank-owned life insurance claim	—			809			—			(809)		NM		809		NM
Net gain (loss) on sale of securities	(45)			—			29			(45)		NM		(29)		NM
Adjusted non-interest income	31,353			28,619			28,071			2,734		9.6		548		2.0
Total operating revenue (b)	$	143,941		$	127,041		$	112,733		$	16,900	13.3		$	14,308	12.7
Efficiency ratio	60.99		%	62.31		%	63.49		%

Pre-tax, pre-provision adjusted earnings (b-a)	$	56,153		$	47,886		$	41,162		$	8,267	17.3		$	6,724	16.3
Average total assets	3,212,149			2,752,916			2,605,008			459,233		16.7		147,908		5.7
Pre-tax, pre-provision adjusted return on average assets	1.75		%	1.74		%	1.58		%


	For the Year Ended December 31,
	2023							2022							2021
	Average Balance			Interest		Average Yield/ Rate		Average Balance			Interest		Average Yield/ Rate		Average Balance			Interest		Average Yield/ Rate
	(Dollars in Thousands)
Interest-earning assets
Commercial real estate and other mortgage loans(1)	$	1,586,967		$	98,370	6.20	%	$	1,484,239		$	66,917	4.51	%	$	1,387,434		$	51,930	3.74	%
Commercial and industrial loans(1)	1,013,866			81,963		8.08	%	771,056			46,575		6.04	%	747,514			38,342		5.13	%
Consumer and other loans(1)	47,018			2,316		4.93	%	49,695			1,876		3.78	%	44,206			1,572		3.56	%
Total loans and leases receivable(1)	2,647,851			182,649		6.90	%	2,304,990			115,368		5.01	%	2,179,154			91,844		4.21	%
Mortgage-related securities(2)	200,383			6,433		3.21	%	173,495			3,486		2.01	%	159,242			2,633		1.65	%
Other investment securities(3)	62,921			1,770		2.81	%	51,700			986		1.91	%	44,739			777		1.74	%
FHLB stock	15,162			1,231		8.12	%	16,462			989		6.01	%	13,066			651		4.98	%
Short-term investments	54,311			2,845		5.24	%	30,845			542		1.76	%	64,308			90		0.14	%
Total interest-earning assets	2,980,628			194,928		6.54	%	2,577,492			121,371		4.71	%	2,460,509			95,995		3.90	%
Non-interest-earning assets	231,521							175,424							144,499
Total assets	$	3,212,149						$	2,752,916						$	2,605,008
Interest-bearing liabilities
Transaction accounts	$	689,500		23,727		3.44	%	$	503,668		3,963		0.79	%	$	506,693		988		0.19	%
Money market accounts	681,336			22,129		3.25	%	761,469			6,241		0.82	%	693,608			1,183		0.17	%
Certificates of deposit	273,387			11,209		4.10	%	97,448			1,358		1.39	%	47,020			396		0.84	%
Wholesale deposits	346,285			14,353		4.14	%	48,825			1,616		3.31	%	119,831			986		0.82	%
Total interest-bearing deposits	1,990,508			71,418		3.59	%	1,411,410			13,178		0.93	%	1,367,152			3,553		0.26	%
FHLB advances	351,990			8,881		2.52	%	414,191			7,024		1.70	%	376,781			4,908		1.30	%
Other borrowings	38,891			2,041		5.25	%	43,818			2,243		5.12	%	31,935			1,759		5.51	%
Junior subordinated notes (4)	—			—		—	%	2,429			504		20.75	%	10,068			1,113		11.05	%
Total interest-bearing liabilities	2,381,389			82,340		3.46	%	1,871,848			22,949		1.23	%	1,785,936			11,333		0.63	%
Non-interest-bearing demand deposit accounts	453,930							566,230							536,981
Other non-interest-bearing liabilities	102,668							65,611							61,580
Total liabilities	2,937,987							2,503,689							2,384,497
Stockholders’ equity	274,162							249,227							220,511
Total liabilities and stockholders’ equity	$	3,212,149						$	2,752,916						$	2,605,008
Net interest income				$	112,588						$	98,422						$	84,662
Net interest spread						3.08	%						3.48	%						3.27	%
Net interest-earning assets	$	599,239						$	705,644						$	674,573
Net interest margin						3.78	%						3.82	%						3.44	%
Average interest-earning assets to average interest-bearing liabilities	125.16		%					137.70		%					137.77		%
Return on average assets	1.13		%					1.46		%					1.37		%
Return on average equity	13.79		%					16.79		%					16.21		%
Average equity to average assets	8.54		%					9.05		%					8.46		%
Non-interest expense to average assets	2.76		%					2.89		%					2.75		%

The following table provides information with respect to: (1) the change in net interest income attributable to changes in rate (changes in rate multiplied by prior volume); and (2) the change in net interest income attributable to changes in volume (changes in volume multiplied by prior rate) for the year ended December 31, 2023 compared to the year ended December 31, 2022. The change in net interest income attributable to changes in rate and volume (changes in rate multiplied by changes in volume) has been allocated to the rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.


	Increase (Decrease) for the Year Ended December 31,
	2023 Compared to 2022						2022 Compared to 2021
	Rate		Volume		Net		Rate		Volume		Net
	(In Thousands)
Interest-earning assets
Commercial real estate and other mortgage loans(1)	$	26,551	$	4,902	$	31,453	$	11,176	$	3,811	$	14,987
Commercial and industrial loans(1)	18,329		17,059		35,388		6,993		1,240		8,233
Consumer and other loans(1)	546		(106)		440		101		203		304
Total loans and leases receivable(1)	45,426		21,855		67,281		18,270		5,254		23,524
Mortgage-related securities(2)	2,341		606		2,947		602		251		853
Other investment securities	538		246		784		81		128		209
FHLB Stock	325		(83)		242		149		189		338
Short-term investments	1,664		639		2,303		522		(70)		452
Total net change in income on interest-earning assets	50,294		23,263		73,557		19,625		5,752		25,376
Interest-bearing liabilities
Transaction accounts	17,816		1,948		19,764		2,981		(6)		2,975
Money market	16,612		(724)		15,888		4,931		127		5,058
Certificates of deposit	5,105		4,746		9,851		364		598		962
Wholesale deposits	507		12,230		12,737		1,503		(873)		630
Total deposits	40,040		18,200		58,240		9,779		(154)		9,625
FHLB advances	3,033		(1,176)		1,857		1,593		523		2,116
Other borrowings	56		(258)		(202)		(131)		615		484
Junior subordinated notes	—		(504)		(504)		579		(1,188)		(609)
Total net change in expense on interest-bearing liabilities	43,129		16,262		59,391		11,820		(204)		11,616
Net change in net interest income	$	7,165	$	7,001	$	14,166	$	7,805	$	5,956	$	13,760


	For the Year Ended December 31,
	2023		2022		2021		2023 Compared to 2022		2022 Compared to 2021
	Average Yield/Rate (3)						Increase (Decrease)
Total loans and leases receivable (a)	6.90	%	5.01	%	4.21	%	1.89	%	0.80	%
Total interest-earning assets(b)	6.54	%	4.71	%	3.90	%	1.83	%	0.81	%
Adjusted total loans and leases receivable (1)(c)	6.78	%	4.78	%	3.91	%	2.00	%	0.87	%
Adjusted total interest-earning assets (1)(d)	6.43	%	4.50	%	3.61	%	1.93	%	0.89	%
Total in-market deposits(e)	2.72	%	0.60	%	0.14	%	2.12	%	0.46	%
Total bank funding(f)	2.87	%	0.84	%	0.37	%	2.03	%	0.47	%
Net interest margin(g)	3.78	%	3.82	%	3.44	%	(0.04)	%	0.38	%
Adjusted net interest margin(h)	3.63	%	3.63	%	3.21	%	—	%	0.42	%

Effective fed funds rate (2)(i)	5.02	%	1.69	%	0.08	%	3.33	%	1.61	%

Beta Calculations:
Total loans and leases receivable(a)/(i)							56.76	%	49.69	%
Total interest-earning assets(b)/(i)							54.98	%	50.31	%
Adjusted total loans and leases receivable (1)(c)/(i)							60.06	%	54.04	%
Adjusted total interest-earning assets (1)(d)/(i)							57.87	%	55.28	%
Total in-market deposits(e)/(i)							63.66	%	28.57	%
Total bank funding(f)/(i)							60.96	%	29.19	%
Net interest margin(g)/(i)							(1.20)	%	23.60	%
Adjusted net interest margin(h)/(i)							—	%	26.09	%

Net interest income increased by $14.2 million, or 14.4%, for the year ended December 31, 2023, compared to the year ended December 31, 2022. The increase was principally due to an increase in average loans and leases outstanding, partially offset by net interest margin compression and a decrease in fees in lieu of interest. Average gross loans and leases of $2.648 billion increased by $342.9 million, or 14.9% for the year ended December 31, 2023, compared to $2.305 billion for the same period in 2022. Loan fees collected in lieu of interest decreased 38.6% to $3.2 million, compared to $5.3 million during the same period of comparison.

The Corporation recognized $8.2 million of provision expense for the year ended December 31, 2023, compared to a $3.9 million provision benefit for the year ended December 31, 2022. The provision expense for the year ended December 31, 2023 was primarily due to a $4.3 million increase in the specific reserves on individually evaluated loans and a $3.7 million increase in the general reserve due to loan growth. These increases were partially offset by a $1.5 million reduction in the general reserve from quantitative factors, mainly due to an improving economic forecast. Specific reserves were higher on loans in Equipment Finance and, to a lesser extent SBA, within the Commercial and Industrial portfolio. Equipment Finance had higher defaults from borrowers in the transportation and logistics industry which management believes is consistent with the cyclical nature of this industry. Given current economic conditions, the Corporation expects continued stress within this group of borrowers in 2024.

Non-interest income increased by $1.9 million, or 6.4%, to $31.3 million for the year ended December 31, 2023, from $29.4 million for the year ended December 31, 2022. Management continues to focus on revenue growth from multiple non-interest income sources in order to maintain a diversified revenue stream through greater contributions from fee-based revenues. Total non-interest income accounted for 21.8% of our total revenues in 2023 compared to 23.0% in 2022. The increase in total non-interest income for the year ended December 31, 2023 primarily reflected an increase in other non-interest income, led by mezzanine fund investment income, commercial loan swap fee income, and higher private wealth management services income. These increases were partially offset by a decrease bank owned life insurance income and lower service charge income.


	For the Year Ended December 31,									Change From Prior Year
	2023			2022			2021			$ Change 2023		% Change 2023		$ Change 2022		% Change 2022
	(Dollars in Thousands)
Private wealth management services fee income	$	11,425		$	10,881		$	10,784		$	544	5.0	%	$	97	0.9
Gain on sale of SBA loans	2,055			2,537			4,044			(482)		(19.0)		(1,507)		(37.3)
Service charges on deposits	3,131			3,849			3,837			(718)		(18.7)		12		0.3
Loan fees	3,363			3,010			2,506			353		11.7		504		20.1
Bank-owned life insurance income	1,494			2,227			1,413			(733)		(32.9)		814		57.6
Net (loss) gain on sale of securities	(45)			—			29			(45)		NM		(29)		(100.0)
Swap fees	2,964			1,793			1,368			1,171		65.3		425		31.1
Other non-interest income	6,921			5,131			4,119			1,790		34.9		1,012		24.6
Total non-interest income	$	31,308		$	29,428		$	28,100		$	1,880	6.4		$	1,328	4.7
Fee income ratio(1)	21.8		%	23.0		%	24.9		%

Private wealth management services fee income increased by $544,000, or 5.0%, to a record $11.4 million for the year ended December 31, 2023 compared to the previous record of $10.9 million for the year ended December 31, 2022. Private wealth management services fee income is primarily driven by the amount of trust assets under management and administration, as well as the mix of business at different fee structures, and can be positively or negatively influenced by the timing and magnitude of volatility within the equity and fixed income markets. This increase was driven by an increase in average assets under management and administration, which is attributable to market appreciation, new client relationships, and new money from existing client relationships. At December 31, 2023, our trust assets under management and administration were $3.122 billion, or 17.3% more than trust assets under management and administration of $2.660 billion at December 31, 2022.

Commercial loan interest rate swap fee income was $3.0 million for the year ended December 31, 2023, compared to $1.8 million for the year ended December 31, 2022. We originate commercial real estate loans in which we offer clients a floating rate and an interest rate swap. The client’s swap is then offset with a counter-party dealer. The execution of these transactions generates swap fee income. The aggregate amortizing notional value of interest rate swaps with various borrowers was $939.2 million as of December 31, 2023, compared to $744.2 million as of December 31, 2022. Interest rate swaps can be an attractive product for our commercial borrowers, although associated fee income can be variable from period to period based on client demand and the interest rate environment in any given quarter.


	For the Year Ended December 31,						Change From Prior Year
	2023		2022		2021		$ Change 2023		% Change 2023		$ Change 2022		% Change 2022
	(Dollars in Thousands)
Compensation	$	61,059	$	57,742	$	51,710	$	3,317	5.7	%	$	6,032	11.7
Occupancy	2,381		2,358		2,180		23		1.0		178		8.2
Professional fees	5,325		4,881		3,736		444		9.1		1,145		30.6
Data processing	3,826		3,197		3,087		629		19.7		110		3.6
Marketing	2,889		2,354		2,022		535		22.7		332		16.4
Equipment	1,340		1,091		990		249		22.8		101		10.2
Computer software	4,985		4,416		4,260		569		12.9		156		3.7
FDIC insurance	2,238		1,042		1,143		1,196		114.8		(101)		(8.8)





Other non-interest expense	4,532		2,393		2,407		2,139		89.4		(14)		(0.6)
Total non-interest expense	$	88,575	$	79,474	$	71,535	$	9,101	11.5		$	7,939	11.1
Total operating expense(1)	$	87,788	$	79,155	$	71,571	$	8,633	10.9		$	7,584	10.6
Full-time equivalent employees	343		337		304		6		1.8		33		10.9

Compensation expense increased by $3.3 million, or 5.7%, to $61.1 million for the year ended December 31, 2023 from $57.7 million for the year ended December 31, 2022 principally due to an increase in average FTEs, annual merit increases, growth in employee benefit costs, and increase in incentive compensation. The increase reflects a $2.5 million, or 7.1%, increase in employee salaries and a $908,000, or 25.6% increase in incentive compensation due to exceptional loan and deposit growth. These increases were partially offset by a $1.5 million, or 22.6% decrease in estimated annual cash bonuses compared to a record year for 2022. The Bank’s compensation philosophy is to provide base salaries competitive with the market. Given the competitive job market and the critical importance to the Corporation of retaining employees, annual base salaries were increased an additional $1.5 million, or approximately 4.1%, in the aggregate for 2024. Average FTEs were 343 for the year ended December 31, 2023, increased by 18, or 5.5%, from 325 for the year ended December 31, 2022.

Other non-interest expense increased $2.1 million, or 89.4%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase was primarily due to a $985,000 increase in liquidation expense related to an Asset-Based Lending client, a $963,000 increase in SBA recourse provision, a $232,000 increase in expense from swap credit valuation changes, increase in travel expense, and an increase in loan related expenses. These increases were partially offset by a decrease in charitable donations due to a non-recurring contribution to First Business Charitable foundation totaling $809,000 in the prior year.

Income tax expense was $10.1 million for the year ended December 31, 2023, compared to $11.4 million for the year ended December 31, 2022. The income tax expense included a $1.2 million and $635,000 net benefit from tax credit investments in 2023 and 2022, respectively. The effective tax rate for the year ended December 31, 2023 was 21.5% compared to 21.8% for the year ended December 31, 2022. Management completed its analysis of the Wisconsin State Budget 2023, which included language that provides an exemption for state tax on certain loan income for loans to Wisconsin small businesses. Management estimates this law will eliminate the Bank’s Wisconsin state income tax in 2023 and the foreseeable future. This conclusion results in a 2023 state income tax benefit of $2.8 million offset by a one-time $2.8 million charge to state income tax expense to recognize a valuation allowance on deferred state income taxes. Based on expected earnings, reduction in state tax, and future tax credit investments, the Corporation expects to report an effective tax rate between 18% and 19% for 2024.

Cash and cash equivalents include short-term investments and cash and due from banks. Short-term investments increased by $30.3 million to $107.2 million at December 31, 2023 from $76.9 million at December 31, 2022. Both short-term investments and cash and due from banks increased during 2023. Short-term investments primarily consist of interest-bearing deposits held at the Federal Reserve Bank (“FRB”). We value the safety and soundness provided by the FRB, and therefore, we incorporate short-term investments in our on-balance sheet liquidity program. As of December 31, 2023 and 2022, interest-bearing deposits held at the FRB were $76.5 million and $47.0 million, respectively. In general, the level of our cash and short-term investments will be influenced by the timing of deposit gathering, scheduled maturities of wholesale deposits, funding of loan and lease growth when opportunities are presented, and the level of our securities portfolio. Please refer to the section entitled Liquidity and Capital Resources for further discussion.

Total securities, including available-for-sale and held-to-maturity, increased by $80.9 million to $305.5 million at December 31, 2023 from $224.7 million at December 31, 2022. As of December 31, 2023 and 2022, our total securities portfolio had a weighted average estimated remaining maturity of approximately 5.6 years and 6.3 years, respectively. The investment portfolio primarily consists of mortgage-backed securities and is used to provide a source of liquidity, including the ability to pledge securities for possible future cash advances, while contributing to the earnings potential of the Bank. The overall duration of the securities portfolio is established and maintained to further mitigate interest rate risk present within our balance sheet as identified through asset/liability simulations. We purchase investment securities intended to protect net interest margin while maintaining an acceptable risk profile. In addition, we will purchase investment securities to utilize our cash position effectively within appropriate policy guidelines and estimates of future cash demands. While mortgage-backed securities present prepayment risk and extension risk, we believe the overall credit risk associated with these investments is minimal, as all of the securities we hold are guaranteed by the United States Treasury, the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”), or the Government National Mortgage Association (“GNMA”), a U.S. government agency. The estimated repayment streams associated with this portfolio also allow

The majority of the securities we hold have active trading markets; therefore, we have not experienced difficulties in pricing our securities. We use a third-party pricing service as our primary source of market prices for the securities portfolio. On a quarterly basis, we validate the reasonableness of prices received from this source through independent verification of the portfolio, data integrity validation through comparison of current price to prior period prices, and an expectation-based analysis of movement in prices based upon the changes in the related yield curves and other market factors. On a periodic basis, we review the third-party pricing vendor’s methodology for pricing relevant securities and the results of its internal control assessments. Our securities portfolio is sensitive to fluctuations in the interest rate environment and has limited sensitivity to credit risk due to the nature of the issuers and guarantors of the securities as previously discussed. If interest rates decline and the credit quality of the securities remains constant or improves, the fair value of our debt securities portfolio would likely improve, thereby increasing total comprehensive income. If interest rates increase and the credit quality of the securities remains constant or deteriorates, the fair value of our debt securities portfolio would likely decline and therefore decrease total comprehensive income. The magnitude of the fair value change will be based upon the duration of the portfolio. A securities portfolio with a longer average duration will exhibit greater market price volatility than a securities portfolio with a shorter average duration in a changing rate environment. During the year ended December 31, 2023, we recognized unrealized holding gains of $5.6 million before income taxes through other comprehensive income. These gains were the result of an increase in interest rates. No securities within our portfolio were deemed to require an allowance for credit losses as of December 31, 2023. We sold approximately $5.1 million of securities during the year ended December 31, 2023 to proactively manage our securities portfolio and meet our long-term investment objectives. As of December 31, 2023 no securities were classified as trading securities. At December 31, 2023, $45.4 million of our securities were pledged to secure various obligations, including interest rate swap contracts and municipal deposits.


	As of December 31,
	2023				2022
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In Thousands)
Available-for-sale:
U.S. Treasuries	$	14,158	$	13,776	$	4,977	$	4,445
U.S. government agency securities - government-sponsored enterprises	27,986		27,566		13,666		13,205
Municipal securities	40,407		35,881		45,088		39,311
Residential mortgage-backed securities - government issued	69,441		68,056		21,790		19,431
Residential mortgage-backed securities - government-sponsored enterprises	131,321		120,833		119,265		106,323
Commercial mortgage-backed securities - government issued	2,995		2,525		3,450		2,932
Commercial mortgage-backed securities - government-sponsored enterprises	32,774		28,369		31,515		26,377

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

U.S. Treasuries represent treasury bonds issued by the United States Treasury. U.S. government agency securities - government-sponsored enterprises represent securities issued by 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 GNMA. Residential and commercial mortgage-backed securities - government-sponsored enterprises include securities guaranteed by FHLMC, FNMA, and the FHLB. Other securities represent certificates of deposit of insured banks and savings institutions with an original maturity greater than three months. As of December 31, 2023, no issuer's securities exceeded 10% of our total stockholders' equity.


	Less than One Year				One to Five Years				Five to Ten Years				Over Ten Years
	Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield		Total
	(Dollars in Thousands)
Available-for-sale:
U.S. treasuries	$	9,182	5.19	%	$	4,594	1.00	%	$	—	—	%	$	—	—	%	$	13,776
U.S. government agency securities - government-sponsored enterprises	13,387		4.12		6,060		2.76		1,345		6.19		6,774		6.04		27,566
Municipal securities	—		—		6,992		1.42		10,570		1.86		18,319		2.05		35,881

	22,569				17,646				11,915				25,093				77,223
Residential mortgage-backed securities																	188,889
Commercial mortgage-backed securities																	30,894
	$	22,569			$	17,646			$	11,915			$	25,093			$	297,006

As of December 31, 2023, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was approximately $939.2 million, compared to $744.2 million as of December 31, 2022. We receive fixed rates and pay floating rates based upon designated benchmark interest rates on the swaps with commercial borrowers. These swaps mature between May 2024 and July 2040. Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements. As of December 31, 2023, the commercial borrower swaps were reported on the Consolidated Balance Sheet as a derivative liability and asset of $51.1 million and $7.9 million, respectively, compared to a derivative liability and asset of $61.4 million and $1.0 million, respectively, as of December 31, 2022. On the offsetting swap contracts with dealer counterparties, we pay fixed rates and receive floating rates based upon designated benchmark interest rates. These interest rate swaps also have maturity dates between May 2024 and July 2040. Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and were reported on the Consolidated Balance Sheet as a net derivative asset of $43.2 million as of December 31, 2023, compared to a net derivative asset of $60.4 million as of December 31, 2022. The gross amount of dealer counterparty swaps as of December 31, 2023, without regard to the enforceable master netting agreement, was a gross derivative asset and liability of $51.1 million and $7.9 million, respectively, compared to a gross derivative asset and liability of $61.4 million and $1.0 million, respectively, as of December 31, 2022.

The Corporation also enters into interest rate swaps to manage interest rate risk and reduce the cost of match-funding certain long-term fixed rate loans. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. The instruments are designated as cash flow hedges as the receipt of floating rate interest from the counterparty is used to manage interest rate risk associated with forecasted issuances of short-term FHLB advances. The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affect earnings. As of December 31, 2023, the aggregate notional value of interest rate swaps designated as cash flow hedges was $402.7 million. These interest rate swaps mature between December 2023 and March 2034. A pre-tax unrealized loss of $3.5 million was recognized in other comprehensive income for the year ended December 31, 2023, while a pre-tax unrealized gain of $8.5 million and $3.6 million were recognized in other comprehensive income for the years ended December 31, 2022 and 2021, respectively, and there were no ineffective portion of these hedges.

The Corporation also enters into interest rate swaps to mitigate market value volatility on certain long-term fixed-rate securities. 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. As of December 31, 2023, the aggregate notional value of interest rate swaps designated as fair value hedges was $12.5 million. These interest rate swaps mature between February 2031 and October 2034. A pre-tax unrealized gain of $22,000 and $602,000 was recognized in other comprehensive income for the year ended December 31, 2023 and 2022, respectively, and there was no ineffective portion of these hedges. No pre-tax unrealized gain or loss was recognized in other comprehensive income for the year ended December 31, 2021.

We continue to actively pursue C&I loans across the Corporation as this segment of our loan and lease portfolio provides an attractive yield commensurate with an appropriate level of credit risk and creates opportunities for in-market deposit, treasury management, and private wealth management relationships which generate additional fee revenue. Underwriting of new credit is primarily through approval from a serial sign-off or committee process and is a key component of our operating philosophy. Business development officers have no individual lending authority limits, and thus, a significant portion of our new credit extensions require approval from a loan approval committee regardless of the type of loan or lease, or the related complexities of each proposal. To monitor the ongoing credit quality of our loans and leases, each credit is evaluated for proper risk rating using a nine grade risk rating system at the time of origination, subsequent renewal, evaluation of updated financial information from our borrowers, or as other circumstances dictate.


	As of December 31,
	2023				2022
	Amount Outstanding		% of Total Loans and Leases		Amount Outstanding		% of Total Loans and Leases
	(Dollars in Thousands)
Commercial real estate:
Commercial real estate — owner occupied	$	256,479	9.0	%	$	268,354	11.0	%
Commercial real estate — non-owner occupied	773,494		27.1		687,091		28.1
Construction	193,080		6.8		218,751		9.0
Multi-family	450,529		15.8		350,026		14.3
1-4 family	26,289		0.9		17,728		0.7
Total commercial real estate	1,699,871		59.6		1,541,950		63.1
Commercial and industrial	1,105,835		38.8		853,327		34.9
Consumer and other	44,312		1.6		47,938		2.0
Total gross loans and leases receivable	2,850,018		100.0	%	2,443,215		100.0	%
Less:
Allowance for credit losses	31,275				24,230
Deferred loan fees and costs, net	(243)				149
Loans and leases receivable, net	$	2,818,986			$	2,418,836


	Amounts Due								Interest Terms On Amounts Due after One Year
	In One Year or Less		After One Year through Five Years		After Five Years		Total		Fixed Rate		Variable Rate
	(In Thousands)
Commercial real estate:
Owner-occupied	$	20,274	$	137,966	$	98,239	$	256,479	$	191,383	$	44,822
Non-owner occupied	96,300		364,249		312,945		773,494		325,712		351,483
Construction	48,652		77,203		67,225		193,080		22,604		121,825
Multi-family	25,669		162,554		262,306		450,529		102,604		322,256
1-4 family	1,140		11,514		13,635		26,289		18,708		6,440
Commercial and industrial	306,864		665,954		133,017		1,105,835		241,606		557,364
Consumer and other	9,992		33,886		434		44,312		28,452		5,868
	$	508,891	$	1,453,326	$	887,801	$	2,850,018	$	931,069	$	1,410,058

Commercial Real Estate. The Bank originates owner-occupied and non-owner-occupied commercial real estate loans which have fixed or adjustable rates and generally terms of three to 10 years and amortizations of up to 30 years on existing commercial real estate. The Bank also originates loans to construct commercial properties and complete land development projects. The Bank’s construction loans generally have terms of six to 24 months with fixed or adjustable interest rates and fees that are due at the time of origination. Loan proceeds are disbursed in increments as construction progresses and as project inspections warrant.

The repayment of commercial real estate loans generally is dependent on sufficient income from the occupants of properties securing the loans to cover operating expenses and debt service. Payments on commercial real estate loans are often dependent on external market conditions impacting the successful operation or development of the property or business involved. Therefore, repayment of such loans is often sensitive to conditions in the real estate market or the general economy, which are outside the borrower’s control. In the event that the cash flow from the property is reduced, the borrower’s ability to repay the loan could be negatively impacted. The deterioration of one or a few of these loans could cause a material increase in our level of nonperforming loans, which would result in a loss of revenue from these loans and could result in an increase in the provision for credit losses and an increase in charge-offs, all of which could have a material adverse impact on our net income. Additionally, many of these loans have real estate as a primary or secondary component of collateral. The market value of real estate can fluctuate significantly in a short period of time as a result of economic conditions. Adverse developments affecting real estate values in one or more of our markets could impact collateral coverage associated with the commercial real estate segment of our portfolio, possibly leading to increased specific reserves or charge-offs, which would adversely affect profitability.

Commercial and Industrial. The Bank’s commercial and industrial loan portfolio is comprised of loans for a variety of purposes which principally are secured by inventory, accounts receivable, equipment, machinery, and other corporate assets and are advanced within limits prescribed by our loan policy. The majority of such loans are secured and typically backed by personal guarantees of the owners of the borrowing business. Of the $1.106 billion of C&I loans outstanding as of December 31, 2023, $464.3 million were conventional C&I loans and $728.0 million were originated by the FBSF subsidiary. FBSF products consists of equipment financing, asset-based lending, accounts receivable financing, and floorplan financing.


	As of December 31,
	2023			2022
	(Dollars 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-accrual loans and leases	20,597			3,659
Repossessed assets, net	247			95
Total non-performing assets	$	20,844		$	3,754



Total non-performing loans and leases to gross loans and leases	0.72		%	0.15		%
Total non-performing assets to gross loans and leases plus repossessed assets, net	0.73		%	0.15		%
Total non-performing assets to total assets	0.59		%	0.13		%
Allowance for credit losses to gross loans and leases	1.16		%	0.99		%
Allowance for credit losses to non-performing loans and leases	160.21		%	662.20		%

As noted in the table above, non-performing assets consisted of non-performing loans and leases and repossessed assets totaling $20.8 million, or 0.59% of total assets, as of December 31, 2023, an increase in non-performing assets of $17.1 million, or 455.2%, from December 31, 2022. As of December 31, 2023 and 2022, our allowance for credit losses to total non-performing loans and leases was 160.21% and 662.20%, respectively. The increase in non-performing assets was primarily due to one fully-collateralized, $8.8 million ABL loan which defaulted in the second quarter 2023. Excluding the ABL loan, non-performing assets totaled $12.0 million, or 0.34% of total assets. The liquidation process has transitioned into Chapter 7 bankruptcy, likely delaying final resolution until the second half of 2024. The Corporation’s ABL loans are rigorously underwritten and fully collateralized, historically resulting in no losses in the event of a default. Another driver in non-performing assets, is an increase in defaults in Equipment Finance driven by transportation and logistics borrowers, which management believes is consistent with the cyclical nature of this industry.

We also monitor asset quality through our established categories as defined in Note 4 – Loans, Leases Receivable, and Allowance for Credit Losses of the Consolidated Financial Statements. As we continue to actively monitor the credit quality of our loan and lease portfolios, we may identify additional loans and leases for which the borrowers or lessees are having difficulties making the required principal and interest payments based upon factors including, but not limited to, the inability to sell the underlying collateral, inadequate cash flow from the operations of the underlying businesses, liquidation events, or bankruptcy filings. We are proactively working with our non-performing loan borrowers to find meaningful solutions to difficult situations that are in the best interests of the Bank.


	As of December 31,
	2023		2022
	(In Thousands)
Individually evaluated loans and leases with no specific reserves required	$	9,691	$	1,067
Individually evaluated loans and leases with specific reserves required	10,906		2,592
Total individually evaluated loans and leases	20,597		3,659
Less: Specific reserve (included in allowance for credit losses)	5,990		1,650
Net non-performing loans and leases	$	14,607	$	2,009
Average non-performing loans and leases	$	10,450	$	4,899

	For the years ended December 31,
	2023		2022
	(In Thousands)
Foregone interest income attributable to non-performing loans and leases	$	1,431	$	400
Less: Interest income recognized on non-performing loans and leases	266		1,436
Net foregone interest income on non-performing loans and leases	$	1,165	$	(1,036)

Loans and leases with no specific reserves represent non-performing loans where the collateral, less cost to sell, equals or exceeds the net realizable value of the loan. As part of the underwriting process, as well as our ongoing monitoring efforts, we evaluate sufficiency of collateral to protect our interest in the related loan or lease. As a result of this practice, a significant portion of our outstanding balance of non-performing loans or leases may not require additional specific reserves or require only a minimal amount of required specific reserve. Management is proactive in recording charge-offs to bring loans to their net realizable value in situations where it is determined with certainty that we will not recover the entire amount of our principal. This practice may lead to a lower allowance for credit loss to non-performing loans and leases ratio as compared to our peers or industry expectations.

The allowance for credit losses (“ACL”) increased $7.0 million, or 29.1%, to $31.3 million as of December 31, 2023 from $24.2 million as of December 31, 2022. A summary of the activity in the ACL, inclusive of reserves for unfunded credit commitments, follows:


	Year Ended December 31,
	2023			2022
	(Dollars in Thousands)
Allowance at beginning of period	$	24,230		$	24,336
Impact of adoption of ASC 326	1,818			—
Charge-offs:
Commercial real estate
Commercial real estate — owner occupied	—			—
Commercial real estate — non-owner occupied	—			—
Construction	—			—
Multi-family	—			—
1-4 family	—			—
Commercial and industrial	(1,781)			(909)
Consumer and other	—			(70)
Total charge-offs	(1,781)			(979)
Recoveries:
Commercial real estate
Commercial real estate — owner occupied	8			4,260
Commercial real estate — non-owner occupied	1			2
Construction	—			—
Multi-family	—			—
1-4 family	40			—
Commercial and industrial	479			437
Consumer and other	20			42
Total recoveries	548			4,741
Net charge-offs	(1,233)			3,762
Provision for credit losses	8,182			(3,868)
Allowance at end of period	$	32,997		$	24,230
Net charge-offs as a percent of average gross loans and leases	0.05		%	(0.16)		%

As of December 31, 2023, deposits increased by $628.6 million to $2.797 billion from $2.168 billion at December 31, 2022. The increase in deposits was primarily due to increases in wholesale deposits and transaction accounts of $255.5 million and $227.0 million, respectively. The large increase in wholesale deposits is primarily driven by a shift from FHLB advances to wholesale deposits to manage interest rate risk and liquidity by utilizing the most efficient and cost-effective source of wholesale funds to match-fund our fixed-rate loan portfolio. In addition, certificates of deposit and money market accounts increased by $133.4 million and $12.7 million, respectively. Both transaction and money market accounts increased due to the successful execution of client deposits initiatives and change in client preferences. Additionally, certificate of deposit accounts saw an increase primarily due to a change in client interest rate expectations.


	As of December 31,
	2023				2022
	Balance		% of Total Deposits		Balance		% of Total Deposits
	(Dollars in Thousands)
Non-interest-bearing transaction accounts	$	445,376	15.9	%	$	537,107	24.8	%
Interest-bearing transaction accounts	895,319		32.0		576,601		26.6
Money market accounts	711,245		25.4		698,505		32.2
Certificates of deposit	287,131		10.3		153,757		7.1
Wholesale deposits	457,708		16.4		202,236		9.3
Total deposits	$	2,796,779	100.0	%	$	2,168,206	100.0	%

Uninsured deposits	994,687				967,465
Less: uninsured deposits collateralized by pledged assets	17,051				14,326
Total uninsured, net of collateralized deposits	$	977,636	35.0	%	$	953,139	44.0	%

Period-end deposit balances associated with in-market relationships will fluctuate based upon maturity of time deposits, client demands for the use of their cash, and our ability to service and maintain existing and new client relationships. Deposits continue to be the primary source of the Bank’s funding for lending and other investment activities. A variety of accounts are designed to attract both short- and long-term deposits. These accounts include non-interest-bearing transaction accounts, interest-bearing transaction accounts, money market accounts, and certificates of deposit. Deposit terms offered by the Bank vary according to the minimum balance required, the time period the funds must remain on deposit, the rates and products offered by competitors, and the interest rates charged on other sources of funds, among other factors. Our Bank’s in-market deposits are obtained primarily from the South Central, Northeast and Southeast regions of Wisconsin and the greater Kansas City Metro.

We measure the success of in-market deposit gathering efforts based on the average balances of our deposit accounts rather than ending balances due to the volatility of some of our larger relationships. Average in-market deposits for the year ended December 31, 2023 were approximately $2.098 billion, or 75.0% of total bank funding. Total bank funding is defined as total deposits plus FHLB advances. This compares to average in-market deposits of $1.929 billion, or 80.6% of total bank funding, for 2022. Refer to Note 9 - Deposits in the Consolidated Financial Statements for additional information regarding our deposit composition.

Consistent with our funding philosophy to manage interest rate risk, we will use the most efficient and cost effective source of wholesale funds. We utilize FHLB advances to the extent we maintain an adequate level of excess borrowing capacity for liquidity and contingency funding purposes and pricing remains favorable in comparison to the wholesale deposit alternative. We will use FHLB advances and/or brokered certificates of deposit in specific maturity periods needed, typically three to five years, to match-fund fixed rate loans and effectively mitigate the interest rate risk measured through our asset/liability management process and to support asset growth initiatives while taking into consideration our operating goals and desired level of usage of wholesale funds. Please refer to the section titled Liquidity and Capital Resources, below, for further information regarding our use and monitoring of wholesale funds.

The Corporation expects to pay dividends on the Series A Preferred Stock when and if declared by its Board, at a fixed rate of 7.0% per annum, payable quarterly, in arrears, on March 15, June 15, September 15 and December 15 of each year up to, but excluding, March 15, 2027. 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 year ended December 31, 2023, the Corporation paid $875,000 in preferred cash dividends. 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.

The Corporation expects to meet its liquidity needs through existing cash on hand, established cash flow sources, its third party senior line of credit, and dividends received from the Bank. While the Bank is subject to certain generally applicable regulatory limitations regarding its ability to pay dividends to the Corporation, we do not believe that the Corporation will be adversely affected by these dividend limitations. The Corporation’s principal liquidity requirements at December 31, 2023 were the interest payments due on subordinated notes and cash dividends payable to both common and preferred stockholders. During 2023 and 2022, FBB declared and paid dividends totaling $12.1 million and $2.0 million, respectively. The capital ratios of the Bank met all applicable regulatory capital adequacy requirements in effect on December 31, 2023, and continue to meet the heightened requirements imposed by Basel III, including the capital conservation buffer. The Corporation’s Board and management teams adhere to the appropriate regulatory guidelines on decisions which affect their capital positions, including but not limited to, decisions relating to the payment of dividends and increasing indebtedness.

We view readily accessible liquidity as a critical element to meet our cash and collateral obligations. We define our readily accessible liquidity as the total of our short-term investments, our unencumbered securities available-for-sale, and our unencumbered pledged loans. As of December 31, 2023 and 2022, our readily accessible liquidity was $734.4 million and $449.6 million, respectively. At December 31, 2023 and 2022, the Bank had $106.8 million and $76.5 million on deposit with the FRB recorded in short-term investments, respectively. Any excess funds not used for loan funding or satisfying other cash obligations were maintained as part of our readily accessible liquidity in our interest-bearing accounts with the FRB, as we value the safety and soundness provided by the FRB. We plan to utilize excess liquidity to fund loan and lease portfolio growth, pay down maturing debt, pay down FHLB advances, allow run off of maturing wholesale certificates of deposit or to invest in securities to maintain adequate liquidity at an improved margin.

We had $739.2 million of outstanding wholesale funds at December 31, 2023, compared to $618.6 million of wholesale funds as of December 31, 2022, which represented 24.0% and 23.9%, respectively, of period end total bank funding. Wholesale funds include FHLB advances, brokered certificates of deposit, and deposits gathered from internet listing services. Total bank funding is defined as total deposits plus FHLB advances. We are committed to raising in-market deposits while utilizing wholesale funds to match-fund our loan portfolio and mitigate interest rate risk. Wholesale funds continue to be an efficient and cost effective source of funding for the Bank and allows it to gather funds across a larger geographic base at price levels and maturities that are more attractive than local time deposits when required to raise a similar level of in-market deposits within a short time period. Access to such deposits and borrowings allows us the flexibility to refrain from pursuing less desirable deposit relationships. In addition, the administrative costs associated with wholesale funds are considerably lower than those that would be incurred to administer a similar level of local deposits with a similar maturity structure. During the time frames necessary to accumulate wholesale funds in an orderly manner, we will use short-term FHLB advances to meet our temporary funding needs. The short-term FHLB advances will typically have terms of one week to one month to cover the overall expected funding demands.

Period-end in-market deposits increased $373.1 million, or 19.0%, to $2.339 billion at December 31, 2023 from $1.966 billion at December 31, 2022 as in-market deposit balances increased due to successful business development efforts, partially offset by deposit movement from money market accounts to, alternative investment options, and clients funding their normal course of business. Our in-market relationships continue to grow; however, deposit balances associated with those relationships will fluctuate. We expect to establish new client relationships and continue marketing efforts aimed at increasing the balances in existing clients’ deposit accounts. Nonetheless, we will continue to use wholesale funds in specific maturity periods, typically three to five years, needed to effectively mitigate the interest rate risk measured through our asset/liability management process or in shorter time periods if in-market deposit balances decline. In order to provide for ongoing liquidity and funding, substantially all of our wholesale funds are certificates of deposit which do not allow for withdrawal at the option of the depositor before the stated maturity (with the exception of deposits accumulated through the internet listing service which have the same early withdrawal privileges and fees as do our other in-market deposits) and FHLB advances with contractual maturity terms and no call provisions. The Bank limits the percentage of wholesale funds to total bank funds in accordance with liquidity policies approved by its Board. The Bank was in compliance with its policy limits as of December 31, 2023.

During the year ended December 31, 2023, operating activities resulted in a net cash inflow of $52.3 million driven by net income of $37.0 million. Net cash used in investing activities for the year ended December 31, 2023 was $506.8 million which consisted of $408.6 million in cash outflows to fund net loan growth and $75.7 million in net cash outflows to purchase available-for-sale securities. Net cash provided by financing activities for the year ended December 31, 2023 was $491.4 million. Financing cash flows included a $628.6 million net increase in deposits and a $134.9 million net increase in FHLB advances, partially offset by cash dividends paid of $7.6 million, and share repurchases of $3.0 million, respectively.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. By their nature, changes in these assumptions and estimates could significantly affect the Corporation’s financial position or results of operations. Actual results could differ from those estimates. Discussed below are certain policies that are critical to the Corporation. We view critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements.

Allowance for Credit Losses. Management believes the determination of the ACL involves a high degree of judgment and complexity than its other significant accounting policies. The ACL is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated credit losses over the life of an asset or an off-balance sheet credit exposure. Management’s determination of the adequacy of the ACL is based on periodic evaluations of past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. However, this evaluation has subjective components requiring material estimates, including expected default probabilities, the expected loss given default, the amounts and timing of expected future cash flows, and estimated losses based on historical loss experience and forecasted economic conditions. All of these factors may be susceptible to significant change. To the extent that actual results differ from management estimates, additional provisions for credit losses may be required that would adversely impact earnings in future periods. The ACL represents our recognition of the risks of extending credit and our evaluation of the quality of the loan and lease portfolio and as such, requires the use of judgment as well as other systematic objective and quantitative methods which may include additional assumptions and estimates.

Goodwill Impairment Assessment. Goodwill is not amortized but, instead, 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 a reporting unit below its carrying amount, including goodwill. The Corporation conducted its annual impairment test as of 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. Although no goodwill impairment was noted, there can be no assurances that future goodwill impairment will not occur. See Note 1 – Nature of Operations and Summary of Significant Accounting Policies for the Corporation's accounting policy on goodwill and see Note 7 – Goodwill and Intangible Assets in the Consolidated Financial Statements for a detailed discussion of the factors considered by management in the assessment.

Income Taxes. The Corporation and its wholly owned subsidiaries file a consolidated federal income tax return and a combined Wisconsin state tax return. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The determination of current and deferred income taxes is based on complex analysis of many factors, including the interpretation of federal and state income tax laws, the difference between the tax and financial reporting basis of assets and liabilities (temporary differences), estimates of amounts currently due or owed, such as the timing of reversals of temporary differences, and current accounting standards. We apply a more likely than not approach to each of our tax positions when determining the amount of tax benefit to record in our Consolidated Financial Statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

We have made our best estimate of valuation allowances utilizing available evidence and evaluation of sources of taxable income including tax planning strategies and expected reversals of timing differences to determine if valuation allowances were needed for deferred tax assets. Realization of deferred tax assets over time is dependent on our ability to generate sufficient taxable earnings in future periods and a valuation allowance may be necessary if management determines that it is more likely than not that the deferred asset will not be utilized. These estimates and assumptions are subject to change. Changes in these estimates and assumptions could adversely affect future consolidated results of operations. The Corporation believes the tax assets and liabilities are properly recorded in the Consolidated Financial Statements. See also Note 16 – Income Taxes in the Consolidated Financial Statements.

Our primary market risk is interest rate risk, which arises from exposure of our financial position to changes in interest rates. It is our strategy to reduce the impact of interest rate risk on net interest margin by maintaining a match-funded position between the maturities and repricing dates of interest-earning assets and interest-bearing liabilities. This strategy is monitored by the Bank’s Asset/Liability Management Committee, in accordance with policies approved by the Bank’s Board. The committee meets regularly to review the sensitivity of the Bank’s assets and liabilities to changes in interest rates, liquidity needs and sources, and pricing and funding strategies.

We manage the structure of interest-earning assets and interest-bearing liabilities by adjusting their mix, yield, maturity and/or repricing characteristics based on market conditions. FHLB advances and, to a lesser extent, wholesale certificates of deposit are a significant source of funds. We use a variety of maturities to augment our management of interest rate exposure. Currently, we do not employ any derivatives to assist in managing our interest rate risk exposure; however, management has the authorization, as permitted within applicable approved policies, and ability to utilize such instruments should they be appropriate to manage interest rate exposure. We maintained our historically neutral balance sheet throughout 2023 and believe we ended the year appropriately positioned.


		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


	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


	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


	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


	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)


	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

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.

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.

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.

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.

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.

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.

(c)Code of Ethics. The Corporation has adopted a code of ethics applicable to all employees, including the principal executive officer, principal financial officer and principal accounting officer of the Corporation. The FBFS Code of Business Conduct and Ethics is posted on the Corporation’s website at ir.firstbusiness.bank/govdocs. The Corporation intends to satisfy the disclosure requirements under Item 5.05(c) of Form 8-K regarding any amendment to or waiver of the code with respect to its Chief Executive Officer, Chief Financial Officer, principal accounting officer, and persons performing similar functions, by posting such information to the Corporation’s website.

Signature

Title

Date

/s/ Corey A. Chambas

Chief Executive Officer and Director

February 28, 2024

Corey A. Chambas

(principal executive officer)

/s/ Brian D. Spielmann

Chief Financial Officer

February 28, 2024

Brian D. Spielmann

(principal financial officer)

/s/ Kevin D. Crampton

Chief Accounting Officer

February 28, 2024

Kevin D. Crampton

(principal accounting officer)

/s/ Gerald L. Kilcoyne

Chair of the Board of Directors

February 28, 2024

Gerald L. Kilcoyne

/s/ Laurie S. Benson

Director

February 28, 2024

Laurie S. Benson

/s/ Mark D. Bugher

Director

February 28, 2024

Mark D. Bugher

/s/ Carla C. Chavarria

Director

February 28, 2024

Carla C. Chavarria

/s/ John J. Harris

Director

February 28, 2024

John J. Harris

/s/ Ralph R. Kauten

Director

February 28, 2024

Ralph R. Kauten

/s/ W. Kent Lorenz

Director

February 28, 2024

W. Kent Lorenz

/s/ Daniel P. Olszewski

Director

February 28, 2024

Daniel P. Olszewski

/s/ Carol P. Sanders

Director

February 28, 2024

Carol P. Sanders


☑			ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the fiscal year ended December 31, 2023
☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the transition period from to


Wisconsin						39-1576570
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

401 Charmany Drive, Madison, WI						53719
(Address of principal executive offices)						(Zip Code)


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	FBIZ	The Nasdaq Stock Market LLC


PART I			1
Item 1. Business			1
Item 1A. Risk Factors			17
Item 1B. Unresolved Staff Comments			29
I tem 1C. Cyber security			29
Item 2. Properties			30
Item 3. Legal Proceedings			31
Item 4. Mine Safety Disclosures			31
PART II			32
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities			32
Item 6. [Reserved]			34
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			34
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			62
Item 8. Financial Statements and Supplementary Data			63
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			126
Item 9A. Controls and Procedures			126
Item 9B. Other Information			127
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections			127
PART III			127
Item 10. Directors, Executive Officers and Corporate Governance			127
Item 11. Executive Compensation			127
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters			127
Item 13. Certain Relationships and Related Transactions, and Director Independence			128
Item 14. Principal Accountant Fees and Services			128
PART IV			129
Item 15. Exhibits and Financial Statements Schedules			129
Item 16. Form 10-K Summary			130
Signatures			131


	As of December 31,
Index	2018		2019		2020		2021		2022		2023
First Business Financial Services, Inc.	$	100.00	$	138.56	$	100.53	$	163.69	$	209.82	$	236.96
NASDAQ Composite Index	100.00		136.69		198.10		242.03		163.28		236.17
KBW NASDAQ Bank Index	100.00		136.13		122.09		168.88		132.75		131.57


Period	Total Number of Shares Purchased(1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Total Number of Shares that May Yet Be Purchased Under the Plans or Programs
October 1, 2023 - October 31, 2023	—	$	—	—
November 1, 2023 - November 30, 2023	458	34.30		—
December 1, 2023 - December 31, 2023	—	—		—
Total	458			—	74,813


	As of December 31,
Key Performance Indicators	2021	2022	2023	Strategic Plan
Return on average equity (“ROAE”)	16.21%	16.79%	13.79%	13.50%
Return on average assets (“ROAA”)	1.37%	1.46%	1.13%	1.15%
Top line revenue growth	8.4%	13.4%	12.6%	≥ 10% per year
In-market deposits to total bank funding	82.9%	76.1%	76.0%	≥ 75%
Employee engagement (1)	87%	87%	90%	≥ 80%
Client satisfaction (1)	93%	95%	93%	≥ 90%

(1) Anonymous surveys conducted annually


	Real Estate	Wholesale and Manufacturing	Retail and Hospitality	Transportation and Warehousing	Other	Total
Commercial real estate — owner occupied	4%	27%	18%	17%	34%	100%
Commercial real estate — non-owner occupied	75% (1)	1%	10%	2%	12%	100%
Commercial and industrial	4%	26%	21%	12%	37%	100%


Interest Rate	Three Months and Less		Over Three Months Through Six Months		Over Six Months Through Twelve Months		Over Twelve Months		Total
	(In Thousands)
0.00% to 0.99%	$	712	$	—	$	233	$	408	$	1,353
1.00% to 1.99%	—		176		2,084		—		2,260
2.00% to 2.99%	2,332		—		5,195		2,552		10,079
3.00% to 3.99%	10,185		2,507		484		39,103		52,279
4.00% to 4.99%	110,400		17,120		13,181		116,131		256,832
5.00% and greater	317,805		21,005		33,226		—		372,036
	$	441,434	$	40,808	$	54,403	$	158,194	$	694,839


	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 payable	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


(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


	Impact on Net Interest Income as of December 31,
Instantaneous Rate Change in Basis Points	2023		2022
Down 300	(0.20)	%	(9.90)	%
Down 200	1.54		(0.88)
Down 100	1.92		0.79
No Change	—		—
Up 100	2.11		2.26
Up 200	2.24		4.48
Up 300	2.36		6.65



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


	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


	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


	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


	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


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


(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


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


	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		%


	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


	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)


	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


	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	%


(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


	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	%


	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	%


	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


	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


	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


	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, 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


	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