FIRST BUSINESS FINANCIAL SERVICES, INC. (FBIZ) FY 2024 MD&A

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

General

Unless otherwise indicated or unless the context requires otherwise, all references in this Report to the “Corporation,” “we,” “us,” “our,” or similar references mean First Business Financial Services, Inc. together with our subsidiary. “FBB” or the “Bank” refers to our subsidiary, First Business Bank.

Forward-Looking Statements

This report may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which reflect our current views with respect to future events and financial performance. Forward-looking statements are not based on historical information, but rather are related to future operations, strategies, financial results, or other developments. Forward-looking statements are based on management’s expectations as well as certain assumptions and estimates made by, and information available to, management at the time the statements are made. Such statements are subject to risks and uncertainties, including among other things:

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

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Uncertainty created by potential federal government actions relating to the authority of regulatory agencies (including bank regulators), international trade policy, and other significant policy matters.

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

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Increases in defaults by borrowers and other delinquencies.

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

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Fluctuations in interest rates and market prices.

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

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

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

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

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Ongoing volatility in the banking sector may result in new legislation, regulations or policy changes that could subject the Corporation and the Bank to increased government regulation and supervision.

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The proportion of the Corporation’s deposit account balances that exceed FDIC insurance limits may expose the Bank to enhanced liquidity risk.

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The Corporation may be subject to increases in FDIC insurance assessments.

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.

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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.

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. We operate as a business bank focusing on 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 include those for business banking, private wealth management services, and bank consulting. Within business banking, we offer commercial lending, asset-based lending, accounts receivable financing, equipment financing, floorplan financing, vendor financing, SBA lending and servicing, treasury management services, and company retirement plans. 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 2024, management finalized the development of its five year strategic plan and began the implementation of strategies and initiatives that drive successful execution. Management’s objective over this five year period is to foster innovative and engaged team members who develop deep client relationships and deliver exceptional results for all stakeholders. To meet this objective, we identified five 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 strategies are described below:

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We will protect and strengthen our unique culture with a growing and geographically diverse team.

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We will develop future-ready talent who will thrive in the workplace of the future by continuously investing in our team to elevate their impact and contribution.

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We will grow our core deposits by driving a company-wide commitment to adding new relationships and capitalizing on innovative sources and new technologies.

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We will achieve operational excellence by fostering a culture of continuous process improvement and utilization of innovative technology.

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We will optimize the performance of each business line and market to achieve sustainable profitability and growth.

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The table below shows the Corporation’s performance for the years ended December 31, 2024, 2023, and 2022 in comparison to the key performance indicators included in the Corporation’s 2024 strategic plan.

(1)
Excluding tax and SBA recourse benefits, the 2024 ROATCE was 14.6%.

(2)
Anonymous survey conducted annually.

(3)
Net promoter score assesses likelihood to recommend on a 11-point scale, where detractors (scores 0-6) are subtracted from promoters (scores 9-10), while passives (scores 7-8) are not considered.

Financial Performance Summary

Results as of and for the year ended December 31, 2024, include:

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Net income available to common shareholders for the year ended December 31, 2024 was $43.4 million, increasing 20.0% compared to $36.2 million for the year ended December 31, 2023.

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Diluted earnings per common share were $5.20 for the year ended December 31, 2024, increasing 20.0% compared to $4.33 in the prior year.

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Return on average assets (“ROAA”) for the year ended December 31, 2024, was 1.20%, compared to 1.13% for 2023.

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Return on average common equity (“ROACE”) is defined as net income available to common shareholders divided by average equity less average preferred stock. ROACE was 14.73% for the year ended December 31, 2024, compared to 13.79% for the year ended December 31, 2023.

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Pre-tax, pre-provision (“PTPP”) adjusted earnings, which excludes certain one-time and discrete items, was $60.4 million for the year ended December 31, 2024, compared to $56.2 million for the year ended December 31, 2023.

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Fees in lieu of interest, defined as prepayment fees, asset-based loan fees, non-accrual interest, and loan fee amortization, totaled $5.5 million for the year ended December 31, 2024, compared to $3.5 million for the year ended December 31, 2023.

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Net interest margin was 3.66% for the year ended December 31, 2024, compared to 3.78% for the year ended December 31, 2023. Adjusted net interest margin, which excludes certain one-time and volatile items including fees in lieu of interest, was 3.47% for the year ended December 31, 2024, compared to 3.62% for the year ended December 31, 2023.

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Top line revenue, defined as net interest income plus non-interest income, totaled $153.5 million for the year ended December 31, 2024, compared to $143.9 million in the year ended December 31, 2023.

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Effective tax rate, including the benefit from Low-Income Housing Tax Credits, was 13.5% for the year ended December 31, 2024, compared to 21.5% for the year ended December 31, 2023.

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Provision for credit loss expense was $8.8 million for the year ended December 31, 2024, compared to $8.2 million for the year ended December 31, 2023.

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Total assets at December 31, 2024, increased $345.4 million, or 9.8%, to $3.853 billion from $3.508 billion at December 31, 2023.

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Period-end gross loans and leases receivable increased $263.8 million, or 9.3%, to $3.114 billion as of December 31, 2024, compared to $2.850 billion as of December 31, 2023. Average gross loans and leases of $2.997 billion increased $349.0 million, or 13.2%, for the year ended December 31, 2024, compared to $2.648 billion for the year ended December 31, 2023.

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Non-performing assets were $28.4 million and 0.74% of total assets as of December 31, 2024, compared to $20.8 million and 0.59% of total assets as of December 31, 2023.

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The allowance for credit losses, including reserve for unfunded credit commitments, increased $4.3 million compared to December 31, 2023. The allowance for credit losses, including reserve for unfunded credit commitments, was 1.20% of total loans, compared to 1.16% at December 31, 2023.

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Period-end core deposits at December 31, 2024, increased $57.4 million, or 2.5%, to $2.396 billion from $2.339 billion as of December 31, 2023. Average core deposits of $2.378 billion increased $280.3 million, or 13.4%, for the year ended December 31, 2024, compared to $2.098 billion for the year ended December 31, 2023.

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Private wealth and trust assets under management and administration increased by $297.2 million, or 9.5%, to $3.419 billion at December 31, 2024, compared to $3.122 billion at December 31, 2023. Private wealth management service fees increased $1.8 million, or 16.1%, for the year ended December 31, 2024, compared to the year ended December 31, 2023.

The detailed financial discussion that follows focuses on 2024 results compared to 2023. Information pertaining to 2023 in comparison to 2022 was included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2023, on page 37 under Part II, Item 7, "Management's Discussion and Analysis of Financial and Result of Operations," which was filed with the SEC on February 26, 2024.

Results of Operations

Top Line Revenue

Top line revenue, comprised of net interest income and non-interest income, increased $9.6 million, or 6.6%, for the year ended December 31, 2024, compared to the year ended December 31, 2023, due to a 10.3% increase in net interest income partially offset by a 6.6% decrease in non-interest income. The increase in net interest income was driven by an increase in average gross loans and leases outstanding. The decrease in non-interest income was due to lower returns on investments in SBIC funds, commercial loan swap fee income, and gains on the sale of SBA loans; partially offset by increases in private wealth fee income.

The components of top line revenue were as follows:

Return on Average Assets and Return on Average Common Equity

ROAA was 1.20% for the year ended December 31, 2024, compared to 1.13% for the year ended December 31, 2023. The increase in ROAA was due to the increase in net interest income and a lower effective tax rate, partially offset by a decrease in non-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, 2024, was 14.73%, compared to 13.79% for the year ended December 31, 2023. The reasons for the change in ROACE are consistent with the net income variance explanation as discussed under ROAA above. We view

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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 60.61% for the year ended December 31, 2024, compared to 60.99% for the year ended December 31, 2023. 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, 2024, was $60.4 million, compared to $56.2 million for the year ended December 31, 2023. 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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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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(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.

(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, 2024 compared to the year ended December 31, 2023. 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.

(1)
The average balances of loans and leases include non-accrual loans and leases and loans held for sale.

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, core deposits, interest-bearing deposits and total interest-bearing liabilities for the year ended December 31, 2024, and 2023. 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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(1)
Excluding fees in lieu of interest.

(2)
Total bank funding represents total deposits plus FHLB advances.

(3)
Board of Governors of the Federal Reserve System (US), Effective Federal Funds Rates (DFF) retried from FRED, Federal Reserve Bank of St. Louis.

(4)
Represents annualized yields/rates.

Net interest income increased $11.6 million, or 10.3% during the year ended December 31, 2024, compared to the year ended December 31, 2023. The increase in net interest income reflected an increase in average gross loans and leases and an increase in fees in lieu of interest, partially offset by net interest margin compression. Average gross loans and leases of $2.997 billion increased by $349.0 million, or 13.2%, for the year ended December 31, 2024, compared to $2.648 billion for the same period in 2023. Loan fees collected in lieu of interest increased 59.8% to $5.5 million, compared to $3.5 million during the same period of comparison.

The yield on average interest-earning assets for the year ended December 31, 2024, was 6.87%, compared to 6.54% for the year ended December 31, 2023. The increase in yield was primarily due to the reinvestment of cash flows from fixed-rate loan portfolios and securities in a higher rate environment. Excluding loan fees in lieu of interest, the yield on average interest-earning assets for the year ended December 31, 2024, was 6.71%, compared to 6.42% for the year ended December 31, 2023.

The average rate paid on total interest-bearing liabilities was 3.91% for the year ended December 31, 2024, an increase from 3.46% for the year ended December 31, 2023. Total interest-bearing liabilities includes interest-bearing deposits, FHLB advances, subordinated and junior subordinated notes and debentures payable, federal funds purchased, and other borrowings. The average rates paid increased due to the increase in short-term market rates, the replacement of maturing wholesale funds at higher fixed rates, and client movement from non-interest bearing to interest bearing core deposit products.

Net interest margin decreased to 3.66% for the year ended December 31, 2024, compared to 3.78% for the year ended December 31, 2023. Adjusted net interest margin measured 3.47% for the year ended December 31, 2024, compared to 3.62% for the year ended December 31, 2023. The decrease in net interest margin is due to increased total bank funding costs in a higher rate environment. This was partially offset by an increase in fees collected in lieu of interest and an increase in earning asset yields due to the reinvestment of cash flows from the fixed-rate loan and securities portfolios in a higher rate environment. Adjusted net interest margin is a non-GAAP measure representing net interest income excluding the impact of fees in lieu of interest, and other recurring, but volatile, components

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of net interest margin divided by average interest-earning assets less other recurring, but volatile, components of average interest-earning assets.

The Corporation maintains a long-term target for net interest margin in the range of 3.60% - 3.65%. Performance in future periods will vary due to factors such as the level of fees in lieu of interest and the timing, pace, and scale of future interest rate changes.

Provision for Credit Losses

We determine our provision for credit losses pursuant to our allowance for credit loss methodology. It is based on a reasonable and supportable forecast as well as considerations for composition, risk, and performance indicators in our credit portfolio. 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.

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

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 decreased by $2.1 million, or 6.6%, to $29.3 million for the year ended December 31, 2024, from $31.3 million for the year ended December 31, 2023. Management continues to focus on revenue growth from multiple non-interest income sources to maintain a diversified revenue stream through greater contributions from fee-based revenues. Total non-interest income accounted for 19.1% of total revenues for the year ended December 31, 2024, compared to 21.8% in 2023. The decrease in total non-interest income for the year ended December 31, 2024, was driven by lower returns on investments in SBIC funds, commercial loan swap fee income, and gains on the sale of SBA loans, partially offset by an increase in private wealth fee income and service charges on deposits.

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The components of non-interest income were as follows:

(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 fee income increased $1.8 million, or 16.1%, for the year ended December 31, 2024, compared to the year ended December 31, 2023. Private wealth fee income is up compared to prior year primarily due to an increase in assets under management and administration, increases in fee rates across the client base, and non-recurring transaction fees in the 2024 period. Private wealth fee income can vary due to the mix of business at different fee structures and can be positively or negatively influenced by the timing and magnitude of volatility within the capital markets. As of December 31, 2024, private wealth and trust assets under management and administration totaled $3.419 billion, increasing $297.2 million, or 9.5%, compared to $3.122 billion as of December 31, 2023, due to an increase in market values, new clients, and new money from existing clients.

Service charges on deposits increased $640,000, or 20.4%, for the year ended December 31, 2024, compared to the year ended December 31, 2023. The increase is primarily driven by new and expanded core deposit relationships. Treasury management business development efforts remain robust as gross treasury management service charges increased $647,000, or 11.1%, for the year ended December 31, 2024, compared to the year ended December 31, 2023. Management believes growth in gross analyzed service charges is a strong indicator of success for the Corporation given the direct correlation to adding and expanding core business relationships.

Other non-interest income decreased $3.1 million, or 44.6%, for the year ended December 31, 2024, compared to the year ended December 31, 2023. The change was primarily due to a decrease from unexpectedly high 2023 returns on the Corporation's investments in SBIC funds. Income from SBIC funds varies from period to period based on changes in the realized and unrealized fair value of underlying investments.

Commercial loan interest rate swap fee income decreased $1.6 million, or 52.7%, for the year ended December 31, 2024, compared to the year ended December 31, 2023. 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 $1.022 billion as of December 31, 2024, compared to $939.2 million as of December 31, 2023. Interest rate swaps can be an attractive product for our commercial borrowers, although associated fee income varies from period to period based on loan activity and the interest rate environment.

Gain on sale of SBA loans decreased $113,000, or 5.5%, for the year ended December 31, 2024, compared to the year ended December 31, 2023. Management expects the SBA loan sales to increase in 2025 as production increases and previously closed commitments fully fund and become eligible for sale, due to additions to the business development team.

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Non-Interest Expense

Non-interest expense increased by $4.9 million, or 5.5%, for the year ended December 31, 2024, compared to the year ended December 31, 2023. Operating expense, which excludes certain one-time and discrete items as defined in the Efficiency Ratio table above, increased $5.2 million, or 6.0%, for the year ended December 31, 2024, compared to the year ended December 31, 2023. The increase in operating expense was primarily due to an increase in compensation expense, computer software expense, and data processing expense.

The components of non-interest expense were as follows:

(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 $2.0 million, or 3.4%, for the year ended December 31, 2024, compared to the year ended December 31, 2024, 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 $2.7 million, or 7.2%, increase in employee salaries and a $428,000, or 8.4%, increase in estimated annual cash bonuses compared to 2023. These increases were partially offset by a $768,000, or 17.2% decrease in individual production incentive compensation. Average FTEs were 350 for the year ended December 31, 2024, increased by seven, or 2.0%, from 343 for the year ended December 31, 2023.

Computer software expense increased $1.2 million, or 23.7%, for the year ended December 31, 2024, compared to the year ended December 31, 2023. The increase was primarily due to our commitment to innovative technology to support growth initiatives, enhance productivity, and improve the client experience.

Data processing expense increased $1.1 million, or 27.9%, for the year ended December 31, 2024, compared to the year ended December 31, 2023, primarily due to an increase in core processing costs due to loan and deposit account growth, private wealth asset growth, and a one-time expense resulting from a change in credit card vendors.

Marketing expense increased $629,000, or 21.8%, for the year ended December 31, 2024, compared to the year ended December 31, 2023. The increase was primarily due to an increase in business development efforts and advertising projects related to the Company’s growth initiatives.

FDIC insurance increased $522,000, or 23.3%, for the year ended December 31, 2024, compared to the year ended December 31, 2023. The increase was primarily due to an increase in total assets and use of brokered deposits.

Professional fees increased $346,000, or 6.5%, for the year ended December 31, 2024, compared to the year ended December 31, 2023. The increase was primarily due to an increase in recruiting expense and professional consulting services for various projects.

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Other non-interest expense decreased $851,000, or 18.8%, for the year ended December 31, 2024, compared to the year ended December 31, 2023. The decrease was primarily due to a decrease in SBA recourse provision and liquidation expenses partially offset by an impairment on historical tax credit investments at exit.

Income Taxes

Income tax expense totaled $6.9 million for the year ended December 31, 2024, compared to $10.1 million for the year ended December 31, 2023. Income tax expense included a $1.6 million net benefit from tax credit investments in both periods. The effective tax rate for the year ended December 31, 2024, was 13.5% compared to 21.5% for the year ended December 31, 2023. The decrease is primarily due to a $1.7 million partial release of a state deferred tax asset valuation allowance due to changes in projected taxable state income based on revised state taxation guidance and 2023 state tax return actual results. The Corporation expects to report an effective tax rate between 16% and 18% for 2025.

Financial Condition

General

Total assets increased by $345.4 million, or 9.8%, to $3.853 billion as of December 31, 2024, compared to $3.508 billion at December 31, 2023. The increase in total assets was primarily driven by an increase in loans and leases receivable and available-for-sale securities, partially offset by a reduction in short-term investments. Total liabilities increased by $306.4 million, or 9.5%, to $3.525 billion at December 31, 2024, compared to $3.218 billion at December 31, 2023. 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. Cash and due from banks decreased $2.9 million to $29.5 million at December 31, 2024, from $32.3 million at December 31, 2023. Short-term investments increased by $21.0 million to $128.2 million at December 31, 2024, from $107.2 million at December 31, 2023. Our 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 readily accessible liquidity program. As of December 31, 2024, and December 31, 2023, interest-bearing deposits held at the FRB were $127.8 million and $106.8 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 $42.6 million, or 14.0%, to $348.1 million, or 9.0% of total assets at December 31, 2024, compared to $305.5 million or 8.7% of total assets at December 31, 2023. As of December 31, 2024, and 2023, our total securities portfolio had a weighted average estimated remaining maturity of approximately 5.2 years and 5.6 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 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

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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, 2024, we recognized unrealized holding losses of $2.2 million before income taxes through other comprehensive income. These losses were the result of an increase in interest rates. No securities within our portfolio were deemed to require an allowance for credit losses as of December 31, 2024. We sold approximately $7.5 million of securities during the year ended December 31, 2024, to proactively manage our securities portfolio and meet our long-term investment objectives. As of December 31, 2024, no securities were classified as trading securities. At December 31, 2024, $36.9 million of our securities were pledged to secure various obligations, including interest rate swap contracts and municipal deposits.

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

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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, 2024, 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, 2024, 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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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, 2024, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was approximately $1.022 billion, compared to $939.2 million as of December 31, 2023. We receive fixed rates and pay floating rates based upon designated benchmark interest rates on the swaps with commercial borrowers. These swaps mature between June 2025 and July 2041. Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements. As of December 31, 2024, the commercial borrower swaps were reported on the Consolidated Balance Sheet as a derivative asset of $2.0 million and liability of $56.6 million compared to a derivative asset of $7.9 million and liability of $51.1 million as of December 31, 2023. 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 June 2025 and July 2041. 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 $54.5 million as of December 31, 2024, compared to a net derivative asset of $43.2 million as of December 31, 2023. In both periods, the counterparties pledged U.S. Treasuries to fully collateralize the position. The gross amount of dealer counterparty swaps as of December 31, 2024, without regard to the enforceable master netting agreement, was a gross derivative liability of $2.0 million and gross derivative asset of $56.6 million, compared to a gross derivative liability of $7.9 million and gross derivative asset of $51.1 million as of December 31, 2023.

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 interest payments on short-term FHLB advances or wholesale deposits. 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, 2024, the aggregate notional value of interest rate swaps designated as cash flow hedges was $484.7 million. These interest rate swaps mature between January 2025 and February 2041. A pre-tax unrealized loss of $4.7 million was recognized in other comprehensive income for the year ended December 31, 2024, respectively, and there was no ineffective portion of these hedges.

The Corporation also enters into interest rate swaps to mitigate market value volatility on certain long-term fixed securities. The objective of the hedge is to protect the Corporation against changes in fair value due to changes in benchmark interest rates. The instruments are designated as fair value hedges as the changes in the fair value of the interest rate swap are expected to offset changes in the fair value of the hedged item attributable to changes in the SOFR swap rate, the designated benchmark interest rate. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affect earnings. As of December 31, 2024, 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 loss of $390,000 was recognized in other comprehensive income for the year ended December 31, 2024, and there was no ineffective portion of these hedges.

Loans and Leases Receivable

Period-end loans and leases receivable, net of allowance for credit losses, increased by $258.4 million, or 9.2%, to $3.077 billion at December 31, 2024, from $2.819 billion at December 31, 2023.

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There continues to be a concentration in CRE loans which represented 61.6% and 59.6% of our total loans, as of December 31, 2024, and December 31, 2023, respectively. As of December 31, 2024, approximately 14.3% of the CRE loans were owner-occupied CRE, compared to 15.1% as of December 31, 2023. 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 $45.9 million, or 4.1%, to $1.152 billion at December 31, 2024, from $1.106 billion at December 31, 2023. The Corporation experienced C&I loan growth in 2024, 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 2025 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 core 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 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 expect our new loan and lease activity to allow us to continue growing in future years.

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

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Below is a view of selected loan portfolios disaggregated by North American Industry Classification (“NAICs”) code as of December 31, 2024:

(1)
Includes approximately $276.9 million of office real estate, or 9% of gross loans.

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

The following table shows the scheduled contractual maturities of the Bank’s consolidated gross loans and leases receivable, as well as the dollar amount of such loans and leases which are scheduled to mature after one year and have fixed or adjustable interest rates, as of December 31, 2024.

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 amortization 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 non-accrual 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

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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 $1.152 billion of C&I loans outstanding as of December 31, 2024, $502.1 million were conventional C&I loans and $649.6 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.

Asset Quality

Our total non-performing assets consisted of the following:

Non-accrual loans and leases increased $7.8 million, to $28.4 million at December 31, 2024, compared to $20.6 million at December 31, 2023. The Corporation's non-accrual loans and leases as a percentage of total gross loans and leases measured 0.91% and 0.72% at December 31, 2024, and 2023, respectively. The change in non-accrual loans and leases is primarily driven by a conventional C&I loan that management identified as non-performing and recognized a specific reserve. While we continue to expect full repayment of the one ABL loan that defaulted during the second quarter of 2023, the liquidation process under Chapter 7 bankruptcy has delayed final resolution. Through our collection efforts, the current balance of this loan is $6.2 million, down from $8.8 million in the prior year. Excluding this credit, non-performing assets totaled $22.2 million, or 0.58% of total assets and $12.0 million, or 0.34% of total assets in the prior year.

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 was 0.74% and 0.59% at December 31, 2024, and December 31, 2023, respectively. As of December 31, 2024, and December 31, 2023, the payment performance of our loans and leases did not point to any new areas of concern, as approximately 99.1% and 99.2%, respectively, of the total portfolio at the end of each period was in a current payment status.

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We reviewed loans and leases with exposure to certain industries:

•
Transportation and Logistics, Equipment Finance: 1% of total loans - Management considered the following: 13% of Equipment Finance Transportation loans are rated Category IV. 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: 3% of total loans - Management considered the following: Less than 1% of the Transportation loans outside of Equipment Finance are rated Category IV. Based on our reserve methodology for individually and collectively evaluated loans, we believe our reserves related to this industry to be appropriate.

•
Office, Commercial Real Estate: 9% 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 office loan maturity terms are 2031 and beyond; all office loans with 2031+ maturities are conventional fixed rate or fixed to the client via an interest rate swap; there are no non-accrual loans in the portfolio. Based on our reserve methodology for individually and collectively evaluated loans, we believe our reserves related to this loan category to be appropriate.

•
Multifamily, Commercial Real Estate: 17% of total loans - Management considered the following: multifamily exposure is concentrated in the Wisconsin markets where local market vacancy rates are below national rates, all multi-family loans with 2031+ maturities are conventional fixed rate or fixed to the client via an interest rate swap, and there are no non-accrual loans in the portfolio. Based on our reserve methodology for individually and collectively evaluated loans, we believe our reserves related to this loan category to be appropriate.

We also monitor asset quality through our established categories as defined in Note 4 – Loans, Lease Receivables, 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 proactively work with our loan borrowers experiencing financial difficulty to find meaningful solutions to difficult situations that are in the best interests of the Bank.

The following represents additional information regarding our non-accrual loans and leases:

Loans and leases with no specific reserves represent non-accrual 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-accrual 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-accrual loans and leases ratio as compared to our peers or industry expectations.

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In 2024, 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-accrual and are placed on non-accrual status. Cash received while a loan or a lease is on non-accrual status is applied against the outstanding principal. If collectability of the contractual principal and interest is not in doubt, payments received may be applied to both interest due on a cash basis and principal.

Allowance for Credit Losses

The allowance for credit losses ("ACL"), including unfunded commitment reserves, increased $4.3 million, or 12.9%, to $37.3 million as of December 31, 2024, from $33.0 million as of December 31, 2023. A summary of the activity in the ACL, inclusive of reserves for unfunded credit commitments, follows:

The Corporation recognized $8.8 million provision expense for the year ended December 31, 2024, compared to $8.2 million for the year ended December 31, 2023. The provision expense for the year ended December 31, 2024, was primarily due to $4.6 million in net charge-offs, a $2.9 million increase in the specific reserves on individually evaluated loans, and a $2.2 million increase in the general reserve due to loan growth. These increases were partially offset by a $645,000 reduction in the general reserve from quantitative and qualitative factors.

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

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As a result of our review process, we have concluded an appropriate ACL for the loan and lease portfolio is $37.3 million, or 1.20% of gross loans and leases, at December 31, 2024. 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.

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

Deposits

As of December 31, 2024, deposits increased by $310.4 million to $3.107 billion from $2.797 billion at December 31, 2023. The increase in deposits was primarily due to increases of $253.0 million, $98.5 million, and $70.3 million in wholesale deposits, money market accounts, and interest-bearing transaction accounts, respectively. These increases were partially offset by decreases of $102.1 million and $9.3 million in certificates of deposits and non-interest-bearing transaction accounts, respectively.

The following table presents the composition of the Bank's consolidated deposits:

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Period-end deposit balances associated with core deposit relationships will fluctuate based upon maturity of time deposits, client demands for the use of their cash, and our ability to maintain existing and acquire 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 core 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 core 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 core deposits for the year ended December 31, 2024, were approximately $2.378 billion, or 74.9% of total bank funding. Total bank funding is defined as total deposits plus FHLB advances. This compares to average core deposits of $2.098 billion, or 75.0% of total bank funding, for 2023.

The following table sets forth the amount and maturities of the Bank's certificates of deposit and term wholesale deposits at December 31, 2024:

At December 31, 2024, time deposits included $67.3 million of certificates of deposit and wholesale deposits in denominations greater than or equal to $250,000. Of these certificates, $42.7 million are scheduled to mature in three months or less, $13.5 million in greater than three through six months, $9.6 million in greater than six through twelve months and $1.5 million in greater than twelve months.

Of the total time deposits outstanding as of December 31, 2024, $519.3 million are scheduled to mature in 2025, $76.2 million in 2026, $79.9 million in 2027, $18.1 million in 2028, and $5.8 million in 2029. As of December 31, 2024, 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 $320.0 million as of December 31, 2024, a decrease of $10.9 million, or 3.28%, from $330.9 million at December 31, 2023. The Bank elected to utilize more wholesale deposits in lieu of FHLB advances in consideration of cost, efficiency, managing interest rate risk, and liquidity. Total wholesale funding as a percentage of total bank funding was 28.9% as of December 31, 2024, compared to 24.0% as of December 31, 2023. Total bank funding is defined as total deposits plus FHLB advances.

Please refer to the section entitled 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.

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A summary of annual maturities of borrowings at December 31, 2024, is as follows:

The Corporation redeemed $15.0 million of subordinated notes payable that bore a fixed interest rate of 5.5% as of August 15, 2024. The Corporation issued new subordinated notes payable on September 13, 2024. The aggregate principal amount of the newly issued subordinated notes payable was $20.0 million. The subordinated notes payable bear a fixed interest rate of 7.5% with a maturity date of September 13, 2034.

Stockholders' Equity

As of December 31, 2024, stockholders’ equity was $328.6 million, or 8.53% of total assets, compared to stockholders’ equity of $289.6 million, or 8.26% of total assets, as of December 31, 2023. Stockholders’ equity increased by $39.0 million during the year ended December 31, 2024. The increase was due to net income of $44.2 million for the year ended December 31, 2024, partially offset by preferred and common stock dividend declarations of $875,000 and $8.3 million, respectively.

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, 2024, 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 April 26, 2024, the Corporation’s Board of Directors authorized the repurchase by the Corporation of shares of its common stock with a maximum aggregate purchase price of $5.0 million, in such quantities, at such prices and on such other terms and conditions as the Corporation’s Chief Executive Officer or Chief Financial Officer determine in their discretion to be in the best interests of the

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Corporation and its shareholders, any time with no expiration date. As of December 31, 2024, the Corporation has not repurchased any shares under this repurchase program.

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, 2024, were the interest payments due on subordinated notes and cash dividends payable to both common and preferred stockholders. During 2024 and 2023, FBB declared and paid cash dividends totaling $11.5 million and $12.1 million, respectively. The capital ratios of the Bank met all applicable regulatory capital adequacy requirements in effect on December 31, 2024, 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 and 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, 2024, and 2023, our readily accessible liquidity was $882.8 million and $734.4 million, respectively. At December 31, 2024, and 2023, the Bank had $127.8 million and $106.8 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 had $976.1 million of outstanding wholesale funds at December 31, 2024, compared to $739.2 million of wholesale funds as of December 31, 2023, which represented 28.9% and 24.0%, 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 core 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 core 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 any temporary funding needs. The short-term FHLB advances will typically have terms of one week to one month to cover expected funding demands.

Period-end core deposits increased $57.4 million, or 2.5%, to $2.396 billion at December 31, 2024, from $2.339 billion at December 31, 2023, as core deposit balances increased due to successful business development efforts, partially offset by clients funding their normal course of business. Our core 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 core 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

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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 core 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, 2024.

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, 2024. In the event that there is a disruption in the availability of wholesale funds at maturity, the Bank has managed the maturity structure, in compliance with our approved liquidity policy, so at least one year of maturities could be funded through readily available liquidity. These potential funding sources include deposits maintained at the FRB or Federal Reserve Discount Window utilizing currently unencumbered securities and acceptable loans as collateral. As of December 31, 2024, the readily 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 core 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, 2024, operating activities resulted in a net cash inflow of $57.5 million driven by net income of $44.2 million. Net cash used in investing activities for the year ended December 31, 2024, was $328.5 million which consisted of $267.4 million in cash outflows to fund net loan growth and $146.2 million in net cash outflows to purchase available-for-sale securities. Net cash provided by financing activities for the year ended December 31, 2024, was $289.2 million. Financing cash flows included a $310.4 million net increase in deposits and a $16.2 million net increase in FHLB advances, partially offset by cash dividends paid of $8.3 million.

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, 2024, and 2023.

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 higher 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

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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-accrual loans and leases and may also include other loans and leases that management identifies as non-conforming. Reserves on individually-evaluated loans are estimated based on one or a combination of estimates of fair value of the underlying collateral less cost to sell, seniority of the Bank’s claim, and borrower repayment forecasts. For loans and leases less than $1,000,000 in the Equipment Finance pool, the recovery value is based on historical experience rather than specific asset appraisals.

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

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, 2024, 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, 2024, 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.

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, liabilities, and allowances are properly recorded in the Consolidated Financial Statements.

The Corporation also invests in certain development entities that generate federal historic, low income housing, and renewable energy 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.

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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.