2 unchanged sentences
When used in this report the words or phrases “may,” “could,” “should,” “hope,” “might,” “believe,” “expect,” “plan,” “assume,” “intend,” “estimate,” “anticipate,” “project,” “likely,” or similar expressions are intended to identify “forward-looking statements.” Such statements are subject to risks and uncertainties, including among other things:
−Removed: • Adverse changes in the economy or business conditions, either nationally or in our markets, including, without limitation, the adverse effects of the COVID-19 pandemic on the global, national, and local economy, which may effect the Corporation’s credit quality, revenue, and business operations.
+Added: • Adverse changes in the economy or business conditions, either nationally or in our markets, including, without limitation, inflation, supply chain issues, labor shortages, and the adverse effects of the COVID-19 pandemic on the global, national, and local economy, which may effect the Corporation’s credit quality, revenue, and business operations.
• Competitive pressures among depository and other financial institutions nationally and in our markets.
19 unchanged sentences
Our products and services include those for business banking, private wealth, and bank consulting.
−Removed: Within business banking, we offer commercial lending, consumer and other lending, asset-based lending, accounts receivable financing, equipment financing, floorplan financing, vendor financing, SBA lending and servicing, treasury management services, and company retirement plans.
−Removed: Our private wealth services for executives and individuals include trust and estate administration, financial planning, investment management, and private banking.
+Added: Within business banking, we offer commercial lending, asset-based lending, accounts receivable financing, equipment financing, floorplan financing, vendor financing, SBA lending and servicing, treasury management services, and company retirement plans.
+Added: Our private wealth services for executives and individuals include trust and estate administration, financial planning, investment management, consumer lending, and private banking.
For other financial institutions, our bank consulting experts provide investment portfolio administrative services, asset liability management services, and asset liability management process validation.
We do not utilize a branch network to attract retail clients.
−Removed: Our operating philosophy is predicated on deep client relationships within our commercial bank markets and skilled expertise within our nationwide specialty finance business lines, combined with the efficiency of centralized administrative functions, such as information technology, loan and deposit operations, finance and accounting, credit administration, compliance, marketing, and human resources.
+Added: Our operating philosophy is predicated on deep client relationships within our commercial bank markets and extensive expertise within our nationwide specialized lending business lines, combined with the efficiency of centralized administrative functions, such as information technology, loan and deposit operations, finance and accounting, credit administration, compliance, marketing, and human resources.
Our focused model allows experienced staff to provide the level of financial expertise needed to develop and maintain long-term relationships with our clients.
Long-Term Strategic Plan
−Removed: In early 2019, the Corporation finalized the development of its five year strategic plan and began the implementation of strategies and initiatives that will drive successful execution.
−Removed: The Corporation’s objective over this five year period is to excel by building the best team that works together to impact client success more than any other financial partner.
+Added: In early 2019, management finalized the development of its five year strategic plan and began the implementation of strategies and initiatives that will drive successful execution.
+Added: Management’s objective over this five year period is to excel by building an expert team with diverse experiences who work together to impact client success more than any other financial partner.
To meet this objective, we identified four key strategies which are linked to corporate financial goals, all business lines, and centralized administration functions to ensure communication and execution are consistent at all levels of the Corporation.
4 unchanged sentences
• We will optimize our business lines for diversification and performance.
−Removed: On March 11, 2020, the World Health Organization declared COVID-19, the disease caused by the novel coronavirus, a pandemic as a result of the global spread of the coronavirus illness.
−Removed: In response to the outbreak, federal and state authorities in the U.S.
−Removed: introduced various measures to try to limit or slow the spread of the virus, including travel restrictions, nonessential business closures, stay-at-home orders, and strict social distancing.
−Removed: The Corporation activated its Pandemic Preparedness Plan to protect the health of employees and clients, which includes temporarily limiting lobby hours and transitioning the vast majority of the Corporation’s workforce to remote work.
−Removed: The Corporation has not incurred any significant disruptions to its business activities.
−Removed: The full impact of COVID-19 remains uncertain.
−Removed: It has caused substantial disruption in international and U.S.
−Removed: economies, markets, and employment.
−Removed: The outbreak is having a significant adverse impact on certain industries the Corporation serves, including retail, restaurants and food services, hospitality, and entertainment.
−Removed: Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its effects on clients and prospects, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect the Corporation’s financial performance.
−Removed: Despite these tremendous headwinds, in 2020 we remained focused on building and developing our diverse team, creating efficiencies, growing deposits, and optimizing business line performance.
−Removed: These efforts resulted in strong operating performance, highlighted by record top line revenue growth and record loan and deposit growth, excluding Paycheck Protection Program (“PPP”) loans.
−Removed: Our key profitability metrics of return on average equity and return on average assets were negatively impacted by elevated provision for loan and lease losses primarily due to the uncertainty surrounding the COVID-19 pandemic.
−Removed: However, we remain steadfast in the pursuit of our long-term goals and firmly believe our 2020 performance positions the Corporation well for strong and sustainable earnings growth in 2021 and beyond.
The following table below shows the Corporation’s performance for the years ended December 31, 2021, 2020, and 2019 in comparison to the key performance indicators included in the Corporation’s long-term strategic plan.
−Removed: Key Performance Indicators FYE 2019 FYE 2020 2023 Goal
+Added: As of and for the Year Ended December 31,
+Added: Key Performance Indicators 2019 2020 2021 2023 Goal
Return on average equity (“ROAE”) 12.55% 8.64% 16.21% 13.50%
9 unchanged sentences
Results as of and for the year ended December 31, 2021 include:
−Removed: • Net income for the year ended December 31, 2020 was $17.0 million, decreasing 27.2% compared to $23.3 million for the year ended December 31, 2019.
−Removed: • Diluted earnings per common share were $1.97 for the year ended December 31, 2020, decreasing 26.5% compared to $2.68 in the prior year.
+Added: • Net income for the year ended December 31, 2021 was $35.8 million, increasing 110.6% compared to $17.0 million for the year ended December 31, 2020.
+Added: • Diluted earnings per common share were $4.17 for the year ended December 31, 2021, increasing 111.4% compared to $1.97 in the prior year.
• Return on average assets and return on average equity for the year ended December 31, 2021 were 1.37% and 16.21% respectively, compared to 0.70% and 8.64%, respectively, for 2020.
1 unchanged sentence
Pre-tax, pre-provision adjusted return on average assets for the year ended December 31, 2021 was 1.58%, compared to 1.59% for the year ended December 31, 2020.
−Removed: • Net interest margin was 3.40% for the year ended December 31, 2020, declining 21 basis points from 3.61% for the year ended December 31, 2019.
−Removed: Adjusted net interest margin, which excludes certain one-time and discrete items, was 3.28% for the year ended December 31, 2020, declining five basis points from 3.33% for the year ended December 31, 2019.
+Added: • Net interest margin was 3.44% for the year ended December 31, 2021, increasing 4 basis points from 3.40% for the year ended December 31, 2020.
+Added: Adjusted net interest margin, which excludes certain one-time and discrete items, was 3.21% for the year ended December 31, 2021, decreasing seven basis points from 3.28% for the year ended December 31, 2020.
• Fees in lieu of interest, defined as prepayment fees, asset-based loan fees, non-accrual interest, and loan fee amortization, totaled $11.2 million for the year ended December 31, 2021, increasing 19.8% compared to $9.3 million for the year ended December 31, 2020.
−Removed: Loan fee amortization for the year ended December 31, 2020 includes PPP processing fee income of $5.3 million.
−Removed: • Top line revenue, which consists of net interest income and non-interest income, grew 11.5% to $104.0 million for the year ended December 31, 2020, compared to $93.3 million for the same period in 2019.
−Removed: • Provision for loan and lease losses was $16.8 million for the year ended December 31, 2020, compared to $2.1 million for the year ended December 31, 2019.
−Removed: Net charge-offs as a percentage of average loans and leases increased to 0.39% for the year ended December 31, 2020, compared to 0.18% for the year ended December 31, 2019.
−Removed: • In January 2021, the Corporation received a recovery of approximately $2.0 million on a loan charged off in a prior year.
−Removed: While this recovery will have a positive impact on the Company’s provision for loan and lease losses in the first quarter of 2021, it is not necessarily indicative of a trend or a reflection of the Company’s ultimate provision for the first quarter.
−Removed: • Non-interest income for the year ended December 31, 2020 totaled $26.9 million, or 25.9% of total revenue, compared to $23.4 million, or 25.1% of total revenue for the year ended December 31, 2019.
−Removed: • Non-interest expense for the year ended December 31, 2020 was $68.9 million, increasing 3.3% compared to $66.7 million for the year ended December 31, 2019.
−Removed: Operating expense, which excludes certain one-time and discrete items, totaled $65.6 million for the year ended December 31, 2020, increasing 5.6% compared to $62.1 million for the year ended December 31, 2019.
−Removed: • The efficiency ratio, which excludes certain one-time and discrete items, improved to 63.09% for the year ended December 31, 2020, down from 66.59% for the year ended December 31, 2019.
+Added: Loan fee amortization for the year ended December 31, 2021 and December 31, 2020 includes PPP processing fee income of $7.3 million and $5.3 million, respectively.
+Added: • Top line revenue, which consists of net interest income and non-interest income, grew 8.4% to $112.8 million for the year ended December 31, 2021, compared to $104.0 million for the year ended December 31, 2020.
+Added: • Provision for loan and lease losses was a net benefit of $5.8 million for the year ended December 31, 2021, compared to provision expense of $16.8 million for the year ended December 31, 2020.
+Added: Net recoveries as a percentage of average loans and leases were 0.07% for the year ended December 31, 2021, compared to net charge-offs of 0.39% for the year ended December 31, 2020.
• Total assets at December 31, 2021 increased $85.1 million, or 3.3%, to $2.653 billion from $2.568 billion at December 31, 2020.
• Period-end gross loans and leases receivable at December 31, 2021 increased $93.4 million, or 4.4%, to $2.239 billion from $2.146 billion as of December 31, 2020.
−Removed: Average gross loans and leases of $2.011
−Removed: billion increased $307.4 million, or 18.0% for the year ended December 31, 2020, compared to $1.704 billion for the same period in 2019.
+Added: Average gross loans and leases of $2.179 billion increased $167.8 million, or 8.3% for the year ended December 31, 2021, compared to $2.011 billion for the same period in 2020.
• Period-end gross loans and leases receivable, excluding net PPP loans, at December 31, 2021 increased $291.5 million, or 15.18%, to $2.212 billion from $1.921 billion as of December 31, 2020.
Average gross loans and leases, excluding net PPP loans, of $2.027 billion increased $230.6 million, or 12.8% for the year ended December 31, 2021, compared to $1.796 billion for the same period in 2020.
−Removed: • PPP loans and PPP deferred processing fees were $228.9 million and $3.5 million, respectively, at December 31, 2020.
+Added: • PPP loans and PPP deferred processing fees were $27.9 million and $557,000, respectively, at December 31, 2021.
Average PPP loans, net of deferred processing fees, were $152.3 million for the year ended December 31, 2021.
−Removed: • Non-performing assets were $26.7 million and 1.04% of total assets as of December 31, 2020, compared to $23.5 million and 1.12% of total assets as of December 31, 2019.
−Removed: Non-performing assets to total assets, excluding net PPP loans was 1.14% as of December 31, 2020.
−Removed: • The allowance for loan and lease losses as of December 31, 2020 increased $9.0 million, or 46.1%, to $28.5 million, compared to $19.5 million as of December 31, 2019.
+Added: • Non-performing assets were $6.5 million or 0.25% of total assets as of December 31, 2021, compared to $26.7 million or 1.04% of total assets as of December 31, 2020.
+Added: Non-performing assets to total assets, excluding net PPP loans were 0.25% as of December 31, 2021, compared to 1.14% as of December 31, 2020.
+Added: • The allowance for loan and lease losses as of December 31, 2021 decreased $4.2 million, or 14.7%, to $24.3 million, compared to $28.5 million as of December 31, 2020.
The allowance for loan and lease losses was 1.09% of total loans as of December 31, 2021, compared to 1.33% as of December 31, 2020.
−Removed: Excluding net PPP loans, the allowance for loan and lease losses increased to 1.48% of total loans as of December 31, 2020.
+Added: Excluding net PPP loans, the allowance for loan and lease losses decreased to 1.10% of total loans as of December 31, 2021, compared to 1.48% as of December 31, 2020.
• Period-end in-market deposits at December 31, 2021 increased $245.3 million, or 14.6%, to $1.928 billion from $1.683 billion as of December 31, 2020.
1 unchanged sentence
• Trust assets under management and administration increased by $671.7 million, or 29.9%, to $2.921 billion at December 31, 2021, compared to $2.249 billion at December 31, 2020.
−Removed: • On January 28, 2021, the Board of Directors of the Company adopted a new share repurchase program that authorizes the Company to repurchase up to $5 million of the Company’s common stock over a period of approximately twelve months, ending on January 31, 2022.
−Removed: The Company suspended its prior share repurchase program in March 2020 due to the uncertainty surrounding the COVID-19 pandemic.
−Removed: Under the previous plan, which was initiated in September 2019 and expired September 30, 2020, the Company had repurchased $3.5 million of the $5 million authorized in the Company’s common stock.
−Removed: COVID-19 Update
−Removed: As of December 31, 2020, the Corporation had $228.9 million in PPP loans outstanding and $3.5 million in deferred processing fees outstanding.
−Removed: The processing fees are deferred and recognized over the contractual life of the loan, or accelerated when forgiven and repaid, as an adjustment of yield using the interest method.
−Removed: For the year ended December 31, 2020, the Corporation recognized $5.3 million in PPP fees, recording 60% of the $8.8 million in deferred Small Business Administration (“SBA”) processing fees for loans originated in 2020.
−Removed: The SBA provides a guaranty to the lender of 100% of principal and interest, unless the lender violated an obligation under the agreement.
−Removed: As loan losses are expected to be immaterial, if any at all, due to the guaranty, management excluded the gross PPP loans from the allowance for loan and lease losses calculation.
−Removed: In January 2021, the Corporation began accepting applications for the SBA’s most recent phase of the PPP program, with an emphasis on supporting in-market businesses and non-profit organizations.
−Removed: As of February 1, 2021, the Corporation had processed and approved over 300 applications for the most recent phase of the PPP program for approximately $85.0 million.
−Removed: Liquidity Sources
−Removed: Management has reviewed all primary and secondary sources of liquidity in preparation for any unforeseen funding needs due to the COVID-19 pandemic and prioritized based on available capacity, term flexibility, and cost.
−Removed: As of December 31, 2020, the Corporation had the following sources of liquidity, including the Corporation’s ability to participate in the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”):
−Removed: (in thousands) December 31, 2020 December 31, 2019
−Removed: Short-term investments $ 27,371 $ 50,995
−Removed: PPPLF availability 225,323 —
−Removed: Collateral value of unencumbered loans (FHLB borrowing availability) 250,127 212,516
−Removed: Market value of unencumbered securities (Fed Discount Window and FHLB borrowing availability) 137,357 174,661
−Removed: Total sources of liquidity $ 640,178 $ 438,172
−Removed: In addition to the above primary sources of liquidity, as of December 31, 2020, the Corporation also had access to $53.5 million in federal funds lines with various correspondent banks and significant experience accessing the highly liquid brokered deposit market.
−Removed: Capital Strength
−Removed: The Corporation’s capital ratios continued to exceed the highest required regulatory benchmark levels.
−Removed: • Total capital to risk-weighted assets at December 31, 2020 was 11.25%, tier 1 capital to risk-weighted assets was 8.96%, tier 1 leverage capital to adjusted average assets was 7.99%, and common equity tier 1 capital to risk-weighted assets was 8.53%.
−Removed: Tangible common equity to tangible assets was 7.60%.
−Removed: Excluding net PPP loans, tier 1 leverage capital to adjusted average assets and tangible common equity to tangible assets were 8.97% and 8.33%, respectively.
−Removed: • As previously announced, during the fourth quarter of 2020, the Corporation’s Board of Directors declared a regular quarterly dividend of $0.165 per share.
−Removed: The dividend was paid on November 12, 2020 to shareholders of record at the close of business on November 2, 2020.
−Removed: Measured against fourth quarter 2020 diluted earnings per share of $0.71, the dividend represents a 23.2% payout ratio.
−Removed: The Board of Directors routinely considers dividend declarations as part of its normal course of business.
−Removed: • On January 29, 2021, the Corporation’s Board of Directors declared a quarterly cash dividend on its common stock of $0.18 per share.
−Removed: The quarterly dividend represents a 9% increase over the quarterly dividend declared in October 2020, and, based on fourth quarter 2020 earnings per share, a dividend payout ratio of 25.4%.
−Removed: Deferral Requests
−Removed: The Corporation provided loan modifications deferring payments up to six months to certain borrowers impacted by COVID-19 who were current in their payments at the inception of the Corporation’s loan modification program.
−Removed: As of December 31, 2020, the Corporation had deferred loans outstanding of $27.0 million, or 1.4% of gross loans and leases, excluding gross PPP loans, compared to $131.5 million, or 7.1% as of September 30, 2020 and $323.2 million, or 18.6% as of June 30, 2020.
−Removed: The following tables represent a breakdown of the deferred loan balances by industry segment and collateral type:
−Removed: (Dollars in thousands) December 31, 2020
−Removed: Collateral Type
−Removed: Industries Description Balance Real Estate Non Real Estate
−Removed: Accommodation and Food Services $ 12,229 $ 12,229 $ —
−Removed: Real Estate and Rental and Leasing 5,975 5,975 —
−Removed: Manufacturing 3,398 — 3,398
−Removed: Arts, Entertainment, and Recreation 3,095 1,051 2,044
−Removed: Transportation and Warehousing 573 — 573
−Removed: Construction 447 447 —
−Removed: Professional, Scientific, and Technical Services 383 383
−Removed: Other Services (except Public Administration) 367 212 155
−Removed: Health Care and Social Assistance 205 — 205
−Removed: Educational Services 195 195 —
−Removed: Administrative and Support and Waste Management and Remediation Services 143 143
−Removed: Total deferred loan balances $ 27,010 $ 20,109 $ 6,901
−Removed: The following table is a further breakdown of the deferred loan balances by certain credit quality indicators.
−Removed: Please refer to Note 5 — Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses for the risk category definitions.
−Removed: December 31, 2020
−Removed: (Dollars in thousands) I II III IV Total
−Removed: Total deferred loan balances $ 13,466 $ 13,448 $ 58 $ 38 $ 27,010
−Removed: % of Total 49.9 % 49.8 % 0.2 % 0.1 % 100.0 %
−Removed: September 30, 2020
−Removed: (Dollars in thousands) I II III IV Total
−Removed: Total deferred loan balances $ 69,984 $ 40,371 $ 20,045 $ 1,069 $ 131,469
−Removed: % of Total 53.2 % 30.7 % 15.2 % 0.8 % 100.0 %
−Removed: Exposure to Stressed Industries
−Removed: Certain industries have been and are expected to be particularly impacted by social distancing, quarantines, and the economic impact of the COVID-19 pandemic, such as the following:
−Removed: (Dollars in thousands) December 31, 2020 September 30, 2020 June 30, 2020
−Removed: Balance % Gross Loans and Leases (1)
−Removed: Balance % Gross Loans and Leases (1)
−Removed: Balance % Gross Loans and Leases (1)
−Removed: $ 62,719 3.3 % $ 66,696 3.6 % $ 70,028 4.0 %
−Removed: Hospitality 80,832 4.2 % 78,786 4.3 % 73,502 4.2 %
−Removed: Entertainment 14,208 0.7 % 16,323 0.9 % 16,675 1.0 %
−Removed: Restaurants & Food Service 24,854 1.3 % 26,728 1.4 % 24,884 1.4 %
−Removed: Total outstanding exposure $ 182,613 9.5 % $ 188,533 10.2 % $ 185,089 10.6 %
−Removed: (1) Excluding net PPP loans.
−Removed: (2) Includes $48.9 million, $52.0 million, and $51.7 million in loans secured by commercial real estate as of December 31, 2020, September 30, 2020, and June 30, 2020, respectively.
−Removed: As of December 31, 2020, the Corporation had no meaningful direct exposure to the energy sector, airline industry, or retail consumer, and does not participate in shared national credits.
−Removed: Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its effects on our clients and prospects, and on the national and local economy as a whole, there can be no assurances as to how the pandemic may ultimately affect the Corporation’s loan portfolio.
Results of Operations
1 unchanged sentence
Top line revenue, comprised of net interest income and non-interest income, increased 8.4% for the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to a $7.6 million, or 9.8%, increase in net interest income and a $1.2 million, or 4.3%, increase in non-interest income.
−Removed: The increase in net interest income was driven by an increase in average loans and leases outstanding, and loan fees collected in lieu of interest, while the increase in non-interest income was primarily a result of a $2.7 million increase in swap fees and a $1.4 million increase in gains on the sale of SBA loans.
−Removed: These favorable variances in top line revenue were partially offset by a reduction in net interest margin which decreased 21 basis points to 3.40% for the year ended December 31, 2020 compared to 3.61% in the prior year.
+Added: The increase in net interest income was driven by an increase in PPP loan processing fees, a decrease in interest expense, and an increase in average loans and leases outstanding and related interest income, partially offset by a reduction in asset-based loan fees in lieu of interest.
+Added: The increase in non-interest income was primarily due to a $2.2 million increase in trust and investment fee income, $2.2 million increase in other fee income, $1.1 million increase in gains on the sale of SBA loans, and $680,000 increase in loan fee income.
+Added: These favorable variances in top line revenue were partially offset by a reduction in swap fee income, which decreased $5.5 million compared to the year ended December 31, 2020.
The components of top line revenue were as follows:
6 unchanged sentences
Return on Average Assets and Return on Average Equity
−Removed: Return on average assets (“ROAA”) was 0.70% for the year ended December 31, 2020 compared to 1.14% for the year ended December 31, 2019.
−Removed: The decrease in ROAA can be attributed principally to a $14.7 million increase in provision for loan and lease losses during the same time period.
−Removed: The increase in the provision for loan and lease losses for the year ended December 31, 2020 was primarily driven by $7.8 million of net charge-offs, a $6.4 million increase in general reserve related to the uncertainty of the economic conditions resulting from the COVID-19 pandemic, and a $2.3 million increase in the general reserve due to loan growth.
−Removed: Please refer to the Components of the Provision for Loan and Lease Losses included in the Provision for Loan and Lease Losses discussion below.
−Removed: The COVID-19 related credit headwind in 2020 was partially offset by record top line revenue.
+Added: ROAA was 1.37% for the year ended December 31, 2021, compared to 0.70% for the year ended December 31, 2020 principally due to a $22.6 million decrease in provision for loan and lease losses.
+Added: Please refer to the Components of the Provision for Loan and Lease Losses i ncluded in the Provision for Loan and Lease Losses section below for further discussion on the reasons driving the improvement in profitability.
We consider ROAA a critical metric to measure the profitability of our organization and how efficiently our assets are deployed.
ROAA also allows us to better benchmark our profitability to our peers without the need to consider different degrees of leverage which can ultimately influence return on equity measures.
−Removed: Return on average equity (“ROAE”) for the year ended December 31, 2020 was 8.64% compared to 12.55% for the year ended December 31, 2019.
−Removed: The primary reasons for the increase in ROAE are consistent with the net income variance explanations as discussed under Return on Average Assets above.
+Added: ROAE for the year ended December 31, 2021 was 16.21% compared to 8.64% for the year ended December 31, 2020.
+Added: The primary reason for the increase in ROAE is consistent with the net income variance explanation as discussed under Return on Average Assets above.
We view ROAE as an important measurement for monitoring profitability and continue to focus on improving our return to our shareholders by enhancing the overall profitability of our client relationships, controlling our expenses, and minimizing our costs of credit.
Efficiency Ratio and Pre-Tax, Pre-Provision Adjusted Earnings
−Removed: Efficiency ratio is a non-GAAP measure representing non-interest expense excluding the effects of the SBA recourse benefit or provision, impairment of tax credit investments, net gains or losses on foreclosed properties, amortization of other intangible assets, losses on early extinguishment of debt, and other discrete items, if any, divided by operating revenue, which is equal to net interest income plus non-interest income less realized net gains or losses on securities, if any.
+Added: Efficiency ratio is a non-GAAP measure representing non-interest expense excluding the effects of the SBA recourse benefit, impairment of tax credit investments, net losses on foreclosed properties, amortization of other intangible assets, losses on early extinguishment of debt, and other discrete items, if any, divided by operating revenue, which is equal to net interest income plus non-interest income less realized net gains or losses on securities, if any.
Pre-tax, pre-provision adjusted earnings is defined as operating revenue less operating expense.
−Removed: In the judgment of the Corporation’s management, the adjustments made to non-interest expense and non-interest income allow investors and analysts to better assess the Corporation’s operating expenses in relation to its core operating revenue by removing the volatility that is associated with certain one-time items and other discrete items.
−Removed: The efficiency ratio improved to 63.09% for the year ended December 31, 2020, compared to 66.59% for the year ended December 31, 2019.
−Removed: This improvement was the result of exceptional 2020 operating revenue attributable to above average fee income generated by the Corporation’s commercial loan interest rate swap program and SBA loan sales, as well as an increase in net interest income driven by an 18.0% increase in average loans and leases receivable and $2.8 million, or 43.8%, increase in fees in lieu of interest.
−Removed: The increase in fees in lieu of interest included $5.3 million in PPP fees.
−Removed: The increase in operating revenue was partially offset by a $3.8 million, or 9.1%, increase in compensation expense reflecting in part the Corporation’s continued investment in its growth strategy.
−Removed: Full-time equivalent employees (“FTE”) were 301 as of December 31, 2020, increasing by 13, or 4.5%, from 288 as of December 31, 2019.
−Removed: The period-end increase in FTEs as of
−Removed: December 31, 2020 consisted of six net new production positions and seven net new support positions across multiple business lines.
−Removed: We believe we will continue to generate modest positive operating leverage and progress towards enhancing our long-term efficiency ratio at a measured pace as we focus on strategic initiatives directed toward revenue growth.
−Removed: These initiatives include efforts to expand our specialty finance lines of business, increase our commercial banking market share, and scale our private wealth management business in our less mature commercial banking markets.
+Added: Management believes the adjustments made to non-interest expense and non-interest income allow investors and analysts to better assess the Corporation’s operating expenses in relation to its core operating revenue by removing the volatility that is associated with certain one-time items and other discrete items.
+Added: The efficiency ratio was 63.49% for the year ended December 31, 2021, compared to 63.09% for the year ended December 31, 2020.
+Added: The Corporation generated positive operating leverage as pre-tax, pre-provision adjusted earnings increased $2.8 million, or 7.2%, to $41.2 million for the year ended December 31, 2021, compared to $38.4 million for the same period in 2020.
+Added: The increase in operating revenue was partially offset by a $5.9 million, or 12.8%, increase in compensation.
+Added: We believe the Corporation will generate positive operating leverage annually and progress towards enhancing the long-term efficiency ratio at a measured pace as we focus on strategic initiatives directed toward revenue growth, process improvement, and automation.
+Added: These initiatives include efforts to grow our existing specialized lending revenues, increase our commercial banking market share, and scale our private wealth management business in our less mature commercial banking markets.
We believe the efficiency ratio and pre-tax, pre-provision adjusted earnings allow investors and analysts to better assess the Corporation’s operating expenses in relation to its top line revenue by removing the volatility that is associated with certain non-recurring and other discrete items.
10 unchanged sentences
25 35 (10) (28.6)
−Removed: SBA recourse (benefit) provision (278) 188 (466) NM
+Added: SBA recourse benefit (76) (278) 202 (72.7)
Impairment of tax credit investments
−Removed: 2,395 4,094 (1,699) (41.5)
+Added: — 2,395 (2,395) NM
Loss on early extinguishment of debt — 744 (744) NM
−Removed: Total operating expense $ 65,619 $ 62,149 $ 3,470 5.6
+Added: Total operating expense (a) $ 71,571 $ 65,619 $ 5,952 9.1
Net interest income $ 84,662 $ 77,071 $ 7,591 9.8
Total non-interest income 28,100 26,940 1,160 4.3
−Removed: Net loss on sale of securities
−Removed: (4) (46) 42 (91.3)
+Added: Net gain (loss) on sale of securities 29 (4) 33 NM
Adjusted non-interest income 28,071 26,944 1,127 4.2
−Removed: Total operating revenue $ 104,015 $ 93,325 $ 10,690 11.5
+Added: Total operating revenue (b) $ 112,733 $ 104,015 $ 8,718 8.4
Efficiency ratio
63.49 % 63.09 %
−Removed: Pre-tax, pre-provision adjusted earnings $ 38,396 $ 31,176 $ 7,220 23.2
+Added: Pre-tax, pre-provision adjusted earnings (b-a) $ 41,162 $ 38,396 $ 2,766 7.2
Average total assets 2,605,008 2,419,616 185,392 7.7
84 unchanged sentences
Consumer and other loans (1)
+Added: (117) 243 126
Total loans and leases receivable (1)
23 unchanged sentences
Net interest income increased by $7.6 million, or 9.8%, for the year ended December 31, 2021, compared to the year ended December 31, 2020.
−Removed: The increase compared to the prior year was principally due to an increase in average loans and leases outstanding and loan fees collected in lieu of interest.
−Removed: Average gross loans and leases of $2.011 billion increased by $307.4 million, or 18.0% for the year ended December 31, 2020, compared to $1.704 billion for the same period in 2019, while loan fees collected in lieu of interest increased 43.8% to $9.3 million, compared to $6.5 million during the same period of comparison.
−Removed: These favorable variances were partially offset by net interest margin compression as the decline in rate across all interest-earning assets, in particular total loans and leases receivable, was greater than the decline in rate across all interest-bearing liabilities.
−Removed: Excluding fees in lieu of interest and interest income from PPP loans, net interest income increased $2.2 million, or 3.5%.
+Added: The increase compared to the prior year was principally due to an increase in average loans and leases outstanding, increase in PPP loan processing fees, and rate-driven decrease in interest expense.
+Added: Average gross loans and leases of $2.179 billion increased by $167.8 million, or 8.3% for the year ended December 31, 2021, compared to $2.011 billion for the same period in 2020.
+Added: Loan fees collected in lieu of interest increased 19.8% to $11.2 million, compared to $9.3 million during the same period of comparison.
+Added: Excluding PPP fee amortization, loan fees collected in lieu of interest decreased 4.6% to $3.8 million, compared to $4.0 million during the same period of comparison.
Excluding net PPP loans, average gross loans and leases for the year ended December 31, 2021 increased $230.6 million, or 12.8%, compared to the year ended December 31, 2020.
+Added: Excluding fees in lieu of interest and interest income from PPP loans, net interest income increased $6.4 million, or 9.7%.
The yield on average earning assets for the year ended December 31, 2021 was 3.90%, a decrease of 26 basis points compared to 4.16% for the year ended December 31, 2020.
−Removed: This decrease was principally due to the decrease in LIBOR and Prime rates and related impact on variable-rate loans, in addition to the renewal of fixed-rate loans and reinvestment of security
−Removed: cash flows at historically low interest rates.
−Removed: This decrease was partially offset by the increase in recurring loan fees collected in lieu of interest.
−Removed: Excluding the impact of loan fees in lieu of interest in both 2020 and 2019, the yield on average earning assets for the year ended December 31, 2020 was 3.75%, a decrease of 119 basis points compared to 4.94% for the year ended December 31, 2019.
−Removed: The yield on average loans and leases receivable for the year ended December 31, 2020 was 4.43%, a decrease of 122 basis points compared to 5.65% for the year ended December 31, 2019.
−Removed: The primary reasons for this decrease are consistent with the average interest-earning asset yield variance explanations discussed above.
−Removed: Excluding the impact of loan fees collected in lieu of interest in both 2020 and 2019, the yield on average loans and leases receivable for the year ended December 31, 2020 was 3.97%, a decrease of 130 basis points compared to 5.27% for the year ended December 31, 2019.
+Added: This decrease was principally due to the renewal of fixed-rate loans and reinvestment of security cash flows at historically low interest rates and a decrease in recurring loan fees in lieu of interest.
+Added: This decrease was partially offset by the increase in PPP loan processing fees and reduction in average PPP loans earning 1% interest.
+Added: Excluding the impact of recurring loan fees in lieu of interest and PPP fees in both 2021 and 2020, the yield on average earning assets for the year ended December 31, 2021 was 3.45%, a decrease of 30 basis points compared to 3.75% for the year ended December 31, 2020.
The average rate paid on interest-bearing liabilities was 0.63% for the year ended December 31, 2021, a decrease of 36 basis points from 0.99% for the year ended December 31, 2020.
−Removed: The average rate paid declined as the Corporation decreased deposit rates in response to the Federal Open Market Committee’s (“FOMC”) decision to lower the target federal funds rate 225 basis points from July 2019 to March 2020.
−Removed: For the year ended December 31, 2020 compared to the year ended December 31, 2019, the average target federal funds rate decreased 174 basis points.
−Removed: In addition to the reduction in deposit rates, average wholesale deposits, which are typically longer duration and therefore a higher cost funding source than in-market deposits, decreased $82.7 million, or 36.7%.
−Removed: Consistent with the Corporation’s longstanding funding strategy to manage interest rate risk and use the most efficient and cost effective source of wholesale funds, a combination of fixed rate wholesale deposits and fixed rate FHLB advances are used at various maturity terms to meet the Corporation’s funding needs.
−Removed: Average FHLB advances for the year ended December 31, 2020 increased $93.4 million to $379.9 million at an average rate paid of 1.45%.
−Removed: As of December 31, 2020, the weighted average original maturity of our FHLB term advances was 5.5 years, compared to 5.4 years as of December 31, 2019.
−Removed: Average wholesale deposits, consisting of brokered certificates of deposit and deposits gathered from internet listing services, for the year ended December 31, 2020 decreased $82.7 million to $142.6 million at an average rate paid of 1.71%.
−Removed: As of December 31, 2020, the weighted average original maturity of our wholesale deposits was 4.1 years, compared to 5.3 years as of December 31, 2019.
−Removed: The rate paid on average wholesale funding is greater than the cost of in-market deposits and changes more gradually because the portfolio includes longer original maturities as the Corporation match-funds its longer-term fixed rate loans to mitigate interest rates risk.
−Removed: Net interest margin decreased 21 basis points to 3.40% for the year ended December 31, 2020, compared to 3.61% for the year ended December 31, 2019.
−Removed: Excluding fees collected in lieu of interest, PPP loan interest income, Federal Reserve interest income, and FHLB dividends net interest margin measured 3.28% for the year ended December 31, 2020, compared to 3.33% for the year ended December 31, 2019.
−Removed: The decrease was primarily due to the decrease in average yield on loans and leases receivable partially offset by a decrease in the average rate paid on in-market deposits and wholesale funding.
−Removed: Management believes its success in growing in-market deposits, disciplined loan pricing, and increased production in existing higher-yielding specialty finance lines of business will allow the Corporation to achieve a net interest margin of at least 3.50%, on average, over the long-term.
+Added: The average rate paid declined as the Corporation decreased deposit rates and renewed maturing FHLB advances at historically low fixed rates.
+Added: In addition to the reduction in deposit rates and FHLB advance renewals, average wholesale deposits, which are typically longer duration and therefore a higher cost funding source than in-market deposits, decreased $22.8 million, or 16.0%.
+Added: Net interest margin increased four basis points to 3.44% for the year ended December 31, 2021, compared to 3.40% for the year ended December 31, 2020.
+Added: Adjusted net interest margin measured 3.21% for the year ended December 31, 2021, compared to 3.28% for the year ended December 31, 2020.
+Added: Adjusted net interest margin is a non-GAAP measure representing net interest income excluding the fees in lieu of interest and other recurring but volatile components of net interest margin divided by average interest-earning assets less average net PPP loans, if any, and other recurring but volatile components of average interest-earning assets.
+Added: Fees in lieu of interest are defined as prepayment fees, asset-based loan fees, non-accrual interest, and loan fee amortization.
+Added: The decrease in adjusted net interest margin was primarily due to the decrease in average yield on loans and leases receivable and investment securities, partially offset by a decrease in the average rate paid on in-market deposits and wholesale funding.
+Added: Management believes its success in growing in-market deposits, disciplined loan pricing, and increased production in existing higher-yielding specialized lending lines of business will allow the Corporation to achieve a net interest margin of at least 3.50%, on average, over the long-term.
However, the collection of loan fees in lieu of interest is an expected source of volatility to quarterly net interest income and net interest margin, particularly given the nature of the Corporation’s asset-based lending business and the Corporation’s participation in the PPP.
Net interest margin may also experience volatility due to events such as the collection of interest on loans previously in non-accrual status or the accumulation of significant short-term deposit inflows.
−Removed: Despite an uncertain rate environment, management expects to effectively manage the Corporation’s liability structure in both term and rate.
−Removed: Further, we expect to attract new in-market deposit relationships which we believe will contribute to our ability to maintain an appropriate cost of funds.
−Removed: Period end in-market deposits - comprised of all transaction accounts, money market accounts, and non-wholesale deposits - increased $304.1 million, or 22.1%, to $1.683 billion at December 31, 2020, compared to $1.379 billion at December 31, 2019.
−Removed: Average in-market deposits increased $297.4 million, or 23.4%, to $1.569 billion for the year ended December 31, 2020, compared to $1.271 billion for the year ended December 31, 2019.
−Removed: This significant increase in deposits was due to successful business development efforts combined with excess liquidity resulting from our clients participation in the PPP.
+Added: Due to significant loan growth in 2021 and expectations for low double-digit loan growth in 2022, management believes excess liquidity will revert back to historical averages in 2022.
Provision for Loan and Lease Losses
1 unchanged sentence
Refer to Allowance for Loan and Lease Losses , below, for further information regarding our allowance for loan and lease loss methodology.
−Removed: The full impact of COVID-19 remains uncertain.
−Removed: It has caused substantial disruption in international and U.S.
−Removed: economies, markets, and employment.
−Removed: The outbreak is having a significant adverse impact on certain industries the Corporation serves, including retail, hospitality, entertainment, and restaurants and food services.
−Removed: Due to COVID-19 and the economic impact it could have on the Corporation’s loan portfolio, additional detail about certain exposure to stressed industries is included in the section titled COVID-19 Update , above.
−Removed: Provision for loan and lease losses increased to $16.8 million for the year ended December 31, 2020 compared to $2.1 million for the year ended December 31, 2019.
−Removed: The increase in provision for loan and lease losses included $8.1 million in charge-offs, partially offset by the release of $5.2 million in related specific reserves.
−Removed: The 2020 charge-off activity was principally driven by a $3.3 million charge-off for a previously reserved legacy SBA loan in the restaurant industry and a $2.8 million charge-off for a previously reserved conventional loan in the hospitality industry.
−Removed: In addition, changes in the general reserve increased the provision for loan and lease losses $949,000 due to historical loss rate updates from net charge-off activity, $5.5 million due to qualitative factor changes related to the uncertainty of the economic conditions during the COVID-19 pandemic, and $2.3 million commensurate with an increase in loan and lease receivables.
+Added: The Corporation recognized a $5.8 million provision benefit for the year ended December 31, 2021, compared to $16.8 million provision expense for the year ended December 31, 2020.
+Added: The provision benefit for the year ended December 31, 2021 was primarily due to a net recovery of $1.6 million, a $4.5 million reduction in the general reserve from improving historical loss rates, and a $2.2 million decrease in specific reserves.
+Added: These decreases were partially offset by a $2.9 million increase in the general reserve due to loan growth.
The following table shows the components of the provision for loan and lease losses for the year ended December 31, 2021 compared to the year ended December 31, 2020.
8 unchanged sentences
Total provision for loan and lease losses $ (5,803) $ 16,808
−Removed: The legacy on-balance sheet SBA portfolio, defined as SBA 7(a) and Express loans originated in 2016 and prior, has been a source of elevated non-performing assets.
−Removed: Additional information on our legacy SBA portfolio is as follows:
−Removed: 2020 December 31,
−Removed: (In Thousands)
−Removed: Performing loans:
−Removed: Off-balance sheet loans
−Removed: $ 23,354 $ 35,029
−Removed: On-balance sheet loans
−Removed: 11,117 19,697
−Removed: 34,471 54,726
−Removed: Non-performing loans:
−Removed: Off-balance sheet loans
−Removed: On-balance sheet loans
−Removed: Off-balance sheet loans
−Removed: 25,285 42,319
−Removed: On-balance sheet loans
−Removed: 18,552 31,734
−Removed: $ 43,837 $ 74,053
−Removed: The addition of specific reserves on impaired loans represents new specific reserves established when collateral shortfalls or government guaranty deficiencies are present, while conversely the release of specific reserves represents the reduction of previously established reserves that are no longer required.
+Added: The addition of specific reserves on impaired loans represents new specific reserves established when collateral shortfalls or government guaranty deficiencies are present, while conversely the release of specific reserves represents the
+Added: reduction of previously established reserves that are no longer required.
Changes in the allowance for loan and lease losses due to subjective factor changes reflect management’s evaluation of the level of risk within the portfolio based upon several factors for each portfolio segment.
1 unchanged sentence
This amount is net of the release of any specific reserve that may have already been provided.
−Removed: Change in the inherent risk of the portfolio is primarily influenced by the overall growth in gross loans and leases and an analysis of loans previously charged off, as well as movement of existing loans and leases in and out of an impaired loan classification where a specific evaluation of a
−Removed: particular credit may be required rather than the application of a general reserve loss rate.
+Added: Change in the inherent risk of the portfolio is primarily influenced by the overall growth in gross loans and leases and an analysis of loans previously charged off, as well as movement of existing loans and leases in and out of an impaired loan classification where a specific evaluation of a particular credit may be required rather than the application of a general reserve loss rate.
Refer to Asset Quality , below, for further information regarding the overall credit quality of our loan and lease portfolio.
−Removed: Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its potential effects on clients and prospects, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect the Corporation’s loan portfolio.
Non-Interest Income
Non-interest income increased by $1.2 million, or 4.3%, to $28.1 million for the year ended December 31, 2021, from $26.9 million for the year ended December 31, 2020.
−Removed: Management continues to focus on revenue growth from multiple non-interest income sources in order to maintain a diversified revenue stream through greater contribution from fee-based revenues.
−Removed: Total non-interest income accounted for 25.9% of our total revenues in 2020 compared to 25.1% in 2019, exceeding our long-term goal of 25% for the second consecutive year.
−Removed: The increase in total non-interest income for the year ended December 31, 2020 primarily reflected record commercial loan interest rate swap fee income and a significant increase in gains on the sale of SBA loans, partially offset by a decrease in other non-interest income.
+Added: Management continues to focus on revenue growth from multiple non-interest income sources in order to maintain a diversified revenue stream through greater contributions from fee-based revenues.
+Added: Total non-interest income accounted for 24.9% of our total revenues in 2021 compared to 25.9% in 2020.
+Added: The increase in total non-interest income for the year ended December 31, 2021 primarily reflected record private wealth management services fee income, an increase in other non-interest income and loan fees, and a significant increase in gain on the sale of SBA loans.
+Added: These favorable variances were partially offset by a decrease in commercial loan interest rate swap fee income.
The components of non-interest income were as follows:
9 unchanged sentences
1,413 1,402 11 0.8
−Removed: Net loss on sale of securities (4) (46) 42 (91.3)
+Added: Net gain (loss) on sale of securities 29 (4) 33 NM
Swap fees 1,368 6,860 (5,492) (80.1)
4 unchanged sentences
(1) Fee income ratio is fee income, per the above table, divided by top line revenue (defined as net interest income plus non-interest income).
−Removed: Private wealth management services fee income increased by $414,000, or 5.1%, to a record $8.6 million for the year ended December 31, 2020 compared to $8.2 million for the year ended December 31, 2019.
−Removed: Private wealth management services fee income is primarily driven by the amount of assets under management and administration, as well as the mix of business at different fee structures, and can be positively or negatively influenced by the timing and magnitude of volatility within the capital markets.
−Removed: This increase was driven by growth in assets under management and administration attributable to both new client relationships and increased equity market values.
+Added: Private wealth management services fee income increased by $2.2 million, or 25.2%, to a record $10.8 million for the year ended December 31, 2021 compared to $8.6 million for the year ended December 31, 2020.
+Added: Private wealth management services fee income is primarily driven by the amount of assets under management and administration, as well as the mix of business at different fee structures, and can be positively or negatively influenced by the timing and magnitude of volatility within the equity markets.
+Added: This increase was driven by growth in assets under management and administration attributable to both new client relationships and increased equity values.
At December 31, 2021, our trust assets under management and administration were a record $2.921 billion, or 29.9% more than trust assets under management and administration of $2.249 billion at December 31, 2020.
We expect to continue to increase our revenue from assets under management and administration as we deepen existing and grow new client relationships in our less mature commercial bank markets, but market volatility may also affect the actual change in revenue.
−Removed: Commercial loan swap fees increased by $2.7 million to $6.9 million for the year ended December 31, 2020 from $4.2 million for the year ended December 31, 2019.
+Added: Gain on sale of SBA loans for the year ended December 31, 2021 totaled $4.0 million, an increase of $1.1 million, or 39.5%, from the same period in 2020.
+Added: Management believes SBA 7a loan production, while variable based on timing of closings, will continue to increase annually at a measured pace.
+Added: Loan fees increased $680,000, or 37.2%, to $2.5 million for the year ended December 31, 2021, compared to $1.8 million for the same period in 2020.
+Added: The increase was principally due to recognizing a full year of floorplan financing
+Added: curtailment fees and an increase in SBA servicing fee income commensurate with the Corporation’s growing SBA sold portfolio.
+Added: Other non-interest income increased by $2.2 million to $4.1 million for the year ended December 31, 2021, compared to $1.9 million for the year ended December 31, 2020.
+Added: The increase was primarily due to an above average increase in returns from the Corporation’s investments in mezzanine funds.
+Added: Commercial loan interest rate swap fee income was $1.4 million for the year ended December 31, 2021, compared to $6.9 million for the year ended December 31, 2020 as it became less advantageous for clients to secure long-term, fixed-rate financing with an interest rate swap relative to other fixed-rate alternatives.
We originate commercial real estate loans in which we offer clients a floating rate and an interest rate swap.
2 unchanged sentences
The aggregate amortizing notional value of interest rate swaps with various borrowers was $640.6 million as of December 31, 2021, compared to $629.1 million as of December 31, 2020.
−Removed: Interest rate swaps continue to be an attractive product for our commercial borrowers, although associated fee income can be variable from period to period based on client demand and the interest rate environment in any given quarter.
−Removed: Gain on sale of SBA loans for the year ended December 31, 2020 totaled $2.9 million, an increase of $1.4 million, or 98.7%, from the same period in 2019.
−Removed: Gross SBA loan commitments closed for the year ended December 31, 2020 totaled $42.5 million, compared to $24.4 million for the same period in 2019.
−Removed: Based on this recent activity, an enhanced business development team, and a growing pipeline of new business, management believes the annual gain on sale of SBA loans will continue to increase at a measured pace moving forward.
−Removed: Other non-interest income decreased by $1.6 million to $1.9 million for the year ended December 31, 2020, compared to $3.6 million for the year ended December 31, 2019.
−Removed: The prior year period included above average returns from the Corporation’s investments in mezzanine funds and gains recognized on end-of-term buyout agreements related to the Corporation’s equipment finance business line.
+Added: Interest rate swaps can be an attractive product for our commercial borrowers, although associated fee income can be variable from period to period based on client demand and the interest rate environment in any given quarter.
Non-Interest Expense
1 unchanged sentence
Operating expense, which excludes certain one-time and discrete items as defined in the Efficiency Ratio table above, increased $6.0 million, or 9.1%, to $71.6 million for the year ended December 31, 2021 compared to $65.6 million for the year ended December 31, 2020.
−Removed: The increase in operating expense was primarily due to an increase in compensation, computer software expense, FDIC insurance, and collateral liquidation costs.
−Removed: These increases were partially offset by a decrease in marketing and other non-interest expense.
+Added: The increase in operating expense was primarily due to an increase in compensation, marketing, and data processing.
+Added: These increases were partially offset by a decrease in other non-interest expense.
The components of non-interest expense were as follows:
10 unchanged sentences
FDIC insurance 1,143 1,238 (95) (7.7)
−Removed: Collateral liquidation costs 328 119 209 NM
+Added: Collateral liquidation costs 265 328 (63) (19.2)
Net loss on foreclosed properties 15 383 (368) (96.1)
−Removed: Impairment on tax credit investments 2,395 4,094 (1,699) (41.5)
−Removed: SBA recourse (benefit) provision (278) 188 (466) NM
+Added: Impairment on tax credit investments — 2,395 (2,395) NM
+Added: SBA recourse (benefit) provision (76) (278) 202 (72.7)
Loss on early extinguishment of debt — 744 (744) NM
6 unchanged sentences
(1) Total operating expense represents total non-interest expense, adjusted to exclude the impact of discrete items as previously defined in the non-GAAP efficiency ratio calculation above.
−Removed: Compensation expense increased by $3.8 million, or 9.1%, to $45.9 million for the year ended December 31, 2020 from $42.0 million for the year ended December 31, 2019.
−Removed: The increase reflects new hires, annual merit increases, growth in employee benefit costs, and an increase in individual incentive compensation.
−Removed: Average full-time equivalent employees (“FTE”) were 301 for the three months ended December 31, 2020, increasing by 16, or 5.6%, from 285 for the three months ended December 31, 2019.
−Removed: We believe we will continue to generate modest positive operating leverage and progress towards enhancing our long-term efficiency ratio at a measured pace as we focus on strategic initiatives directed toward revenue growth.
−Removed: These initiatives include efforts to expand our specialty finance lines of business, increase our commercial banking market share, and scale our private wealth management business in our less mature commercial banking markets.
−Removed: We expect to continue investing in talent, both in the form of additional business development and operational staff, to support our long-term strategic plan.
−Removed: Computer software expense increased by $486,000, or 14.2%, to $3.9 million for the year ended December 31, 2020 from $3.4 million for the year ended December 31, 2019.
−Removed: The increase was principally due to investments in technology platforms to improve the client experience and continuing our strategic focus on scaling the Corporation to efficiently execute our growth strategy.
−Removed: FDIC insurance expense increased $597,000, or 93.1%, to $1.2 million for the year ended December 31, 2020 from $641,000 for the year ended December 31, 2019.
−Removed: FDIC insurance expense for the year ended December 31, 2019 benefited from a reduction in FDIC insurance expense as the Deposit Insurance Fund (“DIF”) reached 1.38%, exceeding the statutorily required minimum ratio of 1.35% and requiring the FDIC to distribute assessment credits to small banks for their portion of their assessments that contributed to the growth in the reserve ratio.
−Removed: The Corporation received a credit of $458,000 during the year ended December 31, 2019.
−Removed: Management expects FDIC insurance expense to increase commensurate with asset growth going forward.
−Removed: Collateral liquidation costs for the year ended December 31, 2020 were $328,000 compared to $119,000 for the year ended December 31, 2019.
−Removed: The increase primarily reflects our special assets team’s continued efforts to exit impaired legacy SBA loans.
−Removed: The Corporation incurred a $744,000 loss, recognized through non-interest expense, on the early extinguishment of $59.5 million in FHLB term advances late in the second quarter of 2020, as the Corporation lowered wholesale funding costs and improved the Corporation’s funding position.
−Removed: Management believes this strategy will help stabilize net interest margin with the expectation of a low interest rate environment for an extended period of time.
−Removed: Marketing expense decreased by $641,000, or 28.9%, to $1.6 million for the year ended December 31, 2020 from $2.2 million for the year ended December 31, 2019.
+Added: Compensation expense increased by $5.9 million, or 12.8%, to $51.7 million for the year ended December 31, 2021 from $45.9 million for the year ended December 31, 2020 principally due to an increase in average FTEs, annual merit increases, growth in employee benefit costs and increase in incentive compensation.
+Added: The increase reflects a $2.1 million, or
+Added: 7.0%, increase in employee salaries and a $2.3 million, or 35.5%, increase in individual and corporate performance-based incentive compensation accruals reflecting strong company performance relative to bonus criteria.
+Added: Average FTEs were 307 for the year ended December 31, 2021, increasing by 16, or 5.5%, from 291 for the year ended December 31, 2020.
+Added: Performance-based incentive compensation accruals will reset to target performance at the start of 2022 and will be evaluated quarterly and increased or decreased based on management’s forecast of full year performance for the Corporation.
+Added: Marketing expense increased by $442,000, or 28.0%, to $2.0 million for the year ended December 31, 2021 from $1.6 million for the year ended December 31, 2020.
During 2020, the Corporation’s adherence to COVID-19 restrictions resulted in a reduction in marketing expenses, such as meals and entertainment, and advertisement expense.
+Added: Management expects marketing expense to continue to increase modestly and return to pre-pandemic levels over the next several quarters primarily driven by sponsorships and business development activities.
+Added: Data processing expense increased by $353,000, or 12.91%, to $3.1 million for the year ended December 31, 2021 from $2.7 million for the year ended December 31, 2020.
+Added: The increase in data processing expense was due to the increase in services associated with deposit accounts, as well as implementation costs for various client-facing products and functionality.
+Added: Management expects data processing expense to continue to increase modestly commensurate with the increase in deposit accounts.
Other non-interest expense decreased by $840,000, or 27.6%, to $2.2 million for the year ended December 31, 2021 from $3.0 million for the year ended December 31, 2020.
−Removed: The decrease was principally due to a decrease in general business-related expenses due to the Corporation’s adherence to COVID-19 restrictions.
−Removed: In addition, the prior year included a one-time right-of-use impairment of $299,000 from vacating and subleasing unused office space in our Kansas City market.
−Removed: The decline in other non-interest expense was partially offset by a $461,000 credit valuation adjustment (“CVA”) related to the commercial loan interest rate swap program.
+Added: The decrease was principally due to a reduction in the credit valuation adjustment (“CVA”) related to the commercial loan interest rate swap program.
The CVA represents a change in the market value of the Company’s commercial loan interest rate swaps to estimate potential borrower credit risk within the portfolio.
The CVA can vary from period to period based on the size of the portfolio, credit metrics, and the interest rate environment in any given quarter.
−Removed: There was no CVA for the year ended December 31, 2019.
−Removed: Impairment on tax credit investments decreased $1.7 million, or 41.5%, to $2.4 million for the year ended December 31, 2020, compared to $4.1 million for the year ended December 31, 2019.
−Removed: The impairment on tax credit investments is related to historic rehabilitation tax credits and new market tax credits that are more than offset by a reduction to income tax expense, which, including the aforementioned gain on state tax credits, results in a net benefit to earnings.
−Removed: The Corporation recognized $1.9 million of impairment associated with the recognition of $2.8 million in federal historic tax credits in 2020, compared to $3.6 million of impairment associated with the recognition of $5.2 million in federal historic tax credits in 2019.
−Removed: SBA recourse provision for the year ended December 31, 2020 was a benefit of $278,000 compared to expense of $188,000 for the year ended December 31, 2019.
−Removed: The total recourse reserve balance was $723,000, or 0.9% of total sold SBA loans outstanding, at December 31, 2020, compared to $1.3 million, or 1.8% of total sold SBA loans outstanding, at December 31, 2019.
−Removed: Changes to SBA recourse reserves may be a source of non-interest expense volatility in future quarters, though the magnitude of this volatility should continue to diminish over time as the outstanding balance of sold legacy SBA loans continues to decline.
+Added: The CVA was $191,000 as of December 31, 2021, compared to $461,000 as of December 31, 2020.
+Added: The Corporation incurred a $744,000 loss, recognized through non-interest expense, on the early extinguishment of $59.5 million in FHLB term advances late in the second quarter of 2020, as the Corporation lowered wholesale funding costs and improved the Corporation’s funding position.
+Added: Management believes this strategy helped stabilize net interest margin during the extended low interest rate environment in 2021.
+Added: No tax credits or related impairment was recognized for the year ended December 31, 2021.
+Added: The impairment on tax credit investments for the year ended December 31, 2020 were related to a new market and historic tax credits.
+Added: The impairment on tax credits were more than offset by a reduction to income tax expense resulting in a net benefit to earnings in the year the credits are earned in 2020.
Income tax expense was $11.3 million for the year ended December 31, 2021, compared to $1.3 million for the year ended December 31, 2020.
−Removed: The Corporation recognized federal historic tax credits in both 2020 and 2019, which reduced income tax expense by $2.8 million and $5.2 million, respectively.
+Added: The Corporation recognized federal historic tax credits in 2020 which reduced income tax expense by $2.8 million.
+Added: No tax credits were recognized in 2021.
The effective tax rate for the year ended December 31, 2021 was 24.0% compared to 7.2% for the year ended December 31, 2020.
−Removed: The effective tax rate, excluding tax credits and other discrete items, for the year ended December 31, 2020 was 19.5% compared to 22.1% for the year ended December 31, 2019.
+Added: The effective tax rate, excluding tax credits and other discrete items, for the year ended December 31, 2020 was 19.5%.
+Added: For 2022, the Company expects to report an effective tax rate of 22%-23%, excluding discrete items, as management intends to continue actively pursuing tax credit opportunities.
FINANCIAL CONDITION
−Removed: At December 31, 2020 total assets were $2.568 billion, representing an increase of $471.1 million, or 22.5%, from $2.097 billion at December 31, 2019.
−Removed: The increase in total assets was primarily driven by an increase in loans and leases receivable, other assets, and securities available-for-sale, partially offset by a decrease in short-term investments.
−Removed: The increase in loans and leases receivable was principally due to the Corporation’s participation in the PPP program and an increase in commercial real estate loans.
−Removed: As of December 31, 2020, the Corporation had $228.9 million in PPP loans outstanding and $3.5 million in deferred processing fees outstanding.
−Removed: Short-term investments
−Removed: Short-term investments decreased by $23.6 million to $27.4 million at December 31, 2020 from $51.0 million at December 31, 2019.
−Removed: Short-term investments primarily consist of interest-bearing deposits held at the Federal Reserve Bank (“FRB”) and commercial paper.
+Added: Total assets increased by $85.1 million, or 3.3%, to $2.653 billion as of December 31, 2021 compared to $2.568 billion at December 31, 2020.
+Added: The increase in total assets was primarily driven by an increase in loans and leases receivable, securities available-for-sale, and short-term investments, partially offset by a decrease in cash and derivatives.
+Added: Total liabilities increased by $58.8 million, or 2.5%, to $2.420 billion as of December 31, 2021 compared to $2.362 billion at December 31, 2020.
+Added: The increase in total liabilities was principally due to an increase in deposits, partially offset by a decrease in FHLB advances and derivatives.
+Added: Cash and cash equivalents
+Added: Cash and cash equivalents include short-term investments and cash and due from banks.
+Added: Short-term investments increased by $20.0 million to $47.4 million at December 31, 2021 from $27.4 million at December 31, 2020.
+Added: The increase in short-term investments was offset by a decrease in cash and due from banks driven by a reduction in cash letter in transit.
+Added: Short-term investments primarily consist of interest-bearing deposits held at the Federal Reserve Bank (“FRB”).
We value the safety and soundness provided by the FRB, and therefore, we incorporate short-term investments in our on-balance sheet liquidity program.
As of December 31, 2021 and 2020, interest-bearing deposits held at the FRB were $47.0 million and $26.7 million, respectively.
−Removed: Although the majority of short-term investments consist of deposits with the FRB, we also make investments in commercial paper.
−Removed: As of December 31, 2020, we did not hold any commercial paper, compared to a total of $5.9 million as of December 31, 2019.
−Removed: Due to current economic conditions, we decided to temporarily exit this short-term investment.
−Removed: We approach our decisions to purchase commercial paper with similar rigor and underwriting standards as applied to our loan and lease portfolio.
−Removed: The original maturities of the commercial paper are usually 60 days or less and provide an attractive yield in comparison to other short-term alternatives.
−Removed: These investments also assist us in maintaining a shorter duration of our overall investment portfolio which we believe is necessary to be in a position to benefit from an anticipated change in the yield curve level and shape.
−Removed: In general, the level of our short-term investments will be influenced by the timing of deposit gathering, scheduled maturities of wholesale deposits, funding of loan and lease growth when opportunities are presented, and the level of our securities portfolio.
+Added: In general, the level of our cash and short-term investments will be influenced by the timing of deposit gathering, scheduled maturities of wholesale deposits, funding of loan and lease growth when opportunities are presented, and the level of our securities portfolio.
Please refer to the section entitled Liquidity and Capital Resources for further discussion.
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We use a third-party pricing service as our primary source of market prices for the securities portfolio.
−Removed: On a quarterly basis, we validate the reasonableness of prices received from this source through independent verification of the
−Removed: portfolio, data integrity validation through comparison of current price to prior period prices, and an expectation-based analysis of movement in prices based upon the changes in the related yield curves and other market factors.
+Added: On a quarterly basis, we validate the reasonableness of prices received from this source through independent verification of the portfolio, data integrity validation through comparison of current price to prior period prices, and an expectation-based analysis of movement in prices based upon the changes in the related yield curves and other market factors.
On a periodic basis, we review the third-party pricing vendor’s methodology for pricing relevant securities and the results of its internal control assessments.
4 unchanged sentences
A securities portfolio with a longer average duration will exhibit greater market price volatility than a securities portfolio with a shorter average duration in a changing rate environment.
−Removed: During the year ended December 31, 2020, we recognized unrealized holding gains of $3.5 million before income taxes through other comprehensive income.
−Removed: These gains were the result of a decrease in interest rates.
+Added: During the year ended December 31, 2021, we recognized unrealized holding losses of $4.3 million before income taxes through other comprehensive income.
+Added: These losses were the result of a decrease in interest rates.
No securities within our portfolio were deemed to be other-than-temporarily impaired as of December 31, 2021.
−Removed: We sold approximately $839,000 of securities during the year ended December 31, 2020 to proactively manage our securities portfolio and meet our long-term investment objectives.
−Removed: As of December 31, 2020 no securities were classified as trading securities.
+Added: We sold approximately $15.0 million of securities during the year ended December 31, 2021 to proactively manage our securities portfolio and meet our long-term investment objectives.
+Added: As of December 31, 2021 no securities were classified as
+Added: trading securities.
At December 31, 2021, $70.3 million of our securities were pledged to secure various obligations, including interest rate swap contracts and municipal deposits.
4 unchanged sentences
Available-for-sale:
+Added: Treasuries $ 4,971 $ 4,914 $ — $ —
government agency securities - government-sponsored enterprises
2 unchanged sentences
Residential mortgage-backed securities - government issued 19,563 19,661 9,894 10,403
−Removed: 9,894 10,403 16,119 16,348
Residential mortgage-backed securities - government-sponsored enterprises
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$ 19,746 $ 20,276 $ 26,374 $ 27,333
+Added: Treasuries represent treasury bonds issued by the United States Treasury.
government agency securities - government-sponsored enterprises represent securities issued by FNMA and the SBA.
Municipal securities include securities issued by various municipalities located primarily within Wisconsin and are primarily general obligation bonds that are tax-exempt in nature.
−Removed: Residential and commercial mortgage-backed securities -
−Removed: government issued represent securities guaranteed by GNMA.
+Added: Residential and commercial mortgage-backed securities - government issued represent securities guaranteed by GNMA.
Residential and commercial mortgage-backed securities - government-sponsored enterprises include securities guaranteed by FHLMC, FNMA, and the FHLB.
11 unchanged sentences
Available-for-sale:
+Added: treasuries $ — — % $ 4,914 1.00 % $ — — % $ — — % $ 4,914
government agency securities - government-sponsored enterprises
26 unchanged sentences
$ 3,793 $ 7,289 $ 7,223 $ 1,441 $ 19,746
−Removed: Derivative Activities
The Bank’s investment policies allow the Bank to participate in hedging strategies or to use financial futures, options, forward commitments, or interest rate swaps with prior approval from the Board.
−Removed: The Bank utilizes, from time to time, derivative instruments in the course of their asset/liability management.
+Added: The Bank utilizes, from time to time, derivative instruments in the course of its asset/liability management.
As of December 31, 2021 and 2020, the Bank did not hold any derivative instruments that were designated as fair value hedges.
3 unchanged sentences
The derivative contracts have mirror-image terms, which results in the positions’ changes in fair value offsetting through earnings each period.
−Removed: The credit risk and risk of non-performance embedded in the fair value calculations is different between the dealer counterparties and the commercial borrowers which may result in a difference in the changes in the fair value of the mirror-image swaps.
−Removed: The Corporation incorporates credit valuation adjustments (“CVA”) to appropriately reflect both its own non-performance risk and the counterparty’s risk in the fair value measurements.
−Removed: When evaluating the fair value of its derivative contracts for the effects of non-performance and credit risk, the Corporation considered the impact of netting and any applicable credit enhancements
−Removed: such as collateral postings, thresholds, and guarantees.
−Removed: As of December 31, 2020, the CVA reflecting the non-performance risk of the borrower was $461,000.
−Removed: There was no CVA as of December 31, 2019.
−Removed: As of December 31, 2020, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was approximately $629.1 million.
+Added: As of December 31, 2021, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was approximately $640.6 million, compared to $629.1 million as of December 31, 2020.
We receive fixed rates and pay floating rates based upon LIBOR on the swaps with commercial borrowers.
−Removed: These swaps mature between March 2021 and December 2037.
+Added: These swaps mature between January 2024 and March 2038.
Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements.
−Removed: These commercial borrower swaps were reported on the Consolidated Balance Sheet as a derivative asset of $49.4 million, included in accrued interest receivable and other assets, and as a derivative liability of $58,000, included in accrued interest payable and other liabilities.
+Added: As of December 31, 2021, the commercial borrower swaps were reported on the Consolidated Balance Sheet as a derivative asset of $26.3 million and as a derivative liability of $6.6 million compared to a derivative asset and liability of $49.4 million and $58,000, respectively, as of December 31, 2020.
On the offsetting swap contracts with dealer counterparties, we pay fixed rates and receive floating rates based upon LIBOR.
−Removed: These interest rate swaps also have maturity dates between March 2021 and December 2037.
−Removed: Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and are reported on the Consolidated Balance Sheet as a net derivative liability of $49.3 million, included in accrued interest payable and other liabilities.
−Removed: The gross amount of dealer counterparty swaps, without regard to the enforceable master netting agreement, was a gross derivative liability of $49.4 million and a gross derivative asset of $58,000.
+Added: These interest rate swaps also have maturity dates between January 2024 and March 2038.
+Added: Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and were reported on the Consolidated Balance Sheet as a net derivative liability of $19.7 million as of December 31, 2021, compared to $49.3 million as of December 31, 2020.
+Added: The gross amount of dealer counterparty swaps as of December 31, 2021, without regard to the enforceable master netting agreement, was a gross derivative liability of $26.3 million and a gross derivative asset of $6.6 million, compared to a gross derivative liability and asset of $49.4 million and
+Added: $58,000, respectively, as of December 31, 2020.
+Added: The decrease in derivative asset and liabilities as of December 31, 2021 compared to December 31, 2020 is due to the fluctuation in interest rates.
The Corporation also enters into interest rate swaps to manage interest rate risk and reduce the cost of match-funding certain long-term fixed rate loans.
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Excluding net PPP loans, loans and leases receivable, net of allowance for loan and lease losses, increased by $295.6 million, or 15.63%, to $2.188 billion at December 31, 2021 from $1.892 billion at December 31, 2020.
−Removed: Multifamily, commercial real estate non-owner occupied, and construction loans were the largest contributors to CRE loan growth as of December 31, 2020, increasing $94.2 million, $47.9 million, and $32.0 million, respectively, from December 31, 2019.
+Added: Excluding PPP loans, commercial and industrial (“C&I”) loans, non-owner-occupied commercial real estate (“CRE”), and construction loans were the largest contributors to loan growth as of December 31, 2021, increasing $196.5 million, $96.9 million, and $38.8 million, respectively, from December 31, 2020.
There continues to be a concentration in CRE loans which represented 65.7% and 70.6% of our total loans, excluding net PPP loans, as of December 31, 2021 and December 31, 2020, respectively.
1 unchanged sentence
We consider owner-occupied CRE more characteristic of the Corporation’s C&I portfolio as, in general, the client’s primary source of repayment is the cash flow from the operating entity occupying the commercial real estate property.
−Removed: Management has elevated its underwriting standards during the COVID-19 pandemic to ensure business owners and guarantors have robust liquidity, operating performance, and collateral positions.
−Removed: Even with these higher standards, the Corporation has been able to grow loans and deepen banking relationships.
−Removed: Our C&I portfolio increased $228.9 million, or 45.5%, to $732.3 million at December 31, 2020 from $503.4 million at December 31, 2019.
−Removed: Excluding net PPP loans, C&I loans increased $3.6 million to $507.0 million from $503.4 million at December 31, 2019.
−Removed: C&I growth in 2020 was impacted by the COVID-19 pandemic and related government stimulus, which reduced the line of credit usage we typically see from our existing C&I clients, specifically our asset-based and accounts receivable clients.
−Removed: C&I lines of credit usage decreased $41.7 million, or 14.7%, to $241.2 million at December 31, 2020 from $282.9 million at December 31, 2019.
−Removed: Some of our specialty finance products have historically experienced counter cyclical growth, growing during times of economic stress and uncertainty.
−Removed: While the Corporation did not experience asset-based loan growth in 2020, management expects asset-based loans and accounts receivable financing volume to increase in 2021.
+Added: Our C&I portfolio decreased $1.5 million, or 0.2%, to $730.8 million at December 31, 2021 from $732.3 million at December 31, 2020.
+Added: Excluding net PPP loans, C&I loans increased $196.5 million, or 38.8%, to $703.5 million from $507.0 million at December 31, 2020.
+Added: Management does not believe this loan growth rate is sustainable and anticipates it will moderate to low double-digits as the Company’s specialized lending products scale over time.
+Added: The Corporation experienced significant C&I loan growth in 2021, led by conventional commercial lending, as well as specialized commercial lending which represented 20.0% of total loans as of December 31, 2021, up from 17.0% as of December 31, 2020.
+Added: Management believes the timely prior-period investments in the Corporation’s specialized lending business lines, such as dealer floorplan financing, small-ticket equipment vendor financing, accounts receivable financing, and asset based lending have positioned C&I lending for strong and sustainable growth in 2022 and beyond.
We will continue to actively pursue C&I loans across the Corporation as this segment of our loan and lease portfolio provides an attractive yield commensurate with an appropriate level of credit risk and creates opportunities for in-market deposit, treasury management, and private wealth management relationships which generate additional fee revenue.
1 unchanged sentence
Business development officers have no individual lending authority limits, and thus, a significant portion of our new credit extensions require approval from a loan approval committee regardless of the type of loan or lease, amount of the credit, or the related complexities of each proposal.
−Removed: In addition, we make every reasonable effort to ensure that there is appropriate collateral or a government guarantee at the time of origination to protect our interest in the
−Removed: related loan or lease.
+Added: In addition, we make every reasonable effort to ensure that there is appropriate collateral or a government guarantee at the time of origination to protect our interest in the related loan or lease.
To monitor the ongoing credit quality of our loans and leases, each credit is evaluated for proper risk rating using a nine grade risk rating system at the time of origination, subsequent renewal, evaluation of updated financial information from our borrowers, or as other circumstances dictate.
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Adverse developments affecting real estate values in one or more of our markets could impact collateral coverage associated with the commercial real estate segment of our portfolio, possibly leading to increased specific reserves or charge-offs, which would adversely affect profitability.
−Removed: Of the $1.359 billion of commercial real estate loans outstanding as of December 31, 2020, $28.7 million were originated by our asset-based lending subsidiary.
+Added: Of the $1.455 billion of commercial real estate loans outstanding as of December 31, 2021, $25.8 million were originated by our asset-based lending subsidiary, as part of a larger asset-based lending relationship.
Commercial and Industrial.
1 unchanged sentence
The majority of such loans are secured and typically backed by personal guarantees of the owners of the borrowing business.
−Removed: Of the $732.3 million of C&I loans outstanding as of December 31, 2020, $290.3 million were conventional C&I loans, $228.9 million were PPP loans, $85.8 million were asset-based loans, $73.1 million were equipment finance loans, $37.2 million were purchased accounts receivable, and $17.1 million were floorplan loans.
−Removed: The asset-based loans, including accounts receivable purchased on a full recourse basis, are typically secured by the borrower’s accounts receivable and inventory.
−Removed: These loans generally have higher interest rates and non-origination fees collected in lieu of interest and the collateral supporting the credit is closely monitored.
−Removed: Additionally, asset-based borrowers are usually highly-leveraged and/or have inconsistent historical earnings.
−Removed: Significant adverse changes in various industries could cause rapid declines in values and collectability associated with those business assets resulting in inadequate collateral coverage that may expose us to future losses.
−Removed: SBA loans are made through programs designed by the federal government to assist the small business community in obtaining financing.
−Removed: As an SBA Preferred Lender, our loans (excluding PPP loans) fall into three categories:
−Removed: loans originated under the SBA’s 7(a) term loan program;
−Removed: loans originated under the SBA’s 504 program;
−Removed: and SBA Express loans and lines of credit.
−Removed: The majority of our SBA loans are originated under the 7(a) term loan program.
−Removed: Historically we have sold the guaranteed portions of our SBA 7(a) loans in the secondary market and retained the non-guaranteed portions.
−Removed: SBA lending is a significant part of our strategic business plan.
−Removed: The success of our SBA lending program is dependent upon the continued availability of SBA loan programs, our status as a Preferred Lender, our ability to effectively compete and originate new SBA loans, and our ability to comply with applicable SBA lending requirements.
−Removed: As of December 31, 2020, the on-balance sheet portion of SBA loans, excluding PPP loans, that were included in the commercial and industrial loan portfolio was $33.2 million, commercial real estate loan portfolio was $12.6 million, and consumer and other was $451,000.
+Added: Of the $730.8 million of C&I loans outstanding as of December 31, 2021, $354.2 million were conventional C&I loans and $447.1 million were specialized lending C&I loans.
+Added: Specialized lending consists of asset-based lending, accounts receivable financing, floorplan financing, equipment financing, and SBA lending.
Direct Financing Leases.
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Asset Quality
−Removed: Non-accrual loans and leases increased $6.0 million, or 29.1%, to $26.6 million at December 31, 2020 compared to $20.6 million at December 31, 2019.
+Added: Non-accrual loans and leases decreased $20.3 million, or 76.1%, to $6.4 million at December 31, 2021 compared to $26.6 million at December 31, 2020.
Our total impaired assets consisted of the following:
27 unchanged sentences
382.76 % 107.15 %
−Removed: As of December 31, 2020 and 2019, $6.5 million and $15.6 million of the non-accrual loans were considered troubled debt restructurings, respectively.
−Removed: As noted in the table above, non-performing assets consisted of non-accrual loans and leases and foreclosed properties totaling $26.7 million, or 1.04% of total assets, as of December 31, 2020, an increase in non-performing assets of $3.1 million, or 13.3%, from December 31, 2019.
−Removed: Impaired loans and leases as of December 31, 2020 and 2019 also included $46,000 and $140,000, respectively, of loans that are performing troubled debt restructurings, which are considered impaired due to the concession in terms, but are meeting the restructured payment terms and therefore are not on non-accrual status.
+Added: As of December 31, 2021 and 2020, $627,000 and $6.5 million of the non-accrual loans were considered troubled debt restructurings, respectively.
+Added: As noted in the table above, non-performing assets consisted of non-accrual loans and leases and foreclosed properties totaling $6.5 million, or 0.25% of total assets, as of December 31, 2021, a decrease in non-performing
+Added: assets of $20.1 million, or 75.5%, from December 31, 2020.
+Added: Impaired loans and leases as of December 31, 2021 and 2020 also included $217,000 and $46,000, respectively, of loans classified as performing troubled debt restructurings, which are considered impaired due to the concession in terms, but are meeting the restructured payment terms and therefore are not on non-accrual status.
The following asset quality ratios exclude net PPP loans as they are fully guaranteed by the SBA:
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Net foregone interest income on impaired loans and leases $ 650 $ 2,158
−Removed: Impaired loans and leases with no impairment reserves represent impaired loans where the collateral, based upon current information, is deemed to be sufficient or that have been partially charged-off to reflect our net realizable value of the loan.
+Added: Loans and leases with no impairment reserves represent impaired loans where the collateral, based upon current information, is deemed to be sufficient or that have been partially charged-off to reflect our net realizable value of the loan.
When analyzing the adequacy of collateral, we obtain external appraisals as appropriate.
4 unchanged sentences
However, we cannot provide assurance that the facts and circumstances surrounding each individual impaired loan will not change and that the specific reserve or current carrying value will not be different in the future, which may require additional charge-offs or specific reserves to be recorded.
−Removed: Foreclosed properties are recorded at fair value of the underlying property, less costs to sell.
−Removed: If, at the time of foreclosure, the fair value less cost to sell is lower than the carrying value of the loan, the difference is charged to the allowance for loan and lease losses prior to the transfer to foreclosed property.
−Removed: The fair value is based on an appraisal, discounted cash flow analysis (the majority of which is based on current occupancy and lease rates) or a verifiable offer to purchase.
−Removed: After foreclosure, valuation allowances or future write-downs to net realizable value are charged directly to non-interest expense.
−Removed: Foreclosed properties of $34,000 were outstanding as of December 31, 2020, compared to $2.9 million as of December 31, 2019.
−Removed: We recorded impairment losses of approximately $363,000 and $224,000 for the years ended December 31, 2020 and 2019, respectively.
−Removed: We recorded a net loss of $20,000 on the sale of existing foreclosed properties for the year ended December 31, 2020, compared to no sales of existing foreclosed property for the year ended December 31, 2019.
−Removed: We continue to evaluate possible exit strategies on our impaired loans when foreclosure action may be probable and our level of foreclosed assets may increase in the future.
−Removed: Loans are transferred to foreclosed properties when we claim ownership rights to the properties.
−Removed: A summary of foreclosed properties activity is as follows:
−Removed: For the Year Ended December 31,
−Removed: (In Thousands)
−Removed: Balance at the beginning of the period $ 2,919 $ 2,547
−Removed: Transfer of loans to foreclosed properties, at fair value 80 596
−Removed: Impairment adjustments (363) (224)
−Removed: Net book value of properties sold (2,602) —
−Removed: Balance at the end of the period $ 34 $ 2,919
Allowance for Loan and Lease Losses
−Removed: The allowance for loan and lease losses increased $9.0 million, or 46.1%, to $28.5 million as of December 31, 2020 from $19.5 million as of December 31, 2019.
−Removed: The allowance for loan and lease losses as a percentage of gross loans and leases also increased to 1.33% as of December 31, 2020 from 1.14% as of December 31, 2019.
−Removed: The allowance for loan and lease losses as a percentage of gross loans and leases, excluding net PPP loans, was 1.48% as of December 31, 2020.
−Removed: The increase in allowance for loan and lease losses as a percent of gross loans and leases was principally driven by COVID-19 and the economic impact it is having on the Corporation’s loan portfolio.
−Removed: For year ended December 31, 2020, the increase in the allowance for loan and lease losses was in large part due to an increase in several qualitative factors after careful evaluation by management.
−Removed: Most notably, a $5.5 million increase was due to the economic conditions caused by the pandemic, including the increase in the unemployment rate, management’s ongoing review and grading of the loan and lease portfolios, consideration of delinquency experience, and the level of loans and leases subject to more frequent review by management.
−Removed: Additionally, the general reserve increased $2.3 million commensurate with loan growth, and $949,000 due to historical loss rate updates to include current year net charge-off activity.
−Removed: During the year ended December 31, 2020, we recorded net charge-offs on impaired loans and leases of approximately $7.8 million, which included $8.1 million of charge-offs and $332,000 of recoveries.
+Added: The allowance for loan and lease losses decreased $4.2 million, or 14.7%, to $24.3 million as of December 31, 2021 from $28.5 million as of December 31, 2020.
+Added: The allowance for loan and lease losses as a percentage of gross loans and leases also decreased to 1.09% as of December 31, 2021 from 1.33% as of December 31, 2020.
+Added: The allowance for loan and lease losses as a percentage of gross loans and leases, excluding net PPP loans, was 1.10% as of December 31, 2021 from 1.48% as of December 31, 2020.
+Added: The decrease in allowance for loan and lease losses as a percent of gross loans and leases was principally driven by significant commercial real estate loan recoveries, and the related impact it had on our commercial real estate historical loss factors, and the release of specific reserves following loan payoffs and charge-offs.
+Added: These general and specific reserve releases were partially offset by an increase in general reserve commensurate with loan growth.
+Added: In addition to the commercial real estate recovery, all other loan segments experienced a reduction in historical loss factors as the look-back period began to roll off the Corporations higher loss rates from the Great Recession.
+Added: Management believes this will continue in 2022, allowing for additional reserve release throughout the year.
+Added: During the year ended December 31, 2021, we recorded net recoveries on impaired loans and leases of approximately $1.6 million, which included $3.5 million of charge-offs and $5.1 million of recoveries.
During the year ended December 31, 2020, we recorded net charge-offs on impaired loans and leases of approximately $7.8 million, which included $8.1 million of charge-offs and $332,000 of recoveries.
1 unchanged sentence
As of December 31, 2021 and 2020, our allowance for loan and lease losses to total non-accrual loans and leases was 382.76% and 107.15%, respectively.
−Removed: This ratio increased primarily due to the increase in allowance for loan and lease losses discussed above.
+Added: This ratio increased primarily due to the substantial decrease in non-accrual loans and leases discussed above, in comparison to the decrease in the allowance for loan and leases losses.
Impaired loans and leases exhibit weaknesses that inhibit repayment in compliance with the original terms of the note or lease.
1 unchanged sentence
As part of the underwriting process, as well as our ongoing monitoring efforts, we try to ensure that we have sufficient collateral to protect our interest in the related loan or lease.
−Removed: As a result of this practice, a significant portion of our outstanding balance of non-performing loans or leases either does not require additional
−Removed: specific reserves or requires only a minimal amount of required specific reserve, as we believe the loans and leases are adequately collateralized as of the measurement period.
−Removed: In addition, management is proactive in recording charge-offs to bring loans to their net realizable value in situations where it is determined with certainty that we will not recover the entire amount of our principal.
+Added: As a result of this practice, a significant portion of our outstanding balance of non-performing loans or leases may not require additional specific reserves or require only a minimal amount of required specific reserve.
+Added: Management is proactive in recording charge-offs to bring loans to their net realizable value in situations where it is determined with certainty that we will not recover the entire amount of our principal.
This practice may lead to a lower allowance for loan and lease loss to non-accrual loans and leases ratio as compared to our peers or industry expectations.
8 unchanged sentences
The methodology also focuses on evaluation of several qualitative factors for each portfolio category, including but not limited to:
−Removed: management’s ongoing review and grading of the loan and lease portfolios, consideration of delinquency experience, changes in the size of the loan and lease portfolios, existing economic conditions, level of loans and leases subject to more frequent review by management, changes in underlying collateral, concentrations of loans to specific industries, and other qualitative factors that could affect credit losses.
+Added: management’s ongoing review and grading of the loan and lease portfolios, consideration of delinquency experience, changes in the size of the loan and lease portfolios,
+Added: existing economic conditions, level of loans and leases subject to more frequent review by management, changes in underlying collateral, concentrations of loans to specific industries, and other qualitative factors that could affect credit losses.
When it is determined that we will not receive our entire contractual principal or the loss is confirmed, we record a charge against the allowance for loan and lease loss reserve to bring the loan or lease to its net realizable value.
Many of the impaired loans as of December 31, 2021 are collateral dependent.
−Removed: It is typically part of our process to obtain appraisals on impaired loans and leases that are primarily secured by real estate or equipment at least annually, or more frequently as circumstances warrant.
−Removed: As we have completed new appraisals and/or market evaluations, we have found that in general real estate values have been stable or improved;
−Removed: however, in specific situations current fair values collateralizing certain impaired loans were inadequate to support the entire amount of the outstanding debt.
+Added: It is typically part of our process to obtain appraisals on impaired loans and leases that are primarily secured by real estate or equipment annually, or more frequently as circumstances warrant.
+Added: As we have completed new appraisals and/or market evaluations, in specific situations current fair values collateralizing certain impaired loans were inadequate to support the entire amount of the outstanding debt.
Foreclosure actions may have been initiated on certain of these commercial real estate and other mortgage loans.
50 unchanged sentences
Although we believe the allowance for loan and lease losses was appropriate based on the current level of loan and lease delinquencies, non-accrual loans and leases, trends in charge-offs, economic conditions, and other factors as of December 31, 2021, there can be no assurance that future adjustments to the allowance will not be necessary.
−Removed: The following tables illustrate ending balances of the Corporation’s gross loan and lease receivable portfolio, segregated by Commercial Real Estate and All Other Loans, and considering certain credit quality indicators.
−Removed: Refer to Note 5 – Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses for risk category definitions.
−Removed: December 31, 2020
−Removed: I II III IV Total
−Removed: (Dollars in Thousands)
−Removed: Total commercial real estate $ 1,083,054 $ 177,296 $ 88,388 $ 10,398 $ 1,359,136
−Removed: All other loans 674,850 28,602 71,662 16,265 791,379
−Removed: Total gross loans and leases receivable $ 1,757,904 $ 205,898 $ 160,050 $ 26,663 $ 2,150,515
−Removed: Category as a % of total portfolio 81.75 % 9.57 % 7.44 % 1.24 % 100.00 %
−Removed: December 31, 2019
−Removed: I II III IV Total
−Removed: (Dollars in Thousands)
−Removed: Total commercial real estate $ 1,040,674 $ 87,833 $ 19,563 $ 6,031 $ 1,154,101
−Removed: All other loans 448,445 35,665 62,332 14,722 561,164
−Removed: Total gross loans and leases receivable $ 1,489,119 $ 123,498 $ 81,895 $ 20,753 $ 1,715,265
−Removed: Category as a % of total portfolio 86.82 % 7.20 % 4.77 % 1.21 % 100.00 %
−Removed: Management’s ongoing review and grading of the loan and lease portfolio during the COVID-19 pandemic resulted in an increase of $82.4 million in Category II and $78.2 million increase in Category III loans from December 31, 2019, primarily due to migration of our commercial real estate portfolio.
−Removed: The commercial real estate loans are to borrowers operating within certain industries which have been and are expected to be particularly impacted by social distancing, quarantines, and the economic impact of the COVID-19 pandemic, such as retail, hospitality, entertainment, and restaurants and food service.
−Removed: In general, our commercial real estate loans within these stressed industries are well-collateralized and include strong project sponsors.
−Removed: As a result of this process, we have concluded an appropriate allowance for loan and lease losses for the commercial real estate loan segment was $17.2 million, or 1.26% of total commercial real estate loans, at December 31, 2020, up from $10.9 million, or 0.94% of total commercial real estate loans, at December 31, 2019.
−Removed: Although we believe the allowance for loan and lease losses related to the commercial real estate portfolio was appropriate based on the current level of loan and lease
−Removed: delinquencies, non-accrual loans and leases, trends in charge-offs, economic conditions, and other factors as of December 31, 2020, there can be no assurance that future adjustments to the allowance will not be necessary.
As of December 31, 2021, deposits increased by $102.4 million to $1.958 billion from $1.856 billion at December 31, 2020.
−Removed: The increase in deposits was primarily due to an increase in transaction accounts, partially offset by a decrease in money market accounts and certificates of deposit.
−Removed: Transaction accounts increased $409.3 million to $976.8 million at December 31, 2020 from $567.5 million at December 31, 2019.
−Removed: Money market accounts decreased $32.9 million to $641.5 million at December 31, 2020 from $674.4 million at December 31, 2019.
−Removed: Transaction account balances increased primarily due to the influx of PPP loan proceeds and successful business development efforts.
−Removed: Management attributes the transition from money market accounts to reciprocal transaction accounts with full FDIC insurance to our clients’ preferences for liquidity and safety and soundness amid the economic uncertainty created by the COVID-19 pandemic.
−Removed: Certificates of deposit decreased $72.3 million to $64.7 million at December 31, 2020 from $137.0 million at December 31, 2019 as client preferences shifted away from term deposits due to the low interest rate environment.
−Removed: The decrease in certificates of deposit was partially offset by a $21.0 million increase in wholesale deposits, mainly due to adding non-maturity reciprocal deposits at a favorable rate compared to alternative funding sources.
−Removed: Excluding these deposits, wholesale deposits decreased as the existing portfolio runoff was replaced by in-market deposits and lower cost FHLB advances to match-fund long-term fixed rate loans and fund loan growth.
−Removed: Our strategic efforts remain focused on adding in-market deposit relationships.
−Removed: Successful deposit campaigns supporting our private wealth management strategy complemented our traditional strength in commercial banking and treasury management, contributing to substantial in-market deposit growth during 2020.
+Added: The increase in deposits was primarily due to a $143.0 million and $112.9 million increase in transaction accounts and money market accounts, respectively partially offset by a decrease in wholesale deposits and certificates of deposit of $142.9 million and $10.6 million, respectively.
+Added: The large increase in in-markets deposits was primarily due to successful business development efforts and PPP loan proceeds.
The following table presents the composition of the Bank’s consolidated deposits.
13 unchanged sentences
$ 1,957,923 100.0 % $ 1,855,516 100.0 %
−Removed: Deposit balances associated with in-market relationships will fluctuate based upon maturity of time deposits, client demands for the use of their cash, and our ability to service and maintain existing and new client relationships.
+Added: Period-end deposit balances associated with in-market relationships will fluctuate based upon maturity of time deposits, client demands for the use of their cash, and our ability to service and maintain existing and new client relationships.
Deposits continue to be the primary source of the Bank’s funding for lending and other investment activities.
5 unchanged sentences
Average in-market deposits for the year ended December 31, 2021 were approximately $1.784 billion, or 78.23% of total bank funding.
−Removed: Total bank funding is defined as total deposits plus FHLB advances, Federal Reserve Discount Window advances, and Federal Reserve PPPLF advances.
−Removed: This compares to average in-market deposits of $1.271 billion, or 71.30% of total bank funding, for 2019.
+Added: Total bank funding is defined as total deposits plus FHLB advances and Federal Reserve PPPLF advances.
+Added: This compares to average in-market deposits of
+Added: $1.569 billion, or 75.01% of total bank funding, for 2020.
Refer to Note 9 - Deposits in the Consolidated Financial Statements for additional information regarding our deposit composition.
8 unchanged sentences
At December 31, 2021, time deposits included $7.9 million of certificates of deposit and wholesale deposits in denominations greater than or equal to $250,000.
−Removed: Of these certificates, $17.2 million are scheduled to mature in three months or less, $2.8 million in greater than three through six months, $6.8 million in greater than six through twelve months and $1.9 million in greater than twelve months.
−Removed: Of the total time deposits outstanding as of December 31, 2020, $101.7 million are scheduled to mature in 2021, $6.2 million in 2022, $1.2 million in 2023, $263,000 in 2024, $1.7 million in 2025 and $1.0 million thereafter.
+Added: Of these certificates, $3.0 million are scheduled to mature in three months or less, $2.1 million in greater than three through six months, $251,000 in greater than six through twelve months and $2.6 million in greater than twelve months.
+Added: Of the total time deposits outstanding as of December 31, 2021, $68.0 million are scheduled to mature in 2022, $4.5 million in 2023, $349,000 in 2024, $324,000 in 2025, and $488,000 in 2026.
As of December 31, 2021, we have no wholesale certificates of deposit which the Bank has the right to call prior to the scheduled maturity.
−Removed: We had total borrowings of $429.2 million as of December 31, 2020, an increase of $99.8 million, or 30.3%, from $329.4 million at December 31, 2019.
−Removed: The primary reason for the increase in borrowings was due to an increase in FHLB advances.
−Removed: While total wholesale funding as a percentage of total bank funding has decreased meaningfully overall due to significant in-market deposit growth, we continue to replace the majority of our maturing brokered certificates of deposit with FHLB advances at lower rates, as needed, to match-fund fixed rate loans and mitigate interest rate risk.
−Removed: Total bank funding is defined as total deposits plus FHLB advances, Federal Reserve Discount Window advances, and Federal Reserve PPPLF advances.
+Added: We had total borrowings of $413.5 million as of December 31, 2021, a decrease of $15.7 million, or 3.7%, from $429.2 million at December 31, 2020.
+Added: While total wholesale funding as a percentage of total bank funding has decreased meaningfully overall due to significant in-market deposit growth, we continue to replace our maturing brokered certificates of deposit with FHLB advances at lower rates, if needed, to match-fund fixed rate loans and mitigate interest rate risk.
+Added: Total bank funding is defined as total deposits plus FHLB advances and Federal Reserve PPPLF advances.
+Added: As of December 31, 2021 and December 31, 2020, the Corporation had other borrowings of $10.4 million and $920,000, respectively, which consisted of sold loans accounted for as secured borrowings because they did not qualify for true sale accounting, as well as borrowings associated with our investment in a community development entity.
During the second quarter of 2020, management tested the availability of the Federal Reserve PPPLF due to the uncertainty of when PPP loans would be required to close and fund and obtained a $29.6 million PPPLF advance.
1 unchanged sentence
The Corporation incurred a $744,000 loss, recognized through non-interest expense, on the early extinguishment of $59.5 million in FHLB term advances late in the second quarter of 2020, as the Corporation lowered wholesale funding costs and improved the Corporation’s funding position.
−Removed: Management believes this strategy will help stabilize net interest margin with the expectation of a low interest rate environment for an extended period of time.
+Added: Management believes this strategy helped stabilize net interest margin during the extended low interest rate environment.
Consistent with our funding philosophy to manage interest rate risk, we will use the most efficient and cost effective source of wholesale funds.
13 unchanged sentences
368,800 376,781 1.30 394,500 379,891 1.45
+Added: Line of credit 500 78 2.90 — — —
Other borrowings 10,363 8,090 4.11 920 676 12.60
Subordinated notes payable 23,788 23,766 5.94 23,747 23,725 5.95
−Removed: 23,747 23,725 5.95 23,707 24,502 7.45
Junior subordinated notes
1 unchanged sentence
$ 413,527 $ 418,783 1.86 $ 429,229 $ 429,624 1.91
−Removed: (1) Weighted average rate of subordinated notes payable reflects the accelerated amortization of subordinated debt issuance costs as a result of the early redemption of a subordinated note during the third quarter of 2019.
A summary of annual maturities of borrowings at December 31, 2021 is as follows:
3 unchanged sentences
Thereafter 143,864
−Removed: On August 15, 2019, we issued an aggregate principal amount of $15,000,000 of subordinated notes to three qualified institutional buyers in a private placement.
−Removed: The subordinated notes, which were structured to qualify as Tier 2 capital, have a maturity date of August 15, 2029 and will bear interest at a fixed rate of 5.50% up to, but not including, August 15, 2024.
−Removed: From and including August 15, 2024 to the maturity date, the interest rate will reset quarterly, equal to the Floating Interest Rate (as defined in the Subordinated Note Purchase Agreement) of the applicable interest period plus 407 basis points.
−Removed: We used the net proceeds from the sale of the notes to fund the redemption of $15,000,000 in aggregate principal amount of outstanding 6.50% Fixed-to-Floating Rate Subordinated Notes due September 1, 2024, which also were structured to qualify as Tier 2 capital.
−Removed: The following table sets forth maximum amounts outstanding at each month-end for specific types of short-term borrowings for the periods indicated.
−Removed: The maximum month-end balance has been the result of using advances with original maturities of up to 30 days to accommodate the orderly issuance of permanent wholesale funds, either in the form of brokered certificates of deposit or FHLB advances.
−Removed: Year Ended December 31,
−Removed: (In Thousands)
−Removed: Maximum month-end balance:
−Removed: FHLB advances $ 72,500 $ 25,000
+Added: The subordinated notes payable consist of two series of notes, each of which qualifies as Tier II capital.
+Added: At December 31, 2021, $15.0 million bore a fixed interest rate of 5.50% with a maturity date of August 15, 2029 and $9.1 million bore a fixed interest rate of 6.00% with a maturity date of April 15, 2027.
+Added: The Corporation may, at its option, redeem the 5.50% notes, in whole or part, at any time after August 15, 2024, and may redeem the 6.00% notes any time after June 15, 2022.
+Added: The 5.50% notes will begin to lose Tier II capital treatment at a rate of 20% per year effective August 15, 2024, while the 6.00% note will begin to lose Tier II capital treatment at a rate of 20% per year effective June 15, 2022.
+Added: Given the historically low interest rate environment, management continues to evaluate options to optimize the Corporation’s capital structure and reduce borrowing costs, wherein we may redeem and replace various notes at the next earliest redemption periods.
+Added: Refer to Note 10 – FHLB Advances, Other Borrowings and Junior Subordinated Notes in the Consolidated Financial Statements for additional information on the terms of Corporation’s current debt instruments.
Stockholders’ Equity
As of December 31, 2021, stockholders’ equity was $232.4 million, or 8.76% of total assets, compared to stockholders’ equity of $206.2 million, or 8.03% of total assets, as of December 31, 2020.
−Removed: Excluding PPP loans, stockholders’ equity was 8.8% of total assets.
−Removed: Stockholders’ equity increased by $12.0 million during the year ended December 31, 2020 attributable to net income of $17.0 million for the year ended December 31, 2020, partially offset by dividend declarations of $5.7 million and stock repurchases of $1.7 million.
−Removed: In August 2019, the Corporation completed a $5 million share repurchase program which was initiated in December 2018 and had a termination date of December 31, 2019.
−Removed: The Corporation repurchased 223,149 shares under the repurchase program at an average price of $22.36 per share.
−Removed: On September 20, 2019, the Corporation announced its Board approved a new share repurchase program.
−Removed: The program authorized the repurchase by the Corporation of up to $5 million in aggregate value of its outstanding shares of common stock over a period of approximately twelve months, ending on September 30, 2020.
−Removed: The Corporation suspended this share repurchase program in March 2020 due to the uncertainty surrounding the COVID-19 pandemic.
−Removed: Prior to suspending the program, the Corporation had repurchased $3.5 million of the $5 million authorized in the Company’s common stock.
+Added: Excluding PPP loans, stockholders’ equity was 8.85% of total assets as of December 31, 2021, compared to 8.80%.
+Added: Stockholders’ equity increased by $26.3 million during the year ended December 31, 2021 attributable to net income of $35.8 million for the year ended December 31, 2021, partially offset by dividend declarations of $6.2 million and stock repurchases of $5.0 million authorized under the repurchase program discussed below.
On January 28, 2021, the Board of Directors of the Corporation approved a new share repurchase program.
−Removed: The program authorizes the repurchase by the Corporation of up to $5.0 million of its total outstanding shares of common stock over a period of approximately twelve months, ending January 31, 2022.
−Removed: Under the new share repurchase program, shares may be repurchased from time to time in the open market or negotiated transactions at prevailing market rates, or by other means in accordance with federal securities laws.
+Added: The program authorized the repurchase by the Corporation of up to $5 million of its total outstanding shares of common stock over a period of approximately twelve months, ending January 31, 2022.
+Added: The Corporation completed the $5 million repurchase program in October 2021, repurchasing a total of 182,151 shares during the year at a weighted average price of $27.40 per share.
+Added: The Corporation did not have an active share repurchase plan as of December 31, 2021.
+Added: Under the share repurchase program, shares were repurchased from time to time in the open market or negotiated transactions at prevailing market rates, or by other means in accordance with federal securities laws.
In connection with the share repurchase program, the Corporation implemented a 10b5-1 trading plan.
−Removed: The trading plan allows the Corporation to repurchase shares of its common stock at times when it otherwise might be prevented from doing so under insider trading laws by requiring that an agent selected by the Corporation repurchase shares of common stock on the Corporation’s behalf on pre-determined terms.
−Removed: Non-bank Consolidated Subsidiaries
−Removed: First Madison Investment Corp (“FMIC”).
−Removed: FMIC is a wholly-owned operating subsidiary of FBB incorporated in the State of Nevada in 1993.
−Removed: FMIC was organized for the purpose of managing a portion of FBB’s investment portfolio.
−Removed: FMIC invests in marketable securities and tax-exempt loans.
−Removed: As an operating subsidiary, FMIC’s results of operations are consolidated with FBB’s for financial and regulatory purposes.
−Removed: FBB’s investment in FMIC was $165.9 million at December 31, 2020, short-term investments were $6.7 million, securities were $118.6 million, gross loans outstanding were $40.1 million, and net income for the year ended December 31, 2020 was $3.1 million.
−Removed: This compares to a total investment of $161.0 million, $5.2 million short-term investments, $112.6 million securities, $41.3 million gross loans, and net income of $3.4 million at and for the year ended December 31, 2019.
−Removed: Effective January 13, 2021, First Business Capital Corp.
−Removed: (“FBCC”) was merged with and into First Business Equipment Finance, LLC (“FBEF”), after which time FBEF’s name was changed to First Business Specialty Finance, LLC (“FBSF”).
−Removed: First Business Equipment Finance, LLC .
−Removed: FBEF was a wholly-owned subsidiary of FBB as of December 31, 2020, formed in 1998 and headquartered in Madison, Wisconsin.
−Removed: FBB’s total investment in FBEF at December 31, 2020 was $11.0 million, gross loans and leases outstanding were $113.7 million and net income was $751,000 for the year ended December 31, 2020.
−Removed: This compares to a total investment of $10.3 million, gross loans and leases outstanding of $79.3 million and net income of $103,000 at and for the year ended December 31, 2019.
−Removed: First Business Capital Corp.
−Removed: FBCC was a wholly-owned subsidiary of FBB as of December 31, 2020, formed in 1995 and headquartered in Madison, Wisconsin.
−Removed: FBB’s investment in FBCC at December 31, 2020 was $50.0 million, gross loans outstanding were $151.8 million and net income for the year ended December 31, 2020 was $1.7 million.
−Removed: This compares to a total investment of $48.2 million, gross loans of $167.8 million and net income of $4.8 million at and for the year ended December 31, 2019.
−Removed: First Business Specialty Finance, LLC (“FBSF”).
−Removed: FBSF, formerly known as First Business Equipment Finance, LLC, headquartered in Madison, Wisconsin, was formed in 1998 for the purpose of originating leases and extending credit in the form of loans to small- and medium-sized companies nationwide and is a wholly-owned subsidiary of FBB.
−Removed: Effective January 13, 2021, FBSF’s purpose and name were changed to reflect the origination and servicing of asset-based loans, purchasing accounts receivable, financing auto dealership floorplans, and originating equipment leases and extending credit in the form of loans to small- and medium-sized companies nationwide.
−Removed: FBB’s pro-forma total investment in FBSF at December 31, 2020 was $61.1 million, gross loans and leases outstanding were $265.5 million and net income was $2.4 million for the year ended December 31, 2020.
−Removed: This compares to a pro-forma total investment of $58.5 million, gross loans and leases outstanding of $247.1 million and net income of $4.9 million at and for the year ended December 31, 2019.
−Removed: Rimrock Road Investment Fund, LLC (“Rimrock”).
−Removed: Rimrock is a wholly-owned subsidiary of FBB and was formed in 2009 for the purpose of holding and liquidating real estate and other assets acquired through foreclosure or other legal proceedings.
−Removed: In 2014, Rimrock’s purpose was changed to reflect its equity investment in an urban revitalization fund.
−Removed: The investment provided federal new market tax credits over a seven year period.
−Removed: FBB’s total investment in Rimrock at December 31, 2020 was $2.8 million and Rimrock had a net loss of $2,000 for the year ended December 31, 2020.
−Removed: This compares to a total investment of $2.8 million and net income of $24,000 at and for the year ended December 31, 2019.
−Removed: BOC Investment, LLC (“BOC”).
−Removed: BOC is a wholly-owned subsidiary of FBB and was formed in 2015 for the purpose of holding its equity investment in a Madison, Wisconsin historic development project.
−Removed: The investment provided federal historic tax credits upon the completion of the restoration project.
−Removed: FBB’s total investment in BOC at December 31, 2020 was $4.0 million.
−Removed: This compares to a total investment of $4.0 million and no income or loss at and for the year ended December 31, 2019.
−Removed: Mitchell Street Apartments Investment, LLC (“Mitchell”).
−Removed: Mitchell is a wholly-owned subsidiary of FBB and was formed in 2016 for the purpose of holding its equity investment in a Milwaukee, Wisconsin historic development project.
−Removed: The investment provided federal and state historic tax credits upon the completion of the restoration project.
−Removed: FBB’s total investment in Mitchell was $1.4 million at December 31, 2020.
−Removed: This compares to a total investment of $1.4 million and no income or loss at and for the year ended December 31, 2019.
−Removed: ABKC Real Estate, LLC (“ABKCRE”).
−Removed: ABKCRE is a wholly-owned subsidiary of FBB and was formed for the purpose of holding and liquidating real estate and other assets acquired by FBB through foreclosure or other legal proceedings.
−Removed: ABKCRE was established in 2017.
−Removed: FBB’s total investment in ABKCRE at December 31, 2020 was $1.5 million and ABKCRE had a net loss of $254,000 for the year ended December 31, 2020.
−Removed: This compares to a total investment of $1.7 million and a $179,000 net loss at and for the year ended December 31, 2019.
−Removed: FBB Tax Credit Investment, LLC (“FBB Tax Credit”).
−Removed: FBB Tax Credit, formerly known as FBB-Milwaukee Real Estate, LLC, is a wholly-owned subsidiary of FBB and was originally formed in 2012 for the purpose of holding and liquidating real estate and other assets acquired by FBB through foreclosure or other legal proceedings.
−Removed: In 2017, FBB Tax Credit’s purpose was changed to facilitate investments in federal and state tax credits.
−Removed: FBB’s total investment in FBB Tax Credit at December 31, 2020 was $11.7 million and FBB Tax Credit had a net income of $923,000 for the year ended December 31, 2020.
−Removed: This compares to a total investment of $8.9 million and net income of $1.7 million at and for the year ended December 31, 2019.
−Removed: FBB Real Estate 2, LLC (“FBB RE 2”).
−Removed: FBB RE 2 is a wholly-owned subsidiary of FBB and was formed for the purpose of holding and liquidating real estate and other assets acquired by FBB through foreclosure or other legal proceedings.
−Removed: FBB’s total investment in FBB RE 2 at December 31, 2020 was $1.1 million and FBB RE 2 had net income $12,000.
−Removed: This compares to a total investment of $1.1 million and no income or loss at and for the year ended December 31, 2019.
+Added: The trading plan allowed the Corporation to repurchase shares of its common stock at times when it otherwise might have been prevented from doing so under insider trading laws by requiring that an agent selected by the Corporation repurchase shares of common stock on the Corporation’s behalf on pre-determined terms.
LIQUIDITY AND CAPITAL RESOURCES
−Removed: We expect to meet our liquidity needs through existing cash on hand, established cash flow sources, our third party senior line of credit, and dividends received from the Bank.
−Removed: While the Bank is subject to certain regulatory limitations regarding their ability to pay dividends to the Corporation, we do not believe that the Corporation will be adversely affected by these dividend limitations.
+Added: The Corporation expects to meet its liquidity needs through existing cash on hand, established cash flow sources, its third party senior line of credit, and dividends received from the Bank.
+Added: While the Bank is subject to certain generally applicable regulatory limitations regarding its ability to pay dividends to the Corporation, we do not believe that the Corporation will be adversely affected by these dividend limitations.
The Corporation’s principal liquidity requirements at December 31, 2021 were the interest payments due on subordinated and junior subordinated notes.
3 unchanged sentences
The Bank maintains liquidity by obtaining funds from several sources.
−Removed: The Bank’s primary source of funds are principal and interest payments on loans receivable and mortgage-related securities, deposits, and other borrowings, such as federal funds, FHLB advances, Federal Reserve Discount Window advances, and Federal Reserve PPPLF advances.
+Added: The Bank’s primary source of funds are principal and interest payments on loans receivable and mortgage-related securities, deposits, and other borrowings, such as federal funds and FHLB advances.
The scheduled payments of loans and mortgage-related securities are generally a predictable source of funds.
Deposit flows and loan prepayments, however, are greatly influenced by general interest rates, economic conditions, and competition.
−Removed: Please refer to the section titled COVID-19 Update for additional information on the Bank’s primary and secondary sources of available liquidity the during the COVID-19 pandemic.
We view on-balance sheet liquidity as a critical element to maintaining adequate liquidity to meet our cash and collateral obligations.
1 unchanged sentence
As of December 31, 2021 and 2020, our immediate on-balance sheet liquidity was $529.5 million and $640.2 million, respectively.
−Removed: The significant increase as of December 31, 2020 compared to December 31, 2019 is principally due to the Banks ability to pledge PPP loans and borrow from the Federal Reserve PPPLF.
−Removed: Excluding Federal Reserve PPPLF availability, immediate on-balance sheet liquidity as of December 31, 2020 was $414.9 million.
−Removed: This decline in on-balance sheet liquidity compared to 2019 is primarily due to the Banks increased use of FHLB advances to replace maturing brokered certificates of deposit.
At December 31, 2021 and 2020, the Bank had $47.0 million and $26.7 million on deposit with the FRB recorded in short-term investments, respectively.
Any excess funds not used for loan funding or satisfying other cash obligations were maintained as part of our on-balance sheet liquidity in our interest-bearing accounts with the FRB, as we value the safety and soundness provided by the FRB.
−Removed: We plan to utilize excess liquidity to fund loan and lease portfolio growth, pay down maturing debt, allow run off of maturing wholesale certificates of deposit or invest in securities to maintain adequate liquidity at an improved margin.
−Removed: We had $567.0 million of outstanding wholesale funds at December 31, 2020, compared to $446.5 million of wholesale funds as of December 31, 2019, which represented 25.2% and 24.5%, respectively, of ending balance total bank funding.
+Added: We plan to utilize excess liquidity to fund loan and lease portfolio growth, pay down maturing debt, allow run off of maturing wholesale certificates of deposit or to invest in securities to maintain adequate liquidity at an improved margin.
+Added: We had $398.4 million of outstanding wholesale funds at December 31, 2021, compared to $567.0 million of wholesale funds as of December 31, 2020, which represented 17.1% and 25.2%, respectively, of period end total bank funding.
Wholesale funds include FHLB advances, Federal Reserve PPPLF advances, brokered certificates of deposit, and deposits gathered from internet listing services.
6 unchanged sentences
The short-term FHLB advances will typically have terms of one week to one month to cover the overall expected funding demands.
−Removed: Period-end in-market deposits increased $304.1 million, or 22.1%, to $1.683 billion at December 31, 2020 from $1.379 billion at December 31, 2019 as in-market deposit balances increased due to PPP loan proceeds and successful business development efforts.
−Removed: Our in-market relationships remain stable;
+Added: Period-end in-market deposits increased $245.3 million, or 14.6%, to $1.928 billion at December 31, 2021 from $1.683 billion at December 31, 2020 as in-market deposit balances increased due to successful business development efforts and PPP loan proceeds.
+Added: Our in-market relationships continue to grow;
however, deposit balances associated with those relationships will fluctuate.
We expect to establish new client relationships and continue marketing efforts aimed at increasing the balances in existing clients’ deposit accounts.
−Removed: Nonetheless, we will continue to use wholesale funds in specific maturity periods, typically three to five years, needed to effectively mitigate the interest rate risk measured through our asset/liability management process
−Removed: or in shorter time periods if in-market deposit balances decline.
+Added: Nonetheless, we will continue to use wholesale funds in specific maturity periods, typically three to five years, needed to effectively mitigate the interest rate risk measured through our asset/liability management process or in shorter time periods if in-market deposit balances decline.
In order to provide for ongoing liquidity and funding, all of our wholesale funds are certificates of deposit which do not allow for withdrawal at the option of the depositor before the stated maturity (with the exception of deposits accumulated through the internet listing service which have the same early withdrawal privileges and fees as do our other in-market deposits) and FHLB advances with contractual maturity terms and no call provisions.
3 unchanged sentences
In the event that there is a disruption in the availability of wholesale funds at maturity, the Bank has managed the maturity structure, in compliance with our approved liquidity policy, so at least one year of maturities could be funded through on-balance sheet liquidity.
−Removed: These potential funding sources include deposits maintained at the FRB or Federal Reserve Discount Window utilizing currently unencumbered securities and acceptable loans as collateral.
+Added: These potential funding sources include deposits maintained
+Added: at the FRB or Federal Reserve Discount Window utilizing currently unencumbered securities and acceptable loans as collateral.
As of December 31, 2021, the available liquidity was in excess of the stated policy minimum.
3 unchanged sentences
We believe that the Bank has sufficient liquidity to match the balance of net withdrawable deposits and short-term borrowings in light of present economic conditions and deposit flows.
−Removed: During the year ended December 31, 2020, operating activities resulted in a net cash inflow of $26.6 million.
−Removed: Operating cash flows included net income of $17.0 million and a provision for loan and leases losses of $16.8 million, partially offset by a net increase in loans originated for sale and sold.
−Removed: Net cash used in investing activities for the year ended December 31, 2020 was $454.5 million which consisted of cash outflows to fund net loan growth and the purchase of $8.0 million in additional bank-owned life insurance and the increase of $5.6 million in FHLB stock.
+Added: During the year ended December 31, 2021, operating activities resulted in a net cash inflow of $36.0 million driven by net income of $35.8 million.
+Added: Net cash used in investing activities for the year ended December 31, 2021 was $111.0 million which consisted of $86.7 million in cash outflows to fund net loan growth and $20.3 million in net cash outflows to purchase available-for-sale securities.
Net cash provided by financing activities for the year ended December 31, 2021 was $75.2 million.
−Removed: Financing cash flows included a $325.1 million net increase in deposits and a $98.8 million net increase in FHLB advances used predominantly to fund net loan growth, partially offset by cash dividends paid and share repurchases of $5.7 million and $1.7 million, respectively.
+Added: Financing cash flows included a $102.4 million net increase in deposits, partially offset by a $25.7 million net decrease in FHLB advances, cash dividends paid of $6.2 million, and authorized share repurchases of $5.0 million, respectively.
Refer to Note 11 - Regulatory Capital for additional information regarding the Corporation’s and the Bank’s capital ratios and the ratios required by their federal regulators at December 31, 2021 and 2020.
−Removed: OFF-BALANCE SHEET ARRANGEMENTS
−Removed: As of December 31, 2020, the Bank had outstanding commitments to originate $654.1 million of loans and commitments to extend funds to or on behalf of clients pursuant to standby letters of credit of $8.1 million, which includes $300.2 million of commitments to extend funds beyond one year.
−Removed: We do not expect any losses as a result of these funding commitments.
−Removed: We have evaluated outstanding commitments associated with loans that were identified as impaired loans and concluded that there are no additional losses required to be recorded with these unfunded commitments as of December 31, 2020.
−Removed: We believe that additional commitments will not be granted or additional collateral will be provided to support any additional funds advanced.
−Removed: The Bank also utilizes interest rate swaps for the purposes of interest rate risk management, as described further in Note 17 – Derivative Financial Instruments in the Consolidated Financial Statements.
−Removed: Additionally the Corporation has remaining commitments of $1.3 million to Aldine Capital Fund II, LP (“Aldine II”), $2.1 million to Aldine Capital Fund III, LP (“Aldine III”), and $725,000 to Dane Workforce Housing Fund, LLC (“Workforce Fund”).
−Removed: Aldine II and Aldine III are private equity mezzanine funding limited partnerships in which we have invested.
−Removed: Aldine II began its operations in March 2013 and Aldine III began its operations in October 2018.
−Removed: The Workforce Fund was organized in 2020 to originate and administer investments for the purpose of alleviating the shortage of Affordable Workforce Housing Units in Dane County, Wisconsin.
−Removed: We believe adequate capital and liquidity are available from various sources to fund projected commitments.
−Removed: In the ordinary course of business, the Corporation sells the guaranteed portions of SBA loans to third parties.
−Removed: In the event of a loss resulting from default and a determination by the SBA that there is a compliance deficiency in the manner in which the loan was originated, funded, or serviced by the Corporation, the SBA may require the Corporation to repurchase the
−Removed: loan, deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of the principal loss related to the deficiency from the Corporation.
−Removed: The Corporation must comply with applicable SBA regulations in order to maintain the guaranty.
−Removed: Management has assessed the estimated losses inherent in the outstanding guaranteed portions of SBA loans sold in accordance with ASC 450, Contingencies , and determined a recourse reserve based on the probability of future losses for these loans to be $723,000 at December 31, 2020.
−Removed: The recourse reserve is reported in accrued interest payable and other liabilities on the Consolidated Balance Sheets.
−Removed: See Note 18 – Commitments and Contingencies in the Consolidated Financial Statements for additional information on the SBA recourse reserve.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
17 unchanged sentences
Although we believe that the allowance for loan and lease losses was appropriate as of December 31, 2021 based upon the evaluation of loan and lease delinquencies, non-performing assets, charge-off trends, economic conditions, and other factors, there can be no assurance that future adjustments to the allowance will not be necessary.
−Removed: If the quality of loans or leases deteriorates, then the allowance for loan and lease losses would generally be expected to increase relative to total loans and leases.
+Added: If the quality of loans or leases
+Added: deteriorates, then the allowance for loan and lease losses would generally be expected to increase relative to total loans and leases.
If loan or lease quality improves, then the allowance would generally be expected to decrease relative to total loans and leases.
1 unchanged sentence
Goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis, and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill.
−Removed: As part of the Corporation’s qualitative assessment of goodwill impairment, management considered the triggering event of the COVID-19 pandemic and determined that the significant change in the general economic environment and financial markets, including the Corporation’s market capitalization, represents an interim impairment indicator requiring continued evaluation.
−Removed: The Corporation performed Step 1,
−Removed: quantitative goodwill impairment testing, as of August 1, 2020.
−Removed: Based on the analysis performed, management concluded the Corporation’s goodwill was not impaired as of August 1, 2020.
−Removed: The Corporation conducted a subsequent impairment test as of December 31, 2020, utilizing a qualitative assessment, and concluded that it was more likely than not the estimated fair value of the reporting unit exceeded its carrying value, resulting in no impairment.
+Added: The Corporation conducted its annual impairment test as of August 1, 2021, utilizing a qualitative assessment, and concluded that it was more likely than not the estimated fair value of the reporting unit exceeded its carrying value, resulting in no impairment.
Although no goodwill impairment was noted, there can be no assurances that future goodwill impairment will not occur.
12 unchanged sentences
See also Note 15 – Income Taxes in the Consolidated Financial Statements.
−Removed: The Corporation also invests in certain development entities that generate federal and state historic tax credits.
−Removed: The tax benefits associated with these investments are accounted for under the flow-through method and are recognized when the respective project is placed in service.
+Added: The Corporation also invests in certain development entities that generate federal and state historic and low income housing tax credits.
+Added: The tax benefits associated with these investments are accounted for either under the flow-through method, equity method, or proportional amortization method and are recognized when the respective project is placed in service or over the investment term.
The federal and state taxing authorities who make assessments based on their determination of tax laws may periodically review our interpretation of federal and state income tax laws.
Tax liabilities could differ significantly from the estimates and interpretations used in determining the current and deferred income tax liabilities based on the completion of examinations by taxing authorities.
−Removed: Quantitative and Qualitative Disclosures about Market Risk
−Removed: Not applicable.
Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.