~~0001521951us-gaap:FairValueInputsLevel1Memberus-gaap:InterestRateSwapMember2021-12-31~~

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☑						Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended ~~September 30, 2022~~March 31, 2023


☐						Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 001-34095

FIRST BUSINESS FINANCIAL SERVICES, INC.

(Exact name of registrant as specified in its charter)


Wisconsin						39-1576570

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


401 Charmany Drive		53719
Madison	Wisconsin
(Address of Principal Executive Offices)		(Zip Code)

(608) 238-8008

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

FBIZ

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

☑☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ

The number of shares outstanding of the registrant’s sole class of common stock, par value $0.01 per share, on ~~October 26, 2022~~April 24, 2023 was ~~8,431,235~~8,293,176 shares.

Table of Contents

FIRST BUSINESS FINANCIAL SERVICES, INC.

INDEX — FORM 10-Q


PART I. Financial Information			1
Item 1. Financial Statements			1
Consolidated Balance Sheets (Unaudited)			1
Consolidated Statements of Income (Unaudited)			2
Consolidated Statements of Comprehensive Income (Unaudited)			43
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)			54
Consolidated Statements of Cash Flows (Unaudited)			75
Notes to Unaudited Consolidated Financial Statements			97
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			4342
Item 3. Quantitative and Qualitative Disclosures about Market Risk			6663
Item 4. Controls and Procedures			6664
PART II. Other Information			6664
Item 1. Legal Proceedings			6664
Item 1A. Risk Factors			6764
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			6765
Item 3. Defaults Upon Senior Securities			1
Item 4. Mine Safety Disclosures			1
Item 5. Other Information			1
Item 6. Exhibits			6766
Signatures			6867

Table of Contents

PART I. Financial Information

Item 1. Financial Statements

First Business Financial Services, Inc.

Consolidated Balance Sheets


			September 30, 2022		December 31, 2021				March 31, 2023		December 31, 2022
			(Unaudited)						(Unaudited)
		(In Thousands, Except Share Data)						(In Thousands, Except Share Data)
Assets	Assets						Assets
Cash and due from banks	Cash and due from banks		$	24,258	$	9,697	Cash and due from banks		$	26,114	$	25,811
Short-term investments	Short-term investments		86,707		47,413		Short-term investments		159,859		76,871
Cash and cash equivalents	Cash and cash equivalents		110,965		57,110		Cash and cash equivalents		185,973		102,682
Securities available-for-sale, at fair value	Securities available-for-sale, at fair value		196,566		205,702		Securities available-for-sale, at fair value		236,989		212,024
Securities held-to-maturity, at amortized cost	Securities held-to-maturity, at amortized cost		13,531		19,746		Securities held-to-maturity, at amortized cost		11,461		12,635
Loans held for sale	Loans held for sale		773		3,570		Loans held for sale		2,697		2,632
Loans and leases receivable, net of allowance for loan and lease losses of $24,143 and $24,336, respectively			2,306,557		2,215,072
Loans and leases receivable, net of allowance for credit losses of $26,140 and $24,230, respectively							Loans and leases receivable, net of allowance for credit losses of $26,140 and $24,230, respectively		2,513,223		2,418,836
Premises and equipment, net	Premises and equipment, net		3,143		1,694		Premises and equipment, net		4,933		4,340
Foreclosed properties			151		164
Repossessed assets							Repossessed assets		89		95
Right-of-use assets, net	Right-of-use assets, net		5,424		4,910		Right-of-use assets, net		7,355		7,690
Bank-owned life insurance	Bank-owned life insurance		54,683		53,600		Bank-owned life insurance		54,383		54,018
Federal Home Loan Bank stock, at cost	Federal Home Loan Bank stock, at cost		15,701		13,336		Federal Home Loan Bank stock, at cost		13,088		17,812
Goodwill and other intangible assets	Goodwill and other intangible assets		12,218		12,268		Goodwill and other intangible assets		12,160		12,159
Derivatives	Derivatives		73,718		26,343		Derivatives		54,612		68,581
Accrued interest receivable and other assets	Accrued interest receivable and other assets		57,372		39,390		Accrued interest receivable and other assets		67,448		63,107
Total assets	Total assets		$	2,850,802	$	2,652,905	Total assets		$	3,164,411	$	2,976,611
Liabilities and Stockholders’ Equity	Liabilities and Stockholders’ Equity						Liabilities and Stockholders’ Equity
Deposits	Deposits		$	2,087,545	$	1,957,923	Deposits		$	2,476,840	$	2,168,206
Federal Home Loan Bank advances and other borrowings	Federal Home Loan Bank advances and other borrowings		420,297		403,451		Federal Home Loan Bank advances and other borrowings		341,859		456,808
Junior subordinated notes			—		10,076

Lease liabilities	Lease liabilities		6,827		5,406		Lease liabilities		9,822		10,175
Derivatives	Derivatives		66,162		28,283		Derivatives		49,012		61,419
Accrued interest payable and other liabilities	Accrued interest payable and other liabilities		16,967		15,344		Accrued interest payable and other liabilities		20,297		19,363
Total liabilities	Total liabilities		2,597,798		2,420,483		Total liabilities		2,897,830		2,715,971

Stockholders’ equity:	Stockholders’ equity:						Stockholders’ equity:
Preferred stock, Series A; $0.01 par value, 7% non-cumulative perpetual preferred stock liquidation preference $1,000 per share, 2,500,000 shares authorized, 12,500 and no shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively			11,992		—
Common stock, $0.01 par value, 25,000,000 shares authorized, 9,370,888 and 9,326,361 shares issued, 8,432,048 and 8,457,564 shares outstanding at September 30, 2022 and December 31, 2021, respectively			94		93
Preferred stock, $0.01 par value, 2,500,000 shares authorized, 12,500 shares of 7% non-cumulative perpetual preferred stock, Series A, outstanding at each March 31, 2023 and December 31, 2022							Preferred stock, $0.01 par value, 2,500,000 shares authorized, 12,500 shares of 7% non-cumulative perpetual preferred stock, Series A, outstanding at each March 31, 2023 and December 31, 2022		11,992		11,992
Common stock, $0.01 par value, 25,000,000 shares authorized, 9,371,657 and 9,371,078 shares issued, 8,306,270 and 8,362,085 shares outstanding at March 31, 2023 and December 31, 2022, respectively							Common stock, $0.01 par value, 25,000,000 shares authorized, 9,371,657 and 9,371,078 shares issued, 8,306,270 and 8,362,085 shares outstanding at March 31, 2023 and December 31, 2022, respectively		94		94
Additional paid-in capital	Additional paid-in capital		86,803		85,797		Additional paid-in capital		88,173		87,512
Retained earnings	Retained earnings		195,235		170,020		Retained earnings		209,008		203,507
Accumulated other comprehensive loss	Accumulated other comprehensive loss		(16,588)		(1,457)		Accumulated other comprehensive loss		(13,671)		(15,310)
Treasury stock, 938,840 and 868,797 shares at September 30, 2022 and December 31, 2021, respectively, at cost			(24,532)		(22,031)
Treasury stock, 1,065,387 and 1,008,993 shares at March 31, 2023 and December 31, 2022, respectively, at cost							Treasury stock, 1,065,387 and 1,008,993 shares at March 31, 2023 and December 31, 2022, respectively, at cost		(29,015)		(27,155)
Total stockholders’ equity	Total stockholders’ equity		253,004		232,422		Total stockholders’ equity		266,581		260,640
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity		$	2,850,802	$	2,652,905	Total liabilities and stockholders’ equity		$	3,164,411	$	2,976,611

~~Table of Contents~~

See accompanying Notes to Unaudited Consolidated Financial Statements.

Table of Contents

First Business Financial Services, Inc.

Consolidated Statements of Income (Unaudited)


		For the Three Months Ended September 30,				For the Nine Months Ended September 30,					For the Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
		(In Thousands, Except Per Share Data)									(In Thousands, Except Per Share Data)
Interest income	Interest income									Interest income
Loans and leases	Loans and leases	$	30,174	$	22,947	$	78,934	$	69,333	Loans and leases	$	39,814	$	23,072
Securities	Securities	1,165		855		3,204		2,524		Securities	1,590		975
Short-term investments	Short-term investments	447		212		915		563		Short-term investments	660		188
Total interest income	Total interest income	31,786		24,014		83,053		72,420		Total interest income	42,064		24,235
Interest expense	Interest expense									Interest expense
Deposits	Deposits	3,181		834		5,005		2,796		Deposits	12,430		766
Federal Home Loan Bank advances and other borrowings	Federal Home Loan Bank advances and other borrowings	2,721		1,677		6,573		5,054		Federal Home Loan Bank advances and other borrowings	2,929		1,539
Junior subordinated notes	Junior subordinated notes	—		280		504		832		Junior subordinated notes	—		504
Total interest expense	Total interest expense	5,902		2,791		12,082		8,682		Total interest expense	15,359		2,809
Net interest income	Net interest income	25,884		21,223		70,971		63,738		Net interest income	26,705		21,426
Provision for loan and lease losses		12		(2,269)		(4,569)		(5,295)
Net interest income after provision for loan and lease losses		25,872		23,492		75,540		69,033
Provision for credit losses										Provision for credit losses	1,561		(855)
Net interest income after provision for credit losses										Net interest income after provision for credit losses	25,144		22,281
Non-interest income	Non-interest income									Non-interest income
Private wealth management service fees	Private wealth management service fees	2,618		2,759		8,311		7,910		Private wealth management service fees	2,654		2,841
Gain on sale of Small Business Administration loans	Gain on sale of Small Business Administration loans	732		721		2,269		3,002		Gain on sale of Small Business Administration loans	476		585

Service charges on deposits	Service charges on deposits	1,018		956		3,058		2,814		Service charges on deposits	682		999
Loan fees	Loan fees	814		713		2,163		1,828		Loan fees	803		652
Increase in cash surrender value of bank-owned life insurance	Increase in cash surrender value of bank-owned life insurance	359		357		1,057		1,056		Increase in cash surrender value of bank-owned life insurance	366		349
Net gain on sale of securities		—		—		—		29
Swap fees	Swap fees	341		—		1,038		684		Swap fees	557		225
Other non-interest income	Other non-interest income	2,315		1,509		4,559		3,208		Other non-interest income	2,872		1,735
Total non-interest income	Total non-interest income	8,197		7,015		22,455		20,531		Total non-interest income	8,410		7,386
Non-interest expense	Non-interest expense									Non-interest expense
Compensation	Compensation	14,817		13,351		42,475		39,263		Compensation	15,908		13,638
Occupancy	Occupancy	566		544		1,689		1,628		Occupancy	631		555
Professional fees	Professional fees	1,203		1,024		3,671		2,803		Professional fees	1,343		1,170
Data processing	Data processing	719		746		2,391		2,315		Data processing	875		780
Marketing	Marketing	543		572		1,713		1,474		Marketing	628		500
Equipment	Equipment	253		260		732		767		Equipment	295		244
Computer software	Computer software	1,128		999		3,327		3,244		Computer software	1,183		1,082
FDIC insurance	FDIC insurance	230		291		840		933		FDIC insurance	394		313

Other non-interest expense	Other non-interest expense	569		703		1,469		1,576		Other non-interest expense	510		541
Total non-interest expense	Total non-interest expense	20,028		18,490		58,307		54,003		Total non-interest expense	21,767		18,823
Income before income tax expense	Income before income tax expense	14,041		12,017		39,688		35,561		Income before income tax expense	11,787		10,844
Income tax expense	Income tax expense	3,215		2,819		8,986		8,396		Income tax expense	2,808		2,172
Net income	Net income	10,826		9,198		30,702		27,165		Net income	8,979		8,672
Preferred stock dividend	Preferred stock dividend	218		—		464		—		Preferred stock dividend	219		—
Net income available to common shareholders	Net income available to common shareholders	$	10,608	$	9,198	$	30,238	$	27,165	Net income available to common shareholders	$	8,760	$	8,672
Earnings per common share	Earnings per common share									Earnings per common share
Basic	Basic	$	1.25	$	1.07	$	3.57	$	3.15	Basic	$	1.05	$	1.02
Diluted	Diluted	1.25		1.07		3.57		3.15		Diluted	1.05		1.02
Dividends declared per share	Dividends declared per share	0.1975		0.18		0.5925		0.54		Dividends declared per share	0.2275		0.1975

See accompanying Notes to Unaudited Consolidated Financial Statements.

Table of Contents

First Business Financial Services, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)


	For the Three Months Ended March 31,
	2023		2022
	(In Thousands)
Net income	$	8,979	$	8,672
Other comprehensive income (loss)
Securities available-for-sale:
Unrealized securities gains (losses) arising during the period	3,762		(12,481)

Securities held-to-maturity:
Amortization of net unrealized losses transferred from available-for-sale	2		5
Interest rate swaps:
Unrealized (losses) gains on interest rate swaps arising during the period	(1,562)		3,869
Income tax (expense) benefit	(563)		2,201
Total other comprehensive income (loss)	1,639		(6,406)
Comprehensive income	$	10,618	$	2,266

See accompanying Notes to Unaudited Consolidated Financial Statements.

Table of Contents

First Business Financial Services, Inc.

Consolidated Statements of ~~Comprehensive Income (Unaudited)~~

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2022 2021 2022 2021
(In Thousands)
Net income $ 10,826 $ 9,198 $ 30,702 $ 27,165
Other comprehensive loss
Securities available-for-sale:
Unrealized securities losses arising during the period (10,174) (1,457) (29,839) (3,033)
Reclassification adjustment for net gain realized in net income — — — (29)
Securities held-to-maturity:
Amortization of net unrealized losses transferred from available-for-sale 3 7 11 22
Interest rate swaps:
Unrealized gains on interest rate swaps arising during the period 3,452 520 9,496 2,338
Income tax benefit 1,719 238 5,201 180
Total other comprehensive loss (5,000) (692) (15,131) (522)
Comprehensive income $ 5,826 $ 8,506 $ 15,571 $ 26,643

~~See accompanying Notes to Unaudited Consolidated Financial Statements.~~

~~Table of Contents~~

~~First Business Financial Services, Inc.~~

~~Consolidated Statements of~~ Changes in Stockholders’ Equity (Unaudited)


		Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total			Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total
		(In Thousands, Except Share Data)																(In Thousands, Except Share Data)
Balance at January 1, 2021		8,566,960	$	—	$	92	$	83,125	$	140,431	$	(933)	$	(16,553)	$	206,162
Balance at January 1, 2022																	Balance at January 1, 2022	8,457,564	$	—	$	93	$	85,797	$	170,020	$	(1,457)	$	(22,031)	$	232,422
Net income	Net income	—	—		—		—		9,731		—		—		9,731		Net income	—	—		—		—		8,672		—		—		8,672
Other comprehensive loss	Other comprehensive loss	—	—		—		—		—		(105)		—		(105)		Other comprehensive loss	—	—		—		—		—		(6,406)		—		(6,406)
Issuance of preferred stock, net of issuance costs																	Issuance of preferred stock, net of issuance costs	—	11,992		—		—		—		—		—		11,992

Share-based compensation - restricted shares and employee stock purchase plan	Share-based compensation - restricted shares and employee stock purchase plan	84,255	—		1		530		—		—		—		531		Share-based compensation - restricted shares and employee stock purchase plan	47,864	—		1		608		—		—		—		609
Issuance of common stock under the employee stock purchase plan	Issuance of common stock under the employee stock purchase plan	1,775	—		—		39		—		—		—		39		Issuance of common stock under the employee stock purchase plan	1,380	—		—		40		—		—		—		40

Cash dividends ($0.18 per share)		—	—		—		—		(1,541)		—		—		(1,541)
Treasury stock re-issued																	Treasury stock re-issued	—	—		—		(1,002)		—		—		1,002		—
Cash dividends ($0.1975 per share)																	Cash dividends ($0.1975 per share)	—	—		—		—		(1,670)		—		—		(1,670)
Treasury stock purchased	Treasury stock purchased	(14,795)	—		—		—		—		—		(326)		(326)		Treasury stock purchased	(18,223)	—		—		—		—		—		(608)		(608)
Balance at March 31, 2021		8,638,195	$	—	$	93	$	83,694	$	148,621	$	(1,038)	$	(16,879)	$	214,491
Net income		—	—		—		—		8,235		—		—		8,235
Other comprehensive loss		—	—		—		—		—		275		—		275
Balance at March 31, 2022																	Balance at March 31, 2022	8,488,585	$	11,992	$	94	$	85,443	$	177,022	$	(7,863)	$	(21,637)	$	245,051

Share-based compensation - restricted shares and employee stock purchase plan		1,421	—		—		607		—		—		—		607
Issuance of common stock under the employee stock purchase plan		1,694	—		—		42		—		—		—		42

Cash dividends ($0.18 per share)		—	—		—		—		(1,556)		—		—		(1,556)
Treasury stock purchased		(23,549)	—		—		—		—		—		(642)		(642)
Balance at June 30, 2021		8,617,761	$	—	$	93	$	84,343	$	155,300	$	(763)	$	(17,521)	$	221,452
Net income		—	—		—		—		9,198		—		—		9,198
Other comprehensive loss		—	—		—		—		—		(692)		—		(692)

Share-based compensation - restricted shares and employee stock purchase plan		651	—		—		578		—		—		—		578
Issuance of common stock under the employee stock purchase plan		1,490	—		—		38		—		—		—		38

Cash dividends ($0.18 per share)		—	—		—		—		(1,546)		—		—		(1,546)
Treasury stock purchased		(136,803)	—		—		—		—		—		(3,748)		(3,748)
Balance at September 30, 2021		8,483,099	$	—	$	93	$	84,959	$	162,952	$	(1,455)	$	(21,269)	$	225,280

~~Table of Contents~~


		Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total			Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total
		(In Thousands, Except Share Data)																(In Thousands, Except Share Data)
Balance at January 1, 2022		8,457,564	$	—	$	93	$	85,797	$	170,020	$	(1,457)	$	(22,031)	$	232,422
Net income		—	—		—		—		8,672		—		—		8,672
Other comprehensive loss		—	—		—		—		—		(6,406)		—		(6,406)
Issuance of preferred stock, net of issuance costs		—	11,992		—		—		—		—		—		11,992

Share-based compensation - restricted shares and employee stock purchase plan		47,864	—		1		608		—		—		—		609

Issuance of common stock under the employee stock purchase plan		1,380	—		—		40		—		—		—		40
Treasury stock re-issued		—	—		—		(1,002)		—		—		1,002		—
Cash dividends ($0.1975 per share)		—	—		—		—		(1,670)		—		—		(1,670)
Treasury stock purchased		(18,223)	—		—		—		—		—		(608)		(608)
Balance at March 31, 2022		8,488,585	$	11,992	$	94	$	85,443	$	177,022	$	(7,863)	$	(21,637)	$	245,051
Balance at December 31, 2022																	Balance at December 31, 2022	8,362,085	$	11,992	$	94	$	87,512	$	203,507	$	(15,310)	$	(27,155)	$	260,640
Cumulative change in accounting principle																	Cumulative change in accounting principle	—	—		—		—		(1,353)		—		—		(1,353)
Balance at January 1, 2023																	Balance at January 1, 2023	8,362,085	11,992		94		87,512		202,154		(15,310)		(27,155)		259,287
Net income	Net income	—	—		—		—		11,204		—		—		11,204		Net income	—	—		—		—		8,979		—		—		8,979
Other comprehensive income	Other comprehensive income	—	—		—		—		—		(3,725)		—		(3,725)		Other comprehensive income	—	—		—		—		—		1,639		—		1,639

Share-based compensation - restricted shares and employee stock purchase plan	Share-based compensation - restricted shares and employee stock purchase plan	27,114	—		—		645		—		—		—		645		Share-based compensation - restricted shares and employee stock purchase plan	(426)	—		—		634		—		—		—		634

Issuance of common stock under the employee stock purchase plan	Issuance of common stock under the employee stock purchase plan	1,254	—		—		35		—		—		—		35		Issuance of common stock under the employee stock purchase plan	1,005	—		—		27		—		—		—		27

Preferred stock dividends	Preferred stock dividends	—	—		—		—		(246)		—		—		(246)		Preferred stock dividends	—	—		—		—		(219)		—		—		(219)
Cash dividends ($0.1975 per share)		—	—		—		—		(1,678)		—		—		(1,678)
Cash dividends ($0.2275 per share)																	Cash dividends ($0.2275 per share)	—	—		—		—		(1,906)		—		—		(1,906)
Treasury stock purchased	Treasury stock purchased	(41,000)	—		—		—		—		—		(1,363)		(1,363)		Treasury stock purchased	(56,394)	—		—		—		—		—		(1,860)		(1,860)
Balance at June 30, 2022		8,475,953	$	11,992	$	94	$	86,123	$	186,302	$	(11,588)	$	(23,000)	$	249,923
Net income		—	—		—		—		10,826		—		—		10,826
Other comprehensive loss		—	—		—		—		—		(5,000)		—		(5,000)
Balance at March 31, 2023																	Balance at March 31, 2023	8,306,270	11,992		94		88,173		209,008		(13,671)		(29,015)		266,581

Share-based compensation - restricted shares and employee stock purchase plan		1,291	—		—		651		—		—		—		651

Issuance of common stock under the employee stock purchase plan		1,006	—		—		29		—		—		—		29

Preferred stock dividends		—	—		—		—		(218)		—		—		(218)
Cash dividends ($0.1975 per share)		—	—		—		—		(1,675)		—		—		(1,675)
Treasury stock purchased		(46,202)	—		—		—		—		—		(1,532)		(1,532)
Balance at September 30, 2022		8,432,048	$	11,992	$	94	$	86,803	$	195,235	$	(16,588)	$	(24,532)	$	253,004

See accompanying Notes to Unaudited Consolidated Financial Statements.

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First Business Financial Services, Inc.

Consolidated Statements of Cash Flows (Unaudited)


		For the Nine Months Ended September 30,					For the Three Months Ended March 31,
		2022		2021			2023		2022
		(In Thousands)					(In Thousands)
Operating activities	Operating activities					Operating activities
Net income	Net income	$	30,702	$	27,165	Net income	$	8,979	$	8,672
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes, net	Deferred income taxes, net	(2,258)		1,218		Deferred income taxes, net	312		(1,209)
Impairment of tax credit investments		(351)		—
Provision for loan and lease losses		(4,569)		(5,295)
Derivative credit valuation adjustment		—		(376)

Provision for credit losses						Provision for credit losses	1,561		(855)

Depreciation, amortization and accretion, net	Depreciation, amortization and accretion, net	3,088		2,696		Depreciation, amortization and accretion, net	912		1,062
Share-based compensation						Share-based compensation	634		609

Gain on disposal of lease equipment	Gain on disposal of lease equipment	(478)		—		Gain on disposal of lease equipment	1		—
Loss on disposal of equipment		—		68

Amortization of low income housing tax credits		552		—
Share-based compensation		1,905		1,716
Net gain on sale of securities		—		(29)

Increase in bank-owned life insurance policies		(1,057)		(1,056)
Amortization of tax credit investments						Amortization of tax credit investments	436		—

Bank-owned life insurance policy income						Bank-owned life insurance policy income	(366)		(349)
Origination of loans for sale	Origination of loans for sale	(94,433)		(57,710)		Origination of loans for sale	(27,639)		(26,531)
Sale of SBA loans originated for sale		99,499		63,805
Sale of loans originated for sale						Sale of loans originated for sale	28,049		28,268
Gain on sale of loans originated for sale	Gain on sale of loans originated for sale	(2,269)		(3,002)		Gain on sale of loans originated for sale	(476)		(585)
Net loss on foreclosed properties, including impairment valuation		27		7
Net loss on repossessed assets						Net loss on repossessed assets	6		12

Loan servicing right impairment (recovery) valuation		15		(78)

Return on investment in limited partnerships						Return on investment in limited partnerships	1,690		147
Excess tax benefit expense from share-based compensation	Excess tax benefit expense from share-based compensation	183		27		Excess tax benefit expense from share-based compensation	137		158
Returns on investments in limited partnerships		314		—
Payments on operating lease liabilities		(1,230)		(1,187)
Payments received on operating leases		134		126
Net increase in accrued interest receivable and other assets		(4)		(4,789)
Net increase in accrued interest payable and other liabilities		1,620		1,455
Net payments on operating lease liabilities						Net payments on operating lease liabilities	(355)		(363)
Net (decrease) increase in accrued interest receivable and other assets						Net (decrease) increase in accrued interest receivable and other assets	(5,738)		93
Net increase (decrease) in accrued interest payable and other liabilities						Net increase (decrease) in accrued interest payable and other liabilities	1,766		(7,031)
Net cash provided by operating activities	Net cash provided by operating activities	31,390		24,761		Net cash provided by operating activities	9,909		2,098
Investing activities	Investing activities					Investing activities
Proceeds from maturities, redemptions, and paydowns of available-for-sale securities	Proceeds from maturities, redemptions, and paydowns of available-for-sale securities	32,699		40,789		Proceeds from maturities, redemptions, and paydowns of available-for-sale securities	4,574		9,131
Proceeds from maturities, redemptions, and paydowns of held-to-maturity securities	Proceeds from maturities, redemptions, and paydowns of held-to-maturity securities	6,190		5,146		Proceeds from maturities, redemptions, and paydowns of held-to-maturity securities	1,169		2,470
Proceeds from sale of available-for-sale securities		—		14,955

Purchases of available-for-sale securities	Purchases of available-for-sale securities	(54,098)		(69,503)		Purchases of available-for-sale securities	(25,924)		(39,760)

Proceeds from sale of foreclosed properties		37		—
Proceeds from sale of repossessed assets						Proceeds from sale of repossessed assets	—		35

Net (increase) decrease in loans and leases		(86,487)		23,969

Net increase in loans and leases						Net increase in loans and leases	(96,356)		(11,653)
Investments in limited partnerships	Investments in limited partnerships	(797)		(672)		Investments in limited partnerships	(650)		(362)
Returns of investments in limited partnerships	Returns of investments in limited partnerships	17		60		Returns of investments in limited partnerships	4		—

Distribution from historic development entities		474		57
Investment in low-income housing entities		(11,146)		(1,307)
Investment in tax credit investments						Investment in tax credit investments	(3,090)		(649)

Investment in Federal Home Loan Bank stock	Investment in Federal Home Loan Bank stock	(35,650)		(6,314)		Investment in Federal Home Loan Bank stock	(11,644)		(5,661)
Proceeds from the sale of Federal Home Loan Bank stock	Proceeds from the sale of Federal Home Loan Bank stock	33,285		7,540		Proceeds from the sale of Federal Home Loan Bank stock	16,369		6,134
Purchases of leasehold improvements and equipment, net	Purchases of leasehold improvements and equipment, net	(1,847)		(224)		Purchases of leasehold improvements and equipment, net	(798)		(60)

Purchases of bank-owned life insurance policies						Purchases of bank-owned life insurance policies	—		(25)

Premium payment on bank owned life insurance policies		(25)		—

Proceeds from redemption of Trust II stock	Proceeds from redemption of Trust II stock	315		—		Proceeds from redemption of Trust II stock	—		315
Net cash used in investing activities	Net cash used in investing activities	(117,033)		14,496		Net cash used in investing activities	(116,346)		(40,085)
Financing activities	Financing activities					Financing activities
Net increase in deposits	Net increase in deposits	129,622		48,766		Net increase in deposits	308,635		65,771
Repayment of Federal Home Loan Bank advances						Repayment of Federal Home Loan Bank advances	(810,350)		(464,200)
Proceeds from Federal Home Loan Bank advances						Proceeds from Federal Home Loan Bank advances	701,470		456,800

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

Repayment of junior subordinated notes payable						Repayment of junior subordinated notes payable	—		(10,076)

Net (decrease) increase in long-term borrowed funds						Net (decrease) increase in long-term borrowed funds	(6,069)		(1,569)

Cash dividends paid						Cash dividends paid	(1,906)		(1,670)
Preferred stock dividends paid						Preferred stock dividends paid	(219)		—
Proceeds from issuance of common stock under ESPP						Proceeds from issuance of common stock under ESPP	27		40

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Proceeds from Federal Home Loan Bank advances 2,002,844 624,300
Repayment of Federal Home Loan Bank advances (1,993,844) (661,000)
Repayment of subordinated notes payable (9,090) —
Proceeds from issuance of subordinated notes payable 20,000 —
Repayment of junior subordinated notes payable (10,076) —
Net (decrease) increase in long-term borrowed funds (3,064) 11,633
Cash dividends paid (5,023) (4,644)
Preferred stock dividends paid (464) —
Proceeds from issuance of common stock under ESPP 104 119
Proceeds from issuance of preferred stock 11,992 —
Purchase of treasury stock (3,503) (4,716)
Net cash provided by financing activities 139,498 14,458
Net increase in cash and cash equivalents 53,855 53,715
Cash and cash equivalents at the beginning of the period 57,110 56,909
Cash and cash equivalents at the end of the period $ 110,965 $ 110,624
Supplementary cash flow information
Cash paid during the period for:
Interest paid on deposits and borrowings $ 11,083 $ 10,876
Income taxes paid 3,263 9,958
Non-cash investing and financing activities:
Right-of-use assets obtained in exchange for operating lease liabilities — 316
Transfer from loans and leases to foreclosed properties 50 145


Proceeds from issuance of preferred stock	—		11,992
Purchase of treasury stock	(1,860)		(608)
Net cash provided by financing activities	189,728		76,480
Net increase in cash and cash equivalents	83,291		38,493
Cash and cash equivalents at the beginning of the period	102,682		57,110
Cash and cash equivalents at the end of the period	$	185,973	$	95,603
Supplementary cash flow information
Cash paid during the period for:
Interest paid on deposits and borrowings	$	13,010	$	3,164
Net income taxes (received) paid	(7)		17

See accompany Notes to Unaudited Consolidated Financial Statements

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Notes to Unaudited Consolidated Financial Statements

Note 1 — Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

The accounting and reporting practices of First Business Financial Services, Inc. (“FBFS” or the “Corporation”), through our wholly-owned subsidiary, First Business Bank (“FBB” or the “Bank”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). FBB operates as a commercial banking institution primarily in Wisconsin and the greater Kansas City metropolitan area. The Bank provides a full range of financial services to businesses, business owners, executives, professionals, and high net worth individuals. FBB also offers bank consulting services to community banks. The Bank is subject to competition from other financial institutions and service providers, and is also subject to state and federal regulations. As of ~~September 30, 2022,~~March 31, 2023, FBB had the following wholly-owned subsidiaries: First Business Specialty Finance, LLC (“FBSF”), First Madison Investment Corp. (“FMIC”), ABKC Real Estate, LLC (“ABKC”), FBB Real Estate 2, LLC (“FBB RE 2”~~), BOC Investment, LLC (“BOC”~~), Mitchell Street Apartments Investment, LLC (“Mitchell Street”), and FBB Tax Credit Investment, LLC (“FBB Tax Credit”).

Basis of Presentation

The accompanying unaudited Consolidated Financial Statements were prepared in accordance with GAAP and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Corporation’s Consolidated Financial Statements and footnotes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022. The unaudited Consolidated Financial Statements include the accounts of the Corporation and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. In accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 810, the Corporation’s ownership interest in FBFS Statutory Trust II (“Trust II”) was not consolidated into the financial statements. As of March 30, 2022, the Bank’s trust preferred securities were redeemed and Trust II was subsequently dissolved.

Management of the Corporation is required to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that could significantly change in the near-term include the value of securities and interest rate swaps, level of the allowance for ~~loan and lease~~credit losses, lease residuals, property under operating leases, goodwill, and income taxes. The results of operations for the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, are not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, ~~2022.~~2023. Certain amounts in prior periods may have been reclassified to conform to the current presentation. Subsequent events have been evaluated through the date of the issuance of the unaudited Consolidated Financial Statements. No significant subsequent events have occurred through this date requiring adjustment to the financial statements or disclosures.

~~The~~Other than the adoption of new standards, the Corporation has not changed its significant accounting and reporting policies from those disclosed in the Corporation’s Form 10-K for the year ended December 31, ~~2021.~~2022.

~~Recent Accounting Pronouncements~~Adoption of new accounting standards

~~In June~~ASU 2016 - 13

On January 1, 2023, the Corporation adopted ASU 2016-03 Financial ~~Accounting Standards Board~~Instruments - Credit losses (“~~FASB”~~ASC 326”) ~~issued Accounting Standard Update (“ASU”) No. 2016-13, “Financial Instruments-~~: Measurement of Credit Losses ~~(Topic 326),~~”on Financial Instruments, as amended, which ~~is often referred to as Current Expected Credit Losses (“CECL”). The ASU~~ replaces the incurred loss ~~impairment~~ methodology ~~for recognizing~~with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement expected credit losses under CECL methodology is applicable to financial assets measured at amortized cost, included loan receivables and held-to-maturity debit securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with ASC 842 on leases. In addition, ASC 326 made changes to the accounting for available for sale and held to maturity debt securities.

The Corporation adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. The Corporation recorded a ~~methodology~~net decrease to retained earnings of $1.4 million as of January 1, 2023 for the cumulative effect of adopting ASC 326. The transition adjustment to allowance for credit losses (“ACL”) includes $1.3 million related to off-balance sheet credit exposures and $484,000 related to loans.

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The following table illustrates the impact of ASC 326:


	January 1, 2023
(In thousands)	As Reported Under ASC 326		Pre-ASC 326 Adoption		Impact of ASC 326 Adoption
Assets:
Loans	$	2,443,215	$	2,443,215	$	—

ACL on loans
Commercial real estate — owner occupied	1,548		1,766		(218)
Commercial real estate — non-owner occupied	4,811		5,108		(297)
Construction	1,755		1,646		109
Multi-family	2,243		2,634		(391)
1-4 family	147		207		(60)
Commercial and industrial	13,762		12,403		1,359
Consumer and other	448		466		(18)
Total ACL on loans	$	24,714	$	24,230	$	484

Net deferred tax asset	$	12,176	$	11,711	$	465

Liabilities:
ACL on unfunded credit commitments	$	1,334	$	—	$	1,334

Stockholders’ equity:	$	259,287	$	260,640	$	(1,353)

ACL - Available For Sale (“AFS”) Debt Securities

For AFS debt securities in an unrealized loss position, the Corporation first assesses whether it intends to sell, or it is more likely than not that ~~reflects all~~it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Corporation evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any decline in fair value that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes.

Changes in the ACL are recorded as a provision for (or recovery of) credit loss expense. Losses are charged against allowance when management believes that uncollectibility of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable on AFS debt securities totaled $1.0 million at March 31, 2023 and is excluded from the estimate of credit losses.

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

Management measures expected credit losses on HTM debt securities on a collective basis by major security type. Accrued interest receivable on HTM debt securities totaled $74,000 at March 31, 2023 and is excluded from the estimate of credit losses. The ~~ASU also requires consideration~~HTM securities portfolio includes residential mortgaged backed securities (“MBS”) commercial MBS, and municipal securities. All residential and commercial MBS are U.S. government issued or U.S. government sponsored and substantially all municipal bonds are rated A or above.

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The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. At the time of adoption, the estimated reserve was immaterial.

ACL - Loans

The ACL is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes that the uncollectibility of a ~~broader range~~loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to ~~inform credit loss estimates, including such factors as~~ past events, current conditions, and reasonable and supportable ~~forecasts that affect~~forecasts. Historical credit loss experience provides the ~~collectability~~basis for the estimation of ~~the reported amount. The amendments affect~~expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as changes in external conditions, such as changes in unemployment rates, property values, or other relevant factors.

Accrued interest receivable on loans ~~debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures,~~totaled $8.9 million at March 31, 2023 and ~~any other financial asset not~~is excluded from the ~~scope under which the Corporation has the contractual right to receive cash. Entities will apply the amendments in the ASU through~~estimate of credit losses.

ACL - Loans - Collectively Evaluated

The ACL is measured on a ~~cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In November 2019, the FASB issued ASU No. 2019-10, “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842).~~” The ASU delays the effective date for the credit losses standard from January 1, 2020 to January 1, 2023 for certain entities, including certain Securities and Exchange Commission filers, public business entities, and private companies. As a smaller reporting company, the Corporation is eligible for the delay and has deferred adoption.collective pool basis when similar risk characteristics exist. The Corporation has ~~established~~identified the following portfolio segments:

Commercial Real Estate: Commercial real estate portfolio segments utilize substantially similar processes and controls. Due to the collateral types, availability of data, and results of the Loss Driver Analysis (“LDA”), management utilizes a ~~cross-functional committee~~unique forecast model for each portfolio segment along with a separate analysis of subjective factors.

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

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

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

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

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

Commercial and Industrial Lending: Commercial and industrial lending is a portfolio segment where management uses a common forecast due to common risk management, similarity in collateral types, availability of data, and results of the LDA. Management has ~~implemented a third-party software solution~~distinct processes, controls, and procedures which enable more precise development of subjective factors at the pool level.

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

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

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

•SBA - Loans originated in accordance with the ~~adoption~~guidelines of the ~~standard. During~~Small Business Administration (“SBA”). As the ~~fourth quarter of 2022, management will have~~Corporation prefers to sell the ~~model validated~~guaranteed portion, the on-balance sheet loans are primarily unguaranteed.

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

Consumer and other - Consumer loans consisting of marketable security loans, home equity, first and second mortgages, and other personal loans for executives and high net-worth individuals. The Corporation uses a unique forecast model and subjective factors for this portfolio segment due to the client type and data availability.

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~~perform~~Measures of the allowance for credit losses are as follows:

Portfolio Segment

Pool

Measurement Method

Loss Driver

Commercial real estate

Owner occupied

Discounted Cash Flow