What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-22 compared with 2022-02-23 · 352 added, 256 removed, 725 unchanged (46% of the section changed)

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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:

• 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.

• Adverse changes in the economy or business conditions, either nationally or in our markets, including, without limitation, inflation, supply chain issues, labor shortages, wage pressures, and the adverse effects of the COVID-19 pandemic on the global, national, and local economy.

• Competitive pressures among depository and other financial institutions nationally and in our markets.

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• Fluctuations in interest rates and market prices.

• The consequences of continued bank acquisitions and mergers in our markets, resulting in fewer but much larger and financially stronger competitors.

• Changes in legislative or regulatory requirements applicable to us and our subsidiaries.

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These risks, together with the risks identified in Item 1A — Risk Factors , could cause actual results to differ materially from what we have anticipated or projected.

These risk factors and uncertainties should be carefully considered by our shareholders and potential investors.

These risk factors and uncertainties should be carefully considered by our stockholders and potential investors.

Investors should not place undue reliance on any such forward-looking statements, which speak only as of the date made.

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

We operate as a business bank focusing on 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, SBA lending and servicing, treasury management services, and company retirement plans.

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.

FBB 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 are focused on 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 solutions, and company retirement services.

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.

Long-Term Strategic Plan

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.

In early 2019, management finalized the development of its five year strategic plan and began the implementation of strategies and initiatives that drive successful execution.

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.

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• We will optimize our business lines for diversification and performance.

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.

As of and for the Year Ended December 31,

Key Performance Indicators 2019 2020 2021 2023 Goal

Return on average equity (“ROAE”) 12.55% 8.64% 16.21% 13.50%

Throughout 2023, the last year of the existing plan, management intends to undertake an extensive process to reassess its key strategies and performance indicators to create a new long-term strategic plan.

The table below shows the Corporation’s performance for the years ended December 31, 2022, 2021, and 2020 in comparison to the key performance indicators included in the Corporation’s 2019 strategic plan.

As of December 31,

Key Performance Indicators 2020 2021 2022 Strategic Plan

Return on average common equity (“ROACE”) 8.64% 16.21% 16.79% 13.50%

Return on average assets (“ROAA”) 0.70% 1.37% 1.46% 1.15%

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Results as of and for the year ended December 31, 2022 include:

• 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.

• Net income available to common shareholders for the year ended December 31, 2022 was $40.2 million, increasing 12.4% compared to $35.8 million for the year ended December 31, 2021.

• Diluted earnings per common share were $4.75 for the year ended December 31, 2022, increasing 13.9% compared to $4.17 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.

• Pre-tax, pre-provision adjusted earnings, which excludes certain one-time and discrete items, for the year ended December 31, 2021 was $41.2 million, increasing 7.2% compared to $38.4 million for the year ended December 31, 2020.

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.

• 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.

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.

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.

• 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.

• 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.

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.

• Return on average assets (“ROA”) for the year ended December 31, 2022 was 1.46% compared to 1.37% for 2021.

• Return on average common equity (“ROACE”), which is defined as net income available to common shareholders divided by average equity reduced by average preferred stock, if any.

ROACE was 16.79% for the year ended December 31, 2022, compared to 16.21% for the year ended December 31, 2021.

• Pre-tax, pre-provision (“PTPP”) adjusted earnings, which excludes certain one-time and discrete items, and PTPP ROA were $47.9 million and 1.74%, respectively, for the year ended December 31, 2022, increasing $6.7 million and 16 bps, from year ended December 31, 2021.

Excluding PPP interest and fee income, PTPP adjusted earnings and ROA were $47.3 million and 1.72%, respectively, for the year ended December 31, 2022, increasing $15.0 million and 40 bps from December 31, 2021.

• Fees in lieu of interest, defined as prepayment fees, asset-based loan fees, non-accrual interest, and loan fee amortization, totaled $5.3 million for the year ended December 31, 2022, decreasing 52.7% compared to $11.2 million for the year ended December 31, 2021.

PPP fee income, included in loan fee amortization, was $509,000 and $7.3 million for the years ended December 31, 2022 and December 31, 2021, respectively.

• Net interest margin was 3.82% for the year ended December 31, 2022, increasing 38 bps from 3.44% for the year ended December 31, 2021.

Adjusted net interest margin, which excludes certain one-time and discrete items, was 3.64% for the year ended December 31, 2022, increasing 43 bps from 3.21% for the year ended December 31, 2021.

• Top line revenue, defined as net interest income plus non-interest income, grew 13.4% to $127.9 million for the year ended December 31, 2022, compared to $112.8 million for the year ended December 31, 2021.

Excluding PPP interest income and fees, top line revenue increased 22.4% to $127.2 million for the year ended December 31, 2022, compared to $103.9 million for the year ended December 31, 2021.

• Effective tax rate was 21.79% for the year ended December 31, 2022 compared to 23.97% for the year ended December 31, 2021.

• Provision for loan and lease losses was a net benefit of $3.9 million for the year ended December 31, 2022, compared to a net provision benefit of $5.8 million for the year ended December 31, 2021.

Net recoveries as a percentage of average loans and leases were 0.16% for the year ended December 31, 2022, compared to net recoveries of 0.07% for the year ended December 31, 2021.

• Total assets at December 31, 2022 increased $323.7 million, or 12.2%, to $2.977 billion from $2.653 billion at December 31, 2021.

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Average gross loans and leases, excluding net PPP loans, of $2.295 billion increased $268.4 million, or 13.2% for the year ended December 31, 2022, compared to $2.027 billion for the same period in 2021.

• 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.

• 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.

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.

• 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.

• PPP loans and PPP deferred processing fees were $554,000 and $48,000, respectively, at December 31, 2022, compared to $27.9 million and $557,000, respectively, at December 31, 2021.

Average PPP loans, net of deferred processing fees, were $9.7 million and $152.3 million for the year ended December 31, 2022 and 2021, respectively.

• Non-performing assets decreased to $3.8 million as of December 31, 2022, compared to $6.5 million as of December 31, 2021.

Non-performing assets to total assets, both including and excluding net PPP loans, improved to 0.13% as of December 31, 2022, from 0.25% as of December 31, 2021.

• The allowance for loan and lease losses as of December 31, 2022 decreased $106,000, or 0.4%, to $24.2 million, compared to $24.3 million as of December 31, 2021.

The allowance for loan and lease losses was 0.99% of total loans as of December 31, 2022, compared to 1.09% as of December 31, 2021.

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, 2022 increased $37.7 million, or 2.0%, to $1.966 billion from $1.928 billion as of December 31, 2021.

Average in-market deposits of $1.929 billion increased $144.5 million, or 8.1%, for the year ended December 31, 2022, compared to $1.784 billion for the same period in 2021.

• 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.

• Private wealth and trust assets under management and administration decreased by $260.7 million, or 8.9%, to $2.660 billion at December 31, 2022, compared to $2.921 billion at December 31, 2021.

Private wealth management service

fees increased $97,000, or 0.90%, for the year ended December 31, 2022, compared to the year ended December 31, 2021.

The detailed financial discussion that follows focuses on 2022 results compared to 2021.

Information pertaining to 2021 in comparison to 2020 was included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021 on page 30 under Part II, Item 7, “Management’s Discussion and Analysis of Financial and Results of Operations,” which was filed with the SEC on February 23, 2022.

Results of Operations

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Top line revenue, comprised of net interest income and non-interest income, increased 13.4% for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to a $13.8 million, or 16.3%, increase in net interest income and a $1.3 million, or 4.7%, increase in non-interest income.

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.

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.

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 increase in net interest income was driven by net interest margin expansion combined with an increase in average loans and leases outstanding and related interest income, partially offset by a reduction in PPP loan fee income.

The increase in non-interest income was primarily due to a $1.0 million increase in other fee income, a $504,000 increase in loan fee income, and a $425,000 increase in swap fee income.

These favorable variances were partially offset by a $1.5 million decrease in gains on the sale of SBA loans during the year ended December 31, 2022.

The components of top line revenue were as follows:

For the Year Ended December 31, Change From Prior Year

2021 2020 $ Change % Change

2022 2021 2020 $ Change 2022 % Change 2022 $ Change 2021 % Change 2021

(Dollars in Thousands)

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Top line revenue $ 127,850 $ 112,762 $ 104,011 $ 15,088 13.4 $ 8,751 8.4 %

Return on Average Assets and Return on Average Equity

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.

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.

ROAE for the year ended December 31, 2021 was 16.21% compared to 8.64% for the year ended December 31, 2020.

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.

Return on Average Assets and Return on Average Common Equity

ROAA was 1.46% for the year ended December 31, 2022, compared to 1.37% for the year ended December 31, 2021 principally due to a $13.8 million increase in net interest income partially offset by an increase in operating expenses.

Please refer to the operating results analysis below for further discussion on the reasons driving the increase in profitability.

We consider ROA a critical metric to measure the profitability of our organization and how efficiently our assets are deployed.

ROA 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.

ROACE for the year ended December 31, 2022 was 16.79% compared to 16.21% for the year ended December 31, 2021.

The primary reason for the change in ROACE is consistent with the net income variance explanation as discussed under Return on Average Assets above.

We view ROACE 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

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.

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.

The efficiency ratio was 63.49% for the year ended December 31, 2021, compared to 63.09% for the year ended December 31, 2020.

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.

The increase in operating revenue was partially offset by a $5.9 million, or 12.8%, increase in compensation.

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.

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.

The efficiency ratio and pre-tax, pre-provision adjusted earnings also allow management to benchmark performance of our model to our peers without the influence of the loan loss provision and tax considerations, which will ultimately influence other traditional financial measurements, including ROAA and ROAE.

Efficiency ratio measured 62.31% and 63.49% for the years ended December 31, 2022 and 2021, respectively.

Efficiency ratio is a non-GAAP measure representing operating expense divided by operating revenue.

Operating expense is defined as non-interest expense excluding the effects of the SBA recourse benefit or provision, impairment of tax credit investments, net gains or losses on repossessed assets, amortization of other intangible assets, and other discrete items, if any.

Operating revenue is defined as net interest income plus non-interest income less realized net gains or losses on securities, if any, and other discrete items.

PTPP adjusted earnings for the year ended December 31, 2022 was $47.9 million, compared to $41.2 million for the year ended December 31, 2021.

PTPP adjusted earnings is a non-GAAP measure defined as operating revenue less operating expense.

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 associated with certain one-time items and other discrete items.

PTPP adjusted earnings allows management to benchmark performance of our model to our peers without the influence of the loan loss provision and

tax considerations, which will ultimately influence other traditional financial measurements, including ROA and ROACE.

The information provided below reconciles the efficiency ratio to its most comparable GAAP measure.

Please refer to the Non-Interest Income and Non-Interest Expense sections below for discussion on additional drivers of the year-over-year change in the efficiency ratio.

Please refer to the Non-Interest Income and Non-Interest Expense sections below for discussion on additional drivers of the year-over-year change in the efficiency ratio and PTPP adjusted earnings.

For the Year Ended December 31, Change From Prior Year

2021 2020 $ Change % Change

2022 2021 2020 $ Change 2022 % Change 2022 $ Change 2021 % Change 2021

(Dollars in Thousands)

Total non-interest expense $ 79,474 $ 71,535 $ 68,898 $ 7,939 11.1 % $ 2,637 3.8 %

Net loss on foreclosed properties

15 383 (368) (96.1)

Amortization of other intangible assets

Net loss on repossessed assets 49 15 383 34 NM (368) (96.1)

Amortization of other intangible assets — 25 35 (25) NM (10) (28.6)

SBA recourse benefit (188) (76) (278) (112) NM 202 (72.7)

Contribution to First Business Charitable Foundation 809 — — 809 NM — NM

Impairment of tax credit investments (351) — 2,395 (351) NM (2,395) NM

Loss on early extinguishment of debt — — 744 — NM (744) NM

Total operating expense (a) $ 79,155 $ 71,571 $ 65,619 $ 7,584 10.6 $ 5,952 9.1

Net interest income $ 98,422 $ 84,662 $ 77,071 $ 13,760 16.3 7,591 9.8

Total non-interest income 29,428 28,100 26,940 1,328 4.7 1,160 4.3

Bank-owned life insurance claim 809 — — 809 NM — NM

Net gain (loss) on sale of securities — 29 (4) (29) NM 33 NM

Adjusted non-interest income 28,619 28,071 26,944 548 2.0 1,127 4.2

Total operating revenue (b) $ 127,041 $ 112,733 $ 104,015 $ 14,308 12.7 $ 8,718 8.4

Efficiency ratio

62.31 % 63.49 % 63.09 %

SBA recourse benefit (76) (278) 202 (72.7)

Impairment of tax credit investments

— 2,395 (2,395) NM

Loss on early extinguishment of debt — 744 (744) NM

Pre-tax, pre-provision adjusted earnings (b-a) $ 47,886 $ 41,162 $ 38,396 $ 6,724 16.3 $ 2,766 7.2

Average total assets 2,752,916 2,605,008 2,419,616 147,908 5.7 185,392 7.7

Pre-tax, pre-provision adjusted return on average assets 1.74 % 1.58 % 1.59 %

NM = Not meaningful

PPP loans, related fees, and interest income had a material impact on the prior period comparisons in the table above.

As this economic stimulus was non-recurring, we believe these key performance indicators are a better indicator of current operating performance of the Corporation, excluding PPP loans and related fee and interest income.

The table below includes the efficiency ratio, and PTPP adjusted earnings and return on average assets, excluding average net PPP loans, fee income, and interest income.

For the Year Ended December 31, Change From Prior Year

2022 2021 2020 $ Change 2022 % Change 2022 $ Change 2021 % Change 2021

(Dollars in Thousands)

Total non-interest expense $ 79,474 $ 71,535 $ 68,898 $ 7,939 11.1 % $ 2,637 3.8 %

Net loss on repossessed assets 49 15 383 34 NM (368) (96.1)

Amortization of other intangible assets — 25 35 (25) NM (10) (28.6)

SBA recourse benefit (188) (76) (278) (112) NM 202 (72.7)

Contribution to First Business Charitable Foundation 809 — — 809 NM — NM

Impairment of tax credit investments (351) — 2,395 (351) NM (2,395) NM

Loss on early extinguishment of debt — — 744 — NM (744) NM

Total operating expense (a) $ 79,155 $ 71,571 $ 65,619 $ 7,584 10.6 $ 5,952 9.1

Net interest income $ 98,422 $ 84,662 $ 77,071 $ 13,760 16.3 7,591 9.8

PPP interest income 97 1,524 2,198 (1,427) (93.6) (674) (30.7)

PPP loan fee amortization 509 7,312 5,283 (6,803) (93.0) 2,029 38.4

Adjusted net interest income 97,816 75,826 69,590 21,990 29.0 6,236 9.0

Total non-interest income 29,428 28,100 26,940 1,328 4.7 1,160 4.3

Net gain (loss) on sale of securities 29 (4) 33 NM

Bank-owned life insurance claim 809 — — 809 NM — NM

Net gain (loss) on sale of securities — 29 (4) (29) NM 33 NM

Adjusted non-interest income 28,619 28,071 26,944 548 2.0 1,127 4.2

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Average total assets 2,752,916 2,605,008 2,419,616 147,908 5.7 185,392 7.7

Average PPP loans, net 9,740 152,264 215,025 (142,524) (93.6) (62,761) (29.2)

Adjusted average total assets $ 2,743,176 $ 2,452,744 $ 2,204,591 $ 290,432 11.8 $ 248,153 11.3

Pre-tax, pre-provision adjusted return on average assets 1.72 % 1.32 % 1.40 %

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For the Year Ended December 31,

2022 2021 2020

Balance Interest Average

(Dollars in Thousands)

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$ 503,668 3,963 0.79 % $ 506,693 988 0.19 % $ 392,577 1,448 0.37 %

Money market 693,608 1,183 0.17 % 651,402 2,842 0.44 %

Money market accounts 761,469 6,241 0.82 % 693,608 1,183 0.17 % 651,402 2,842 0.44 %

Certificates of deposit 97,448 1,358 1.39 % 47,020 396 0.84 % 111,698 2,198 1.97 %

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414,191 7,024 1.70 % 376,781 4,908 1.30 % 379,891 5,507 1.45 %

Federal reserve PPPLF — — — % 15,207 54 0.36 %

Other borrowings 43,818 2,243 5.12 % 31,935 1,759 5.51 % 24,472 1,509 6.17 %

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Interest income related to non-accrual loans and leases is recognized when collected.

Interest income includes net loan fees collected in lieu of interest.

Interest income includes net loan fees in lieu of interest.

(2) Includes amortized cost basis of assets available-for-sale and held-to-maturity.

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Increase (Decrease) for the Year Ended December 31,

2021 Compared to 2020

Rate Volume Net

2022 Compared to 2021 2021 Compared to 2020

Rate Volume Net Rate Volume Net

(In Thousands)

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(2) Includes amortized cost basis of assets available-for-sale and held-to-maturity.

The change in yield of the respective interest-earning asset or the rate paid on interest-bearing liability compared to the change in short-term market rates is commonly referred to as a beta.

The table below displays the beta calculations for loans and leases, total interest earning assets, in-market deposits, interest-bearing deposits and total interest-bearing liabilities for the year ended December 31, 2022 and 2021.

Additionally, adjusted total loans and leases and total interest-earning assets excludes the volatile impact of fees in lieu of interest.

Asset and Liability Beta Analysis

For the Year Ended December 31,

2022 2021 2020 2022 Compared to 2021 2021 Compared to 2020

Average Yield/Rate (4)

Increase (Decrease)

Total loans and leases receivable (a)

5.01 % 4.21 % 4.43 % 0.80 % (0.22)

Total interest-earning assets (b)

4.71 % 3.90 4.16 % 0.81 (0.26)

Adjusted total loans and leases receivable (1)(c)

4.79 % 3.91 4.32 % 0.88 (0.41)

Adjusted total interest-earning assets (1)(d)

4.52 % 3.61 4.03 % 0.91 (0.42)

Total in-market deposits (e)

0.60 % 0.14 0.56 % 0.46 (0.42)

Total bank funding (2)(f)

0.84 % 0.37 0.86 % 0.47 (0.49)

Net interest margin (g)

3.82 % 3.44 3.40 % 0.38 0.04

Adjusted net interest margin (h)

3.64 3.21 3.28 0.43 (0.07)

Effective fed funds rate (3)(i)

1.69 % 0.08 % 0.37 % 1.61 % (0.29) %

Beta Calculations:

Total loans and leases receivable (a)/(i)

49.69 % 75.86 %

Total interest-earning assets (b)/(i)

50.15 % 89.66 %

Adjusted total loans and leases receivable (1)(c)/(i)

54.66 % 141.38 %

Adjusted total interest-earning assets (1)(d)/(i)

56.39 % 144.83 %

Total in-market deposits (e)/(i)

28.57 % 144.83 %

Total bank funding (2)(f)/(i)

29.19 % 168.97 %

Net interest margin (g)/(i)

Adjusted net interest margin (h)/(i)

26.71 % 24.14 %

NM = Not meaningful

(1) Excluding average net PPP loans, PPP loan interest income, and fees in lieu of interest.

(2) Total bank funding represents total deposits, plus FHLB advances, and Federal Reserve PPPLF advances.

(3) Board of Governors of the Federal Reserve System (US), Effective Federal Funds Rates [DFF].

retrieved from FRED, Federal Reserve Bank of St.

(4) Represents annualized yields/rates.

Net interest income increased by $13.8 million, or 16.3%, for the year ended December 31, 2022, compared to the year ended December 31, 2021.

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.

The increase was principally due to net interest margin expansion combined with an increase in average loans and leases outstanding, which was partially offset by a decrease in PPP loan processing fees.

Average gross loans and leases of $2.305 billion increased by $125.8 million, or 5.8% for the year ended December 31, 2022, compared to $2.179 billion for the same period in 2021.

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.

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, 2022 increased $268.4 million, or 13.2%, compared to the year ended December 31, 2021.

Loan fees collected in lieu of interest decreased 52.7% to $5.3 million, compared to $11.2 million during the same period of comparison.

Excluding PPP fee amortization, loan fees collected in lieu of interest increased 24.1% to $4.8 million, compared to $3.8 million during the same period of comparison.

Excluding fees in lieu of interest and interest income from PPP loans, net interest income increased $21.1 million, or 29.3%.

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.

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.

This decrease was partially offset by the increase in PPP loan processing fees and reduction in average PPP loans earning 1% interest.

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.

The average rate paid declined as the Corporation decreased deposit rates and renewed maturing FHLB advances at historically low fixed rates.

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%.

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.

The yield on average earning assets for the year ended December 31, 2022 was 4.71%, an increase of 81 basis points compared to 3.90% for the year ended December 31, 2021.

This increase was principally due to the rising interest rates on variable-rate loans and investment in securities at higher interest rates.

These increases were partially offset by the decrease in PPP loan processing fees.

Excluding the impact of recurring loan fees in lieu of interest and PPP fees in both 2022 and 2021, the yield on average earning assets for the year ended December 31, 2022 was 4.52%, an increase of 91 basis points compared to 3.61% for the year ended December 31, 2021.

The average rate paid on interest-bearing liabilities was 1.23% for the year ended December 31, 2022, an increase of 60 basis points from 0.63% for the year ended December 31, 2021.

The average rate paid increased as the Corporation increased deposit rates and secured wholesale funding, which consists of wholesale deposits and FHLB advances, at elevated fixed rates.

Partially offset the increase in deposit and wholesale funding rates, average wholesale funding decreased $33.6 million, or 6.8%, which is typically a higher cost funding source than in-market deposits, .

Net interest margin increased 38 basis points to 3.82% for the year ended December 31, 2022, compared to 3.44% for the year ended December 31, 2021.

Adjusted net interest margin measured 3.64% for the year ended December 31, 2022, compared to 3.21% for the year ended December 31, 2021.

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.

Fees in lieu of interest are defined as prepayment fees, asset-based loan fees, non-accrual interest, and loan fee amortization.

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.

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.

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.

The increase in adjusted net interest margin was primarily due to the increase in average yield on loans and leases receivable and investment securities, partially offset by an increase in the average rate paid total bank funding.

For the Year Ended

(Dollars in thousands) December 31,

2022 December 31,

2021 December 31,

Interest income $ 121,371 $ 95,995 $ 94,179

Interest expense 22,949 11,333 17,108

Net interest income (a)

98,422 84,662 77,071

Fees in lieu of interest 5,283 11,160 9,315

PPP loan interest income 97 1,524 2,198

FRB interest income and FHLB dividend income 1,525 741 789

FRB PPPLF interest expense — — 54

Adjusted net interest income (b)

$ 91,517 $ 71,237 $ 64,823

Average interest-earning assets (c)

$ 2,577,492 $ 2,460,509 $ 2,265,105

Average net PPP loans 9,740 152,264 215,025

Average FRB cash and FHLB stock 46,708 76,880 46,595

Average non-accrual loans and leases 5,011 14,172 27,656

Adjusted average interest-earning assets (d)

$ 2,516,033 $ 2,217,193 $ 1,975,829

Net interest margin (a / c)

3.82 % 3.44 % 3.40 %

Adjusted net interest margin (b / d)

3.64 % 3.21 % 3.28 %

Management believes its success in growing in-market deposits, disciplined loan pricing, and increased production in existing higher-yielding commercial lending products will allow the Corporation to achieve a net interest margin that supports our long-term profitability goals.

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.

In addition, 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.

Provision for Loan and Lease Losses

We determine our provision for loan and lease losses pursuant to our allowance for loan and lease loss methodology, which is based on the magnitude of current and historical net charge-offs recorded throughout the established look-back period, the evaluation of several qualitative factors for each portfolio category, and the amount of specific reserves established for impaired loans that present collateral shortfall positions.

We determined our provision for loan and lease losses pursuant to our allowance for loan and lease loss methodology, which is based on the magnitude of current and historical net charge-offs recorded throughout the established look-back period, the evaluation of several qualitative factors for each portfolio category, and the amount of specific reserves established for impaired loans that present collateral shortfall positions.

Refer to Allowance for Loan and Lease Losses , below, for further information regarding our allowance for loan and lease loss methodology.

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.

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.

The Corporation recognized a $3.9 million provision benefit for the year ended December 31, 2022, compared to $5.8 million provision benefit for the year ended December 31, 2021.

The provision benefit for the year ended December 31, 2022 was primarily due to a net recovery of $3.8 million and a $2.0 million reduction in the general reserve from improving historical loss rates.

These decreases were partially offset by a $2.1 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.

The net recovery for the year ended December 31, 2022 included a $4.1 million principal recovery relating to a legacy SBA relationship originated in May 2016 and fully charged-off in December 2020.

The following table shows the components of the provision for loan and lease losses.

For the Year Ended December 31,

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Total provision for loan and lease losses $ (3,868) $ (5,803) $ 16,808

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.

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.

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Total non-interest income accounted for 23.0% of our total revenues in 2022 compared to 24.9% in 2021.

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.

These favorable variances were partially offset by a decrease in commercial loan interest rate swap fee income.

The increase in total non-interest income for the year ended December 31, 2022 primarily reflected an increase in other non-interest income, led by mezzanine fund investment income and gains recognized on end-of-term buyout agreements, an increase in loan fee income, and commercial loan swap fee income.

Additionally, a bank-owned life insurance claim was recognized during the year ended December 31, 2022.

These increases were partially offset by a decrease in gains on the sale of SBA loans.

The components of non-interest income were as follows:

For the Year Ended December 31, Change From Prior Year

2021 2020 $ Change % Change

2022 2021 2020 $ Change 2022 % Change 2022 $ Change 2021 % Change 2021

(Dollars in Thousands)

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Loan fees 3,010 2,506 1,826 504 20.1 680 37.2

Increase in cash surrender value of bank-owned life insurance

1,413 1,402 11 0.8

Bank-owned life insurance income 2,227 1,413 1,402 814 57.6 11 0.8

Net gain (loss) on sale of securities — 29 (4) (29) NM 33 (825.0)

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(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).

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.

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.

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.

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.

Management believes SBA 7a loan production, while variable based on timing of closings, will continue to increase annually at a measured pace.

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.

The increase was principally due to recognizing a full year of floorplan financing

curtailment fees and an increase in SBA servicing fee income commensurate with the Corporation’s growing SBA sold portfolio.

Private wealth management services fee income increased by $97,000, or 0.9%, to a record $10.9 million for the year ended December 31, 2022 compared to the previous record of $10.8 million for the year ended December 31, 2021.

wealth management services fee income is primarily driven by the amount of trust 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 and fixed income markets.

This increase was driven by an increase in average trust assets under management and administration, which is attributable to both new client relationships and new money from existing client relationships.

At December 31, 2022, our trust assets under management and administration were $2.660 billion, or 8.9% less than trust assets under management and administration of $2.921 billion at December 31, 2021.

During 2022, the equity and fixed income market values decreased and more than offset the new money received during the year.

We expect to continue to increase our revenue from trust 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.

Other non-interest income increased by $1.0 million to $5.1 million for the year ended December 31, 2022, compared to $4.1 million for the year ended December 31, 2021.

The increase was primarily due to an above average increase in returns from the Corporation’s investments in mezzanine funds.

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.

The increase was primarily due to strong returns from the Corporation’s investments in mezzanine funds and gains recognized on end-of-term buyout agreements related to the Corporation’s equipment financing business line.

Loan fees increased $504,000, or 20.1%, to $3.0 million for the year ended December 31, 2022, compared to $2.5 million for the same period in 2021.

The increase was driven by an increase in equipment finance lending, floorplan finance lending, and conventional lending activity generating additional service fee income.

Bank-owned life insurance income increased by $814,000, or 57.6%, to $2.2 million for the year ended December 31, 2022, compared to $1.4 million for the year ended December 31, 2021.

The increase was due to the recognition of a $809,000 insurance claim.

Commercial loan interest rate swap fee income was $1.8 million for the year ended December 31, 2022, compared to $1.4 million for the year ended December 31, 2021.

We originate commercial real estate loans in which we offer clients a floating rate and an interest rate swap.

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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.

Gain on sale of SBA loans for the year ended December 31, 2022 totaled $2.5 million, a decrease of $1.5 million, or 37.3%, from the same period in 2021.

Reduced premiums was the primary factor for the lower income.

Given current premium levels, the Bank may reduce sales activity and retain the guaranteed portion on the balance sheet.

Non-Interest Expense

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Operating expense, which excludes certain one-time and discrete items as defined in the Efficiency Ratio table above, increased $7.6 million, or 10.6%, to $79.2 million for the year ended December 31, 2022 compared to $71.6 million for the year ended December 31, 2021.

The increase in operating expense was primarily due to an increase in compensation, marketing, and data processing.

These increases were partially offset by a decrease in other non-interest expense.

The increase in operating expense was primarily due to an increase in compensation, professional fees, marketing, and occupancy.

The components of non-interest expense were as follows:

For the Year Ended December 31, Change From Prior Year

2021 2020 $ Change % Change

2022 2021 2020 $ Change 2022 % Change 2022 $ Change 2021 % Change 2021

(Dollars in Thousands)

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FDIC insurance 1,042 1,143 1,238 (101) (8.8) (95) (7.7)

Collateral liquidation costs 265 328 (63) (19.2)

Net loss on foreclosed properties 15 383 (368) (96.1)

Impairment on tax credit investments — 2,395 (2,395) NM

SBA recourse (benefit) provision (76) (278) 202 (72.7)

Loss on early extinguishment of debt — 744 (744) NM

Other non-interest expense 2,393 2,407 3,911 (14) (0.6) (1,504) (38.5)

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Compensation expense increased by $6.0 million, or 11.7%, to $57.7 million for the year ended December 31, 2022 from $51.7 million for the year ended December 31, 2021 principally due to an increase in average FTEs, annual merit increases, growth in employee benefit costs and increase in incentive compensation.

The increase reflects a $2.1 million, or

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.

The increase reflects a $3.4 million, or 10.7%, increase in employee salaries and a $1.4 million, or 16.3%, increase in individual and corporate performance-based incentive compensation accruals reflecting strong company performance relative to bonus criteria.

The Bank’s compensation philosophy is to provide base salaries competitive with the market.

Average FTEs were 325 for the year ended December 31, 2022, increasing by 18, or 5.9%, from 307 for the year ended December 31, 2021.

Performance-based incentive compensation accruals will reset to target performance at the start of 2023 and will be evaluated quarterly and increased or decreased based on management’s forecast of full year performance for the Corporation.

Professional fees increased $1.1 million, or 30.6%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase was primarily due to an increase in recruiting expense, audit expenses, legal expense, and a general increase in other professional consulting services for various projects.

Marketing expense increased by $332,000, or 16.4%, to $2.4 million for the year ended December 31, 2022 from $2.0 million for the year ended December 31, 2021.

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.

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.

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.

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.

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.

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.

The CVA was $191,000 as of December 31, 2021, compared to $461,000 as of December 31, 2020.

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.

Management believes this strategy helped stabilize net interest margin during the extended low interest rate environment in 2021.

No tax credits or related impairment was recognized for the year ended December 31, 2021.

The impairment on tax credit investments for the year ended December 31, 2020 were related to a new market and historic tax credits.

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.

The increase was primarily due to an increase in business development efforts as the Corporation returns to pre-pandemic activity levels.

Occupancy expense increased by $178,000, or 8.2%, to $2.4 million for the year ended December 31, 2022 from $2.2 million for the year ended December 31, 2021.

During November 2022, the Corporation relocated the Southeast Wisconsin office location to accommodate growth in the number of employees.

Income tax expense was $11.4 million for the year ended December 31, 2022, compared to $11.3 million for the year ended December 31, 2021.

The Corporation recognized federal historic tax credits in 2020 which reduced income tax expense by $2.8 million.

No tax credits were recognized in 2021.

The income tax expense included a $338,000 net benefit from tax credit investments.

The effective tax rate for the year ended December 31, 2022 was 21.8% compared to 24.0% for the year ended December 31, 2021.

The effective tax rate, excluding tax credits and other discrete items, for the year ended December 31, 2020 was 19.5%.

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.

For 2023, the Corporation expects to report an effective tax rate of 21%-22% as management anticipates increased tax credit activity.

FINANCIAL CONDITION

Total assets increased by $323.7 million, or 12.2%, to $2.977 billion as of December 31, 2022 compared to $2.653 billion at December 31, 2021.

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.

The increase in total assets was primarily driven by an increase in loans and leases receivable, cash and cash equivalents, derivatives, and other assets.

Total liabilities increased by $295.5 million, or 12.2%, to $2.716 billion as of December 31, 2022 compared to $2.420 billion at December 31, 2021.

The increase in total liabilities was principally due to an increase in deposits, partially offset by a decrease in FHLB advances and derivatives.

The increase in total liabilities was principally due to an increase in deposits, FHLB advances, and interest rate swap derivatives.

Cash and cash equivalents

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Short-term investments increased by $29.5 million to $76.9 million at December 31, 2022 from $47.4 million at December 31, 2021.

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.

Both short-term investments and cash and due from banks increased during 2022.

Short-term investments primarily consist of interest-bearing deposits held at the Federal Reserve Bank (“FRB”).

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Please refer to the section entitled Liquidity and Capital Resources for further discussion.

Total securities, including available-for-sale and held-to-maturity, increased by $15.1 million to $225.4 million at December 31, 2021 from $210.3 million at December 31, 2020.

Total securities, including available-for-sale and held-to-maturity, decreased by $789,000 to $224.7 million at December 31, 2022 from $225.4 million at December 31, 2021.

As of December 31, 2022 and 2021, our total securities portfolio had a weighted average estimated maturity of approximately 6.3 years and 5.7 years, respectively.

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In addition, we will purchase investment securities to utilize our cash position effectively within appropriate policy guidelines and estimates of future cash demands.

While mortgage-backed securities present prepayment risk and extension risk, we believe the overall credit risk associated with these investments is minimal, as the majority of the securities we hold are guaranteed by the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”), or the Government National Mortgage Association (“GNMA”), a U.S.

While mortgage-backed securities present prepayment risk and extension risk, we believe the overall credit risk associated with these investments is minimal, as the majority of the securities we hold are guaranteed by the United States Treasury, the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”), or the Government National Mortgage Association (“GNMA”), a U.S.

government agency.

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During the year ended December 31, 2022, we recognized unrealized holding losses of $27.7 million before income taxes through other comprehensive income.

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.

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.

As of December 31, 2021 no securities were classified as

trading securities.

These losses were the result of an increase in interest rates.

No securities within our portfolio were deemed to be other-than-temporarily impaired as of December 31, 2022, and we sold no securities during the year ended December 31, 2022.

As of December 31, 2022 no securities were classified as trading securities.

At December 31, 2022, $35.9 million of our securities were pledged to secure various obligations, including interest rate swap contracts and municipal deposits.

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government agency securities - government-sponsored enterprises 13,666 13,205 19,797 19,935

19,797 19,935 22,699 22,629

Municipal securities 45,088 39,311 30,828 30,957

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Residential mortgage-backed securities - government-sponsored enterprises 119,265 106,323 85,748 85,705

85,748 85,705 102,843 105,006

Commercial mortgage-backed securities - government issued 3,450 2,932 5,801 5,771

5,801 5,771 5,289 5,464

Commercial mortgage-backed securities - government-sponsored enterprises 31,515 26,377 36,786 36,531

36,786 36,531 12,584 13,365

Other securities — — 2,205 2,228

$ 239,751 $ 212,024 $ 205,699 $ 205,702

$ 205,699 $ 205,702 $ 179,581 $ 183,925

As of December 31,

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Municipal securities $ 7,467 $ 7,404 $ 13,009 $ 13,228

$ 13,009 $ 13,228 $ 17,106 $ 17,508

Residential mortgage-backed securities - government issued 1,625 1,518 2,226 2,266

Residential mortgage-backed securities - government-sponsored issued 1,537 1,444 2,502 2,578

2,502 2,578 3,693 3,856

Commercial mortgage-backed securities - government-sponsored enterprises 2,006 1,904 2,009 2,204

$ 12,635 $ 12,270 $ 19,746 $ 20,276

$ 19,746 $ 20,276 $ 26,374 $ 27,333

Treasuries represent treasury bonds issued by the United States Treasury.

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— — 401 2.25 20,376 1.68 5,600 1.65 26,377

Other securities 2,228 2.38 — — — — — — 2,228

$ 593 $ 13,884 $ 48,141 $ 149,406 $ 212,024

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$ 2,146 $ 5,806 $ 3,823 $ 860 $ 12,635

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.

The Board approved Bank policies allow the Bank to participate in hedging strategies or to use financial futures, options, forward commitments, or interest rate swaps.

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.

The Corporation offers interest rate swap products directly to qualified commercial borrowers.

The Corporation economically hedges client derivative transactions by entering into offsetting interest rate swap contracts executed with a third party.

Derivative transactions executed as part of this program are not considered hedging instruments and are marked-to-market through earnings each period.

The derivative contracts have mirror-image terms, which results in the positions’ changes in fair value offsetting through earnings each period.

The Corporation’s derivative financial instruments, under which the Corporation is required to either receive cash from or pay cash to counterparties depending on changes in interest rates applied to notional amounts, are carried at fair value on the consolidated balance sheets.

As of December 31, 2022, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was approximately $744.2 million, compared to $640.6 million as of December 31, 2021.

We receive fixed rates and pay floating rates based upon LIBOR on the swaps with commercial borrowers.

These swaps mature between January 2024 and March 2038.

We receive fixed rates and pay floating rates based upon designated benchmark interest rates on the swaps with commercial borrowers.

These swaps mature between May 2024 and June 2039.

Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements.

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.

These interest rate swaps also have maturity dates between January 2024 and March 2038.

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.

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

$58,000, respectively, as of December 31, 2020.

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.

As of December 31, 2022, the commercial borrower swaps were reported on the Consolidated Balance Sheet as a derivative liability and asset of $61.4 million and $1.0 million, respectively, compared to a derivative asset and liability of $26.3 million and $6.6 million, respectively, as of December 31, 2021.

On the offsetting swap contracts with dealer counterparties, we pay fixed rates and receive floating rates based upon designated benchmark interest rates.

These interest rate swaps also have maturity dates between May 2024 and June 2039.

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 asset of $60.4 million as of December 31, 2022, compared to a net derivative liability of $19.7 million as of December 31, 2021.

The gross amount of dealer counterparty swaps as of December 31, 2022, without regard to the enforceable master netting agreement, was a gross derivative asset and liability of $61.4 million and $1.0 million, compared to a gross derivative liability of $26.3 million and gross derivative asset of $6.6 million as of December 31, 2021.

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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The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affects earnings.

As of December 31, 2021, the aggregate notional value of interest rate swaps designated as cash flow hedges was $106.0 million.

These interest rate swaps mature between December 2022 and December 2027.

A pre-tax unrealized loss of $3.6 million was recognized in other comprehensive income for the year ended December 31, 2021 and there was no ineffective portion of these hedges.

As of December 31, 2022, the aggregate notional value of interest rate swaps designated as cash flow hedges was $116.4 million compared to $106.0 million as of December 31, 2021.

These interest rate swaps mature between December 2022 and March 2034.

As of December 31, 2022, the interest rate swaps were reported on the Consolidated Balance Sheet as a derivative asset of $6.6 million, compared to a derivative liability of $1.9 million as of December 31, 2021.Pre-tax unrealized gains of $8.5 million and $3.6 million were recognized in other comprehensive income for the years ended December 31, 2022 and 2021, respectively, and there were no ineffective portion of these hedges.

The Corporation also enters into interest rate swaps to mitigate market value volatility on certain long-term fixed-rate securities.

The objective of the hedge is to protect the Corporation against changes in fair value due to changes in benchmark interest rates.

The instruments are designated as fair value hedges as the changes in the fair value of the interest rate swap are expected to offset changes in the fair value of the hedged item attributable to changes in the SOFR swap rate, the designated benchmark interest rate.

These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value.

As of December 31, 2022, the aggregate notional value of interest rate swaps designated as fair value hedges was $12.5 million and there were no fair value hedges as of December 31, 2021.

These interest rate swaps mature between February 2031 and October 2034.

A pre-tax unrealized gain of $602,000 was recognized in other comprehensive income for the year ended December 31, 2022 and there was no ineffective portion of these hedges.

No pre-tax unrealized gain or loss was recognized in other comprehensive income for the years ended December 31, 2021 and 2020.

For further information and discussion of our derivatives, see Note 17 — Derivative Financial Instruments of the Consolidated Financial Statements.

Loans and Leases Receivable

Loans and leases receivable, net of allowance for loan and lease losses, increased by $203.8 million, or 9.2%, to $2.419 billion at December 31, 2022 from $2.215 billion at December 31, 2021.

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.

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.

Excluding net PPP loans, loans and leases receivable, net of allowance for loan and lease losses, increased by $230.6 million, or 10.5%, to $2.418 billion at December 31,

2022 from $2.188 billion at December 31, 2021.

Excluding PPP loans, loan growth was across all categories with the highest growth in commercial and industrial (“C&I”) loans increasing $137.2 million from December 31, 2021.

There continues to be a concentration in CRE loans which represented 63.1% and 65.7% of our total loans, excluding net PPP loans, as of December 31, 2022 and December 31, 2021, respectively.

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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.

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.

Our C&I portfolio increased $110.4 million, or 15.1%, to $841.2 million at December 31, 2022 from $730.8 million at December 31, 2021.

Excluding net PPP loans, C&I loans increased $137.2 million, or 19.5%, to $840.7 million from $703.5 million at December 31, 2021.

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.

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.

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.

The Corporation experienced significant C&I loan growth in 2022, due to growth across products and geographies.

Management believes the investment in the Corporation’s C&I product lines has positioned the Corporation for strong and sustainable growth in 2023 and beyond.

We 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.

Underwriting of new credit is primarily through approval from a serial sign-off or committee process and is a key component of our operating philosophy.

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.

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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Loan proceeds are disbursed in increments as construction progresses and as project inspections warrant.

The repayment of commercial real estate loans generally is dependent on sufficient income from the properties securing the loans to cover operating expenses and debt service.

The repayment of commercial real estate loans generally is dependent on sufficient income from the occupants of properties securing the loans to cover operating expenses and debt service.

Payments on commercial real estate loans are often dependent on external market conditions impacting the successful operation or development of the property or business involved.

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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.

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.

Of the $1.542 billion of commercial real estate loans outstanding as of December 31, 2022, $26.8 million were originated by the FBSF subsidiary, as part of a larger asset-based lending relationship.

Commercial and Industrial.

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The majority of such loans are secured and typically backed by personal guarantees of the owners of the borrowing business.

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.

Specialized lending consists of asset-based lending, accounts receivable financing, floorplan financing, equipment financing, and SBA lending.

Of the $841.2 million of C&I loans outstanding as of December 31, 2022, $373.6 million were conventional C&I loans and $467.6 million were originated by the FBSF subsidiary.

FBSF products consists of equipment financing, asset-based lending, accounts receivable financing, SBA lending, and floorplan financing.

Direct Financing Leases.

Direct financing leases initiated through FBSF are originated with a fixed rate and typically a term of seven years or less.

Direct financing leases initiated through FBSF are originated with a fixed implicit rate and typically a term of seven years or less.

It is customary in the leasing industry to provide 100% financing;

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Total non-accrual loans and leases 3,659 6,358

Foreclosed properties, net 164 34

Repossessed assets, net 95 164

Total non-performing assets 3,754 6,522

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Total non-accrual loans and leases to gross loans and leases 0.15 % 0.28 %

Total non-performing assets to gross loans and leases plus foreclosed properties, net

0.29 % 1.24 %

Total non-performing assets to gross loans and leases plus repossessed assets, net 0.15 % 0.29 %

Total non-performing assets to total assets 0.13 % 0.25 %

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662.20 % 382.76 %

As of December 31, 2021 and 2020, $627,000 and $6.5 million of the non-accrual loans were considered troubled debt restructurings, respectively.

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

assets of $20.1 million, or 75.5%, from December 31, 2020.

As of December 31, 2022 and 2021, $30,000 and $627,000 of the non-accrual loans were considered troubled debt restructurings, respectively.

As noted in the table above, non-performing assets consisted of non-accrual loans and leases and repossessed assets totaling $3.8 million, or 0.13% of total assets, as of December 31, 2022, a decrease in non-performing assets

of $2.8 million, or 42.4%, from December 31, 2021.

Impaired loans and leases as of December 31, 2022 and 2021 also included $156,000 and $217,000, 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.

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Total non-accrual loans and leases to gross loans and leases 0.15 % 0.29 %

Total non-performing assets to gross loans and leases plus foreclosed properties, net

Total non-performing assets to gross loans and leases plus repossessed assets, net 0.15 0.29

Total non-performing assets to total assets 0.13 0.25

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Non-performing assets as a percentage of total assets decreased to 0.13% at December 31, 2022 from 0.25% at December 31, 2021.

As of December 31, 2021, the payment performance of our loans and leases did not point to any new areas of concern, as approximately 99.8% of the total portfolio was in a current payment status, compared to 99.0% as of December 31, 2020.

As of December 31, 2022, the payment performance of our loans and leases did not point to any new areas of concern, as approximately 99.8% of the total portfolio was in a current payment status, similar to December 31, 2021.

We also monitor asset quality through our established categories as defined in Note 4 – Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses of the Consolidated Financial Statements.

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Allowance for Loan and Lease Losses

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.

The allowance for loan and lease losses decreased $106,000, or 0.4%, to $24.2 million as of December 31, 2022 from $24.3 million as of December 31, 2021.

The allowance for loan and lease losses as a percentage of gross loans and leases also decreased to 0.99% as of December 31, 2022 from 1.09% as of December 31, 2021.

The allowance for loan and lease losses as a percentage of gross loans and leases, excluding net PPP loans, was 0.99% as of December 31, 2022 from 1.10% as of December 31, 2021.

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.

These general and specific reserve releases were partially offset by an increase in general reserve commensurate with loan growth.

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.

Management believes this will continue in 2022, allowing for additional reserve release throughout the year.

These general releases were partially offset by an increase in general reserve commensurate with loan growth.

The Corporation will adopt ASU No.

2016-13, “ Financial Instruments- Credit Losses (Topic 326)”, on January 1st, 2023 and anticipates an initial increase in reserves, including unfunded commitments reserves, of approximately $1.0 million to $4.0 million.

During the year ended December 31, 2022, we recorded net recoveries on impaired loans and leases of approximately $3.8 million, which included $979,000 of charge-offs and $4.7 million of recoveries.

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.

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.

As of December 31, 2022 and 2021, our allowance for loan and lease losses to total non-accrual loans and leases was 662.20% and 382.76%, respectively.

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The methodology also focuses on evaluation of several qualitative factors for each portfolio category, including but not limited to:

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.

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.

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.

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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.

As a result of our review process, we have concluded an appropriate allowance for loan and lease losses for the existing loan and lease portfolio was $24.2 million, or 0.99% of gross loans and leases, at December 31, 2022.

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As of December 31, 2022, deposits increased by $210.3 million to $2.168 billion from $1.958 billion at December 31, 2021.

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.

The large increase in in-markets deposits was primarily due to successful business development efforts and PPP loan proceeds.

The increase in deposits was primarily due to an increase in wholesale deposits and certificates of deposit of $172.6 million and $99.7 million, respectively, partially offset by a decrease of $55.9 million and $6.1 million in money market accounts and transaction accounts, respectively.

The large increase in wholesale deposits is primarily driven by a shift from FHLB advances to wholesale deposits to manage interest rate risk and liquidity by utilizing the most efficient and cost-effective source of wholesale funds to match-fund our fixed-rate loan portfolio.

Additionally, certificate of deposit accounts saw an increase primarily due to an increase in interest rates.

The following table presents the composition of the Bank’s consolidated deposits.

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We measure the success of in-market deposit gathering efforts based on the average balances of our deposit accounts as compared to ending balances due to the volatility of some of our larger relationships.

Average in-market deposits for the year ended December 31, 2021 were approximately $1.784 billion, or 78.23% of total bank funding.

Total bank funding is defined as total deposits plus FHLB advances and Federal Reserve PPPLF advances.

This compares to average in-market deposits of

$1.569 billion, or 75.01% of total bank funding, for 2020.

Average in-market deposits for the year

ended December 31, 2022 were approximately $1.929 billion, or 80.6% of total bank funding.

Total bank funding is defined as total deposits plus FHLB advances.

This compares to average in-market deposits of $1.784 billion, or 78.2% of total bank funding, for 2021.

Refer to Note 9 - Deposits in the Consolidated Financial Statements for additional information regarding our deposit composition.

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3.00% to 3.99% 55,049 7,594 3,231 1,706 67,580

4.00% to 4.99% 80,770 9,678 35,067 89,466 214,981

$ 155,729 $ 27,183 $ 51,838 $ 106,243 $ 340,993

At December 31, 2022, time deposits included $81.6 million of certificates of deposit and wholesale deposits in denominations greater than or equal to $250,000.

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.

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.

Of these certificates, $31.3 million are scheduled to mature in three months or less, $9.7 million in greater than three through six months, $38.6 million in greater than six through twelve months and $2.0 million in greater than twelve months.

Of the total time deposits outstanding as of December 31, 2022, $234.8 million are scheduled to mature in 2023, $12.8 million in 2024, $14.4 million in 2025, $25.5 million in 2026, and $51.4 million in 2027.

As of December 31, 2022, we have no wholesale certificates of deposit which the Bank has the right to call prior to the scheduled maturity.

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.

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.

Total bank funding is defined as total deposits plus FHLB advances and Federal Reserve PPPLF advances.

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.

As of December 31, 2021, the Corporation had no PPPLF advances outstanding.

Management believes this strategy helped stabilize net interest margin during the extended low interest rate environment.

We had total borrowings of $456.8 million as of December 31, 2022, an increase of $43.3 million, or 10.5%, from $413.5 million at December 31, 2021.

Total wholesale funding as a percentage of total bank funding has increased due to significant wholesale deposit growth as part of the Bank’s strategy to mitigate interest rate risk by match-funding fixed rate loans with the most cost effective form of wholesale funding.

Total bank funding is defined as total deposits plus FHLB advances.

As of December 31, 2022 and December 31, 2021, the Corporation had other borrowings of $6.1 million and $10.4 million, 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.

Consistent with our funding philosophy to manage interest rate risk, we will use the most efficient and cost effective source of wholesale funds.

We will utilize FHLB advances to the extent we maintain an adequate level of excess borrowing capacity for liquidity and contingency funding purposes and pricing remains favorable in comparison to the wholesale deposit alternative.

We utilize FHLB advances to the extent we maintain an adequate level of excess borrowing capacity for liquidity and contingency funding purposes and pricing remains favorable in comparison to the wholesale deposit alternative.

We will use FHLB advances and/or brokered certificates of deposit in specific maturity periods needed, typically three to five years, to match-fund fixed rate loans and effectively mitigate the interest rate risk measured through our asset/liability management process and to support asset growth initiatives while taking into consideration our operating goals and desired level of usage of wholesale funds.

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Federal funds purchased $ — $ 14 7.42 % $ — $ — — %

Federal Reserve PPPLF — — — — 15,207 0.35

FHLB advances

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$ 456,808 $ 460,438 2.12 $ 413,527 $ 418,783 1.86

(1) Weighted average rate of junior subordinated notes reflects the accelerated amortization of subordinated debt issuance costs as a result of the early redemption of the junior subordinated notes during the first quarter of 2022.

A summary of annual maturities of borrowings at December 31, 2022 is as follows:

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Thereafter 40,428

The subordinated notes payable consist of two series of notes, each of which qualifies as Tier II capital.

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.

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.

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.

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.

On March 4, 2022, the Corporation completed a private placement of $20.0 million in new subordinated debt to one institutional investor.

Management used a portion of the proceeds during the second quarter of 2022 to redeem $9.1 million of subordinated notes bearing a fixed interest rate of 6.00%.

The remainder of the proceeds were designed to be used for general corporate purposes, including to support the Bank’s growth strategy, and to fund share repurchases.

The subordinated note bears a fixed interest rate of 3.50% with a maturity date of March 15, 2032 and has certain financial performance covenants

with which the Corporation was in compliance as of September 30, 2022.

The Corporation may, at its option, redeem the note, in whole or part, after the fifth anniversary of issuance.

Additionally, at December 31, 2022, subordinated notes included a $15.0 million note which bore a fixed interest rate of 5.50% with a maturity date of August 15, 2029.

The Corporation may, at its option, redeem the 5.50% notes, in whole or part, at any time after August 15, 2024.

The 5.50% notes will begin to lose Tier II capital treatment at a rate of 20% per year effective August 15, 2024.

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.

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As of December 31, 2022, stockholders’ equity was $260.6 million, or 8.8% of total assets, compared to stockholders’ equity of $232.4 million, or 8.8% of total assets, as of December 31, 2021.

Excluding PPP loans, stockholders’ equity was 8.85% of total assets as of December 31, 2021, compared to 8.80%.

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.

Stockholders’ equity increased by $28.2 million during the year ended December 31, 2022 attributable to net income of $40.9 million for the year ended December 31, 2022, partially offset by preferred and common stock dividend declarations of $683,000 and $6.7 million, respectively, and stock repurchases of $5.0 million authorized under the repurchase program discussed below.

On March 4, 2022, the Corporation issued 12,500 shares, or $12.5 million in aggregate liquidation preference, of 7.0% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, with a liquidation preference of $1,000 per share (the “Series A Preferred Stock”) in a private placement to institutional investors.

The net proceeds received from the issuance of the Series A Preferred Stock were $12.0 million.

The proceeds were used to redeem $10.1 million of junior subordinated notes in the first quarter of 2022.

The Corporation expects to pay dividends on the Series A Preferred Stock when and if declared by its Board, at a fixed rate of 7.0% per annum, payable quarterly, in arrears, on March 15, June 15, September 15 and December 15 of each year up to, but excluding, March 15, 2027.

For each dividend period from and including March 15, 2027, dividends will be paid at a floating rate of Three-Month Term SOFR plus a spread of 539 basis points per annum.

During the year ended December 31, 2022, the Corporation paid $683,000 in preferred cash dividends.

The Series A Preferred Stock is perpetual and has no stated maturity.

The Corporation may redeem the Series A Preferred Stock at its option at a redemption price equal to $1,000 per share, plus any declared and unpaid dividends (without regard to any undeclared dividends), subject to regulatory approval, on or after March 15, 2027 or within 90 days following a regulatory capital treatment event, in accordance with the terms of the Series A Preferred Stock.

On March 4, 2022, the Corporation’s Board approved a share repurchase program.

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 March 4, 2023.

As of December 16, 2022, the Corporation had completed the share repurchase program, purchasing a total of 142,074 shares for approximately $5.0 million at an average cost of $35.14 per share.

On January 27, 2023, the Board of Directors of the Corporation approved a new share repurchase program.

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, 2024.

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.

The Corporation did not have an active share repurchase plan as of December 31, 2021.

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.

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.

Under the new share repurchase program, shares are 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 has implemented a trading plan intended to satisfy the affirmative defense conditions of Rule 10b5-1 under the Securities Exchange Act.

The trading plan allows 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

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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.

The Corporation’s principal liquidity requirements at December 31, 2022 were the interest payments due on subordinated notes and cash dividends payable to both common and preferred stockholders.

During 2022 and 2021, FBB declared and paid dividends totaling $2.0 million and $8.5 million, respectively.

The capital ratios of the Bank met all applicable regulatory capital adequacy requirements in effect on December 31, 2021, and continue to meet the heightened requirements imposed by Basel III, including the capital conservation buffer that was fully phased-in as of January 1, 2019.

The capital ratios of the Bank met all applicable regulatory capital adequacy requirements in effect on December 31, 2022, and continue to meet the heightened requirements imposed by Basel III, including the capital conservation buffer.

The Corporation’s Board and management teams adhere to the appropriate regulatory guidelines on decisions which affect their capital positions, including but not limited to, decisions relating to the payment of dividends and increasing indebtedness.

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Deposit flows and loan prepayments, however, are greatly influenced by general interest rates, economic conditions, and competition.

We view on-balance sheet liquidity as a critical element to maintaining adequate liquidity to meet our cash and collateral obligations.

We define our on-balance sheet liquidity as the total of our short-term investments, our unencumbered securities available-for-sale, and our unencumbered pledged loans.

As of December 31, 2021 and 2020, our immediate on-balance sheet liquidity was $529.5 million and $640.2 million, respectively.

We view readily accessible liquidity as a critical element to meet our cash and collateral obligations.

We define our readily accessible liquidity as the total of our short-term investments, our unencumbered securities available-for-sale, and our unencumbered pledged loans.

As of December 31, 2022 and 2021, our readily accessible liquidity was $449.6 million and $529.5 million, respectively.

At December 31, 2022 and 2021, the Bank had $76.5 million and $47.0 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.

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.

Any excess funds not used for loan funding or satisfying other cash obligations were maintained as part of our readily accessible liquidity in our interest-bearing accounts with the FRB, as we value the safety and soundness provided by the FRB.

We plan to utilize excess liquidity to fund loan and lease portfolio growth, pay down maturing debt, pay down FHLB advances, allow run off of maturing wholesale certificates of deposit or to invest in securities to maintain adequate liquidity at an improved margin.

We had $618.6 million of outstanding wholesale funds at December 31, 2022, compared to $398.4 million of wholesale funds as of December 31, 2021, which represented 23.9% and 17.1%, 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.

Total bank funding is defined as total deposits plus FHLB advances and Federal Reserve PPPLF advances.

We are committed to raising in-market deposits while utilizing wholesale funds to mitigate interest rate risk.

Wholesale funds include FHLB advances, brokered certificates of deposit, and deposits gathered from internet listing services.

Total bank funding is defined as total deposits plus FHLB advances.

We are committed to raising in-market deposits while utilizing wholesale funds to match-fund our loan portfolio and mitigate interest rate risk.

Wholesale funds continue to be an efficient and cost effective source of funding for the Bank and allows it to gather funds across a larger geographic base at price levels and maturities that are more attractive than local time deposits when required to raise a similar level of in-market deposits within a short time period.

Access to such deposits and borrowings allows us the flexibility to refrain from pursuing single service deposit relationships in markets that have experienced unfavorable pricing levels.

Access to such deposits and borrowings allows us the flexibility to refrain from pursuing less desirable deposit relationships.

In addition, the administrative costs associated with wholesale funds are considerably lower than those that would be incurred to administer a similar level of local deposits with a similar maturity structure.

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The short-term FHLB advances will typically have terms of one week to one month to cover the overall expected funding demands.

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.

Period-end in-market deposits increased $37.7 million, or 2.0%, to $1.966 billion at December 31, 2022 from $1.928 billion at December 31, 2021 as in-market deposit balances increased due to successful business development efforts, partially offset by deposit movement from money market accounts to, alternative investment options, and clients funding their normal course of business.

In addition, in-market deposit balances were negatively impacted by the outflow of client funds previously accumulated as part of their participation in the Paycheck Protection Program.

Our in-market relationships continue to grow;

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The Bank was able to access the wholesale funding market as needed at rates and terms comparable to market standards during the year ended December 31, 2022.

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.

These potential funding sources include deposits maintained

at the FRB or Federal Reserve Discount Window utilizing currently unencumbered securities and acceptable loans as collateral.

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 readily available liquidity.

These potential funding sources include deposits maintained at the FRB or Federal Reserve Discount Window utilizing currently unencumbered securities and acceptable loans as collateral.

As of December 31, 2022, the available liquidity was in excess of the stated policy minimum.

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The Bank also has the ability to raise local market deposits by offering attractive rates to generate the level required to fulfill its liquidity needs.

The Corporation has filed a shelf registration with the Securities and Exchange Commission that would allow the Corporation to offer and sell, from time to time and in one or more offerings, up to $75.0 million in aggregate initial offering price of common and preferred stock, debt securities, warrants, subscription rights, units, or depository shares, or any combination thereof.

The Bank is required by federal regulation to maintain sufficient liquidity to ensure safe and sound operations.

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Net cash provided by financing activities for the year ended December 31, 2022 was $252.2 million.

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.

Financing cash flows included a $210.3 million net increase in deposits and a $47.6 million net increase in FHLB advances, partially offset by cash dividends paid of $6.7 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, 2022 and 2021.

2021 COMPARED TO 2020

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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We estimate the allowance reserve balance required and the related provision for loan and lease losses based on quarterly evaluations of the loan and lease portfolio, with particular attention paid to loans and leases that have been specifically identified as needing additional management analysis because of the potential for further problems.

During these evaluations, consideration is also given to such factors as the level and composition of impaired and other non-performing loans and leases, historical loss experience, results of examinations by regulatory agencies, independent loan and lease reviews, our estimate of the fair value of the underlying collateral taking into consideration various valuation techniques and qualitative adjustments to inputs to those estimates of fair value, the strength and availability of guarantees, concentration of credits, and other factors.

estimate of the fair value of the underlying collateral taking into consideration various valuation techniques and qualitative adjustments to inputs to those estimates of fair value, the strength and availability of guarantees, concentration of credits, and other factors.

Allocations of the allowance may be made for specific loans or leases, but the entire allowance is available for any loan or lease that, in our judgment, should be charged off.

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Although we believe that the allowance for loan and lease losses was appropriate as of December 31, 2022 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.

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.

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.

If loan or lease quality improves, then the allowance would generally be expected to decrease relative to total loans and leases.

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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.

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.

The Corporation conducted its annual impairment test as of July 1, 2022, 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.

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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 7. Management’s Discussion and Analysis