# FIRST BUSINESS FINANCIAL SERVICES, INC. (FBIZ) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from FIRST BUSINESS FINANCIAL SERVICES, INC.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1521951/000152195124000020/fbiz-20231231.htm
Accession: 0001521951-24-000020
Filing date: 2024-02-28
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/FBIZ/
All MD&A years: /company/FBIZ/mda/
Previous year: /company/FBIZ/mda/fy2022/ (FY 2022)
Next year: /company/FBIZ/mda/fy2024/ (FY 2024)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

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

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

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

•Increases in defaults by borrowers and other delinquencies.

•Our ability to manage growth effectively, including the successful expansion of our client support, administrative infrastructure, and internal management systems.

•Fluctuations in interest rates and market prices.

•Changes in legislative or regulatory requirements applicable to us and our subsidiaries.

•Changes in tax requirements, including tax rate changes, new tax laws, and revised tax law interpretations.

•Fraud, including client and system failure or breaches of our network security, including our internet banking activities.

•Failure to comply with the applicable SBA regulations in order to maintain the eligibility of the guaranteed portions of SBA loans.

    These risks, together with the risks identified in Item 1A — Risk Factors, could cause actual results to differ materially from what we have anticipated or projected. These risk factors and uncertainties should be carefully considered by our stockholders and potential investors. Investors should not place undue reliance on any such forward-looking statements, which speak only as of the date made.

    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 do not intend to, and specifically disclaim any obligation to, update any forward-looking statements.

    The following discussion and analysis is intended as a review of significant events and factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto.

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Overview

    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.

Long-Term Strategic Plan

    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.

These four strategies are described below:

•We will identify, attract, develop, and retain a diverse, high performing team to positively impact the overall performance and efficiency of the Corporation.

•We will increase internal efficiencies, deliver a differentiated client experience, and drive client experience utilizing technology where possible.

•We will diversify and grow our deposit base.

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

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

[[GREPCENT_TABLE]]
[["","As of December 31,"],["Key Performance Indicators","2021","2022","2023","Strategic Plan"],["Return on average equity (\u201cROAE\u201d)","16.21%","16.79%","13.79%","13.50%"],["Return on average assets (\u201cROAA\u201d)","1.37%","1.46%","1.13%","1.15%"],["Top line revenue growth","8.4%","13.4%","12.6%","\u2265 10% per year"],["In-market deposits to total bank funding","82.9%","76.1%","76.0%","\u2265 75%"],["Employee engagement (1)","87%","87%","90%","\u2265 80%"],["Client satisfaction (1)","93%","95%","93%","\u2265 90%"],["(1) Anonymous surveys conducted annually"]]
[[/GREPCENT_TABLE]]

Throughout 2023, the last year of the existing plan, management undertook an extensive process to reassess its key strategies and performance indicators to create a new long-term strategic plan. The Corporation intends to disclose information about the key terms of the new strategic plan later in 2024 after it is finalized.

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Financial Performance Summary 

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

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

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

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

•Return on average common equity (“ROACE”), which is defined as net income available to common shareholders divided by average equity reduced by average preferred stock, if any. ROACE was 13.79% for the year ended December 31, 2023, compared to 16.79% for the year ended December 31, 2022.

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

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

•Net interest margin was 3.78% for the year ended December 31, 2023, declining 4 bps from 3.82% for the year ended December 31, 2022. Adjusted net interest margin, which excludes certain one-time and discrete items, was 3.63% for the year ended December 31, 2023 and December 31, 2022.

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

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

•Provision for credit losses was $8.2 million for the year ended December 31, 2023, compared to a net provision benefit of $3.9 million for the year ended December 31, 2022. Net charge-offs as a percentage of average loans and leases were 0.05% for the year ended December 31, 2023, compared to net recoveries of 0.16% for the year ended December 31, 2022.

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

•Period-end gross loans and leases receivable at December 31, 2023 increased $407.2 million, or 16.7%, to $2.850 billion from $2.443 billion as of December 31, 2022. Average gross loans and leases of $2.648 billion increased $342.9 million, or 14.9% for the year ended December 31, 2023, compared to $2.305 billion for the same period in 2022.

•Non-performing assets increased to $20.8 million as of December 31, 2023, compared to $3.8 million as of December 31, 2022. Non-performing assets to total assets increased to 0.59% as of December 31, 2023, from 0.13% as of December 31, 2022.

•The allowance for credit losses as of December 31, 2023 increased $7.0 million, or 29.1%, to $31.3 million, compared to $24.2 million as of December 31, 2022. The allowance for credit losses was 1.16% of total loans as of December 31, 2023, compared to 0.99% as of December 31, 2022.

•Period-end in-market deposits at December 31, 2023 increased $373.1 million, or 19.0%, to $2.339 billion from $1.966 billion as of December 31, 2022. Average in-market deposits of $2.098 billion increased $169.3 million, or 8.8%, for the year ended December 31, 2023, compared to $1.929 billion for the same period in 2022.

•Private wealth and trust assets under management and administration increased by $461.5 million, or 17.3%, to $3.122 billion at December 31, 2023, compared to $2.660 billion at December 31, 2022. Private wealth management service fees increased $544,000, or 5.00%, for the year ended December 31, 2023, compared to the year ended December 31, 2022.

The detailed financial discussion that follows focuses on 2023 results compared to 2022. Information pertaining to 2022 in comparison to 2021 was included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022 on page 33 under Part II, Item 7, “Management’s Discussion and Analysis of Financial and Results of Operations,” which was filed with the SEC on February 22, 2023.

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Results of Operations

Top Line Revenue

    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.

    The components of top line revenue were as follows: 

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,","","Change From Prior Year"],["","","2023","","2022","","2021","","$ Change 2023","","% Change 2023","","$ Change 2022","","% Change 2022"],["","","(Dollars in Thousands)"],["Net interest income","","$","112,588","","","$","98,422","","","$","84,662","","","$","14,166","","","14.4","%","","$","13,760","","","16.3","%"],["Non-interest income","","31,308","","","29,428","","","28,100","","","1,880","","","6.4","","","1,328","","","4.7","%"],["Top line revenue","","$","143,896","","","$","127,850","","","$","112,762","","","$","16,046","","","12.6","","","$","15,088","","","13.4","%"]]
[[/GREPCENT_TABLE]]

Return on Average Assets and Return on Average Common Equity

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

    ROACE for the year ended December 31, 2023 was 13.79% compared to 16.79% for the year ended December 31, 2022. The primary reason for the change in ROACE is consistent with the change in ROAA discussed above. We view ROACE as an important measurement for monitoring profitability and continue to focus on improving our return to our shareholders by enhancing the overall profitability of our client relationships, controlling our expenses, and minimizing our costs of credit.

Efficiency Ratio and Pre-Tax, Pre-Provision Adjusted Earnings

    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.

    Please refer to the Non-Interest Income and Non-Interest Expense sections below for discussion on additional drivers of the year-over-year change in the efficiency ratio and PTPP adjusted earnings.

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[[GREPCENT_TABLE]]
[["","","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","%","","$","7,939","","","11.1","%"],["Less:"],["Net loss on repossessed assets","","12","","","49","","","15","","","(37)","","","(75.5)","","","34","","","226.7"],["Amortization of other intangible assets","","\u2014","","","\u2014","","","25","","","\u2014","","","NM","","(25)","","","NM"],["SBA recourse expense (benefit)","","775","","","(188)","","","(76)","","","963","","","(512.2)","","","(112)","","","147.4"],["Contribution to First Business Charitable Foundation","","\u2014","","","809","","","\u2014","","","(809)","","","NM","","809","","","NM"],["Impairment of tax credit investments","","\u2014","","","(351)","","","\u2014","","","351","","","NM","","(351)","","","NM"],["Total operating expense (a)","","$","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","","\u2014","","","809","","","\u2014","","","(809)","","","NM","","809","","","NM"],["Net gain (loss) on sale of securities","","(45)","","","\u2014","","","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","%"]]
[[/GREPCENT_TABLE]]

NM = Not meaningful

Net Interest Income

    Net interest income levels depend on the amount of and yield on interest-earning assets as compared to the amount of and rate paid on interest-bearing liabilities. Net interest income is sensitive to changes in market rates of interest and the asset/liability management processes to prepare for and respond to such changes.

The table below shows average balances, interest, average rates, net interest margin and the spread between combined average rates earned on our interest-earning assets and cost of interest-bearing liabilities for the periods indicated. The average balances are derived from average daily balances.

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[[GREPCENT_TABLE]]
[["","","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)","","\u2014","","","\u2014","","","\u2014","%","","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\u2019 equity","","274,162","","","","","","","249,227","","","","","","","220,511"],["Total liabilities and stockholders\u2019 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","%"]]
[[/GREPCENT_TABLE]]

(1)The average balances of loans and leases include non-accrual loans and leases and loans held for sale. Interest income related to non-accrual loans and leases is recognized when collected. Interest income includes net loan fees in lieu of interest.

(2)Includes amortized cost basis of assets available-for-sale and held-to-maturity.

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

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(4)Weighted average rate of junior subordinated notes and debentures reflects the accelerated amortization of subordinated debt issuance costs as a result of the early redemption of the junior subordinated notes during the first quarter of 2022.

The following table provides information with respect to: (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.

Rate/Volume Analysis

[[GREPCENT_TABLE]]
[["","","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","","\u2014","","","(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"]]
[[/GREPCENT_TABLE]]

(1)The average balances of loans and leases include non-accrual loans and leases and loans held for sale. Interest income related to non-accrual loans and leases is recognized when collected. Interest income includes net loan fees collected in lieu of interest.

(2)Includes amortized cost basis of assets available-for-sale and held-to-maturity.

    The change in yield of the respective interest-earning asset or the rate paid on interest-bearing liability compared to the change in short-term market rates is commonly referred to as a beta. The table below displays the beta calculations for loans and leases, total interest earning assets, in-market deposits, interest-bearing deposits and total interest-bearing liabilities for the year ended December 31, 2023 and 2022. Additionally, adjusted total loans and leases and total interest-earning assets excludes the volatile impact of fees in lieu of interest.

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Asset and Liability Beta Analysis

[[GREPCENT_TABLE]]
[["","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","%","","\u2014","%","","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)","","","","","","","\u2014","%","","26.09","%"]]
[[/GREPCENT_TABLE]]

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

(2)Board of Governors of the Federal Reserve System (US), Effective Federal Funds Rates [DFF]. retrieved from FRED, Federal Reserve Bank of St. Louis.

(3)Represents annualized yields/rates.

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 yield on average earning assets for the year ended December 31, 2023 was 6.54%, an increase of 183 basis points compared to 4.71% for the year ended December 31, 2022. This increase was principally due to the rising interest rates on variable-rate loans and investment in securities at higher interest rates. Excluding the impact of recurring loan fees in lieu of interest in both 2023 and 2022, the yield on average earning assets for the year ended December 31, 2023 was 6.43%, an increase of 193 basis points compared to 4.50% for the year ended December 31, 2022.

    The average rate paid on interest-bearing liabilities was 3.46% for the year ended December 31, 2023, an increase of 223 basis points from 1.23% for the year ended December 31, 2022. The average rate paid increased as the Corporation increased deposit rates and secured wholesale funding, which consists of wholesale deposits and FHLB advances, at elevated fixed rates.

    Net interest margin decreased four basis points to 3.78% for the year ended December 31, 2023, compared to 3.82% for the year ended December 31, 2022. Adjusted net interest margin measured 3.63% for the years ended December 31, 2023 and December 31, 2022. Adjusted net interest margin is a non-GAAP measure representing net interest income excluding the fees in lieu of interest and other recurring, but volatile, components of net interest margin divided by average interest-earning assets less other recurring, but volatile, components of average interest-earning assets.

    Management believes its success in growing in-market deposits, disciplined loan pricing, and increased production in existing higher-yielding commercial lending products will allow the Corporation to achieve a net interest margin that supports our long-term profitability goals. The collection of loan fees in lieu of interest is an expected source of volatility to quarterly net

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

Provision for Credit Losses

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

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

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["(Dollars in thousands)","","2023","","2022","","2021"],["Change in general reserve due to subjective factor changes","","$","33","","","$","(384)","","","$","(426)"],["Change in general reserve due to quantitative factor changes","","(1,453)","","","(2,012)","","","(4,456)"],["Charge-offs","","1,781","","","979","","","3,508"],["Recoveries","","(548)","","","(4,741)","","","(5,126)"],["Change in specific reserves on individually evaluated loans, net","","4,330","","","146","","","(2,175)"],["Change due to loan growth, net","","3,652","","","2,144","","","2,872"],["Change in unfunded credit commitment reserve","","387","","","\u2014","","","\u2014"],["Total provision for credit losses (a)","","$","8,182","","","$","(3,868)","","","$","(5,803)"]]
[[/GREPCENT_TABLE]]

(a) - Management adopted ASC 326 on January 1, 2023. Prior periods are presented under the incurred loss model.

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

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

Non-Interest Income

    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.

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    The components of non-interest income were as follows: 

[[GREPCENT_TABLE]]
[["","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","%","","$","97","","","0.9"],["Gain on sale of SBA loans","2,055","","","2,537","","","4,044","","","(482)","","","(19.0)","","","(1,507)","","","(37.3)"],["Service charges on deposits","3,131","","","3,849","","","3,837","","","(718)","","","(18.7)","","","12","","","0.3"],["Loan fees","3,363","","","3,010","","","2,506","","","353","","","11.7","","","504","","","20.1"],["Bank-owned life insurance income","1,494","","","2,227","","","1,413","","","(733)","","","(32.9)","","","814","","","57.6"],["Net (loss) gain on sale of securities","(45)","","","\u2014","","","29","","","(45)","","","NM","","(29)","","","(100.0)"],["Swap fees","2,964","","","1,793","","","1,368","","","1,171","","","65.3","","","425","","","31.1"],["Other non-interest income","6,921","","","5,131","","","4,119","","","1,790","","","34.9","","","1,012","","","24.6"],["Total non-interest income","$","31,308","","","$","29,428","","","$","28,100","","","$","1,880","","","6.4","","","$","1,328","","","4.7"],["Fee income ratio(1)","21.8","%","","23.0","%","","24.9","%"]]
[[/GREPCENT_TABLE]]

(1)Fee income ratio is fee income, per the above table, divided by top line revenue (defined as net interest income plus non-interest income).

    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.

Other non-interest income increased by $1.8 million to $6.9 million for the year ended December 31, 2023, compared to $5.1 million for the year ended December 31, 2022. The increase was primarily due to strong returns from the Corporation’s investments in mezzanine funds.

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.

Loan fees increased $353,000, or 11.7%, to $3.4 million for the year ended December 31, 2023, compared to $3.0 million for the same period in 2022. The increase was driven by an increase in equipment finance and floorplan finance lending activity generating additional service fee income.

Bank-owned life insurance income decreased by $733,000, or 32.9%, to $1.5 million for the year ended December 31, 2023, compared to $2.2 million for the year ended December 31, 2022. The decrease was due to the recognition of a $809,000 insurance claim in the year ended December 31, 2022.

Service charges on deposits for the year ended December 31, 2023 totaled $3.1 million, a decrease of $718,000, or 18.7%, from the same period in 2022. The decrease was due to higher earnings credit rates commensurate with the higher interest rate environment partially offset by an increase in additional product sales to new and existing clients.

Gain on sale of SBA loans for the year ended December 31, 2023 totaled $2.1 million, a decrease of $482,000, or 19.0%, from the same period in 2022. The decrease is mainly due to a reduction in total loans sold resulting from lighter production in the first half of 2023.

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Non-Interest Expense

    Non-interest expense increased by $9.1 million, or 11.5%, to $88.6 million for the year ended December 31, 2023 from $79.5 million for the year ended December 31, 2022. Operating expense, which excludes certain one-time and discrete items as defined in the Efficiency Ratio table above, increased $8.6 million, or 10.9%, to $87.8 million for the year ended December 31, 2023 compared to $79.2 million for the year ended December 31, 2022. The increase in operating expense was due to an increase in all expense categories, led by compensation, FDIC insurance, and other non-interest expense.

    The components of non-interest expense were as follows: 

[[GREPCENT_TABLE]]
[["","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"]]
[[/GREPCENT_TABLE]]

NM = Not meaningful

(1)Total operating expense represents total non-interest expense, adjusted to exclude the impact of discrete items as previously defined in the non-GAAP efficiency ratio calculation above.

    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.

FDIC Insurance increased $1.2 million, or 114.8%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase was primarily due to an increase in the assessment rate and the Corporation’s assessable base.

Data processing fees increased $629,000, or 19.7%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase was primarily due to an increase in core processing costs commensurate with loan and deposit account growth, as well as various project implementations.

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Computer software expense increased by $569,000, or 12.9%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase was primarily due to continued investment in technology to support the Corporation’s growth.

Marketing expense increased by $535,000, or 22.7%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase was primarily due to an increase in business development efforts and advertising projects commensurate with our expanding sales force.

Professional fees increased $444,000, or 9.1%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase was primarily due to an increase in recruiting expense and a general increase in other professional consulting services for various projects.

Income Taxes

    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.

FINANCIAL CONDITION

General

    Total assets increased by $531.2 million, or 17.8%, to $3.508 billion as of December 31, 2023 compared to $2.977 billion at December 31, 2022. The increase in total assets was primarily driven by an increase in loans and leases receivable, cash and cash equivalents, securities, and other assets. Total liabilities increased by $502.3 million, or 18.5%, to $3.218 billion as of December 31, 2023 compared to $2.716 billion at December 31, 2022. The increase in total liabilities was principally due to an increase in deposits.

Cash and cash equivalents

    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.

Securities

    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

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us to better match short-term liabilities. The Bank’s investment policies allow for various types of investments, including tax-exempt municipal securities. The ability to invest in tax-exempt municipal securities provides for further opportunity to improve our overall yield on the securities portfolio. We evaluate the credit risk of the municipal securities prior to purchase and generally limit exposure to general obligation issuances from municipalities, primarily in Wisconsin.

    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.

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    The tables below set forth information regarding the amortized cost and fair values of our securities.

[[GREPCENT_TABLE]]
[["","","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"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["","","2023","","2022"],["","","Amortized Cost","","Fair Value","","Amortized Cost","","Fair Value"],["","","(In Thousands)"],["Held-to-maturity:"],["Municipal securities","","$","4,210","","","$","4,173","","","$","7,467","","","$","7,404"],["Residential mortgage-backed securities - government issued","","1,211","","","1,135","","","1,625","","","1,518"],["Residential mortgage-backed securities - government-sponsored issued","","1,078","","","1,025","","","1,537","","","1,444"],["Commercial mortgage-backed securities - government-sponsored enterprises","","2,004","","","1,922","","","2,006","","","1,904"],["","","$","8,503","","","$","8,255","","","$","12,635","","","$","12,270"]]
[[/GREPCENT_TABLE]]

    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.

    The following table sets forth the contractual maturity and weighted average yield characteristics of the fair value of our available-for-sale securities and the amortized cost of our held-to-maturity securities at December 31, 2023, classified by remaining contractual maturity. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay securities without call or prepayment penalties. Yields on tax-exempt securities have not been computed on a tax equivalent basis.

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[[GREPCENT_TABLE]]
[["","","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","%","","$","\u2014","","","\u2014","%","","$","\u2014","","","\u2014","%","","$","13,776"],["U.S. government agency securities - government-sponsored enterprises","","13,387","","","4.12","","","6,060","","","2.76","","","1,345","","","6.19","","","6,774","","","6.04","","","27,566"],["Municipal securities","","\u2014","","","\u2014","","","6,992","","","1.42","","","10,570","","","1.86","","","18,319","","","2.05","","","35,881"],["","","22,569","","","","","17,646","","","","","11,915","","","","","25,093","","","","","77,223"],["Residential mortgage-backed securities","","","","","","","","","","","","","","","","","","188,889"],["Commercial mortgage-backed securities","","","","","","","","","","","","","","","","","","30,894"],["","","$","22,569","","","","","$","17,646","","","","","$","11,915","","","","","$","25,093","","","","","$","297,006"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Less than One Year","","One to Five Years","","Five to Ten Years","","Over Ten Years"],["","","Amortized Cost","","Weighted Average Yield","","Amortized Cost","","Weighted Average Yield","","Amortized Cost","","Weighted Average Yield","","Amortized Cost","","Weighted Average Yield","","Total"],["","","(Dollars in Thousands)"],["Held-to-maturity:"],["Municipal securities","","$","1,060","","","2.40","%","","$","3,150","","","2.76","%","","$","\u2014","","","\u2014","%","","$","\u2014","","","\u2014","%","","$","4,210"],["","","1,060","","","","","3,150","","","","","\u2014","","","","","\u2014","","","","","4,210"],["Residential mortgage-backed securities","","","","","","","","","","","","","","","","","","2,289"],["Commercial mortgage-backed securities","","","","","","","","","","","","","","","","","","2,004"],["","","$","1,060","","","","","$","3,150","","","","","$","\u2014","","","","","$","\u2014","","","","","$","8,503"]]
[[/GREPCENT_TABLE]]

48

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Derivatives

The Board-approved Bank policies allow the Bank to participate in hedging strategies or to use financial futures, options, forward commitments, or interest rate swaps. The Bank utilizes, from time to time, derivative instruments in the course of its asset/liability management. The Corporation’s derivative financial instruments, under which the Corporation is required to either receive cash from or pay cash to counterparties depending on changes in interest rates applied to notional amounts, are carried at fair value on the consolidated balance sheets.

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.

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

Loans and Leases Receivable

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

    There continues to be a concentration in CRE loans which represented 59.6% and 63.1% of our total loans, as of December 31, 2023 and December 31, 2022, respectively. As of December 31, 2023, approximately 15.1% of the CRE loans

49

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were owner-occupied CRE, compared to 17.4% as of December 31, 2022. We consider owner-occupied CRE more characteristic of the Corporation’s C&I portfolio as, in general, the client’s primary source of repayment is the cash flow from the operating entity occupying the commercial real estate property.

    Our C&I portfolio increased $252.5 million, or 29.6%, to $1.106 billion at December 31, 2023 from $853.3 million at December 31, 2022. The Corporation experienced significant C&I loan growth in 2023, due to growth across products and geographies. Management believes the investment in the Corporation’s C&I product lines has positioned the Corporation for strong and sustainable growth in 2024 and beyond.

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.

    While we continue to experience significant competition from banks operating in our primary geographic areas, we remain committed to our underwriting standards and will not deviate from those standards for the sole purpose of growing our loan and lease portfolio. We continue to expect our new loan and lease activity to be adequate to replace normal amortization, allowing us to continue growing in future years.

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The following table presents information concerning the composition of the Bank’s consolidated loans and leases receivable. 

[[GREPCENT_TABLE]]
[["","","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 \u2014 owner occupied","","$","256,479","","","9.0","%","","$","268,354","","","11.0","%"],["Commercial real estate \u2014 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"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","Real Estate","Wholesale and Manufacturing","Retail and Hospitality","Transportation and Warehousing","Other","Total"],["Commercial real estate \u2014 owner occupied","4%","27%","18%","17%","34%","100%"],["Commercial real estate \u2014 non-owner occupied","75% (1)","1%","10%","2%","12%","100%"],["Commercial and industrial","4%","26%","21%","12%","37%","100%"]]
[[/GREPCENT_TABLE]]

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

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

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

[[GREPCENT_TABLE]]
[["","","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"]]
[[/GREPCENT_TABLE]]

    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.

    Consumer and Other. The Bank originates a small amount of consumer loans consisting of home equity, first and second mortgages, and other personal loans for professional and executive clients of the Bank.

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Asset Quality

    Non-performing loans and leases increased $16.9 million, or 462.9%, to $20.6 million at December 31, 2023 compared to $3.7 million at December 31, 2022. Our total non-performing assets consisted of the following:

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["","","2023","","2022"],["","","(Dollars in Thousands)"],["Non-performing loans and leases"],["Commercial real estate:"],["Commercial real estate \u2013 owner occupied","","$","\u2014","","","$","\u2014"],["Commercial real estate \u2013 non-owner occupied","","\u2014","","","\u2014"],["Construction","","\u2014","","","\u2014"],["Multi-family","","\u2014","","","\u2014"],["1-4 family","","22","","","30"],["Total non-performing commercial real estate","","22","","","30"],["Commercial and industrial","","20,575","","","3,629"],["Consumer and other","","\u2014","","","\u2014"],["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","%"]]
[[/GREPCENT_TABLE]]

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

    We use a wide variety of available metrics to assess the overall asset quality of the portfolio and no one metric is used independently to make a final conclusion as to the asset quality of the portfolio. Non-performing assets as a percentage of total assets increased to 0.59% at December 31, 2023 from 0.13% at December 31, 2022. As of December 31, 2023, 99.20% of loans were current compared to 99.8% as of December 31, 2022. The decrease in current status is primarily driven by higher past-due Equipment Finance borrowers.

We reviewed loans and leases with exposure to certain industries:

•Transportation and Logistics, Equipment Finance - 2% of total loans - Management considered the following: 7% of Equipment Finance Transportation loans are rated Category IV and defaults from these borrowers are driving an increase in charge-offs and new reserves. Based on our reserve methodology for individually and collectively evaluated loans, we believe our reserves related to this industry to be appropriate

•Transportation and Logistics, other than Equipment Finance - 4% of total loans - Management considered the following: Less than 1% of the Transportation loans outside of Equipment Finance are rated Category IV. Collateral on these loans includes commercial real estate, business assets, and equipment. Based on these and other borrower-specific considerations, no additional reserve requirements were identified.

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•Office, Commercial Real Estate - 10% of total loans - Management considered the following: office exposure is concentrated in the Wisconsin markets where local market vacancy rates are below national rates, a majority of the loan maturity dates are beyond 2031 with the borrower paying a fixed rate, either directly or through an interest rate swap, and there are no non-performing loans in the portfolio. Based on these and other borrower-specific considerations, no additional reserve requirements were identified.

•Multifamily, Commercial Real Estate - 16% of total loans - Management considered the following: multifamily exposure is concentrated in the Wisconsin markets where local market vacancy rates are below national rates, a majority of the loan maturity dates are beyond 2029 with the borrower paying a fixed rate, either directly or through an interest rate swap, and there are no non-performing loans in the portfolio. Based on these and other borrower-specific considerations, no additional reserve requirements were identified.

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

    Additional information about non-performing loans is as follows:

[[GREPCENT_TABLE]]
[["","","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)"]]
[[/GREPCENT_TABLE]]

    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.

In 2023, as well as in all previous reporting periods, there were no loans over 90 days past due and still accruing interest. Loans and leases greater than 90 days past due are considered non-performing and are placed on non-accrual status. Cash received while a loan or a lease is on non-accrual status is generally applied solely against the outstanding principal. If collectability of the contractual principal and interest is not in doubt, payments received may be applied to both interest due on a cash basis and principal.

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Allowance for Credit Losses

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

[[GREPCENT_TABLE]]
[["","","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","","","\u2014"],["Charge-offs:"],["Commercial real estate"],["Commercial real estate \u2014 owner occupied","","\u2014","","","\u2014"],["Commercial real estate \u2014 non-owner occupied","","\u2014","","","\u2014"],["Construction","","\u2014","","","\u2014"],["Multi-family","","\u2014","","","\u2014"],["1-4 family","","\u2014","","","\u2014"],["Commercial and industrial","","(1,781)","","","(909)"],["Consumer and other","","\u2014","","","(70)"],["Total charge-offs","","(1,781)","","","(979)"],["Recoveries:"],["Commercial real estate"],["Commercial real estate \u2014 owner occupied","","8","","","4,260"],["Commercial real estate \u2014 non-owner occupied","","1","","","2"],["Construction","","\u2014","","","\u2014"],["Multi-family","","\u2014","","","\u2014"],["1-4 family","","40","","","\u2014"],["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)","%"]]
[[/GREPCENT_TABLE]]

During the first quarter of 2023, the Corporation adopted ASU 2016-13, including the CECL methodology for estimating the ACL. This standard was adopted using a modified retrospective approach on January 1, 2023, resulting in a $484,000 increase to the ACL and a $1.3 million increase to the unfunded credit commitments reserve. In addition to the adoption of ASU 2016-13, the increase in ACL as a percent of gross loans and leases was principally due to increase in specific reserves and changes to quantitative and qualitative model factors.

During the year ended December 31, 2023, the Corporation recorded net charge-offs on non-performing loans and leases of approximately $1.2 million, which included $1.8 million of charge-offs and $548,000 of recoveries. During the year ended December 31, 2022, we recorded net recoveries on non-performing loans and leases of approximately $3.8 million, which included $979,000 of charge-offs and $4.7 million of recoveries.

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

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

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transportation and logistics industry which management believes is consistent with the cyclical nature of this industry. Given current economic conditions, the Corporation expects continued stress within this group of borrowers in 2024.

    As a result of our review process, we have concluded an appropriate ACL for the loan and lease portfolio is $33.0 million, or 1.16% of gross loans and leases, at December 31, 2023. However, given ongoing complexities with current workout situations and the uncertainty surrounding future economic conditions, further charge-offs, and increased provisions for credit losses may be recorded if additional facts and circumstances lead us to a different conclusion.

    The table below shows our allocation of the allowance for loan losses by loan portfolio segments. The allocation of the allowance by segment is management’s best estimate of the inherent risk in the respective loan portfolio as described in Allowance for Credit Losses in the Critical Accounting Policies and Estimates section. Despite the specific allocation noted in the table below, the entire allowance is available to cover any loss.

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["","","2023","","2022"],["","","Balance","","(a)","","Balance","","(a)"],["","","(Dollars in Thousands)"],["Loan and lease portfolios:"],["Commercial real estate","","$","12,170","","","0.72","%","","$","12,560","","","0.81","%"],["Commercial and industrial","","18,710","","","1.69","","","11,128","","","1.30"],["Consumer and other","","395","","","0.89","","","542","","","1.13"],["Total allowance for loan losses","","$","31,275","","","1.10","%","","$","24,230","","","0.99","%"],["Reserve for unfunded credit commitments (b)","","$","1,722","","","","","$","\u2014"],["Total allowance for credit losses","","$","32,997","","","1.16","%","","$","24,230","","","0.99","%"]]
[[/GREPCENT_TABLE]]

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

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

    The change in ACL as a percentage of gross loans and leases for the portfolios was due to additional specific reserves in Commercial and industrial and change in quantitative factors in all portfolios in the adoption of ASC 326. Although we believe the ACL was appropriate based on the current level of loan and lease delinquencies, non-accrual loans and leases, trends in charge-offs, economic conditions, and other factors as of December 31, 2023, there can be no assurance that future adjustments to the allowance will not be necessary.

Deposits

    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.

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

[[GREPCENT_TABLE]]
[["","","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","%"]]
[[/GREPCENT_TABLE]]

    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.

    The following table sets forth the amount and maturities of the Bank’s certificates of deposit and term wholesale deposits at December 31, 2023. 

[[GREPCENT_TABLE]]
[["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%","","$","712","","","$","\u2014","","","$","233","","","$","408","","","$","1,353"],["1.00% to 1.99%","","\u2014","","","176","","","2,084","","","\u2014","","","2,260"],["2.00% to 2.99%","","2,332","","","\u2014","","","5,195","","","2,552","","","10,079"],["3.00% to 3.99%","","10,185","","","2,507","","","484","","","39,103","","","52,279"],["4.00% to 4.99%","","110,400","","","17,120","","","13,181","","","116,131","","","256,832"],["5.00% and greater","","317,805","","","21,005","","","33,226","","","\u2014","","","372,036"],["","","$","441,434","","","$","40,808","","","$","54,403","","","$","158,194","","","$","694,839"]]
[[/GREPCENT_TABLE]]

    At December 31, 2023, time deposits included $120.2 million of certificates of deposit and wholesale deposits in denominations greater than or equal to $250,000. Of these certificates, $87.7 million are scheduled to mature in three months or less, $5.5 million in greater than three through six months, $24.5 million in greater than six through twelve months and $2.5 million in greater than twelve months.

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    Of the total time deposits outstanding as of December 31, 2023, $536.6 million are scheduled to mature in 2024, $19.1 million in 2025, $50.4 million in 2026, $73.8 million in 2027, and $12.8 million in 2028. As of December 31, 2023, we have no wholesale certificates of deposit which the Bank has the right to call prior to the scheduled maturity.

Borrowings

    We had total borrowings of $330.9 million as of December 31, 2023, a decrease of $125.9 million, or 27.6%, from $456.8 million at December 31, 2022. The Bank utilized more wholesale deposits in lieu of FHLB advances to manage interest rate risk and liquidity by utilizing the most efficient and cost-effective source of wholesale funds to match-fund our fixed-rate loan portfolio. Total wholesale funding as a percentage of total bank funding was 25.2% as of December 31, 2023 compared to 25.1% as of December 31, 2022. Total bank funding is defined as total deposits plus FHLB advances.

As of December 31, 2023, the Corporation had $20,000 of other borrowings, which consisted of sold tax credit investments accounted for as secured borrowings because they did not qualify for true sale accounting. As of December 31, 2022, the Corporation had other borrowings of $6.1 million which consisted of sold loans accounted for as secured borrowings because they did not qualify for true sale accounting.

     Consistent with our funding philosophy to manage interest rate risk, we will use the most efficient and cost effective source of wholesale funds. 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 following table sets forth the outstanding balances, weighted average balances, and weighted average interest rates for our borrowings (short-term and long-term) as indicated. 

[[GREPCENT_TABLE]]
[["","","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","","$","\u2014","","","$","3","","","5.37","%","","$","\u2014","","","$","14","","","7.42","%"],["FHLB advances","","281,500","","","351,990","","","2.52","","","416,380","","","414,191","","","1.70"],["Line of credit","","\u2014","","","38","","","7.26","","","\u2014","","","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)","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","2,429","","","20.75"],["","","$","330,916","","","$","390,881","","","2.79","","","$","456,808","","","$","460,438","","","2.12"]]
[[/GREPCENT_TABLE]]

(1)     Weighted average rate of junior subordinated notes reflects the accelerated amortization of subordinated debt issuance costs as a result of the early redemption of the junior subordinated notes during the first quarter of 2022.

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A summary of annual maturities of borrowings at December 31, 2023 is as follows:

[[GREPCENT_TABLE]]
[["(In Thousands)"],["Maturities during the year ended December 31,"],["2024","","$","120,520"],["2025","","48,000"],["2026","","65,000"],["2027","","28,000"],["2028","","\u2014"],["Thereafter","","69,396"],["","","$","330,916"]]
[[/GREPCENT_TABLE]]

The Corporation issued new subordinated debentures as of September 29, 2023. The aggregate principal amount of the newly issued subordinated debentures was $15.0 million which qualified as Tier 2 capital. The subordinated debentures bear a fixed interest rate of 8.0% with a maturity date of September 29, 2033. The Corporation may, at its option, redeem the debentures, in whole or part, at any time after the fifth anniversary of issuance.

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

Stockholders’ Equity

    As of December 31, 2023, stockholders’ equity was $289.6 million, or 8.26% of total assets, compared to stockholders’ equity of $260.6 million, or 8.76% of total assets, as of December 31, 2022. Stockholders’ equity increased by $28.9 million during the year ended December 31, 2023 attributable to net income of $37.0 million for the year ended December 31, 2023, partially offset by preferred and common stock dividend declarations of $875,000 and $7.6 million, respectively, and stock repurchases of $2.0 million of the $5.0 million authorized under the repurchase program discussed below.

On March 4, 2022, the Corporation issued 12,500 shares, or $12.5 million in aggregate liquidation preference, of 7.0% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, with a liquidation preference of $1,000 per share (the “Series A Preferred Stock”) in a private placement to institutional investors. The net proceeds received from the issuance of the Series A Preferred Stock were $12.0 million.

The 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.

On January 27, 2023, the Board of Directors of the Corporation approved a share repurchase program. The program authorized the repurchase by the Corporation of up to $5 million of its total outstanding shares of common stock over a period of approximately twelve months, ending January 31, 2024. As of December 31, 2023, the Corporation had repurchased a total of 65,112 shares for approximately $2.0 million at an average cost of $30.72 per share. At this time, the Corporation does not expect to adopt a new plan to replace the recently expired plan due to strong balance sheet growth.

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

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LIQUIDITY AND CAPITAL RESOURCES

     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.

    The Bank maintains liquidity by obtaining funds from several sources. The Bank’s primary source of funds are principal and interest payments on loans receivable and mortgage-related securities, deposits, and other borrowings, such as federal funds and FHLB advances. The scheduled payments of loans and mortgage-related securities are generally a predictable source of funds. Deposit flows and loan prepayments, however, are greatly influenced by general interest rates, economic conditions, and competition.

    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.

    The Bank was able to access the wholesale funding market as needed at rates and terms comparable to market standards during the year ended December 31, 2023. In the event that there is a disruption in the availability of wholesale funds at maturity, the Bank has managed the maturity structure, in compliance with our approved liquidity policy, so at least one year of maturities could be funded through readily available liquidity. These potential funding sources include deposits maintained at

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the FRB or Federal Reserve Discount Window utilizing currently unencumbered securities and acceptable loans as collateral. As of December 31, 2023, the available liquidity was in excess of the stated policy minimum. We believe the Bank will also have access to the unused federal funds lines, cash flows from borrower repayments, and cash flows from security maturities. The Bank also has the ability to raise local market deposits by offering attractive rates to generate the level required to fulfill its liquidity needs.

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

    The Bank is required by federal regulation to maintain sufficient liquidity to ensure safe and sound operations. We believe that the Bank has sufficient liquidity to match the balance of net withdrawable deposits and short-term borrowings in light of present economic conditions and deposit flows.

    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.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

    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.

One of the most significant judgments impacting the ACL estimate is the economic forecast for United States national unemployment and United States national GDP. Changes in the economic forecast could significantly affect the estimated credit losses which could potentially lead to materially different allowance levels from one reporting period to the next.

Loans that no longer conform to the risk characteristics of any pool are evaluated individually. This includes all non-performing loans and may also include other loans that management identifies as non-conforming. Reserves on individually-evaluated loans are estimated based on one or a combination of estimates of fair value of the underlying collateral less cost to sell, seniority of the Bank’s claim, and borrower repayment forecasts. For loans and leases less than $1,000,000 in the Equipment Finance pool, the recovery value is based on historical experience rather than specific asset appraisals.

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

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

    We also continue to exercise our legal rights and remedies as appropriate in the collection and disposal of non-performing assets, and adhere to rigorous underwriting standards in our origination process in order to achieve strong asset quality. Although we believe that the ACL was appropriate as of December 31, 2023 based upon the evaluation of loan and lease delinquencies, non-performing assets, charge-off trends, economic conditions, and other factors, there can be no assurance that future adjustments to the allowance will not be necessary.

    Goodwill Impairment Assessment.  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.

    The Corporation also invests in certain development entities that generate federal and state historic and low income housing tax credits. The tax benefits associated with these investments are accounted for either under the flow-through method, equity method, or proportional amortization method and are recognized when the respective project is placed in service or over the investment term.

    The federal and state taxing authorities who make assessments based on their determination of tax laws may periodically review our interpretation of federal and state income tax laws. Tax liabilities could differ significantly from the estimates and interpretations used in determining the current and deferred income tax liabilities based on the completion of examinations by taxing authorities.