What changed in this filing

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Item 1. Business

2023-02-22 compared with 2022-02-23 · 142 added, 121 removed, 412 unchanged (39% of the section changed)

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(together with all of its subsidiaries, collectively referred to as the “Corporation,” “FBFS,” “we,” “us,” or “our”) is a registered bank holding company originally incorporated in 1986 under the laws of the State of Wisconsin and is engaged in the commercial banking business through its wholly-owned bank subsidiary, First Business Bank (“FBB” or the “Bank”), headquartered in Madison, Wisconsin.

All of our operations are conducted through FBB and First Business Specialty Finance, LLC (“FBSF”).

All of our operations are conducted through FBB and its wholly-owned subsidiary First Business Specialty Finance, LLC (“FBSF”).

The Bank operates as a business bank, delivering a full line of commercial banking products and services tailored to meet the specific needs of small and medium-sized businesses, business owners, executives, professionals, and high net worth individuals.

Our products and services include those for business banking, private wealth, and bank consulting.

Within business banking, we offer commercial lending, asset-based lending, accounts receivable financing, equipment financing, floorplan financing, vendor financing, Small Business Administration (“SBA”) lending and servicing, treasury management services, and company retirement plans.

Our private wealth management services include trust and estate administration, financial planning, investment management, consumer lending and private banking for executives and owners of our business banking clients and others.

Our products and services are focused on business banking, private wealth, and bank consulting.

Our private wealth management services include trust and estate administration, financial planning, investment management, and private banking for executives and owners of our business banking clients and others.

Our bank consulting experts provide investment portfolio administrative services, asset liability management services, and asset liability management process validation for other financial institutions.

We do not utilize a branch network to attract retail clients.

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 operating model is predicated on deep client relationships, financial expertise, and an efficient, centralized administration function delivering best in class client satisfaction.

Our focused model allows experienced staff to provide the level of financial expertise needed to develop and maintain long-term relationships with our clients.

We conduct our commercial banking business operations through one operating segment.

We conduct our commercial banking operations through one operating segment.

As of December 31, 2022, on a consolidated basis, we had total assets of $2.977 billion, total gross loans and leases of $2.443 billion, total deposits of $2.168 billion, and total stockholders’ equity of $260.6 million.

Commercial Banking Business Lines

Commercial Banking Products and Services

Commercial Lending

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Our commercial loans are typically secured by various types of business assets, including inventory, receivables, and equipment.

We also originate loans secured by commercial real estate, including owner-occupied and non owner-occupied commercial facilities.

In very limited cases, we may originate loans on an unsecured basis.

We also originate loans secured by commercial real estate, including owner-occupied and non owner-occupied facilities.

As of December 31, 2022, our conventional commercial real estate and commercial loans – excluding consumer lending, asset-based lending, accounts receivable financing, equipment financing, floorplan financing, and SBA lending described below – represented approximately 75% of our total gross loans and leases receivable.

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FBB, through its wholly-owned subsidiary FBSF, provides asset-based lending to small- to medium-sized companies.

With sales offices located in several states, our asset-based lending team serves clients nationwide.

With business development officers located in several states, our asset-based lending team serves clients nationwide.

We primarily provide revolving lines of credit and term loans for financial and strategic acquisitions, capital expenditures, working capital to support rapid growth, bank debt refinancing, debt restructuring, and corporate turnaround strategies.

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FBB, through its wholly-owned subsidiary FBSF, provides funding to clients by purchasing accounts receivable primarily on a full recourse basis.

With sales offices located in several states, our accounts receivable financing team serves clients nationwide.

With business development officers located in several states, our accounts receivable financing team serves clients nationwide.

Our accounts receivable financing team provides working capital to support growth and other cash flow needs.

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Equipment Financing

FBB, through its wholly-owned subsidiary FBSF, delivers a broad range of equipment finance products, including loans and leases, to address the financing needs of commercial clients in a variety of industries.

FBB, through its wholly-owned subsidiary FBSF, finances a broad range of equipment, through loans and leases, to address the financing needs of commercial clients in a variety of industries.

Our focus in this financing vertical includes manufacturing equipment, industrial assets, construction and transportation equipment, and a wide variety of other commercial equipment.

These financings generally range between $250,000 and $5 million with terms of 36 to 84 months.

FBSF also delivers small ticket vendor equipment financing through its proprietary, online, credit scoring architecture.

FBSF also delivers small ticket vendor equipment financing via an online application and proprietary credit scoring architecture.

Through this nationwide distribution channel, FBSF provides financing solutions for equipment vendors and their end users.

These equipment vendors specialize primarily in healthcare, manufacturing, and technology equipment, as well as specialty vehicles.

The end users (i.e., our lessees and borrowers) are primarily businesses utilizing vocational trucks, physician group practices, veterinarians, and hospitals.

These equipment vendors specialize primarily in healthcare, manufacturing, technology equipment, and specialty vehicles.

The end users (i.e., our lessees and borrowers) are primarily industrial transportation users, physician groups, veterinarians, and hospitals.

These financings generally range between $25,000 and $500,000 with terms of 36 to 84 months.

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FBB, through its wholly-owned subsidiary FBSF, offers floorplan financing for independent car dealerships nationwide.

Floorplan financing allows car dealers the flexibility to finance their acquisition of preowned cars, preserving liquidity and allowing dealers to purchase inventory.

Floorplan financing is the latest expansion of the Bank’s specialized lending solutions, offering floorplan programs from $500,000 to $10 million for larger, well-established independent car dealers.

These floorplan programs generally range from $500,000 to $10 million for larger, well-established independent car dealers.

As of December 31, 2022, floorplan financing represented approximately 2% of our total gross loans and leases receivable.

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The PLP is part of the SBA's effort to streamline the procedures necessary to provide financial assistance to the small business community.

Under this program, the SBA delegates the final credit decision and most servicing and liquidation authority and responsibility to PLP lenders.

Under this program, the SBA delegates the final credit decision, most servicing, liquidation authority and responsibility to PLP lenders.

We leverage this program authority and capacity to package, underwrite, process, service, and liquidate, if necessary, SBA loans nationwide.

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We earn interest income from these loans, generally at variable rates higher than those of our traditional commercial loans.

We also obtain funding and service fee income by gathering deposits from these clients.

We also obtain funding and treasury management fee income by gathering deposits from these clients.

Our SBA strategy generates non-interest income from two primary sources.

First, we typically sell the guaranteed portions of the SBA loans to aggregators who securitize the assets for sale in the secondary market.

First, we often choose to sell the guaranteed portions of the SBA loans to aggregators who securitize the assets for sale in the secondary market.

We receive a premium on each loan sold, resulting in the recognition of a gain in the period of sale.

Second, we receive servicing income from the holder

of the securitized asset over the life of the loan.

Second, we receive servicing income from the holder of the securitized asset over the life of the loan.

As of December 31, 2022, the on-balance sheet portion of SBA loans represented approximately 2% of our total gross loans and leases receivable.

Treasury Management Services

FBB provides comprehensive cash management services for commercial banking and specialized lending clients to manage their cash and liquidity, including lockbox, accounts receivable collection services, electronic payment solutions, fraud detection and protection, information reporting, reconciliation, and data integration solutions.

FBB provides comprehensive treasury management services for commercial banking and specialized lending clients to manage their cash and liquidity, including lockbox, accounts receivable collection services, electronic payment solutions, fraud detection and protection, information reporting, reconciliation, and data integration solutions.

For our clients involved in international trade, the Bank offers international payment services, foreign exchange, and trade letters of credit.

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As of December 31, 2022, FBB had $2.287 billion of private wealth assets under management and administration.

The Bank also originates a small amount of consumer loans to its Private Wealth Management clients.

As of December 31, 2021, our consumer and other loans represented approximately 2% of our total gross loans and leases receivable.

The Bank also offers private banking to its Private Wealth Management clients.

As of December 31, 2022, our private wealth loans represented approximately 2% of our total gross loans and leases receivable.

Bank Consulting Services

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These services include investment portfolio management and administrative services, asset liability management services, and asset liability process validations required by regulators.

FBB encounters strong competition across all of our lines of business.

FBB encounters strong competition across all of our commercial banking products and services.

Such competition includes banks, savings institutions, mortgage banking companies, credit unions, finance companies, equipment finance companies, mutual funds, insurance companies, brokerage firms, investment banking firms, and FinTech companies.

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None of our employees are represented by a union or subject to a collective bargaining agreement.

Information with respect to Human Capital Management is included in the definitive Proxy Statement for the Annual Meeting of the Shareholders to be held on April 29, 2022 under the caption “Human Capital Management” and is incorporated herein by reference.

The Corporation believes achieving strong financial results begins with its employees.

In 2022, the workforce grew to 345 employees.

While the majority of employees are located in the primary banking markets, the Corporation has employees in over 27 states.

This geographic expansion allows the Corporation to continue to diversify the workforce and add producers and specialists as the business lines grow.

The Corporation’s culture is critical and is rooted in our founding beliefs and guided by our cultural competencies.

The Corporation’s leaders and employees are expected to treat everyone with the highest respect.

The clarity of the Corporation’s core values creates a special and committed team atmosphere.

This increases productivity, reduces turnover, attracts motivated employees, and cultivates an inclusive atmosphere.

The Corporation’s culture creates engaged employees, who, in turn, generate satisfied clients.

The Corporation is in a people-differentiated business and attracting and retaining the best talent possible is critical to our success.

The strength of our culture and core values is demonstrated in a number of ways:

• In 2023, the Corporation was named to the national list of Top Workplaces USA for the second year in a row and to the regional list of Wisconsin State Journal Top Workplaces for the South Central Wisconsin area and Milwaukee

Journal Sentinel for the Milwaukee/Southeast Wisconsin area.

Top Workplaces awards are based solely on feedback captured through a third-party administered employee engagement survey and provide regional and national level programs plus industry and culture excellence awards.

Being part of the highly regarded Top Workplaces list is a tangible indicator how well the Corporation is navigating its culture in today’s world of work.

◦ In 2022, as part of the Top Workplaces Survey, the Corporation was awarded the Top Workplaces Culture Excellence recognition across nine categories.

These awards celebrate companies that excel in specific areas of workplace culture.

The Corporation's Culture Excellence Awards include:

Leadership, Innovation, Compensation & Benefits, Work-Life Flexibility, Purpose & Values, DEI Practices, Employee Appreciation, Employee Well-Being, and Professional Development.

• The Corporation has been successful in rehiring former employees ("boomerangs").

The special culture and character and caliber of coworkers are the boomerangs' top reasons for returning.

Eighteen employees have rejoined the Corporation which represents approximately 5% of the workforce.

• In 2022, the Corporation achieved an employee engagement rating of 87% with a 92% participation rate – both are well above the finance and insurance industry norm of 76% and 70%, respectively.

Employee engagement is a key business driver for organizational success.

Engaged employees work harder, are more loyal and are more likely to go the extra mile for the organization and our clients.

• Employee turnover was 11.02% across the Corporation in 2022 – well below the employee turnover average of 20.3% in the banking industry, as reported in a survey conducted by Aon in 2022.

The Corporation is committed to expanding its talent pool and leadership pipeline to include more individuals from underrepresented groups and recognizes how important it is for employees to develop and progress in their careers.

To support this development, the Corporation provides a variety of resources to help employees grow in their current roles and build new skills, including a learning management system, tuition reimbursement, commercial banking development program, and manager effectiveness programs.

The Corporation has an interactive talent management platform which enables more effective talent management, increases engagement and accountability, and supports performance management, goal planning, career pathing and succession management.

• The Corporation continues to make progress with multi-year strategic succession planning goals.

On January 3, 2023, the Corporation announced a number of executive-level promotions and appointments.

In addition, we invest in all our people and have succession planning and talent development goals that go beyond the executive level.

In 2022, the Corporation made progress with the successful recruitment of females in leadership roles in multiple regions.

• A Professional Development check-in was conducted with all employees to encourage goal setting that could potentially lead to a promotion, an internal transfer, or being more effective in their current role.

In 2022, 100% of the workforce established performance goals and nearly 20% of the workforce progressed along their career path into new roles within the Corporation.

The Corporation recognizes the value different perspectives, experiences, and cultures bring to our organization.

To deliver the client-centered solutions for which the Corporation is known, it is important to fully embrace and welcome the dynamic and vibrant backgrounds of our ever-growing workforce and community.

Leaders and managers are committed to fostering a culture of belonging, broadening perspectives, and deepening relationships.

• Throughout 2022, the Corporation furthered its DEI efforts by introducing leaders and all employees to foundational DEI concepts, establishing a shared understanding of why they matter and equipping leaders and managers to demonstrate their commitment to DEI to motivate employee engagement.

◦ 100% of the Corporation's leaders completed a multi-session DEI course curated by our external DEI consultant, an inclusive leadership self-assessment, and participated in all or most of the learning sessions offered throughout the year.

◦ All employees were invited to participate in the multi-session DEI course and learning sessions on a voluntary basis.

Approximately 65% of employees participated in one or more learning courses throughout the year.

• A Belonging Index is measured as part of the Corporation’s engagement survey.

The Belonging Index measures a feeling of security and support, and a sense of acceptance and inclusion as a member of the team and employee of the Corporation.

The Corporation's Belonging Index was 91% in our 2022 engagement survey.

The Corporation continues to evaluate where and how employees work.

As hybrid work has evolved, so has the Corporation.

The Corporation’s leaders and managers have learned to be more flexible and enable employees to do their jobs with more autonomy and in new ways.

This has also enabled the Corporation to expand talent pools and grow the depth and

diversity of its workforce.

In 2022, the Corporation had approximately 75% of its employees working a hybrid or remote work schedule.

The Corporation is committed to paying an attractive, equitable, and competitive wage based on market rates for the employees' roles, experience and how they perform.

To ensure pay is competitive, the Corporation regularly benchmarks against other companies both within and outside our industry.

The Corporation is additionally committed to supporting employees’ and their families’ well-being by offering a very comprehensive total rewards package.

The Corporation’s Wellness Committee assists in prioritizing how to best support employees’ physical, emotional, and financial wellness.

Given the competitive job market and the critical importance of retaining employees, annual base salaries were increased by an additional $650,000 or approximately 2% more in 2023 (and in 2022) than the Corporation’s historical average annual merit increase.

First Business Bank

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In 1990, FBB relocated its home office to Madison, Wisconsin, and began focusing on providing high-quality banking services to small- to medium-sized businesses located in Madison and the surrounding area.

FBB’s business lines include commercial loans, commercial real estate

loans, asset-based loans, accounts receivable financing, SBA lending and servicing, floorplan financing, equipment loans and leases, commercial deposit accounts, company retirement solutions, and treasury management services.

FBB’s business lines include commercial loans, commercial real estate loans, asset-based loans, accounts receivable financing, SBA lending and servicing, floorplan financing, equipment loans and leases, commercial deposit accounts, company retirement solutions, and treasury management services.

FBB offers a variety of deposit accounts and personal loans to business owners, executives, professionals, and high net worth individuals.

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FBB has four full-service banking locations in Madison, Brookfield, and Appleton, Wisconsin, and Leawood, Kansas.

As of December 31, 2021, FBB had seven wholly-owned subsidiaries and total gross loans and leases receivable of $2.241 billion, total deposits of $1.958 billion, and total stockholders’ equity of $265.0 million.

As of December 31, 2022, FBB had six wholly-owned subsidiaries and total gross loans and leases receivable of $2.443 billion, total deposits of $2.171 billion, and total stockholders’ equity of $294.1 million.

FBFS Statutory Trust II

In September 2008, FBFS formed FBFS Statutory Trust II (“Trust II”), a Delaware business trust wholly-owned by FBFS.

In 2008, Trust II completed the sale of $10.0 million of 10.5% fixed rate trust preferred securities.

Trust II also issued common securities in the amount of $315,000 to FBFS.

Trust II used the proceeds from the offering to purchase $10.3 million of 10.5% junior subordinated notes issued by FBFS.

FBFS has the right to redeem the junior subordinated notes at each interest payment date on or after September 26, 2013.

The preferred securities are mandatorily redeemable upon the maturity of the junior subordinated notes on September 26, 2038.

In September 2008, FBFS formed FBFS Statutory Trust II (“Trust II”), a Delaware business trust wholly-owned by FBFS to facilitate the sale of trust preferred securities by Trust II and Trust II’s purchase of junior subordinated notes issued by FBFS.

FBFS’s ownership interest in Trust II has not been consolidated into the financial statements.

As of March 30, 2022, the junior subordinated notes and preferred securities were redeemed and Trust II was dissolved.

Corporate Information

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This Form 10-K and all of our other filings under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available free of charge through that website, including copies of our proxy statement, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we file those materials with, or furnish them to, the Securities and Exchange Commission (“SEC”).

Although certain of our business lines are marketed throughout the Midwest and beyond, our primary markets lie in Wisconsin, Kansas, and Missouri.

Although certain of our commercial banking products and services are marketed throughout the Midwest and beyond, our primary markets lie in Wisconsin, Kansas, and Missouri.

Specifically, our three markets in Wisconsin consist of South Central Wisconsin, Southeast Wisconsin, and Northeast Wisconsin.

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South Central Wisconsin

As the capital of Wisconsin and home of the University of Wisconsin-Madison, the greater Madison area, specifically Dane County, offers an appealing economic environment populated by a highly educated workforce.

As the capital of Wisconsin and home of the University of Wisconsin-Madison, the greater Madison area, specifically Dane County and surrounding counties, offers an appealing economic environment populated by a highly educated workforce.

While the economy of the South Central Wisconsin is driven in large part by the government and education sectors, there is also a diverse array of industries outside of these segments.

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Southeast Wisconsin

Our Southeast Wisconsin market, the primary commercial and industrial hub for Southeast Wisconsin, provides a diverse economic base, with both a highly skilled labor force and significant manufacturing base.

Southeast Wisconsin provides a diverse economic base with a highly skilled labor force and strong manufacturing industry.

The most prominent economic sectors include manufacturing, financial services, health care, diversified service companies, and education.

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There are no family relationships between any directors or executive officers of FBFS.

Chambas, age 59 , has served as a director of FBFS since July 2002, as Chief Executive Officer since December 2006 and as President since February 2005.

Chambas, age 60 , has served as a director of FBFS since July 2002, as Chief Executive Officer since December 2006 and as President from February 2005 until January 2023.

He served as Chief Operating Officer of FBFS from February 2005 to September 2006 and as Executive Vice President from July 2002 to February 2005.

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Sloane has over 35 years of financial services experience including mergers and acquisitions, strategic planning and financial reporting and analysis.

Prior to joining FBFS, Mr.

Sloane was Executive Vice President, Chief Financial Officer and Treasurer with Peoples Bancorp, Inc.

in Marietta, Ohio from 2008 to 2015.

He also served as Senior Vice President of Strategic Planning & Analysis for WesBanco, Inc.

in Wheeling, West Virginia from 2006 to 2008, as Senior Vice President and Controller from 1998 to 2006 and in various other capacities from 1989 to 1998.

On May 18, 2022, Mr.

Sloane notified the Corporation that he intends to retire on March 31, 2023.

The Corporation plans to appoint Brian D.

Spielmann to succeed Mr.

Sloane as the Corporation’s Chief Financial Officer upon Mr.

Sloane’s retirement.

Spielmann is currently serving as Deputy Chief Financial Officer and Chief Accounting Officer of the Corporation.

Conley, age 69 , has served as FBFS’s General Counsel since June 2008.

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She has been an employee of FBFS for over 25 years.

Meloy, age 60, has served as Chief Executive Officer of FBB since December 2007.

Meloy joined FBFS in 2000 and has held various positions including Executive Vice President of FBB and President and Chief Executive Officer of FBB-Milwaukee.

He also currently serves as a director of our subsidiaries FBB and FBSF.

Meloy, age 61, was promoted to Executive Vice President of FBFS in January 2023..

Meloy joined FBFS in 2000 and has held various positions including Chief Executive Officer of FBB, Executive Vice President of FBB, and President and Chief Executive Officer of FBB-Milwaukee.

He also currently serves as a director of our FBSF subsidiary.

Meloy has over 35 years of commercial lending experience.

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He also served as Director of IT for Aurora Health Care from 2006 to 2010 and Manager of IT for the American Transmission Company from 2000 to 2006.

Seiler, age 57 , has served as Chief Operating Officer of FBFS since April 2016.

Seiler, age 58 , has served as Chief Operating Officer of FBFS since April 2016 and was promoted to President of FBFS in January 2023.

He also currently serves as a director for our subsidiary FBSF.

Seiler has over 25 years of financial services experience including his previous position as Managing Director (formerly Senior Vice President/Manager) of the Correspondent Banking Division with BMO Harris

Bank in Milwaukee, Wisconsin which he held from 2007 to 2016.

Prior to that, he held the position of Senior Vice President/Team Leader, Correspondent Real Estate Division from 2005 to 2007 and Vice President, Relationship Manager, Commercial Real Estate from 2002 to 2005.

Quade, age 57 , has served as Chief Credit Officer of FBFS since April 2020.

Quade had been serving as the Company’s Deputy Chief Credit Officer since October 2019.

Quade had been serving as the Corporation’s Deputy Chief Credit Officer since October 2019.

He also currently serves as a director for our subsidiary FBSF.

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Quade held the position of Senior Vice President with Johnson Bank in Milwaukee, Wisconsin which he held from 2008 to 2019.

Hartlieb , age 51, has served as President of FBB since 2015.

Hartlieb , age 52, has served as President of FBB since 2015 and was promoted to Chief Executive Officer and concurrently elected a director of FBB in January 2023.

Hartlieb joined FBB in 2009 as Senior Vice President of Greater Dane County.

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Federal and state banking laws impose a comprehensive system of supervision, regulation, and enforcement on the operations of FDIC-insured institutions, their holding companies, and affiliates that is intended primarily for the protection of the FDIC-insured deposits and depositors of banks, rather than shareholders.

These laws, and the regulations of the bank regulatory agencies issued under them, affect, among other things, the scope of our business, the kinds and amounts of investments the Corporation and the Bank may make, reserve requirements, required capital levels relative to assets, the nature and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire, dealings with the Corporation’s and the Bank’s insiders and affiliates, and payment of dividends.

In reaction to the global financial crisis beginning in 2008 (the “global financial crisis”) and particularly following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), we experienced heightened regulatory requirements and scrutiny.

These laws, and the regulations of the bank regulatory agencies issued under them, affect, among other things, the scope of our business, the kinds and amounts of investments the Corporation and the Bank may make, limits on the Bank’s loans to any one borrower, reserve requirements, required capital levels relative to assets, the nature and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire, dealings with the Corporation’s and the Bank’s insiders and affiliates, and payment of dividends.

In reaction to the global financial crisis beginning in 2008 (the “global financial crisis”), and particularly following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), we experienced

heightened regulatory requirements and scrutiny.

Although the reforms primarily targeted systemically important financial service providers, their influence filtered down in varying degrees to community banks over time and caused our compliance and risk management processes, and the costs thereof, to increase.

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The supervisory framework for U.S.

banking organizations subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that are not publicly

available and can impact the conduct and growth of their business.

banking organizations subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that are not publicly available and can impact the conduct and growth of their business.

These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, information technology, and various other factors.

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However, if such securities were issued prior to May 19, 2010 by bank holding companies with less than $15 billion of assets, they may be retained, subject to certain restrictions.

Because we have assets of less than $15 billion, we are able to maintain our trust preferred proceeds as capital but we have to comply with new capital mandates in other respects and will not be able to raise capital in the future through the issuance of trust preferred securities.

The Basel III Rule .

The risk-based capital guidelines for U.S.

banks since 1989 were based upon the 1988 capital accord known as “Basel I” adopted by the international Basel Committee on Banking Supervision, a committee of central banks and bank supervisors that acts as the primary global standard setter for prudential regulation, as implemented by the U.S.

bank regulatory agencies on an interagency basis.

The principles reached as part of Basel I have been subject to change in subsequent years.

On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced agreement on a strengthened set of capital requirements for banking organizations around the world, known as Basel III, to address deficiencies recognized in connection with the global financial crisis.

In July 2013, the U.S.

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The Basel III Rule is applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies” who are relieved from compliance with the Basel III Rule.

While holding companies with consolidated assets of less than $3 billion, like the Corporation, are considered small bank holding companies for this purpose, the Corporation has securities registered with the SEC and that disqualifies us from taking advantage of the relief.

While holding companies with consolidated assets of less than $3 billion, like us, are considered small bank holding companies for this purpose, we have securities registered with the SEC and that disqualifies us from taking advantage of the relief.

Banking organizations became subject to the Basel III Rule on January 1, 2015, and its requirements were fully phased-in as of January 1, 2019.

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Not only did the Basel III Rule increase most of the required minimum capital ratios in effect prior to January 1, 2015, but it introduced the concept of Common Equity Tier 1 Capital, which consists primarily of common stock, related surplus (net of treasury stock), retained earnings, and Common Equity Tier 1 minority interests subject to certain regulatory adjustments.

The Basel III Rule also changed the definition of capital by establishing more stringent criteria that instruments must meet to be considered Additional Tier 1 Capital (primarily non-cumulative perpetual preferred stock that meets certain requirements) and

Tier 2 Capital (primarily other types of preferred stock and subordinated debt, subject to limitations).

A number of instruments that qualified as Tier 1 Capital under Basel I do not qualify, or their qualifications changed.

For example, noncumulative perpetual preferred stock, which qualified as simple Tier 1 Capital under Basel I, does not qualify as Common Equity Tier 1 Capital, but qualifies as Additional Tier 1 Capital.

A number of instruments that historically qualified as Tier 1 Capital under Basel I do not qualify, or their qualifications changed.

For example, noncumulative perpetual preferred stock, which qualified as simple Tier 1 Capital, does not qualify as Common Equity Tier 1 Capital, but qualifies as Additional Tier 1 Capital.

The Basel III Rule also constrained the inclusion of minority interests, mortgage-servicing assets, and deferred tax assets in capital and requires deductions from Common Equity Tier 1 Capital in the event that such assets exceed a certain percentage of a banking institution’s Common Equity Tier 1 Capital.

The Basel III Rule required minimum capital ratios as of January 1, 2015, as follows:

The Basel III Rule required minimum capital ratios beginning as of January 1, 2015, as follows:

• A ratio of minimum Common Equity Tier 1 Capital equal to 4.5% of risk-weighted assets;

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• A Common Equity Tier 1 Capital ratio to risk-weighted assets of 6.5% or more;

• A ratio of Tier 1 Capital to total risk-weighted assets of 8% or more (6% under Basel I);

• A ratio of Total Capital to total risk-weighted assets of 10% or more (the same as Basel I);

• A ratio of Tier 1 Capital to total risk-weighted assets of 8% or more;

• A ratio of Total Capital to total risk-weighted assets of 10% or more;

• A leverage ratio of Tier 1 Capital to total adjusted average quarterly assets of 5% or greater.

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(i) requiring the institution to submit a capital restoration plan;

(ii) limiting the institution’s asset growth and restricting its activities;

(ii) limiting

the institution’s asset growth and restricting its activities;

(iii) requiring the institution to issue additional capital stock (including additional voting stock) or to sell itself;

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The BHCA does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies.

Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of non-banking activities, including securities and insurance underwriting and sales, merchant banking, and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of FDIC-insured institutions or the financial system generally.

activities, including securities and insurance underwriting and sales, merchant banking, and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of FDIC-insured institutions or the financial system generally.

The Corporation has not elected to operate as a financial holding company.

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On March 31, 2020, the final rule’s original effective date was delayed and became effective on September 30, 2020.

Capital Requirements.

The Corporation has been subject to the complex consolidated capital requirements of the Basel III Rule since the U.S.

federal banking agencies approved its implementation effective January 1, 2015.

Only qualifying small bank holding companies were excluded from compliance with the Basel III Rule by virtue of the Federal Reserve’s “Small Bank Holding Company Policy Statement.” Prior to 2018, our assets were in excess of the maximum permitted in the definition of a small bank holding company for this purpose;

however, the Regulatory Relief Act expanded the category of holding companies that may rely on the policy statement by raising the maximum amount of assets they may hold to $3 billion, and the Federal Reserve issued an interim final rule, effective August 30, 2018, to bring the policy statement in line with the law.

As a result, qualifying holding companies with assets of less than $3 billion are not subject to the capital requirements of the Basel III Rule and are deemed to be “well-capitalized.” However, one of the qualifications for this treatment is that the holding company not have securities registered with the SEC.

The Corporation is a public reporting company and has shares registered with the SEC.

As such, the Corporation does not meet the qualifications of the Small Bank Holding Company Policy Statement.

For a discussion of capital requirements, see The Role of Capital above.

Dividend Payments.

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For institutions like the Bank that are not considered large and highly complex banking organizations, assessments are now based on examination ratings and financial ratios.

The total base assessment rates currently range from 1.5 basis points to 30 basis points.

At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, increases or decreases the assessment rates, following notice and comment on proposed rulemaking.

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The reserve ratio is the FDIC insurance fund balance divided by estimated insured deposits.

The Dodd-Frank Act altered the minimum reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends to FDIC-insured institutions when the reserve ratio exceeds certain thresholds.

The reserve ratio reached 1.36% as of September 30, 2018, exceeding the statutory required minimum reserve ratio of 1.35%.

Accordingly, pursuant to rules adopted by the FDIC, in January 2019 the FDIC provided notice of assessment credits awarded to insured depository institutions, like the Bank, with total consolidated assets of less than $10 billion for the portion of their regular assessments that contributed to growth in the reserve ratio between 1.15% and 1.35%.

The FDIC applies the credits each quarter (beginning with the September 2019 assessment invoice for the second quarter of 2019) that the reserve ratio is at least 1.38% to offset the regular deposit insurance assessments of institutions with credits.

As of September 30, 2021, the most recent available date, the reserve ratio was 1.27%.

The reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends to FDIC-insured institutions when the reserve ratio exceeds certain thresholds.

The reserve ratio was 1.26% as of June 30, 2022, which is less than the statutory minimum reserve ratio of 1.35% to be achieved by September 30, 2028.

Accordingly, on June 1, 2022, the FDIC adopted a final rule increasing the initial base deposit insurance rate schedules by 2 basis points, beginning with the first quarterly assessment period of 2023.

Starting January 1, 2023, the total base assessment rates for small banks, such as the Bank, ranged from 2.5 basis points to 32 basis points.

This new assessment rate schedule will remain in effect unless and until the reserve ratio meets or exceeds 2.00%.

Progressively lower assessment rate schedules will take effect when the reserve ratio reaches 2.00%, and again when it reaches 2.50%.

Supervisory Assessments.

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The amount of the assessment is calculated on the basis of the Bank’s total assets.

Capital Requirements.

Banks are generally required to maintain capital levels in excess of other businesses.

For a discussion of capital requirements, see The Role of Capital above.

Liquidity Requirements.

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However, under federal law and FDIC regulations, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank.

Federal law and FDIC regulations also prohibit FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines that the activity would not pose a significant risk to the DIF.

Federal law and FDIC regulations also prohibit FDIC-insured state banks and their

subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines that the activity would not pose a significant risk to the DIF.

These restrictions have not had, and are not currently expected to have, a material impact on the operations of the Bank.

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Federal law permits state and national banks to merge with banks in other states subject to:

(i) regulatory

(i) regulatory approval;

(ii) federal and state deposit concentration limits;

and (iii) state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger.

Transaction Account Reserves.

As announced on March 15, 2020, the Federal Reserve reduced reserve requirement ratios to zero percent by way of an interim final rule that was effective March 26, 2020, and a subsequent final rule adopting the interim final rule effective March 12, 2021.

This action eliminated reserve requirements for all depository institutions.

The Federal Reserve Act authorizes the Federal Reserve to establish reserve requirements within specified ranges for purposes of implementing monetary policy on certain types of deposits and other liabilities of depository institutions and impose reserve requirements on transaction accounts, non-personal time deposits, and Eurocurrency liabilities.

Prior to the change effective March 26, 2020, reserve requirement ratios on net transaction accounts differed based on the amount of net transactions accounts at the depository institution.

A certain amount of net transaction accounts, known as the "reserve requirement exemption amount," was subject to a reserve requirement ratio of zero percent.

Net transaction account balances above the reserve requirement exemption amount and up to a specified amount, known as the "low reserve tranche," were subject to a reserve requirement ratio of 3%.

Net transaction account balances above the low reserve tranche were subject to a reserve requirement ratio of 10%.

For 2022, the low reserve tranche amounts and exemption amounts were increased to $640.6 million and $32.4 million, respectively, compared to $182.9 million and $21.1 million, respectively, for 2021.

These reserve requirements are subject to annual adjustment by the Federal Reserve.

Brokered Deposits.

On December 19, 2018, the FDIC adopted a final rule on the treatment of reciprocal deposits pursuant to the Regulatory Relief Act.

The final rule, effective March 6, 2019, exempts certain reciprocal deposits from being considered as brokered deposits for certain insured institutions.

The final rule, effective March 6, 2019, exempts certain reciprocal deposits from being

considered as brokered deposits for certain insured institutions.

In particular, well-capitalized and well-rated institutions are not required to treat reciprocal deposits as brokered deposits up to the lesser of 20% of their total liabilities or $5 billion.

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On December 14, 2021, the Office of the Comptroller of the Currency (“OCC”) issued a final rule to rescind the June 2020 Community Reinvestment Act (“CRA”) rule and replace it with a rule based on the rules adopted jointly by the federal banking agencies in 1995, as amended.

The final rule aligns the OCC’s CRA rules with the current Board of Governors of the Federal Reserve System and Federal Deposit Insurance Corporation rules and thereby facilitates the ongoing interagency work to modernize the CRA regulatory framework and create consistency for all insured depository institutions.

The final rule aligns the OCC’s CRA rules with the current Federal Reserve and FDIC rules and thereby facilitates the ongoing interagency work to modernize the CRA regulatory framework and create consistency for all insured depository institutions.

Anti-Money Laundering.

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As implemented by federal banking and securities regulators and the Department of the Treasury, AML laws obligate depository institutions to verify their customers’ identity, conduct customer due diligence, report on suspicious activity, file reports of transactions in currency, and conduct enhanced due diligence on certain accounts.

In addition, the Financial Crimes Enforcement Network (“FinCen”) promulgated customer due diligence and customer identification rules that required banks to identify and verify the identity of beneficial owners of all legal entity customers (with certain exclusions) at the time a new account is opened (subject to certain exemptions).

Sanctions laws prohibit persons of the United States from engaging in any transaction with a restricted person or restricted country.

Depository institutions are required by their respective federal regulators to maintain policies and procedures in order to ensure compliance with the above obligations.

Federal regulators regularly examine BSA/Anti–Money Laundering (“AML”) and sanctions compliance programs to ensure their adequacy and effectiveness, and the frequency and extent of such examinations and the remedial actions

resulting therefrom have been increasing.

Non–compliance with sanctions laws and/or AML laws or failure to maintain an adequate BSA/AML compliance program can lead to significant monetary penalties and reputational damage, and federal regulators evaluate the effectiveness of an applicant in combating money laundering when determining whether to approve a proposed bank merger, acquisition, restructuring, or other expansionary activity.

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The new law establishes the most significant overhaul of BSA and AML since the USA PATRIOT Act of 2001, including:

(i) new beneficial ownership reporting requirements;

(i) new beneficial ownership information and the establishment of a beneficial ownership registry, which requires corporate entities (generally any corporation, limited liability company or similar entity with 20 or fewer employees and annual gross income of $5 million or less) to report beneficial ownership information to FinCEN (which information will be maintained by FinCEN and made available upon request to financial institutions);

(ii) whistleblower and penalty enhancements;

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federal and state laws and regulations governing requirements for maintaining policies and procedures to protect non-public personal information of their consumers.

These laws require the Bank to periodically disclose their privacy policies and practices relating to sharing such information and permit consumers to opt out of their ability to share information with unaffiliated third parties under certain circumstances.

require the Bank to periodically disclose their privacy policies and practices relating to sharing such information and permit consumers to opt out of their ability to share information with unaffiliated third parties under certain circumstances.

They also impact the Bank’s ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to contact clients with marketing offers.

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Multiple states and Congress are considering additional laws or regulations that could create or alter individual privacy rights and impose additional obligations on banks and related financial services companies in possession of or with access to personal data.

On November 18, 2021, the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve System, and the Office of the Comptroller of the Currency (OCC) (collectively, the agencies) issued a joint final rule, to establish computer-security incident notification requirements for banking organizations and their bank service providers.

On November 18, 2021, the FDIC, the Federal Reserve System, and the OCC (collectively, the agencies) issued a joint final rule, to establish computer-security incident notification requirements for banking organizations and their bank service providers.

The rule will provide the agencies with early awareness of emerging threats to banking organizations and the broader financial system, including potentially systemic cyber events.

The final rule takes effect on April 1, 2022, with full compliance extended to May 1, 2022.

The final rule took effect on April 1, 2022, with full compliance extended to May 1, 2022.

Concentrations in Commercial Real Estate .

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Because abuses in connection with residential mortgages were a significant factor contributing to the financial crisis, many new rules issued by the CFPB and required by the Dodd-Frank Act addressed mortgage and mortgage-related products, their underwriting, origination, servicing, and sales.

The Dodd-Frank Act significantly expanded underwriting requirements

applicable to loans secured by 1-4 family residential real property and augmented federal law combating predatory lending practices.

The Dodd-Frank Act significantly expanded underwriting requirements applicable to loans secured by 1-4 family residential real property and augmented federal law combating predatory lending practices.

In addition to numerous disclosure requirements, the Dodd‑Frank Act imposed new standards for mortgage loan originations on all lenders, including banks and savings associations, in an effort to strongly encourage lenders to verify a borrower’s ability to repay, while also establishing a presumption of compliance for certain “qualified mortgages.” The Regulatory Relief Act provided relief in connection with mortgages for banks with assets of less than $10 billion, and, as a result, mortgages the Bank makes are now considered to be qualified mortgages if they are held in portfolio for the life of the loan.

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The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

Pursuant to an additional FASB accounting standard update, “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842),” issued in November 2019, the effective date of CECL was delayed from January 2020 to January 2023 for certain entities, including smaller reporting companies like the Corporation.

On May 8, 2020, four federal banking agencies issued an interagency policy statement on the new CECL methodology.

The policy statement harmonizes the agencies' policies on allowance for credit losses with the FASB’s new accounting standards.

Specifically, the statement (i) updates concepts and practices from prior policy statements issued in December 2006 and July 2001 and specifies which prior guidance documents are no longer relevant;

(ii) describes the appropriate CECL methodology, in light of Topic 326, for determining Allowances for Credit Losses (“ACLs”) on financial assets measured at amortized cost, net investments in leases, and certain off-balance sheet credit exposures;

and (iii) describes how to estimate an ACL for an impaired available-for-sale debt security in line with Topic 326.

The policy statement is effective at the time that each institution adopts the new standards required by the FASB.

On December 21, 2018, the federal banking agencies issued a joint final rule revising their regulatory capital rules to (i) address the impending implementation of the CECL accounting standard under GAAP;

(ii) provide an optional three-year phase-in period for the day-one adverse regulatory capital effects that banking organizations were expected to experience upon enacting CECL;

and (iii) require the use of CECL in stress tests beginning with the 2020 capital planning and stress testing cycle for certain banking organizations.

The final rule took effect on April 1, 2019;

however, on August 26, 2020, the federal bank regulatory agencies issued a final rule allowing institutions that adopted the CECL accounting standard in 2020 the option to mitigate the estimated capital effects of CECL for two years, followed by the three-year transition period already provided by the joint final rule.

We elected to use the 2020 Capital Transition Relief as permitted under the applicable regulations.

Legislation and Regulation Addressing the COVID-19 Pandemic

The COVID-19 pandemic has created unprecedented health and economic uncertainty in the United States and internationally and has prompted federal, state, and local legislative and regulatory action designed to address the pandemic’s challenges.

The COVID-19 pandemic created unprecedented health and economic uncertainty in the United States and internationally and has prompted federal, state, and local legislative and regulatory action designed to address the pandemic’s challenges.

Beginning in March 2020, the federal bank regulatory agencies began issuing various rulemakings and interagency statements providing temporary resources, flexibility and relief for financial institutions.

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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.

What changed 10-K

Item 1. Business