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 ~~March 31,~~June 30, 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 ~~April 24,~~July 21, 2023 was ~~8,293,176~~8,315,465 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)			3
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)			4
Consolidated Statements of Cash Flows (Unaudited)			56
Notes to Unaudited Consolidated Financial Statements			78
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			4239
Item 3. Quantitative and Qualitative Disclosures about Market Risk			6361
Item 4. Controls and Procedures			6462
PART II. Other Information			6462
Item 1. Legal Proceedings			6463
Item 1A. Risk Factors			6463
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			6564
~~Item 3. Defaults Upon Senior Securities~~			1
~~Item 4. Mine Safety Disclosures~~			1
Item 5. Other Information			164
Item 6. Exhibits			6664
Signatures			6765

Table of Contents

PART I. Financial Information

Item 1. Financial Statements

First Business Financial Services, Inc.

Consolidated Balance Sheets


			March 31, 2023		December 31, 2022				June 30, 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		$	26,114	$	25,811	Cash and due from banks		$	32,299	$	25,811
Short-term investments	Short-term investments		159,859		76,871		Short-term investments		80,510		76,871
Cash and cash equivalents	Cash and cash equivalents		185,973		102,682		Cash and cash equivalents		112,809		102,682
Securities available-for-sale, at fair value	Securities available-for-sale, at fair value		236,989		212,024		Securities available-for-sale, at fair value		253,626		212,024
Securities held-to-maturity, at amortized cost	Securities held-to-maturity, at amortized cost		11,461		12,635		Securities held-to-maturity, at amortized cost		9,830		12,635
Loans held for sale	Loans held for sale		2,697		2,632		Loans held for sale		2,191		2,632
Loans and leases receivable, net of allowance for credit losses of $26,140 and $24,230, respectively			2,513,223		2,418,836
Loans and leases receivable, net of allowance for credit losses of $28,115 and $24,230, respectively							Loans and leases receivable, net of allowance for credit losses of $28,115 and $24,230, respectively		2,646,468		2,418,836
Premises and equipment, net	Premises and equipment, net		4,933		4,340		Premises and equipment, net		5,094		4,340
Repossessed assets	Repossessed assets		89		95		Repossessed assets		65		95
Right-of-use assets, net	Right-of-use assets, net		7,355		7,690		Right-of-use assets, net		7,049		7,690
Bank-owned life insurance	Bank-owned life insurance		54,383		54,018		Bank-owned life insurance		54,747		54,018
Federal Home Loan Bank stock, at cost	Federal Home Loan Bank stock, at cost		13,088		17,812		Federal Home Loan Bank stock, at cost		14,482		17,812
Goodwill and other intangible assets	Goodwill and other intangible assets		12,160		12,159		Goodwill and other intangible assets		12,073		12,159
Derivatives	Derivatives		54,612		68,581		Derivatives		70,440		68,581
Accrued interest receivable and other assets	Accrued interest receivable and other assets		67,448		63,107		Accrued interest receivable and other assets		76,864		63,107
Total assets	Total assets		$	3,164,411	$	2,976,611	Total assets		$	3,265,738	$	2,976,611
Liabilities and Stockholders’ Equity	Liabilities and Stockholders’ Equity						Liabilities and Stockholders’ Equity
Deposits	Deposits		$	2,476,840	$	2,168,206	Deposits		$	2,528,852	$	2,168,206
Federal Home Loan Bank advances and other borrowings	Federal Home Loan Bank advances and other borrowings		341,859		456,808		Federal Home Loan Bank advances and other borrowings		370,113		456,808

Lease liabilities	Lease liabilities		9,822		10,175		Lease liabilities		9,499		10,175
Derivatives	Derivatives		49,012		61,419		Derivatives		61,147		61,419
Accrued interest payable and other liabilities	Accrued interest payable and other liabilities		20,297		19,363		Accrued interest payable and other liabilities		23,495		19,363
Total liabilities	Total liabilities		2,897,830		2,715,971		Total liabilities		2,993,106		2,715,971

Stockholders’ equity:	Stockholders’ equity:						Stockholders’ equity:
Preferred stock, $0.01 par value, 2,500,000 shares authorized, 12,500 shares of 7% non-cumulative perpetual preferred stock, Series A, outstanding at 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			94		94
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 June 30, 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 June 30, 2023 and December 31, 2022		11,992		11,992
Common stock, $0.01 par value, 25,000,000 shares authorized, 9,417,981 and 9,371,078 shares issued, 8,315,465 and 8,362,085 shares outstanding at June 30, 2023 and December 31, 2022, respectively							Common stock, $0.01 par value, 25,000,000 shares authorized, 9,417,981 and 9,371,078 shares issued, 8,315,465 and 8,362,085 shares outstanding at June 30, 2023 and December 31, 2022, respectively		95		94
Additional paid-in capital	Additional paid-in capital		88,173		87,512		Additional paid-in capital		89,272		87,512
Retained earnings	Retained earnings		209,008		203,507		Retained earnings		215,237		203,507
Accumulated other comprehensive loss	Accumulated other comprehensive loss		(13,671)		(15,310)		Accumulated other comprehensive loss		(13,877)		(15,310)
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)
Treasury stock, 1,102,516 and 1,008,993 shares at June 30, 2023 and December 31, 2022, respectively, at cost							Treasury stock, 1,102,516 and 1,008,993 shares at June 30, 2023 and December 31, 2022, respectively, at cost		(30,087)		(27,155)
Total stockholders’ equity	Total stockholders’ equity		266,581		260,640		Total stockholders’ equity		272,632		260,640
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity		$	3,164,411	$	2,976,611	Total liabilities and stockholders’ equity		$	3,265,738	$	2,976,611

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 March 31,					For the Three Months Ended June 30,				For the Six Months Ended June 30,
		2023		2022					2023		2022		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	$	39,814	$	23,072			Loans and leases	$	44,279	$	25,687	$	84,094	$	48,759
Securities	Securities	1,590		975				Securities	1,813		1,064		3,403		2,039
Short-term investments	Short-term investments	660		188				Short-term investments	1,069		280		1,729		468
Total interest income	Total interest income	42,064		24,235				Total interest income	47,161		27,031		89,226		51,266
Interest expense	Interest expense							Interest expense
Deposits	Deposits	12,430		766				Deposits	16,541		1,058		28,971		1,824
Federal Home Loan Bank advances and other borrowings	Federal Home Loan Bank advances and other borrowings	2,929		1,539				Federal Home Loan Bank advances and other borrowings	2,873		2,313		5,802		3,851
Junior subordinated notes	Junior subordinated notes	—		504				Junior subordinated notes	—		—		—		504
Total interest expense	Total interest expense	15,359		2,809				Total interest expense	19,414		3,371		34,773		6,179
Net interest income	Net interest income	26,705		21,426				Net interest income	27,747		23,660		54,453		45,087
Provision for credit losses	Provision for credit losses	1,561		(855)				Provision for credit losses	2,231		(3,727)		3,793		(4,582)
Net interest income after provision for credit losses	Net interest income after provision for credit losses	25,144		22,281				Net interest income after provision for credit losses	25,516		27,387		50,660		49,669
Non-interest income	Non-interest income							Non-interest income
Private wealth management service fees	Private wealth management service fees	2,654		2,841				Private wealth management service fees	2,893		2,852		5,547		5,693
Gain on sale of Small Business Administration loans	Gain on sale of Small Business Administration loans	476		585				Gain on sale of Small Business Administration loans	444		951		920		1,537
Service charges on deposits	Service charges on deposits	682		999				Service charges on deposits	766		1,041		1,448		2,040
Loan fees	Loan fees	803		652				Loan fees	905		697		1,708		1,349
Increase in cash surrender value of bank-owned life insurance	Increase in cash surrender value of bank-owned life insurance	366		349				Increase in cash surrender value of bank-owned life insurance	363		350		729		698
Net loss on sale of securities								Net loss on sale of securities	(45)		—		(45)		—
Swap fees	Swap fees	557		225				Swap fees	977		471		1,534		697
Other non-interest income	Other non-interest income	2,872		1,735				Other non-interest income	1,071		510		3,943		2,244
Total non-interest income	Total non-interest income	8,410		7,386				Total non-interest income	7,374		6,872		15,784		14,258
Non-interest expense	Non-interest expense							Non-interest expense
Compensation	Compensation	15,908		13,638				Compensation	15,129		14,020		31,037		27,658
Occupancy	Occupancy	631		555				Occupancy	603		568		1,234		1,123
Professional fees	Professional fees	1,343		1,170				Professional fees	1,240		1,298		2,583		2,468
Data processing	Data processing	875		780				Data processing	1,061		892		1,936		1,673
Marketing	Marketing	628		500				Marketing	779		670		1,407		1,170
Equipment	Equipment	295		244				Equipment	355		235		650		479
Computer software	Computer software	1,183		1,082				Computer software	1,197		1,117		2,379		2,199
FDIC insurance	FDIC insurance	394		313				FDIC insurance	580		296		974		610
Other non-interest expense	Other non-interest expense	510		541				Other non-interest expense	1,087		360		1,598		900
Total non-interest expense	Total non-interest expense	21,767		18,823				Total non-interest expense	22,031		19,456		43,798		38,280
Income before income tax expense	Income before income tax expense	11,787		10,844				Income before income tax expense	10,859		14,803		22,646		25,647
Income tax expense	Income tax expense	2,808		2,172				Income tax expense	2,522		3,599		5,330		5,771
Net income	Net income	8,979		8,672				Net income	8,337		11,204		17,316		19,876
Preferred stock dividend	Preferred stock dividend	219		—				Preferred stock dividend	219		246		438		246
Net income available to common shareholders	Net income available to common shareholders	$	8,760	$	8,672			Net income available to common shareholders	$	8,118	$	10,958	$	16,878	$	19,630
Earnings per common share	Earnings per common share							Earnings per common share
Basic	Basic	$	1.05	$	1.02			Basic	$	0.98	$	1.29	$	2.02	$	2.31
Diluted	Diluted	1.05		1.02				Diluted	0.98		1.29		2.02		2.31
Dividends declared per share	Dividends declared per share	0.2275		0.1975				Dividends declared per share	0.2275		0.1975		0.455		0.395

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,					For the Three Months Ended June 30,				For the Six Months Ended June 30,
		2023		2022					2023		2022		2023		2022
		(In Thousands)				(In Thousands)
Net income	Net income	$	8,979	$	8,672			Net income	$	8,337	$	11,204	$	17,316	$	19,876
Other comprehensive income (loss)
Other comprehensive (loss) income								Other comprehensive (loss) income
Securities available-for-sale:	Securities available-for-sale:							Securities available-for-sale:
Unrealized securities gains (losses) arising during the period		3,762		(12,481)

Unrealized securities losses arising during the period								Unrealized securities losses arising during the period	(4,015)		(7,184)		(252)		(19,665)
Reclassification adjustment for net gain realized in net income								Reclassification adjustment for net gain realized in net income	45		—		45		—
Securities held-to-maturity:	Securities held-to-maturity:							Securities held-to-maturity:
Amortization of net unrealized losses transferred from available-for-sale	Amortization of net unrealized losses transferred from available-for-sale	2		5				Amortization of net unrealized losses transferred from available-for-sale	1		3		3		8
Interest rate swaps:	Interest rate swaps:							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)
Unrealized gains on interest rate swaps arising during the period								Unrealized gains on interest rate swaps arising during the period	3,693		2,175		2,131		6,044
Income tax benefit (expense)								Income tax benefit (expense)	70		1,281		(494)		3,482
Total other comprehensive (loss) income								Total other comprehensive (loss) income	(206)		(3,725)		1,433		(10,131)
Comprehensive income	Comprehensive income	$	10,618	$	2,266			Comprehensive income	$	8,131	$	7,479	$	18,749	$	9,745

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, 2022	Balance at January 1, 2022	8,457,564	$	—	$	93	$	85,797	$	170,020	$	(1,457)	$	(22,031)	$	232,422	Balance at January 1, 2022	8,457,564	$	—	$	93	$	85,797	$	170,020	$	(1,457)	$	(22,031)	$	232,422
Net income	Net income	—	—		—		—		8,672		—		—		8,672		Net income	—	—		—		—		8,672		—		—		8,672
Other comprehensive loss	Other comprehensive loss	—	—		—		—		—		(6,406)		—		(6,406)		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		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	47,864	—		1		608		—		—		—		609		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	1,380	—		—		40		—		—		—		40		Issuance of common stock under the employee stock purchase plan	1,380	—		—		40		—		—		—		40
Treasury stock re-issued	Treasury stock re-issued	—	—		—		(1,002)		—		—		1,002		—		Treasury stock re-issued	—	—		—		(1,002)		—		—		1,002		—
Cash dividends ($0.1975 per share)	Cash dividends ($0.1975 per share)	—	—		—		—		(1,670)		—		—		(1,670)		Cash dividends ($0.1975 per share)	—	—		—		—		(1,670)		—		—		(1,670)
Treasury stock purchased	Treasury stock purchased	(18,223)	—		—		—		—		—		(608)		(608)		Treasury stock purchased	(18,223)	—		—		—		—		—		(608)		(608)
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	Balance at March 31, 2022	8,488,585	$	11,992	$	94	$	85,443	$	177,022	$	(7,863)	$	(21,637)	$	245,051
Net income																	Net income	—	—		—		—		11,204		—		—		11,204
Other comprehensive loss																	Other comprehensive loss	—	—		—		—		—		(3,725)		—		(3,725)

Share-based compensation - restricted shares and employee stock purchase plan																	Share-based compensation - restricted shares and employee stock purchase plan	25,860	—		—		645		—		—		—		645
Issuance of common stock under the employee stock purchase plan																	Issuance of common stock under the employee stock purchase plan	1,254	—		—		35		—		—		—		35

Preferred stock dividends																	Preferred stock dividends	—	—		—		—		(246)		—		—		(246)
Cash dividends ($0.1975 per share)																	Cash dividends ($0.1975 per share)	—	—		—		—		(1,678)		—		—		(1,678)
Treasury stock purchased																	Treasury stock purchased	(41,000)	—		—		—		—		—		(1,363)		(1,363)
Balance at June 30, 2022																	Balance at June 30, 2022	8,474,699	$	11,992	$	94	$	86,123	$	186,302	$	(11,588)	$	(23,000)	$	249,923

Common Shares Outstanding Preferred Stock Common
Stock Additional
Paid-in
Capital Retained
Earnings Accumulated
Other
Comprehensive
Loss Treasury
Stock Total
(In Thousands, Except Share Data)
Balance at December 31, 2022 8,362,085 $ 11,992 $ 94 $ 87,512 $ 203,507 $ (15,310) $ (27,155) $ 260,640
Cumulative change in accounting principle — — — — (1,353) — — (1,353)
Balance at January 1, 2023 8,362,085 11,992 94 87,512 202,154 (15,310) (27,155) 259,287
Net income — — — — 8,979 — — 8,979
Other comprehensive income — — — — — 1,639 — 1,639
Share-based compensation - restricted shares and employee stock purchase plan (426) — — 634 — — — 634
Issuance of common stock under the employee stock purchase plan 1,005 — — 27 — — — 27
Preferred stock dividends — — — — (219) — — (219)
Cash dividends ($0.2275 per share) — — — — (1,906) — — (1,906)
Treasury stock purchased (56,394) — — — — — (1,860) (1,860)
Balance at March 31, 2023 8,306,270 11,992 94 88,173 209,008 (13,671) (29,015) 266,581

Table of Contents


	Common Shares Outstanding	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total
	(In Thousands, Except Share Data)
Balance at December 31, 2022	8,362,085	$	11,992	$	94	$	87,512	$	203,507	$	(15,310)	$	(27,155)	$	260,640
Cumulative change in accounting principle	—	—		—		—		(1,353)		—		—		(1,353)
Balance at January 1, 2023	8,362,085	11,992		94		87,512		202,154		(15,310)		(27,155)		259,287
Net income	—	—		—		—		8,979		—		—		8,979
Other comprehensive income	—	—		—		—		—		1,639		—		1,639




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

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

Preferred stock dividends	—	—		—		—		(219)		—		—		(219)
Cash dividends ($0.2275 per share)	—	—		—		—		(1,906)		—		—		(1,906)
Treasury stock purchased	(56,394)	—		—		—		—		—		(1,860)		(1,860)
Balance at March 31, 2023	8,306,270	11,992		94		88,173		209,008		(13,671)		(29,015)		266,581
Net income	—	—		—		—		8,337		—		—		8,337
Other comprehensive loss	—	—		—		—		—		(206)		—		(206)




Share-based compensation - restricted shares and employee stock purchase plan	45,280	—		1		1,071		—		—		—		1,072

Issuance of common stock under the employee stock purchase plan	1,044	—		—		28		—		—		—		28

Preferred stock dividends	—	—		—		—		(219)		—		—		(219)
Cash dividends ($0.2275 per share)	—	—		—		—		(1,889)		—		—		(1,889)
Treasury stock purchased	(37,129)	—		—		—		—		—		(1,072)		(1,072)
Balance at June 30, 2023	8,315,465	$	11,992	$	95	$	89,272	$	215,237	$	(13,877)	$	(30,087)	$	272,632

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 Three Months Ended March 31,					For the Six Months Ended June 30,
		2023		2022			2023		2022
		(In Thousands)					(In Thousands)
Operating activities	Operating activities					Operating activities
Net income	Net income	$	8,979	$	8,672	Net income	$	17,316	$	19,876
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	312		(1,209)		Deferred income taxes, net	510		(1,695)

Impairment of tax credit investments						Impairment of tax credit investments	—		(351)
Provision for credit losses	Provision for credit losses	1,561		(855)		Provision for credit losses	3,793		(4,582)

Depreciation, amortization and accretion, net	Depreciation, amortization and accretion, net	912		1,062		Depreciation, amortization and accretion, net	1,872		2,025
Share-based compensation	Share-based compensation	634		609		Share-based compensation	1,706		1,254
Net loss on disposal of fixed assets						Net loss on disposal of fixed assets	73		—

Gain on disposal of lease equipment		1		—

Amortization of tax credit investments	Amortization of tax credit investments	436		—		Amortization of tax credit investments	870		—

Bank-owned life insurance policy income	Bank-owned life insurance policy income	(366)		(349)		Bank-owned life insurance policy income	(729)		(698)
Origination of loans for sale	Origination of loans for sale	(27,639)		(26,531)		Origination of loans for sale	(64,032)		(61,278)
Sale of loans originated for sale	Sale of loans originated for sale	28,049		28,268		Sale of loans originated for sale	65,393		64,129
Gain on sale of loans originated for sale	Gain on sale of loans originated for sale	(476)		(585)		Gain on sale of loans originated for sale	(920)		(1,537)
Net loss on repossessed assets	Net loss on repossessed assets	6		12		Net loss on repossessed assets	4		20

Return on investment in limited partnerships	Return on investment in limited partnerships	1,690		147		Return on investment in limited partnerships	3,392		314
Excess tax benefit expense from share-based compensation	Excess tax benefit expense from share-based compensation	137		158		Excess tax benefit expense from share-based compensation	128		183
Net payments on operating lease liabilities	Net payments on operating lease liabilities	(355)		(363)		Net payments on operating lease liabilities	(709)		(727)
Net (decrease) increase in accrued interest receivable and other assets		(5,738)		93
Net increase (decrease) in accrued interest payable and other liabilities		1,766		(7,031)
Net decrease in accrued interest receivable and other assets						Net decrease in accrued interest receivable and other assets	(9,513)		(13,814)
Net increase in accrued interest payable and other liabilities						Net increase in accrued interest payable and other liabilities	3,307		13,658
Net cash provided by operating activities	Net cash provided by operating activities	9,909		2,098		Net cash provided by operating activities	22,461		16,777
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	4,574		9,131		Proceeds from maturities, redemptions, and paydowns of available-for-sale securities	10,047		20,185
Proceeds from maturities, redemptions, and paydowns of held-to-maturity securities	Proceeds from maturities, redemptions, and paydowns of held-to-maturity securities	1,169		2,470		Proceeds from maturities, redemptions, and paydowns of held-to-maturity securities	2,797		5,761

Proceeds from sale of available-for-sale securities						Proceeds from sale of available-for-sale securities	5,084		—
Purchases of available-for-sale securities	Purchases of available-for-sale securities	(25,924)		(39,760)		Purchases of available-for-sale securities	(57,281)		(43,231)

Proceeds from sale of repossessed assets	Proceeds from sale of repossessed assets	—		35		Proceeds from sale of repossessed assets	25		37

Net increase in loans and leases	Net increase in loans and leases	(96,356)		(11,653)		Net increase in loans and leases	(231,661)		(46,359)
Investments in limited partnerships	Investments in limited partnerships	(650)		(362)		Investments in limited partnerships	(700)		(363)
Returns of investments in limited partnerships	Returns of investments in limited partnerships	4		—		Returns of investments in limited partnerships	4		—
Investment in tax credit investments	Investment in tax credit investments	(3,090)		(649)		Investment in tax credit investments	(9,598)		(5,937)

Distribution from tax credit investments						Distribution from tax credit investments	33		282
Investment in Federal Home Loan Bank stock	Investment in Federal Home Loan Bank stock	(11,644)		(5,661)		Investment in Federal Home Loan Bank stock	(24,375)		(23,370)
Proceeds from the sale of Federal Home Loan Bank stock	Proceeds from the sale of Federal Home Loan Bank stock	16,369		6,134		Proceeds from the sale of Federal Home Loan Bank stock	27,705		13,746
Purchases of leasehold improvements and equipment, net	Purchases of leasehold improvements and equipment, net	(798)		(60)		Purchases of leasehold improvements and equipment, net	(1,255)		(469)

Purchases of bank-owned life insurance policies	Purchases of bank-owned life insurance policies	—		(25)		Purchases of 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	(116,346)		(40,085)		Net cash used in investing activities	(279,175)		(79,428)
Financing activities	Financing activities					Financing activities
Net increase in deposits		308,635		65,771
Net increase (decrease) in deposits						Net increase (decrease) in deposits	360,646		(88,592)
Repayment of Federal Home Loan Bank advances	Repayment of Federal Home Loan Bank advances	(810,350)		(464,200)		Repayment of Federal Home Loan Bank advances	(1,228,050)		(1,228,543)
Proceeds from Federal Home Loan Bank advances	Proceeds from Federal Home Loan Bank advances	701,470		456,800		Proceeds from Federal Home Loan Bank advances	1,147,375		1,413,844

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

Repayment of subordinated notes payable						Repayment of subordinated notes payable	—		(9,090)
Repayment of junior subordinated notes payable	Repayment of junior subordinated notes payable	—		(10,076)		Repayment of junior subordinated notes payable	—		(10,076)

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

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

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Net decrease in long-term borrowed funds						Net decrease in long-term borrowed funds	(6,020)		(3,020)

Cash dividends paid						Cash dividends paid	(3,795)		(3,348)
Preferred stock dividends paid						Preferred stock dividends paid	(438)		(246)
Proceeds from issuance of common stock under ESPP						Proceeds from issuance of common stock under ESPP	55		75

Proceeds from issuance of preferred stock	Proceeds from issuance of preferred stock	—		11,992		Proceeds from issuance of preferred stock	—		11,992
Purchase of treasury stock	Purchase of treasury stock	(1,860)		(608)		Purchase of treasury stock	(2,932)		(1,971)
Net cash provided by financing activities	Net cash provided by financing activities	189,728		76,480		Net cash provided by financing activities	266,841		101,025
Net increase in cash and cash equivalents	Net increase in cash and cash equivalents	83,291		38,493		Net increase in cash and cash equivalents	10,127		38,374
Cash and cash equivalents at the beginning of the period	Cash and cash equivalents at the beginning of the period	102,682		57,110		Cash and cash equivalents at the beginning of the period	102,682		57,110
Cash and cash equivalents at the end of the period	Cash and cash equivalents at the end of the period	$	185,973	$	95,603	Cash and cash equivalents at the end of the period	$	112,809	$	95,484
Supplementary cash flow information	Supplementary cash flow information					Supplementary cash flow information
Cash paid during the period for:	Cash paid during the period for:					Cash paid during the period for:
Interest paid on deposits and borrowings	Interest paid on deposits and borrowings	$	13,010	$	3,164	Interest paid on deposits and borrowings	$	30,478	$	5,707
Net income taxes (received) paid		(7)		17
Net income taxes paid (received)						Net income taxes paid (received)	1,192		(31)
Non-cash investing and financing activities:						Non-cash investing and financing activities:

Transfer of loans to repossessed assets						Transfer of loans to repossessed assets	—		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.~~financial institutions. The Bank is subject to competition from other financial institutions and service providers, and is also subject to state and federal regulations. As of ~~March 31,~~June 30, 2023, FBB had the following wholly-owned subsidiaries: First Business Specialty Finance, LLC (“FBSF”), First Madison Investment Corp. (“FMIC”), ABKC Real Estate, LLC (“ABKC”), FBB Real Estate 2, LLC (“FBB RE 2”), Mitchell Street Apartments Investment, LLC (“Mitchell Street”), and FBB Tax Credit Investment, LLC (“FBB Tax Credit”).

Basis of Presentation

The 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, 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.

Management of the Corporation is required to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that could significantly change in the near-term include the value of securities and interest rate swaps, level of the allowance for credit losses, lease residuals, property under operating leases, goodwill, and income taxes. The results of operations for the three and six months ended ~~March 31,~~June 30, 2023, are not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, 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.

~~Other than the adoption of new standards, the~~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, ~~2022.~~

~~Adoption~~2022 and updates from the adoption of new accounting standards disclosed in the Corporation’s Form 10-Q for the quarter ended March 31, 2023.

~~ASU 2016 - 13~~Recent Accounting Pronouncements

~~On January 1,~~In March 2023, the ~~Corporation adopted ASU 2016-03~~ Financial ~~Instruments -~~Accounting Standards Board issued Accounting Standards Update No. 2023-02 “Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit ~~losses (“ASC 326”): Measurement~~Structures Using the Proportional Amortization Method (a consensus of ~~Credit Losses~~the Emerging Issues Task Force).” The amendments in this Update permit reporting entities to elect to account for their tax equity investments, regardless of the program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. A reporting entity may make an accounting policy election to apply the proportional amortization method on ~~Financial Instruments, as amended, which replaces~~a tax-credit-program-by-tax-credit-program basis rather than electing to apply the ~~incurred loss methodology with an expected loss methodology that is referred~~proportional amortization method at the reporting entity level or 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.

individual investments. The Corporation ~~adopted ASC 326 using~~is assessing 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 net decrease to retained earningsimpact 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.

this standard.

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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 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 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.

~~Table of Contents~~

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 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 past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as changes in external conditions, such as changes in unemployment rates, property values, or other relevant factors.

~~Accrued interest receivable on loans totaled $8.9 million at March 31, 2023 and is excluded from the estimate of credit losses.~~

~~ACL - Loans - Collectively Evaluated~~

~~The ACL is measured on a collective pool basis when similar risk characteristics exist. The Corporation has identified the following portfolio segments:~~

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

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

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

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

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

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

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

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

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

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

•SBA - Loans originated in accordance with the guidelines of the Small Business Administration (“SBA”). As the Corporation prefers to sell the guaranteed portion, the on-balance sheet loans are primarily unguaranteed.

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

Consumer and other - Consumer loans 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.

~~Table of Contents~~

~~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~~