Regulatory Capital

The Corporation and the Bank are subject to various regulatory capital requirements administered by Federal and the State of Wisconsin 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 Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory practices. The Corporation’s and the Bank’s 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, 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 Bank. The Corporation’s and the Bank’s 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 financial institutions to strongly consider eliminating, deferring or significantly reducing dividends if: (i) net income available to common stockholders 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 and 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 Bank is 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 Bank 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 Bank 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 Bank 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.

In July 2013, the FRB and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision’s 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 increased 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 in assets to retain, through a one-time election, the past treatment for accumulated other comprehensive income, which did 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, was 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 will increase each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019.

As of March 31, 2018, the Corporation’s capital levels exceeded the regulatory minimums and Bank’s capital levels remained characterized as well capitalized under the regulatory framework. The following table summarizes both the Corporation’s and Bank’s capital ratios and the ratios required by their federal regulators at March 31, 2018 and December 31, 2017:



	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 March 31, 2018
Total capital (to risk-weighted assets)
Consolidated	$	216,519	11.78	%	$	147,099	8.00	%	$	181,575	9.875	%	N/A		N/A
First Business Bank	209,579		11.45		146,437		8.00		180,758		9.875		$	183,046	10.00	%
Tier 1 capital (to risk-weighted assets)
Consolidated	$	171,638	9.33	%	$	110,324	6.00	%	$	144,801	7.875	%	N/A		N/A
First Business Bank	188,425		10.29		109,828		6.00		144,149		7.875		$	146,437	8.00	%
Common equity tier 1 capital (to risk-weighted assets)
Consolidated	$	161,616	8.79	%	$	82,743	4.50	%	$	117,219	6.375	%	N/A		N/A
First Business Bank	188,425		10.29		82,371		4.50		116,692		6.375		$	118,980	6.50	%
Tier 1 leverage capital (to adjusted assets)
Consolidated	$	171,638	9.26	%	$	74,127	4.00	%	$	74,127	4.00	%	N/A		N/A
First Business Bank	188,425		10.19		73,929		4.00		73,929		4.00		$	92,412	5.00	%



	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, 2017
Total capital (to risk-weighted assets)
Consolidated	$	214,501	11.98	%	$	143,219	8.00	%	$	165,597	9.250	%	N/A		N/A
First Business Bank	207,986		11.66		142,736		8.00		165,038		9.250		$	178,420	10.00	%
Tier 1 capital (to risk-weighted assets)
Consolidated	$	169,176	9.45	%	$	107,414	6.00	%	$	129,792	7.250	%	N/A		N/A
First Business Bank	186,374		10.45		107,052		6.00		129,354		7.250		$	142,736	8.00	%
Common equity tier 1 capital (to risk-weighted assets)
Consolidated	$	159,157	8.89	%	$	80,561	4.50	%	$	102,939	5.750	%	N/A		N/A
First Business Bank	186,374		10.45		80,289		4.50		102,591		5.750		$	115,973	6.50	%
Tier 1 leverage capital (to adjusted assets)
Consolidated	$	169,176	9.54	%	$	70,920	4.00	%	$	70,920	4.00	%	N/A		N/A
First Business Bank	186,374		10.56		70,617		4.00		70,617		4.00		$	88,272	5.00	%