Regulatory Capital

The Corporation and the Banks are subject to various regulatory capital requirements administered by Federal, State of Wisconsin and State of Kansas banking agencies. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions on the part of regulators, that if undertaken, could have a direct material effect on the Banks’ assets, liabilities and certain off-balance-sheet items as calculated under regulatory practices. The Corporation’s and the Banks’ capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The Corporation regularly reviews and updates when appropriate its Capital and Liquidity Action Plan (the “Capital Plan”), which is designed to help ensure appropriate capital adequacy, to plan for future capital needs and to ensure that the Corporation serves as a source of financial strength to the Banks. The Corporation’s and the Banks’ Boards of Directors and management teams adhere to the appropriate regulatory guidelines on decisions which affect their respective capital positions, including but not limited to, decisions relating to the payment of dividends and increasing indebtedness.

As a bank holding company, the Corporation’s ability to pay dividends is affected by the policies and enforcement powers of the Board of Governors of the Federal Reserve system (the “Federal Reserve”). Federal Reserve guidance urges companies to strongly consider eliminating, deferring or significantly reducing dividends if: (i) net income available to common shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividend; (ii) the prospective rate of earnings retention is not consistent with the bank holding company’s capital needs and overall current prospective financial condition; or (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital ratios. Management intends, when appropriate under regulatory guidelines, to consult with the Federal Reserve Bank of Chicago and provide it with information on the Corporation’s then-current and prospective earnings and capital position in advance of declaring any cash dividends. As a Wisconsin corporation, the Corporation is subject to the limitations of the Wisconsin Business Corporation Law, which prohibit the Corporation from paying dividends if such payment would: (i) render the Corporation unable to pay its debts as they become due in the usual course of business, or (ii) result in the Corporation’s assets being less than the sum of its total liabilities plus the amount needed to satisfy the preferential rights upon dissolution of any stockholders with preferential rights superior to those stockholders receiving the dividend.

The Banks are also subject to certain legal, regulatory and other restrictions on their ability to pay dividends to the Corporation. As a bank holding company, the payment of dividends by the Banks to the Corporation is one of the sources of funds the Corporation could use to pay dividends, if any, in the future and to make other payments. Future dividend decisions by the Banks and the Corporation will continue to be subject to compliance with various legal, regulatory and other restrictions as defined from time to time.

Qualitative measures established by regulation to ensure capital adequacy require the Corporation and the Banks to maintain minimum amounts and ratios of Total Common Equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to adjusted total assets. These risk-based capital requirements presently address credit risk related to both recorded and off-balance-sheet commitments and obligations. Management believes, as of December 31, 2016, that the Corporation and the Banks met all applicable capital adequacy requirements.

In July 2013, the FRB and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for U.S. banks. These rules are applicable to all financial institutions that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as bank and savings and loan holding companies other than “small bank holding companies” (generally non-publicly traded bank holding companies with consolidated assets of less than $1 billion). Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by the Corporation. The rules include a new Common Equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, require a minimum ratio of Total Capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. The rules also permit banking organizations with less than $15 billion to retain, through one-time election, the existing treatment for accumulated other comprehensive income, which would not affect regulatory capital. The Corporation elected to retain this treatment, which reduces the volatility of regulatory capital ratios. A new capital conservation buffer, comprised of Common Equity Tier 1 capital, is also established above the regulatory minimum capital requirements. This capital conservation buffer will be phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increase each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019.

The phase-in period for the final rules became effective for the Corporation on January 1, 2015, with full compliance with all of the final rules’ requirements phased in over a multi-year schedule, to be fully phased-in by January 1, 2019. As of December 31, 2016, the Corporation’s and the Banks’ capital levels remained characterized as well capitalized under the new rules.

The following table summarizes both the Corporation’s and Banks’ capital ratios and the ratios required by their federal regulators at December 31, 2016 and 2015, respectively:



	Actual				Minimum Required for Capital Adequacy Purposes				For Capital Adequacy Purposes Plus Capital Conservation Buffer				Minimum Required to Be Well Capitalized Under Prompt Corrective Action Requirements
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in Thousands)
As of December 31, 2016
Total capital (to risk-weighted assets)
Consolidated	$	204,117	11.74	%	$	139,101	8.00	%	$	149,968	8.625	%	N/A		N/A
First Business Bank	147,811		11.55		102,362		8.00		110,360		8.625		$	127,953	10.00	%
First Business Bank – Milwaukee	24,347		11.02		17,680		8.00		19,062		8.625		22,101		10.00
Alterra Bank	31,699		13.27		19,106		8.00		20,599		8.625		23,882		10.00
Tier 1 capital (to risk-weighted assets)
Consolidated	$	160,964	9.26		$	104,326	6.00		$	115,193	6.625	%	N/A		N/A
First Business Bank	134,208		10.49		76,772		6.00		84,769		6.625		$	102,362	8.00
First Business Bank – Milwaukee	22,323		10.10		13,260		6.00		14,642		6.625		17,680		8.00
Alterra Bank	28,685		12.01		14,329		6.00		15,822		6.625		19,106		8.00
Common equity tier 1 capital (to risk-weighted assets)
Consolidated	$	150,960	8.68		$	78,244	4.50		$	89,111	5.125	%	N/A		N/A
First Business Bank	134,208		10.49		57,579		4.50		65,576		5.125		$	83,170	6.50
First Business Bank – Milwaukee	22,323		10.10		9,945		4.50		11,327		5.125		14,365		6.50
Alterra Bank	28,685		12.01		10,747		4.50		12,240		5.125		15,524		6.50
Tier 1 leverage capital (to adjusted assets)
Consolidated	$	160,964	9.07		$	70,985	4.00		$	70,985	4.00	%	N/A		N/A
First Business Bank	134,208		10.40		51,600		4.00		51,600		4.00		$	64,500	5.00
First Business Bank – Milwaukee	22,323		9.15		9,758		4.00		9,758		4.00		12,198		5.00
Alterra Bank	28,685		10.58		10,842		4.00		10,842		4.00		13,552		5.00



	Actual				Minimum Required for Capital Adequacy Purposes				Minimum Required to Be Well Capitalized Under Prompt Corrective Action Requirements
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in Thousands)
As of December 31, 2015
Total capital (to risk-weighted assets)
Consolidated	$	189,163	11.11	%	$	136,208	8.00	%	N/A		N/A
First Business Bank	141,388		11.12		101,754		8.00		$	127,193	10.00	%
First Business Bank – Milwaukee	20,931		12.03		13,914		8.00		17,392		10.00
Alterra Bank	30,300		11.39		21,279		8.00		26,598		10.00
Tier 1 capital (to risk-weighted assets)
Consolidated	$	149,920	8.81	%	$	102,156	6.00	%	N/A		N/A
First Business Bank	128,852		10.13		76,316		6.00		$	101,754	8.00	%
First Business Bank – Milwaukee	19,172		11.02		10,435		6.00		13,914		8.00
Alterra Bank	28,278		10.63		15,959		6.00		21,279		8.00
Common equity tier 1 capital (to risk-weighted assets)
Consolidated	$	139,920	8.22	%	$	76,617	4.50	%	N/A		N/A
First Business Bank	128,852		10.13		57,237		4.50		$	110,669	6.50	%
First Business Bank – Milwaukee	19,172		11.02		7,826		4.50		82,675		6.50
Alterra Bank	28,278		10.63		11,969		4.50		11,305		6.50
Tier 1 leverage capital (to adjusted assets)
Consolidated	$	149,920	8.63	%	$	69,466	4.00	%	N/A		N/A
First Business Bank	128,852		10.44		49,359		4.00		$	61,698	5.00	%
First Business Bank – Milwaukee	19,172		7.81		9,821		4.00		12,276		5.00
Alterra Bank	28,278		9.89		11,441		4.00		14,301		5.00

The following table reconciles stockholders’ equity to federal regulatory capital at December 31, 2016 and 2015, respectively:



	As of December 31,
	2016			2015
	(In Thousands)
Stockholders’ equity of the Corporation	$	161,650		$	150,832
Net unrealized and accumulated losses on specific items	522			80
Disallowed servicing assets	(652		)	(370		)
Disallowed goodwill and other intangibles	(10,560		)	(10,622		)
Junior subordinated notes	10,004			10,000
Tier 1 capital	160,964			149,920
Allowable general valuation allowances and subordinated debt	43,153			39,243
Total capital	$	204,117		$	189,163