FIRST BUSINESS FINANCIAL SERVICES, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

Forward-looking statements

  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.
•Competitive pressures among depository and other financial institutions
nationally and in our markets.
•Increases in defaults by borrowers and other delinquencies.
•Our ability to manage growth effectively, including the successful expansion of
our client support, administrative infrastructure, and internal management
systems.
•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.
•Changes in tax requirements, including tax rate changes, new tax laws, and
revised tax law interpretations.
•Fraud, including client and system failure or breaches of our network security,
including our internet banking activities.
•Failure to comply with the applicable SBA regulations in order to maintain the
eligibility of the guaranteed portions of SBA loans.

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

  Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, we caution that,
while our management believes such assumptions or bases are reasonable and are
made in good faith, assumed facts or bases can vary from actual results, and the
differences between assumed facts or bases and actual results can be material,
depending on the circumstances. Where, in any forward-looking statement, an
expectation or belief is expressed as to future results, such expectation or
belief is expressed in good faith and believed to have a reasonable basis, but
there can be no assurance that the statement of expectation or belief will be
achieved or accomplished.

We do not intend to update any forward-looking statements and we specifically disclaim any obligation to update them.

  The following discussion and analysis is intended as a review of significant
events and factors affecting our financial condition and results of operations
for the periods indicated. The discussion should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto.

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                                    Overview

  We are a registered bank holding company incorporated under the laws of the
State of Wisconsin and are engaged in the commercial banking business through
our wholly-owned banking subsidiary, FBB. 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. 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 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. Management's objective over this five year period is to
excel by building an expert team with diverse experiences who work together to
impact client success more than any other financial partner. To meet this
objective, we identified four key strategies which are linked to corporate
financial goals, all business lines, and centralized administration functions to
ensure communication and execution are consistent at all levels of the
Corporation. These four strategies are described below:

•We will identify, attract, develop, and retain a diverse, high performing team
to positively impact the overall performance and efficiency of the Corporation.
•We will increase internal efficiencies, deliver a differentiated client
experience, and drive client experience utilizing technology where possible.
•We will diversify and grow our deposit base.
•We will optimize our business lines for diversification and performance.

The table below presents the Company’s performance for the years ended December 31, 20212020 and 2019 against the key performance indicators included in the Company’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%
Return on average assets ("ROAA")                    1.14%               0.70%               1.37%               1.15%
Top line revenue growth                              9.1%                11.5%               8.4%            ? 10% per year
In-market deposits to total bank funding             75.5%               74.8%               82.9%               ? 75%
Employee engagement (1)                               82%                 91%                 87%                ? 80%
Client satisfaction (1)                               93%                 96%                 93%                ? 90%

(1) Anonymous surveys carried out annually







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                         Financial Performance Summary

Results as of and for the year ended December 31, 2021 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.
•Diluted earnings per common share were $4.17 for the year ended December 31,
2021, increasing 111.4% compared to $1.97 in the prior year.
•Return on average assets and return on average equity for the year ended
December 31, 2021 were 1.37% and 16.21% respectively, compared to 0.70% and
8.64%, respectively, for 2020.
•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.
•Total assets at December 31, 2021 increased $85.1 million, or 3.3%, to $2.653
billion from $2.568 billion at December 31, 2020.
•Period-end gross loans and leases receivable at December 31, 2021 increased
$93.4 million, or 4.4%, to $2.239 billion from $2.146 billion as of December 31,
2020. Average gross loans and leases of $2.179 billion increased $167.8 million,
or 8.3% for the year ended December 31, 2021, compared to $2.011 billion for the
same period in 2020.
•Period-end gross loans and leases receivable, excluding net PPP loans, at
December 31, 2021 increased $291.5 million, or 15.18%, to $2.212 billion from
$1.921 billion as of December 31, 2020. Average gross loans and leases,
excluding net PPP loans, of $2.027 billion increased $230.6 million, or 12.8%
for the year ended December 31, 2021, compared to $1.796 billion for the same
period in 2020.
•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. The allowance for loan and lease losses was 1.09% of total
loans as of December 31, 2021, compared to 1.33% as of December 31, 2020.
Excluding net PPP loans, the allowance for loan and lease losses decreased to
1.10% of total loans as of December 31, 2021, compared to 1.48% as of
December 31, 2020.
•Period-end in-market deposits at December 31, 2021 increased $245.3 million, or
14.6%, to $1.928 billion from $1.683 billion as of December 31, 2020. Average
in-market deposits of $1.784 billion increased $215.8 million, or 13.8%, for the
year ended December 31, 2021, compared to $1.569 billion for the same period in
2020.
•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.
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                             Results of Operations

Top Line Revenue

  Top line revenue, comprised of net interest income and non-interest income,
increased 8.4% for the year ended December 31, 2021 compared to the year ended
December 31, 2020 primarily due to a $7.6 million, or 9.8%, increase in net
interest income and a $1.2 million, or 4.3%, increase in non-interest income.
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 components of revenue were as follows:

                                                  For the Year Ended December 31,                       Change From Prior Year
                                                      2021                2020                    $ Change                % Change
                                                                     (Dollars in Thousands)
Net interest income                               $   84,662          $  77,071                $      7,591                       9.8  %
Non-interest income                                   28,100             26,940                       1,160                       4.3
Top line revenue                                  $  112,762          $ 104,011                $      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 included 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.

Efficiency ratio and adjusted profit before tax and before provision

  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.

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  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. 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.

                                                       For the Year Ended December 31,                Change From Prior Year
                                                       2021                   2020               $ Change               % Change
                                                                               (Dollars in Thousands)
Total non-interest expense                      $        71,535           $   68,898          $     2,637                      3.8  %
Less:
Net loss on foreclosed properties                            15                  383                 (368)                   (96.1)
Amortization of other intangible assets                      25                   35                  (10)                   (28.6)
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
Total operating expense (a)                     $        71,571           $   65,619          $     5,952                      9.1
Net interest income                             $        84,662           $   77,071          $     7,591                      9.8
Total non-interest income                                28,100               26,940                1,160                      4.3

Less:

Net gain (loss) on sale of securities                        29                   (4)                  33                          NM
Adjusted non-interest income                             28,071               26,944                1,127                      4.2
Total operating revenue (b)                     $       112,733           $  104,015          $     8,718                      8.4
Efficiency ratio                                          63.49   %            63.09  %

Pre-tax, pre-provision adjusted earnings
(b-a)                                           $        41,162           $   38,396          $     2,766                      7.2
Average total assets                                  2,605,008            2,419,616              185,392                      7.7
Pre-tax, pre-provision adjusted return on
average assets                                             1.58   %             1.59  %


NM = Not meaningful

Net Interest Income

  Net interest income levels depend on the amount of and yield on
interest-earning assets as compared to the amount of and rate paid on
interest-bearing liabilities. Net interest income is sensitive to changes in
market rates of interest and the asset/liability management processes to prepare
for and respond to such changes.

The table below shows average balances, interest, average rates, net interest
margin and the spread between combined average rates earned on our
interest-earning assets and cost of interest-bearing liabilities for the periods
indicated. The average balances are derived from average daily balances.

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                                                                                                 For the Year Ended December 31,
                                                                                 2021                                                       2020
                                                                                                   Average                                                    Average
                                                            Average                                Yield/              Average                                Yield/
                                                            Balance            Interest             Rate               Balance            Interest             Rate
                                                                                                     (Dollars in Thousands)
Interest-earning assets
Commercial real estate and other mortgage loans(1)       $ 1,387,434          $ 51,930                3.74  %       $ 1,245,886          $ 51,188                4.11  %
Commercial and industrial loans(1)                           727,923            37,470                5.15  %           701,328            35,487                5.06  %
Direct financing leases(1)                                    19,591               872                4.45  %            26,564             1,039                3.91  %
Consumer and other loans(1)                                   44,206             1,572                3.56  %            37,544             1,446                3.85  %
Total loans and leases receivable(1)                       2,179,154            91,844                4.21  %         2,011,322            89,160                4.43  %
Mortgage-related securities(2)                               159,242             2,633                1.65  %           173,084             3,548                2.05  %
Other investment securities(3)                                44,739               777                1.74  %            31,809               639                2.01  %
FHLB stock                                                    13,066               651                4.98  %            11,576               671                5.80  %
Short-term investments                                        64,308                90                0.14  %            37,314               161                0.43  %
Total interest-earning assets                              2,460,509            95,995                3.90  %         2,265,105            94,179                4.16  %
Non-interest-earning assets                                  144,499                                                    154,511
Total assets                                             $ 2,605,008                                                $ 2,419,616
Interest-bearing liabilities
Transaction accounts                                     $   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  %
Certificates of deposit                                       47,020               396                0.84  %           111,698             2,198                1.97  %
Wholesale deposits                                           119,831               986                0.82  %           142,591             2,434                1.71  %
Total interest-bearing deposits                            1,367,152             3,553                0.26  %         1,298,268             8,922                0.69  %
FHLB advances                                                376,781             4,908                1.30  %           379,891             5,507                1.45  %
Federal reserve PPPLF                                              -                 -                   -  %            15,207                54                0.36  %
Other borrowings                                              31,935             1,759                5.51  %            24,472             1,509                6.17  %
Junior subordinated notes                                     10,068             1,113               11.05  %            10,054             1,116               11.10  %
Total interest-bearing liabilities                         1,785,936            11,333                0.63  %         1,727,892            17,108                0.99  %
Non-interest-bearing demand deposit accounts                 536,981                                                    412,825
Other non-interest-bearing liabilities                        61,580                                                     82,337
Total liabilities                                          2,384,497                                                  2,223,054
Stockholders' equity                                         220,511                                                    196,562
Total liabilities and stockholders' equity               $ 2,605,008                                                $ 2,419,616
Net interest income                                                           $ 84,662                                                   $ 77,071
Net interest spread                                                                                   3.27  %                                                    3.17  %
Net interest-earning assets                              $   674,573                                                $   537,213
Net interest margin                                                                                   3.44  %                                                    3.40  %
Average interest-earning assets to average
interest-bearing liabilities                                  137.77  %                                                  131.09  %
Return on average assets                                        1.37  %                                                    0.70  %
Return on average equity                                       16.21  %                                                    8.64  %
Average equity to average assets                                8.46  %                                                    8.12  %
Non-interest expense to average assets                          2.75  %                                                    2.85  %


(1)The average balances of loans and leases include non-accrual loans and leases
and loans held for sale. Interest income related to non-accrual loans and leases
is recognized when collected. Interest income includes net loan fees collected
in lieu of interest.
(2)Includes amortized cost basis of assets available-for-sale and
held-to-maturity.
(3)Yields on tax-exempt municipal securities are not presented on a
tax-equivalent basis in this table.
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  The following table provides information with respect to: (1) the change in
net interest income attributable to changes in rate (changes in rate multiplied
by prior volume); and (2) the change in net interest income attributable to
changes in volume (changes in volume multiplied by prior rate) for the year
ended December 31, 2021 compared to the year ended December 31, 2020. The change
in net interest income attributable to changes in rate and volume (changes in
rate multiplied by changes in volume) has been allocated to the rate and volume
changes in proportion to the relationship of the absolute dollar amounts of the
change in each.

                              Rate/Volume Analysis

                                                                                   Increase (Decrease) for the Year Ended December 31,
                                                                                                  2021 Compared to 2020
                                                                                     Rate                                   Volume                Net
                                                                                                     (In Thousands)
Interest-earning assets
Commercial real estate and other mortgage loans(1)            $             (4,784)                                     $     5,526          $       

742

Commercial and industrial loans(1)                                             621                                            1,362                1,983
Direct financing leases(1)                                                     130                                             (297)                (167)
Consumer and other loans(1)                                                   (117)                                             243                  126
Total loans and leases receivable(1)                                        (4,150)                                           6,834                

2,684

Mortgage-related securities(2)                                                (647)                                            (268)                (915)
Other investment securities                                                    (96)                                             234                  138
FHLB Stock                                                                    (100)                                              80                  (20)
Short-term investments                                                        (147)                                              76                  (71)
Total net change in income on interest-earning assets                       (5,140)                                           6,956                

1,816

Interest-bearing liabilities
Transaction accounts                                                          (805)                                             345                 (460)
Money market                                                                (1,832)                                             173               (1,659)
Certificates of deposit                                                       (895)                                            (907)              (1,802)
Wholesale deposits                                                          (1,107)                                            (341)              (1,448)
Total deposits                                                              (4,639)                                            (730)              (5,369)
FHLB advances                                                                 (554)                                             (45)                (599)
Federal reserve PPPLF                                                            -                                              (54)                 (54)
Other borrowings                                                              (174)                                             424                  250
Junior subordinated notes                                                       (5)                                               2                   (3)
Total net change in expense on interest-bearing
liabilities                                                                 (5,372)                                            (403)              

(5,775)

Net change in net interest income                             $                232                                      $     7,359          $     

7,591


(1)The average balances of loans and leases include non-accrual loans and leases
and loans held for sale. Interest income related to non-accrual loans and leases
is recognized when collected. Interest income includes net loan fees collected
in lieu of interest.
(2)Includes amortized cost basis of assets available-for-sale and
held-to-maturity.

  Net interest income increased by $7.6 million, or 9.8%, for the year ended
December 31, 2021, compared to the year ended December 31, 2020. 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. Average gross loans and leases of $2.179
billion increased by $167.8 million, or 8.3% for the year ended December 31,
2021, compared to $2.011 billion for the same period in 2020. 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, 2021 increased
$230.6 million, or 12.8%, compared to the year ended December 31, 2020.
Excluding fees in lieu of interest and interest income from PPP loans, net
interest income increased $6.4 million, or 9.7%.

  The yield on average earning assets for the year ended December 31, 2021 was
3.90%, a decrease of 26 basis points compared to 4.16% for the year ended
December 31, 2020. 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.

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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.
Adjusted net interest margin measured 3.21% for the year ended December 31,
2021, compared to 3.28% for the year ended December 31, 2020. 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.

Allowance for losses on loans and leases

  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. 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. These decreases were partially
offset by a $2.9 million increase in the general reserve due to loan growth.

The following table shows the components of the allowance for losses on loans and leases for the year ended December 31, 2021 compared to the year ended
December 31, 2020.

                                                                      For the Year Ended December 31,
(Dollars in thousands)                                                   2021                    2020

Change in general reserve due to changes in subjective factors $

   (426)         $     5,460
Change in general reserve due to historical loss factor
changes                                                                     (4,456)                 949
Charge-offs                                                                  3,508                8,139
Recoveries                                                                  (5,126)                (332)
Change in specific reserves on impaired loans, net                          (2,175)                 316
Change due to loan growth, net                                               2,872                2,276
Total provision for loan and lease losses                         $         

(5,803) $16,808

The addition of specific impaired loan reserves represents new specific reserves built up in the event of insufficient collateral or government guarantee defaults, while conversely the release of specific reserves represents the

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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. Charge-offs in
excess of previously established specific reserves require an additional
provision for loan and lease losses to maintain the allowance for loan and lease
losses at a level deemed appropriate by management. This amount is net of the
release of any specific reserve that may have already been provided. Change in
the inherent risk of the portfolio is primarily influenced by the overall growth
in gross loans and leases and an analysis of loans previously charged off, as
well as movement of existing loans and leases in and out of an impaired loan
classification where a specific evaluation of a particular credit may be
required rather than the application of a general reserve loss rate. Refer to
Asset Quality, below, for further information regarding the overall credit
quality of our loan and lease portfolio.

Non-interest income

  Non-interest income increased by $1.2 million, or 4.3%, to $28.1 million for
the year ended December 31, 2021, from $26.9 million for the year ended
December 31, 2020. Management continues to focus on revenue growth from multiple
non-interest income sources in order to maintain a diversified revenue stream
through greater contributions from fee-based revenues. Total non-interest income
accounted for 24.9% of our total revenues in 2021 compared to 25.9% in 2020. 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 components of non-interest income were as follows:

                                            For the Year Ended December 31,        Change From Prior Year
                                               2021                   2020                     $ Change               % Change
                                                              (Dollars in

Thousands)

Private wealth management services fee
income                                  $        10,784           $    8,611                $     2,173                      25.2  %
Gain on sale of SBA loans                         4,044                2,899                      1,145                      39.5
Service charges on deposits                       3,837                3,415                        422                      12.4
Loan fees                                         2,506                1,826                        680                      37.2
Increase in cash surrender value of
bank-owned life insurance                         1,413                1,402                         11                       0.8
Net gain (loss) on sale of securities                29                   (4)                        33                           NM
Swap fees                                         1,368                6,860                     (5,492)                    (80.1)
Other non-interest income                         4,119                1,931                      2,188                     113.3
Total non-interest income               $        28,100           $   26,940                $     1,160                       4.3
Fee income ratio(1)                                24.9   %             25.9  %

(1) Commission income ratio is commission income, as per the table above, divided by sales income (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 have increased $680,000i.e. 37.2%, at $2.5 million for the year ended
December 31, 2021compared to $1.8 million for the same period in 2020. The increase is mainly due to the recognition of a full year of funding

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

  Other non-interest income increased by $2.2 million to $4.1 million for the
year ended December 31, 2021, compared to $1.9 million for the year ended
December 31, 2020. 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. We originate commercial real estate loans in which we
offer clients a floating rate and an interest rate swap. The client's swap is
then offset with a counter-party dealer. The execution of these transactions
generates swap fee income. The aggregate amortizing notional value of interest
rate swaps with various borrowers was $640.6 million as of December 31, 2021,
compared to $629.1 million as of December 31, 2020. Interest rate swaps can be
an attractive product for our commercial borrowers, although associated fee
income can be variable from period to period based on client demand and the
interest rate environment in any given quarter.

Non-interest charges

  Non-interest expense increased by $2.6 million, or 3.8%, to $71.5 million for
the year ended December 31, 2021 from $68.9 million for the year ended
December 31, 2020. Operating expense, which excludes certain one-time and
discrete items as defined in the Efficiency Ratio table above, increased $6.0
million, or 9.1%, to $71.6 million for the year ended December 31, 2021 compared
to $65.6 million for the year ended December 31, 2020. 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 components of non-interest expense were as follows:

                                             For the Year Ended December 31,        Change From Prior Year
                                                2021                   2020                     $ Change               % Change
                                                               (Dollars in Thousands)
Compensation                             $         51,710          $   45,850                $     5,860                      12.8  %
Occupancy                                           2,180               2,252                        (72)                     (3.2)
Professional fees                                   3,736               3,530                        206                       5.8
Data processing                                     3,087               2,734                        353                      12.9
Marketing                                           2,022               1,580                        442                      28.0
Equipment                                             990               1,199                       (209)                    (17.4)
Computer software                                   4,260               3,900                        360                       9.2
FDIC insurance                                      1,143               1,238                        (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                          2,203               3,043                       (840)                    (27.6)
Total non-interest expense               $         71,535          $   68,898                $     2,637                       3.8
Total operating expense(1)               $         71,571          $   65,619                $     5,952                       9.1
Full-time equivalent employees                        304                 301                          3                       1.0


NM = Not meaningful

(1) Total operating expenses represent total non-interest expense, adjusted to exclude the impact of discrete items as previously defined in the non-GAAP efficiency ratio calculation above.

  Compensation expense increased by $5.9 million, or 12.8%, to $51.7 million for
the year ended December 31, 2021 from $45.9 million for the year ended
December 31, 2020 principally due to an increase in average FTEs, annual merit
increases, growth in employee benefit costs and increase in incentive
compensation. The increase reflects a $2.1 million, or

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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. Average FTEs
were 307 for the year ended December 31, 2021, increasing by 16, or 5.5%, from
291 for the year ended December 31, 2020. Performance-based incentive
compensation accruals will reset to target performance at the start of 2022 and
will be evaluated quarterly and increased or decreased based on management's
forecast of full year performance for the Corporation.

Marketing expense increased by $442,000, or 28.0%, to $2.0 million for the year
ended December 31, 2021 from $1.6 million for the year ended December 31, 2020.
During 2020, the Corporation's adherence to COVID-19 restrictions resulted in a
reduction in marketing expenses, such as meals and entertainment, and
advertisement expense. 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.

Income taxes

  Income tax expense was $11.3 million for the year ended December 31, 2021,
compared to $1.3 million for the year ended December 31, 2020. 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 effective tax rate
for the year ended December 31, 2021 was 24.0% compared to 7.2% for the year
ended December 31, 2020. 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.


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                              FINANCIAL CONDITION

General

  Total assets increased by $85.1 million, or 3.3%, to $2.653 billion as of
December 31, 2021 compared to $2.568 billion at December 31, 2020. 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. Total liabilities increased by
$58.8 million, or 2.5%, to $2.420 billion as of December 31, 2021 compared to
$2.362 billion at December 31, 2020. The increase in total liabilities was
principally due to an increase in deposits, partially offset by a decrease in
FHLB advances and derivatives.

Cash and cash equivalents

  Cash and cash equivalents include short-term investments and cash and due from
banks. Short-term investments increased by $20.0 million to $47.4 million at
December 31, 2021 from $27.4 million at December 31, 2020. 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. Short-term investments
primarily consist of interest-bearing deposits held at the Federal Reserve Bank
("FRB"). We value the safety and soundness provided by the FRB, and therefore,
we incorporate short-term investments in our on-balance sheet liquidity program.
As of December 31, 2021 and 2020, interest-bearing deposits held at the FRB were
$47.0 million and $26.7 million, respectively. In general, the level of our cash
and short-term investments will be influenced by the timing of deposit
gathering, scheduled maturities of wholesale deposits, funding of loan and lease
growth when opportunities are presented, and the level of our securities
portfolio. Please refer to the section entitled Liquidity and Capital Resources
for further discussion.

Securities

  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. As of December 31, 2021 and 2020, our total securities
portfolio had a weighted average estimated maturity of approximately 5.7 years
and 5.0 years, respectively. The investment portfolio primarily consists of
mortgage-backed securities and is used to provide a source of liquidity,
including the ability to pledge securities for possible future cash advances,
while contributing to the earnings potential of the Bank. The overall duration
of the securities portfolio is established and maintained to further mitigate
interest rate risk present within our balance sheet as identified through
asset/liability simulations. We purchase investment securities intended to
protect net interest margin while maintaining an acceptable risk profile. 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. government agency. The estimated repayment streams associated with this
portfolio also allow us to better match short-term liabilities. The Bank's
investment policies allow for various types of investments, including tax-exempt
municipal securities. The ability to invest in tax-exempt municipal securities
provides for further opportunity to improve our overall yield on the securities
portfolio. We evaluate the credit risk of the municipal securities prior to
purchase and generally limit exposure to general obligation issuances from
municipalities, primarily in Wisconsin.

  The majority of the securities we hold have active trading markets; therefore,
we have not experienced difficulties in pricing our securities. We use a
third-party pricing service as our primary source of market prices for the
securities portfolio. On a quarterly basis, we validate the reasonableness of
prices received from this source through independent verification of the
portfolio, data integrity validation through comparison of current price to
prior period prices, and an expectation-based analysis of movement in prices
based upon the changes in the related yield curves and other market factors. On
a periodic basis, we review the third-party pricing vendor's methodology for
pricing relevant securities and the results of its internal control assessments.
Our securities portfolio is sensitive to fluctuations in the interest rate
environment and has limited sensitivity to credit risk due to the nature of the
issuers and guarantors of the securities as previously discussed. If interest
rates decline and the credit quality of the securities remains constant or
improves, the fair value of our debt securities portfolio would likely improve,
thereby increasing total comprehensive income. If interest rates increase and
the credit quality of the securities remains constant or deteriorates, the fair
value of our debt securities portfolio would likely decline and therefore
decrease total comprehensive income. The magnitude of the fair value change will
be based upon the duration of the portfolio. A securities portfolio with a
longer average duration will exhibit greater market price volatility than a
securities portfolio with a shorter average duration in a changing rate
environment. During the year ended December 31, 2021, we recognized unrealized
holding losses of $4.3 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
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trading securities. At December 31, 2021, $70.3 million of our securities were
pledged to secure various obligations, including interest rate swap contracts
and municipal deposits.

The tables below present information regarding the amortized cost and fair values ​​of our securities.

                                                                                          As of December 31,
                                                                           2021                                         2020
                                                            Amortized Cost          Fair Value           Amortized Cost          Fair Value
                                                                                            (In Thousands)

Available for sale :

U.S. Treasuries                                           $         4,971          $    4,914          $             -          $        -
U.S. government agency securities -
government-sponsored enterprises                                   19,797              19,935                   22,699              22,629
Municipal securities                                               30,828              30,957                   24,067              24,779

Residential Mortgage Backed Securities – Government Issued

                                                             19,563              19,661                    9,894              10,403
Residential mortgage-backed securities -
government-sponsored enterprises                                   85,748              85,705                  102,843             105,006

Commercial mortgage-backed securities – government issued

                                                              5,801               5,771                    5,289               5,464
Commercial mortgage-backed securities -
government-sponsored enterprises                                   36,786              36,531                   12,584              13,365
Other securities                                                    2,205               2,228                    2,205               2,279
                                                          $       205,699          $  205,702          $       179,581          $  183,925


                                                                                           As of December 31,
                                                                           2021                                          2020
                                                            Amortized Cost           Fair Value           Amortized Cost           Fair Value
                                                                                             (In Thousands)

Held to maturity:

Municipal securities                                      $        13,009   

$13,228 $17,106 $17,508
Residential Mortgage Backed Securities – Government Issued

                                                              2,226                2,266                    3,564                3,676
Residential mortgage-backed securities -
government-sponsored issued                                         2,502                2,578                    3,693                3,856
Commercial mortgage-backed securities -
government-sponsored enterprises                                    2,009                2,204                    2,011                2,293
                                                          $        19,746          $    20,276          $        26,374          $    27,333


  U.S. Treasuries represent treasury bonds issued by the United States Treasury.
U.S. government agency securities - government-sponsored enterprises represent
securities issued by FNMA and the SBA. Municipal securities include securities
issued by various municipalities located primarily within Wisconsin and are
primarily general obligation bonds that are tax-exempt in nature. Residential
and commercial mortgage-backed securities - government issued represent
securities guaranteed by GNMA. Residential and commercial mortgage-backed
securities - government-sponsored enterprises include securities guaranteed by
FHLMC, FNMA, and the FHLB. Other securities represent certificates of deposit of
insured banks and savings institutions with an original maturity greater than
three months. As of December 31, 2021, no issuer's securities exceeded 10% of
our total stockholders' equity.

  The following table sets forth the contractual maturity and weighted average
yield characteristics of the fair value of our available-for-sale securities and
the amortized cost of our held-to-maturity securities at December 31, 2021,
classified by remaining contractual maturity. Actual maturities may differ from
contractual maturities because issuers have the right to call or prepay
securities without call or prepayment penalties. Yields on tax-exempt securities
have not been computed on a tax equivalent basis.
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                                                                Less than One Year                                One to Five Years                             Five to Ten Years                             Over Ten Years
                                                                                   Weighted                                         Weighted                                  Weighted                                       Weighted
                                                                                   Average                                          Average                                   Average                                        Average
                                                         Fair Value                 Yield                 Fair Value                 Yield              Fair Value             Yield                Fair Value                Yield
               Total
                                                                                                                                             (Dollars in Thousands)
Available-for-sale:
U.S. treasuries                                     $               -                      -  %       $          4,914                   1.00  %       $       -                      -  %       $            -                      -  %       $   4,914
U.S. government agency securities -
government-sponsored enterprises                                    -                      -                       978                   0.56              4,726                   0.93                  14,231                   0.80             19,935
Municipal securities                                              496                   0.30                     2,951                   1.33             11,839                   1.41                  15,671                   1.85             30,957
Residential mortgage-backed securities -
government issued                                                   -                      -                         -                      -              2,273                   2.94                  17,388                   1.89             19,661
Residential mortgage-backed securities -
government-sponsored enterprises                                    -                      -                     1,216                   2.34             13,271                   2.09                  71,218                   1.72             85,705
Commercial mortgage-backed securities -
government issued                                                   -                      -                         -                      -              1,658                   3.10                   4,113                   1.60              5,771
Commercial mortgage-backed securities -
government-sponsored enterprises                                    -                      -                     1,878                   2.41             24,703                   1.63                   9,950                   1.53             36,531
Other securities                                                2,228                   2.38                         -                      -                  -                      -                       -                      -              2,228
                                                    $           2,724                                 $         11,937                                 $  58,470                                 $      132,571                                 $ 205,702


                                                                Less than One Year                                One to Five Years                                Five to Ten Years                                 Over Ten Years
                                                                                   Weighted                                         Weighted                                         Weighted                                       Weighted
                                                                                   Average                                          Average                                          Average                                        Average
                                                       Amortized Cost               Yield               Amortized Cost               Yield               Amortized Cost               Yield              Amortized Cost              Yield                Total
                                                                                                                                                (Dollars in Thousands)
Held-to-maturity:
Municipal securities                                $           3,793                   2.13  %       $          7,289                   2.27  %       $          1,927                   2.67  %       $            -                      -  %       $ 13,009
Residential mortgage-backed securities -
government issued                                                   -                      -                         -                      -                     1,491                   2.00                     735                   2.14             2,226
Residential mortgage-backed securities -
government-sponsored enterprises                                    -                      -                         -                      -                     1,796                   1.68                     706                   3.35             2,502
Commercial mortgage-backed securities -
government-sponsored enterprises                                    -                      -                         -                      -                     2,009                   3.27                       -                      -             2,009
                                                    $           3,793                                 $          7,289                                 $          7,223                                 $        1,441                                 $ 19,746


Derivatives

  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 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.

  As of December 31, 2021, the aggregate amortizing notional value of interest
rate swaps with various commercial borrowers was approximately $640.6 million,
compared to $629.1 million as of December 31, 2020. We receive fixed rates and
pay floating rates based upon LIBOR on the swaps with commercial borrowers.
These swaps mature between January 2024 and March 2038. Commercial borrower
swaps are completed independently with each borrower and are not subject to
master netting arrangements. 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
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$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.

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.
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.
The instruments are designated as cash flow hedges as the receipt of floating
rate interest from the counterparty is used to manage interest rate risk
associated with forecasted issuances of short-term FHLB advances. 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.

Loans and leases receivable

  Loans and leases receivable, net of allowance for loan and lease losses,
increased by $97.6 million, or 4.6%, to $2.215 billion at December 31, 2021 from
$2.117 billion at December 31, 2020. 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.

  There continues to be a concentration in CRE loans which represented 65.7% and
70.6% of our total loans, excluding net PPP loans, as of December 31, 2021 and
December 31, 2020, respectively. As of December 31, 2021, approximately 16.2% of
the CRE loans were owner-occupied CRE, compared to 18.7% as of December 31,
2020. 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. Excluding net PPP
loans, C&I loans increased $196.5 million, or 38.8%, to $703.5 million from
$507.0 million at December 31, 2020. 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.

  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.

  While we continue to experience significant competition from banks operating
in our primary geographic areas, we remain committed to our underwriting
standards and will not deviate from those standards for the sole purpose of
growing our loan and lease portfolio. We continue to expect our new loan and
lease activity to be adequate to replace normal amortization, allowing us to
continue growing in future years.





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The following table presents information regarding the composition of the Bank’s consolidated loans and contracts receivable.

                                                                              As of December 31,
                                                              2021                                          2020
                                                 Amount            % of Total Loans            Amount            % of Total Loans
                                               Outstanding            and Leases             Outstanding            and Leases
                                                                            (Dollars in Thousands)
Commercial real estate:
Commercial real estate - owner
occupied                                     $    235,589                    10.5  %       $    253,882                    11.8  %
Commercial real estate - non-owner
occupied                                          661,423                    29.5               564,532                    26.3
Land development                                   42,792                     1.9                49,839                     2.3
Construction                                      179,841                     8.0               141,043                     6.6
Multi-family                                      320,072                    14.3               311,556                    14.5
1-4 family                                         14,911                     0.7                38,284                     1.8
Total commercial real estate                    1,454,628                    64.9             1,359,136                    63.2
Commercial and industrial                         730,819                    32.6               732,318                    34.0
Direct financing leases, net                       15,743                     0.7                22,331                     1.1
Consumer and other:
Home equity and second mortgage                     4,223                     0.2                 7,833                     0.4
Other                                              35,518                     1.6                28,897                     1.3
Total consumer and other                           39,741                     1.8                36,730                     1.7
Total gross loans and leases
receivable                                      2,240,931                   100.0  %          2,150,515                   100.0  %
Less:
Allowance for loan and lease losses                24,336                                        28,521
Deferred loan fees                                  1,523                                         4,545
Loans and leases receivable, net             $  2,215,072                                  $  2,117,449











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The following table shows the scheduled contractual maturities of the Bank's
consolidated gross loans and leases receivable, as well as the dollar amount of
such loans and leases which are scheduled to mature after one year and have
fixed or adjustable interest rates, as of December 31, 2021.

                                                                           Amounts Due                                           Interest Terms On Amounts Due after One Year
                                                                   After One
                                            In One Year          Year through          After Five                                                                   Variable
                                              or Less             Five Years              Years               Total                     Fixed Rate                     Rate
                                                                                                     (In Thousands)
Commercial real estate:
Owner-occupied                            $     14,481          $    

112,813 $108,295 $235,589 $164,074

                  $  57,034
Non-owner occupied                              83,881               294,650             282,892              661,423                     310,930                    266,612
Land development                                17,074                23,964               1,754               42,792                       8,432                     17,286
Construction                                    34,103                30,941             114,797              179,841                      56,351                     89,387
Multi-family                                    23,216                98,516             198,340              320,072                      99,619                    197,237
1-4 family                                       3,013                 7,587               4,311               14,911                      11,755                        143
Commercial and industrial                      235,189               418,358              77,272              730,819                     304,426                    191,204
Direct financing leases                          1,239                13,992                 512               15,743                      14,504                          -
Consumer and other                               4,367                34,418                 956               39,741                      30,055                      5,319
                                          $    416,563          $  1,035,239          $  789,129          $ 2,240,931          $        1,000,146                  $ 824,222



  Commercial Real Estate. The Bank originates owner-occupied and
non-owner-occupied commercial real estate loans which have fixed or adjustable
rates and generally terms of three to 10 years and amortizations of up to 30
years on existing commercial real estate. The Bank also originates loans to
construct commercial properties and complete land development projects. The
Bank's construction loans generally have terms of six to 24 months with fixed or
adjustable interest rates and fees that are due at the time of origination. 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. 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. Therefore, repayment of such
loans is often sensitive to conditions in the real estate market or the general
economy, which are outside the borrower's control. In the event that the cash
flow from the property is reduced, the borrower's ability to repay the loan
could be negatively impacted. The deterioration of one or a few of these loans
could cause a material increase in our level of nonperforming loans, which would
result in a loss of revenue from these loans and could result in an increase in
the provision for loan and lease losses and an increase in charge-offs, all of
which could have a material adverse impact on our net income. Additionally, many
of these loans have real estate as a primary or secondary component of
collateral. The market value of real estate can fluctuate significantly in a
short period of time as a result of economic conditions. 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.

  Commercial and Industrial. The Bank's commercial and industrial loan portfolio
is comprised of loans for a variety of purposes which principally are secured by
inventory, accounts receivable, equipment, machinery, and other corporate assets
and are advanced within limits prescribed by our loan policy. 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.

  Direct Financing Leases. Direct financing leases initiated through FBSF are
originated with a fixed rate and typically a term of seven years or less. It is
customary in the leasing industry to provide 100% financing; however, FBSF will,
from time-to-time, require a down payment or lease deposit to provide a credit
enhancement. As of December 31, 2021, the Bank had $15.7 million in net direct
financing receivables outstanding.
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  FBSF leases machinery and equipment to clients under leases which qualify as
direct financing leases for financial reporting and as operating leases for
income tax purposes. Under the direct financing method of accounting, the
minimum lease payments to be received under the lease contract, together with
the estimated unguaranteed residual value (approximating 3% to 20% of the cost
of the related equipment), are recorded as lease receivables when the lease is
signed and the lease property is delivered to the client. The excess of the
minimum lease payments and residual values over the cost of the equipment is
recorded as unearned lease income. Unearned lease income is recognized over the
term of the lease on a basis which results in a level rate of return on the
unrecovered lease investment. Lease payments are recorded when due under the
lease contract. Residual value is the estimated fair market value of the
equipment on lease at lease termination and was estimated to be $3.6 million as
of December 31, 2021. In estimating the equipment's fair value, FBSF relies on
historical experience by equipment type and manufacturer, published sources of
used equipment pricing, internal evaluations and, when available, valuations by
independent appraisers, adjusted for known trends.

Consumer and Other. The Bank issues small amount of consumer loans consisting of home equity, first and second mortgages and other personal loans to the Bank’s business and executive clients.

Asset quality

Unexpected loans and leases decreased $20.3 millioni.e. 76.1%, at $6.4 million at December 31, 2021 compared to $26.6 million at December 31, 2020.

  Our total impaired assets consisted of the following:

                                                                                    As of December 31,
                                                                                 2021                 2020
                                                                                  (Dollars in Thousands)
Non-accrual loans and leases
Commercial real estate:
Commercial real estate - owner occupied                                    $        348           $    5,429
Commercial real estate - non-owner occupied                                           -                3,783
Land development                                                                      -                  890
Construction                                                                          -                    -
Multi-family                                                                          -                    -
1-4 family                                                                          339                  250
Total non-accrual commercial real estate                                            687               10,352
Commercial and industrial                                                         5,572               16,155
Direct financing leases, net                                                         99                   49
Consumer and other:
Home equity and second mortgage                                                       -                   40
Other                                                                                 -                   21
Total non-accrual consumer and other loans                                            -                   61
Total non-accrual loans and leases                                                6,358               26,617
Foreclosed properties, net                                                          164                   34
Total non-performing assets                                                       6,522               26,651
Performing troubled debt restructurings                                             217                   46
Total impaired assets                                                      $      6,739           $   26,697
Total non-accrual loans and leases to gross loans and leases                       0.28   %             1.24  %

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

                                                         0.29   %             1.24  %
Total non-performing assets to total assets                                        0.25   %             1.04  %
Allowance for loan and lease losses to gross loans and leases                      1.09   %             1.33  %

Allowance for losses on loans and leases on unaccrued loans and leases

      382.76   %           107.15  %


  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
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assets of $20.1 million, or 75.5%, from December 31, 2020. Impaired loans and
leases as of December 31, 2021 and 2020 also included $217,000 and $46,000,
respectively, of loans classified as performing troubled debt restructurings,
which are considered impaired due to the concession in terms, but are meeting
the restructured payment terms and therefore are not on non-accrual status.

The following asset quality ratios exclude net PPP loans as they are fully
guaranteed by the SBA:

                                                                                 As of December 31,
                                                                            2021                    2020
                                                                                   (In Thousands)
Total non-accrual loans and leases to gross loans and leases                    0.29  %                1.38  %

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

                                                      0.29                   1.38
Total non-performing assets to total assets                                     0.25                   1.14
Allowance for loan and lease losses to gross loans and leases                   1.10                   1.48


  We use a wide variety of available metrics to assess the overall asset quality
of the portfolio and no one metric is used independently to make a final
conclusion as to the asset quality of the portfolio. Non-performing assets as a
percentage of total assets decreased to 0.25% at December 31, 2021 from 1.04% at
December 31, 2020. 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. 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. As we continue to actively monitor the credit quality of our loan
and lease portfolios, we may identify additional loans and leases for which the
borrowers or lessees are having difficulties making the required principal and
interest payments based upon factors including, but not limited to, the
inability to sell the underlying collateral, inadequate cash flow from the
operations of the underlying businesses, liquidation events, or bankruptcy
filings. We are proactively working with our impaired loan borrowers to find
meaningful solutions to difficult situations that are in the best interests of
the Bank.

  In 2021, as well as in all previous reporting periods, there were no loans
over 90 days past due and still accruing interest. Loans and leases greater than
90 days past due are considered impaired and are placed on non-accrual status.
Cash received while a loan or a lease is on non-accrual status is generally
applied solely against the outstanding principal. If collectability of the
contractual principal and interest is not in doubt, payments received may be
applied to both interest due on a cash basis and principal.

  Additional information about impaired loans is as follows:

                                                                                            As of December 31,
                                                                                         2021                            2020
                                                                                              (In Thousands)
Impaired loans and leases with no impairment reserves                    $             4,419                         $   18,966
Impaired loans and leases with impairment reserves required                            2,156                              7,697
Total impaired loans and leases                                                        6,575                             26,663

Less: Allowance for impairment (included in allowance for loan and lease losses)

                                                                                1,505                              3,681
Net impaired loans and leases                                            $             5,070                         $   22,982
Average impaired loans and leases                                        $            14,260                         $   27,703

                                                                                     For the years ended December 31,
                                                                                         2021                            2020
                                                                                              (In Thousands)
Interest income attributable to impaired loans and leases                $             1,104                         $    2,794
Less: Interest income recognized on impaired loans and leases                            454                                636
Net foregone interest income on impaired loans and leases                $               650                         $    2,158


  Loans and leases with no impairment reserves represent impaired loans where
the collateral, based upon current information, is deemed to be sufficient or
that have been partially charged-off to reflect our net realizable value of the
loan.

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When analyzing the adequacy of collateral, we obtain external appraisals as
appropriate. Our policy regarding commercial real estate appraisals requires the
utilization of appraisers from our approved list, the performance of independent
reviews to monitor the quality of such appraisals, and receipt of new appraisals
for impaired loans at least annually, or more frequently as circumstances
warrant. We make adjustments to the appraised values for appropriate selling
costs. In addition, the ordering of appraisals and review of the appraisals are
performed by individuals who are independent of the business development
process. Based on the specific evaluation of the collateral of each impaired
loan, we believe the reserve for impaired loans was appropriate at December 31,
2021. However, we cannot provide assurance that the facts and circumstances
surrounding each individual impaired loan will not change and that the specific
reserve or current carrying value will not be different in the future, which may
require additional charge-offs or specific reserves to be recorded.

Allowance for losses on loans and leases

   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 as a percentage of gross loans and
leases also decreased to 1.09% as of December 31, 2021 from 1.33% as of
December 31, 2020. The allowance for loan and lease losses as a percentage of
gross loans and leases, excluding net PPP loans, was 1.10% as of December 31,
2021 from 1.48% as of December 31, 2020. 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.

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, 2021 and 2020, our allowance for loan and lease losses to
total non-accrual loans and leases was 382.76% and 107.15%, respectively. This
ratio increased primarily due to the substantial decrease in non-accrual loans
and leases discussed above, in comparison to the decrease in the allowance for
loan and leases losses. Impaired loans and leases exhibit weaknesses that
inhibit repayment in compliance with the original terms of the note or lease.
However, the measurement of impairment on loans and leases may not always result
in a specific reserve included in the allowance for loan and lease losses. As
part of the underwriting process, as well as our ongoing monitoring efforts, we
try to ensure that we have sufficient collateral to protect our interest in the
related loan or lease. As a result of this practice, a significant portion of
our outstanding balance of non-performing loans or leases may not require
additional specific reserves or require only a minimal amount of required
specific reserve. Management is proactive in recording charge-offs to bring
loans to their net realizable value in situations where it is determined with
certainty that we will not recover the entire amount of our principal. This
practice may lead to a lower allowance for loan and lease loss to non-accrual
loans and leases ratio as compared to our peers or industry expectations. As
asset quality strengthens, our allowance for loan and lease losses is measured
more through general characteristics, including historical loss experience, of
our portfolio rather than through specific identification and we would therefore
expect this ratio to rise. Conversely, if we identify further impaired loans,
this ratio could fall if the impaired loans are adequately collateralized and
therefore require no specific or general reserve. Given our business practices
and evaluation of our existing loan and lease portfolio, we believe this
coverage ratio is appropriate for the probable losses inherent in our loan and
lease portfolio as of December 31, 2021.

  To determine the level and composition of the allowance for loan and lease
losses, we break out the portfolio by segments with similar risk
characteristics. First, we evaluate loans and leases for potential impairment
classification. We analyze each loan and lease identified as impaired on an
individual basis to determine a specific reserve based upon the estimated value
of the underlying collateral for collateral-dependent loans, or alternatively,
the present value of expected cash flows. For each segment of loans and leases
that has not been individually evaluated, management segregates the Bank's loss
factors into a quantitative general reserve component based on historical loss
rates throughout the defined look back period. The quantitative general reserve
component also considers an estimate of the historical loss emergence period,
which is the period of time between the event that triggers the loss to the
charge-off of that loss. 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,
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existing economic conditions, level of loans and leases subject to more frequent
review by management, changes in underlying collateral, concentrations of loans
to specific industries, and other qualitative factors that could affect credit
losses.

  When it is determined that we will not receive our entire contractual
principal or the loss is confirmed, we record a charge against the allowance for
loan and lease loss reserve to bring the loan or lease to its net realizable
value. Many of the impaired loans as of December 31, 2021 are collateral
dependent. It is typically part of our process to obtain appraisals on impaired
loans and leases that are primarily secured by real estate or equipment
annually, or more frequently as circumstances warrant. 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 $24.3
million, or 1.09% of gross loans and leases, at December 31, 2021. However,
given ongoing complexities with current workout situations and the uncertainty
surrounding future economic conditions, further charge-offs, and increased
provisions for loan and lease losses may be recorded if additional facts and
circumstances lead us to a different conclusion. In addition, various federal
and state regulatory agencies review the allowance for loan and lease losses.
These agencies could require certain loan and lease balances to be classified
differently or charged off when their credit evaluations differ from those of
management, based on their judgments about information available to them at the
time of their examination.
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Here is a summary of the activity in the allowance for loan losses and leases:

                                                                                   Year Ended December 31,
                                                                                 2021                    2020
                                                                                   (Dollars in Thousands)
Allowance at beginning of period                                            $    28,521               $ 19,520

Dump :

Commercial real estate
Commercial real estate - owner occupied                                             (11)                (3,339)
Commercial real estate - non-owner occupied                                           -                 (2,780)
Construction and land development                                                     -                      -
Multi-family                                                                          -                      -
1-4 family                                                                         (245)                     -
Commercial and industrial                                                        (3,227)                (1,951)
Direct financing leases                                                               -                    (56)
Consumer and other
Home equity and second mortgage                                                       -                      -
Other                                                                               (25)                   (13)
Total charge-offs                                                                (3,508)                (8,139)
Recoveries:
Commercial real estate
Commercial real estate - owner occupied                                             435                      1
Commercial real estate - non-owner occupied                                       1,422                      3
Construction and land development                                                 2,078                      -
Multi-family                                                                          -                      -
1-4 family                                                                            -                      -
Commercial and industrial                                                         1,168                    325
Direct financing leases                                                               -                      -
Consumer and other
Home equity and second mortgage                                                       2                      1
Other                                                                                21                      2
Total recoveries                                                                  5,126                    332
Net charge-offs                                                                   1,618                 (7,807)
Provision for loan and lease losses                                              (5,803)                16,808
Allowance at end of period                                                  $    24,336               $ 28,521
Net charge-offs as a percent of average gross loans and leases                    (0.07)  %               0.39  %


  We review our methodology and periodically adjust allocation percentages of
the allowance by segment, as reflected in the following table. Within the
specific categories, certain loans or leases have been identified for specific
reserve allocations as well as the whole category of that loan type or lease
being reviewed for a general reserve based on the foregoing analysis of trends
and overall balance growth within that category.
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  The table below shows our allocation of the allowance for loan and lease
losses by loan portfolio segments. The allocation of the allowance by segment is
management's best estimate of the inherent risk in the respective loan segments.
Despite the specific allocation noted in the table below, the entire allowance
is available to cover any loss.

                                                              As of December 31,
                                                        2021                      2020
                                                Balance        (a)        Balance        (a)
                                                            (Dollars in Thousands)
Loan and lease segments:
Commercial real estate                         $ 15,110       1.04  %    $ 17,157       1.26  %
Commercial and industrial                         8,413       1.13         10,593       1.40
Consumer and other                                  813       2.05         

771 2.10 Total allowance for losses on loans and leases $24,336 1.09% $28,521 1.33%

(a) Loan loss allowance category as a percentage of total loans by category.

  Although we believe the allowance for loan and lease losses was appropriate
based on the current level of loan and lease delinquencies, non-accrual loans
and leases, trends in charge-offs, economic conditions, and other factors as of
December 31, 2021, there can be no assurance that future adjustments to the
allowance will not be necessary.

Deposits

  As of December 31, 2021, deposits increased by $102.4 million to $1.958
billion from $1.856 billion at December 31, 2020. 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 following table presents the composition of the Bank's consolidated
deposits.

                                                                                      As of December 31,
                                                                     2021                                           2020
                                                                             % of Total
                                                       Balance                Deposits               Balance           % of Total Deposits
                                                                                    (Dollars in Thousands)
Non-interest-bearing transaction accounts           $   589,559                     30.1  %       $   472,818                      25.4  %
Interest-bearing transaction accounts                   530,225                     27.1              503,992                      27.2
Money market accounts                                   754,410                     38.5              641,504                      34.6
Certificates of deposit                                  54,091                      2.8               64,694                       3.5
Wholesale deposits                                       29,638                      1.5              172,508                       9.3
Total deposits                                      $ 1,957,923                    100.0  %       $ 1,855,516                     100.0  %


  Period-end deposit balances associated with in-market relationships will
fluctuate based upon maturity of time deposits, client demands for the use of
their cash, and our ability to service and maintain existing and new client
relationships. Deposits continue to be the primary source of the Bank's funding
for lending and other investment activities. A variety of accounts are designed
to attract both short- and long-term deposits. These accounts include
non-interest-bearing transaction accounts, interest-bearing transaction
accounts, money market accounts, and certificates of deposit. Deposit terms
offered by the Bank vary according to the minimum balance required, the time
period the funds must remain on deposit, the rates and products offered by
competitors, and the interest rates charged on other sources of funds, among
other factors. Our Bank's in-market deposits are obtained primarily from the
South Central, Northeast and Southeast regions of Wisconsin and the greater
Kansas City Metro.

  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
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$1.569 billion, or 75.01% of total bank funding, for 2020. Refer to Note 9 -
Deposits in the Consolidated Financial Statements for additional information
regarding our deposit composition.

The following table shows the amount and maturities of the Bank’s certificates of deposit and wholesale term deposits at December 31, 2021.

                                                       Over Three Months       Over Six Months
                                   Three Months           Through Six           Through Twelve         Over Twelve
Interest Rate                        and Less               Months                  Months                Months              Total
                                                                             (In Thousands)
0.00% to 0.99%                    $    36,821          $        6,797          $       4,343          $     4,897          $  52,858
1.00% to 1.99%                            370                       -                    300                  403              1,073
2.00% to 2.99%                              -                       -                      -                  112                112
3.00% to 3.99%                          9,389                       -                 10,000                  297             19,686

                                  $    46,580          $        6,797          $      14,643          $     5,709          $  73,729


  At December 31, 2021, time deposits included $7.9 million of certificates of
deposit and wholesale deposits in denominations greater than or equal to
$250,000. 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. As of December 31, 2021, we have no
wholesale certificates of deposit which the Bank has the right to call prior to
the scheduled maturity.
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Loans

  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.

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.

   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 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. Please refer to the section titled Liquidity and Capital
Resources, below, for further information regarding our use and monitoring of
wholesale funds.

The following table shows the outstanding balances, weighted average balances and weighted average interest rates of our borrowings (short-term and long-term) as indicated.

                                            December 31, 2021                           December 31, 2020
                                                 Weighted       Weighted                     Weighted       Weighted
                                                  Average       Average                       Average       Average
                                   Balance        Balance         Rate         Balance        Balance         Rate
                                                                (Dollars in Thousands)
 Federal funds purchased         $       -      $       -            -  %    $       -      $      71         0.69  %
 Federal Reserve PPPLF                   -              -            -               -         15,207         0.35
 FHLB advances                     368,800        376,781         1.30         394,500        379,891         1.45
 Line of credit                        500             78         2.90               -              -            -
 Other borrowings                   10,363          8,090         4.11             920            676        12.60
 Subordinated notes payable         23,788         23,766         5.94          23,747         23,725         5.95
 Junior subordinated notes          10,076         10,068        11.05          10,062         10,054        11.09
                                 $ 413,527      $ 418,783         1.86       $ 429,229      $ 429,624         1.91


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A summary of the annual maturities of borrowings in December 31, 2021 is as follows:

(In Thousands)
Maturities during the year ended December 31,
2022                                               $ 173,500
2023                                                  37,300
2024                                                  35,500
2025                                                  23,363
2026                                                       -
Thereafter                                           143,864
                                                   $ 413,527


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. 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.

Equity

  As of December 31, 2021, stockholders' equity was $232.4 million, or 8.76% of
total assets, compared to stockholders' equity of $206.2 million, or 8.03% of
total assets, as of December 31, 2020. 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.

  On January 28, 2021, 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, 2022. 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.


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                        LIQUIDITY AND CAPITAL RESOURCES

   The Corporation expects to meet its liquidity needs through existing cash on
hand, established cash flow sources, its third party senior line of credit, and
dividends received from the Bank. 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. During 2021 and 2020, FBB declared and paid
dividends totaling $8.5 million and $12.0 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 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.

  The Bank maintains liquidity by obtaining funds from several sources. The
Bank's primary source of funds are principal and interest payments on loans
receivable and mortgage-related securities, deposits, and other borrowings, such
as federal funds and FHLB advances. The scheduled payments of loans and
mortgage-related securities are generally a predictable source of funds. Deposit
flows and loan prepayments, however, are greatly influenced by general interest
rates, economic conditions, and competition.

  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. At December 31, 2021 and 2020,
the Bank had $47.0 million and $26.7 million on deposit with the FRB recorded in
short-term investments, respectively. Any excess funds not used for loan funding
or satisfying other cash obligations were maintained as part of our on-balance
sheet liquidity in our interest-bearing accounts with the FRB, as we value the
safety and soundness provided by the FRB. 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.

  We had $398.4 million of outstanding wholesale funds at December 31, 2021,
compared to $567.0 million of wholesale funds as of December 31, 2020, which
represented 17.1% and 25.2%, respectively, of period end total bank funding.
Wholesale funds include FHLB advances, Federal Reserve PPPLF advances, brokered
certificates of deposit, and deposits gathered from internet listing services.
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
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. 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.
During the time frames necessary to accumulate wholesale funds in an orderly
manner, we will use short-term FHLB advances to meet our temporary funding
needs. 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. Our in-market relationships continue to grow;
however, deposit balances associated with those relationships will fluctuate. We
expect to establish new client relationships and continue marketing efforts
aimed at increasing the balances in existing clients' deposit accounts.
Nonetheless, we will continue to use wholesale funds in specific maturity
periods, typically three to five years, needed to effectively mitigate the
interest rate risk measured through our asset/liability management process or in
shorter time periods if in-market deposit balances decline. In order to provide
for ongoing liquidity and funding, all of our wholesale funds are certificates
of deposit which do not allow for withdrawal at the option of the depositor
before the stated maturity (with the exception of deposits accumulated through
the internet listing service which have the same early withdrawal privileges and
fees as do our other in-market deposits) and FHLB advances with contractual
maturity terms and no call provisions. The Bank limits the percentage of
wholesale funds to total bank funds in accordance with liquidity policies
approved by its Board. The Bank was in compliance with its policy limits as of
December 31, 2021.

  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,
2021. 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
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at the FRB or Federal Reserve Discount Window utilizing currently unencumbered
securities and acceptable loans as collateral. As of December 31, 2021, the
available liquidity was in excess of the stated policy minimum. We believe the
Bank will also have access to the unused federal funds lines, cash flows from
borrower repayments, and cash flows from security maturities. 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 Bank is required by federal regulations to maintain sufficient liquidity to ensure safe and sound operations. We believe the Bank has sufficient liquidity to balance the balance of net withdrawable deposits and short-term borrowings given current economic conditions and deposit flows.

  During the year ended December 31, 2021, operating activities resulted in a
net cash inflow of $36.0 million driven by net income of $35.8 million. Net cash
used in investing activities for the year ended December 31, 2021 was $111.0
million which consisted of $86.7 million in cash outflows to fund net loan
growth and $20.3 million in net cash outflows to purchase available-for-sale
securities. Net cash provided by financing activities for the year ended
December 31, 2021 was $75.2 million. Financing cash flows included a $102.4
million net increase in deposits, partially offset by a $25.7 million net
decrease in FHLB advances, cash dividends paid of $6.2 million, and authorized
share repurchases of $5.0 million, respectively.

  Refer to Note 11 - Regulatory Capital for additional information regarding the
Corporation's and the Bank's capital ratios and the ratios required by their
federal regulators at December 31, 2021 and 2020.


                   CRITICAL ACCOUNTING POLICIES AND ESTIMATES

  The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. By their nature, changes in these
assumptions and estimates could significantly affect the Corporation's financial
position or results of operations. Actual results could differ from those
estimates. Discussed below are certain policies that are critical to the
Corporation. We view critical accounting policies to be those which are highly
dependent on subjective or complex judgments, estimates and assumptions, and
where changes in those estimates and assumptions could have a significant impact
on the financial statements.

  Allowance for Loan and Lease Losses. The allowance for loan and lease losses
represents our recognition of the risks of extending credit and our evaluation
of the quality of the loan and lease portfolio and as such, requires the use of
judgment as well as other systematic objective and quantitative methods which
may include additional assumptions and estimates. The risks of extending credit
and the accuracy of our evaluation of the quality of the loan and lease
portfolio are neither static nor mutually exclusive and could result in a
material impact on our Consolidated Financial Statements. We may over-estimate
the quality of the loan and lease portfolio, resulting in a lower allowance for
loan and lease losses than necessary, overstating net income and equity.
Conversely, we may under-estimate the quality of the loan and lease portfolio,
resulting in a higher allowance for loan and lease losses than necessary,
understating net income and equity. The allowance for loan and lease losses is a
valuation allowance for probable credit losses, increased by the provision for
loan and lease losses and decreased by charge-offs, net of recoveries. 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. 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. Loan and lease
losses are charged against the allowance when we believe that the
uncollectability of a loan or lease balance is confirmed. See Note 1 - Nature of
Operations and Summary of Significant Accounting Policies and Note 4 - Loan and
Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease
Losses in the Consolidated Financial Statements for further discussion of the
allowance for loan and lease losses.

  We also continue to exercise our legal rights and remedies as appropriate in
the collection and disposal of non-performing assets, and adhere to rigorous
underwriting standards in our origination process in order to achieve strong
asset quality. Although we believe that the allowance for loan and lease losses
was appropriate as of December 31, 2021 based upon the evaluation of loan and
lease delinquencies, non-performing assets, charge-off trends, economic
conditions, and other factors, there can be no assurance that future adjustments
to the allowance will not be necessary. If the quality of loans or leases
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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.

  Goodwill Impairment Assessment. 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. Although no goodwill impairment was noted,
there can be no assurances that future goodwill impairment will not occur. See
Note 1 - Nature of Operations and Summary of Significant Accounting Policies for
the Corporation's accounting policy on goodwill and see Note 7 - Goodwill and
Other Intangible Assets in the Consolidated Financial Statements for a detailed
discussion of the factors considered by management in the assessment.

  Income Taxes. The Corporation and its wholly owned subsidiaries file a
consolidated federal income tax return and a combined Wisconsin state tax
return. Deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. The
determination of current and deferred income taxes is based on complex analysis
of many factors, including the interpretation of federal and state income tax
laws, the difference between the tax and financial reporting basis of assets and
liabilities (temporary differences), estimates of amounts currently due or owed,
such as the timing of reversals of temporary differences, and current accounting
standards. We apply a more likely than not approach to each of our tax positions
when determining the amount of tax benefit to record in our Consolidated
Financial Statements. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.

  We have made our best estimate of valuation allowances utilizing available
evidence and evaluation of sources of taxable income including tax planning
strategies and expected reversals of timing differences to determine if
valuation allowances were needed for deferred tax assets. Realization of
deferred tax assets over time is dependent on our ability to generate sufficient
taxable earnings in future periods and a valuation allowance may be necessary if
management determines that it is more likely than not that the deferred asset
will not be utilized. These estimates and assumptions are subject to change.
Changes in these estimates and assumptions could adversely affect future
consolidated results of operations. The Corporation believes the tax assets and
liabilities are properly recorded in the Consolidated Financial Statements. See
also Note 15 - Income Taxes in the Consolidated Financial Statements.

  The Corporation also invests in certain development entities that generate
federal and state historic and low income housing tax credits. The tax benefits
associated with these investments are accounted for either under the
flow-through method, equity method, or proportional amortization method and are
recognized when the respective project is placed in service or over the
investment term.

  The federal and state taxing authorities who make assessments based on their
determination of tax laws may periodically review our interpretation of federal
and state income tax laws. Tax liabilities could differ significantly from the
estimates and interpretations used in determining the current and deferred
income tax liabilities based on the completion of examinations by taxing
authorities.

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