Annual Statements Open main menu

Bank First Corp - Quarter Report: 2021 September (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number: 001-38676

BANK FIRST CORPORATION

(Exact name of registrant as specified in its charter)

WISCONSIN

    

39-1435359

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

402 North 8th Street, Manitowoc, Wisconsin

    

54220

(Address of principal executive offices)

(Zip Code)

(920) 652-3100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes      No  

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

    

Name on each exchange on which registered

Common Stock, par value $0.01 per share

 

BFC

 

The Nasdaq Stock Market LLC

The number of shares of the issuer’s common stock, par value $0.01, outstanding as of November 9, 2021 was 7,628,840 shares.

Table of Contents

TABLE OF CONTENTS

Page Number

Part I. Financial Information

3

ITEM 1.

Financial Statements

3

Consolidated Balance Sheets – September 30, 2021 (unaudited) and December 31, 2020

3

Consolidated Statements of Income – Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)

4

Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)

5

Consolidated Statements of Changes in Stockholders’ Equity – Three and Nine Months Ended September 30, 2021 and 2020  (unaudited)

6

Consolidated Statements of Cash Flows –Nine Months Ended September 30, 2021 and 2020 (unaudited)

7

Notes to Unaudited Consolidated Financial Statements

9

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

55

ITEM 4.

Controls and Procedures

57

Part II. Other Information

57

ITEM 1.

Legal Proceedings

57

ITEM 1A.

Risk Factors

57

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

58

ITEM 3.

Defaults Upon Senior Securities

58

ITEM 4.

Mine Safety Disclosures

58

ITEM 5.

Other Information

58

ITEM 6.

Exhibits

59

Signatures

60

2

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS:

BANK FIRST CORPORATION

Consolidated Balance Sheets

(In thousands, except share and per share data)

    

September 30,2021

    

December 31, 2020

(Unaudited)

(Audited)

Assets

Cash and due from banks

$

32,340

$

36,255

Interest-bearing deposits

 

1,256

 

5,195

Federal funds sold

 

266,357

 

128,769

Cash and cash equivalents

 

299,953

 

170,219

Securities held to maturity, at amortized cost ($5,925 and $6,688 fair value at September 30, 2021 and December 31, 2020, respectively)

 

5,912

 

6,669

Securities available for sale, at fair value

 

148,376

 

165,039

Loans held for sale

2,596

809

Loans, net

 

2,188,678

 

2,173,802

Premises and equipment, net

 

44,181

 

43,183

Goodwill

 

55,357

 

55,472

Other investments

 

8,997

 

8,896

Cash value of life insurance

 

31,705

 

31,394

Identifiable intangible assets, net

 

8,731

 

9,167

Other real estate owned (“OREO”)

 

197

 

1,885

Investment in minority-owned subsidiaries

 

42,940

 

42,305

Other assets

 

8,982

 

9,176

TOTAL ASSETS

$

2,846,605

$

2,718,016

Liabilities and Stockholders’ Equity

 

 

  

Liabilities:

 

  

 

  

Deposits:

 

  

 

  

Interest-bearing deposits

$

1,681,062

$

1,605,317

Noninterest-bearing deposits

 

790,196

 

715,646

Total deposits

 

2,471,258

 

2,320,963

Securities sold under repurchase agreements

 

17,402

 

36,377

Notes payable

 

9,179

 

23,469

Subordinated notes

 

17,500

 

17,500

Other liabilities

 

16,004

 

24,850

Total liabilities

 

2,531,343

 

2,423,159

Stockholders’ equity:

 

  

 

  

Serial preferred stock - $0.01 par value

 

  

 

  

Authorized - 5,000,000 shares

 

 

Common stock - $0.01 par value

 

  

 

  

Authorized - 20,000,000 shares

 

  

 

  

Issued - 8,478,383 shares as of September 30, 2021 and December 31, 2020

 

  

 

  

Outstanding - 7,641,771 and 7,709,497 shares as of September 30, 2021 and December 31, 2020, respectively

 

85

 

85

Additional paid-in capital

 

92,789

 

92,847

Retained earnings

 

248,619

 

221,393

Treasury stock, at cost - 836,612 and 768,886 shares as of September 30, 2021 and December 31, 2020, respectively

 

(30,602)

 

(25,227)

Accumulated other comprehensive income

 

4,371

 

5,759

Total stockholders’ equity

 

315,262

 

294,857

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

2,846,605

$

2,718,016

See accompanying notes to consolidated financial statements.

3

Table of Contents

ITEM 1. Financial Statements Continued:

BANK FIRST CORPORATION

Consolidated Statements of Income

(In thousands, except per share data) (Unaudited)

    

Three months ended September 30, 

Nine months ended September 30, 

2021

    

2020

    

2021

    

2020

Interest income:

Loans, including fees

$

23,584

$

24,719

$

69,792

$

69,648

Securities:

 

 

 

 

Taxable

 

739

 

688

 

1,953

 

2,393

Tax-exempt

 

465

 

493

 

1,402

 

1,403

Other

 

110

 

28

 

196

 

162

Total interest income

 

24,898

 

25,928

 

73,343

 

73,606

Interest expense:

 

 

 

 

Deposits

 

1,769

 

2,721

 

5,906

 

10,043

Securities sold under repurchase agreements

 

3

 

4

 

8

 

110

Borrowed funds

 

192

 

278

 

578

 

1,089

Total interest expense

 

1,964

 

3,003

 

6,492

 

11,242

Net interest income

 

22,934

 

22,925

 

66,851

 

62,364

Provision for loan losses

 

650

 

1,350

 

2,500

 

5,475

Net interest income after provision for loan losses

 

22,284

 

21,575

 

64,351

 

56,889

Noninterest income:

 

 

 

 

Service charges

 

1,491

 

1,343

 

4,554

 

3,417

Income from Ansay and Associates, LLC (“Ansay”)

 

756

 

970

 

2,204

 

2,571

Income from UFS, LLC (“UFS”)

 

751

 

720

 

1,780

 

2,467

Loan servicing income

 

599

 

538

 

2,282

 

1,226

Net gain on sales of mortgage loans

 

1,206

 

1,304

 

6,204

 

3,096

Net (loss) gain on sales of securities

(3)

(3)

3,233

Other

 

228

 

240

 

791

 

766

Total noninterest income

 

5,028

 

5,115

 

17,812

 

16,776

Noninterest expense:

 

 

 

 

Salaries, commissions, and employee benefits

 

6,996

 

6,609

 

21,208

 

19,669

Occupancy

 

1,070

 

1,171

 

3,248

 

3,367

Data processing

 

1,259

 

1,463

 

4,010

 

3,996

Postage, stationery, and supplies

 

204

 

219

 

532

 

668

Net (gain) loss on sales and valuations of OREO

 

 

(32)

 

(206)

 

1,411

Advertising

 

50

 

41

 

152

 

165

Charitable contributions

 

121

 

110

 

399

 

360

Outside service fees

 

741

 

888

 

2,300

 

3,083

Amortization of intangibles

 

351

 

418

 

1,053

 

1,114

Penalty for early extinguishment of debt

1,323

Other

 

1,674

 

1,315

 

4,216

 

4,225

Total noninterest expense

 

12,466

 

12,202

 

36,912

 

39,381

Income before provision for income taxes

 

14,846

 

14,488

 

45,251

 

34,284

Provision for income taxes

 

3,628

 

3,534

 

10,971

 

7,768

Net Income

$

11,218

$

10,954

$

34,280

$

26,516

Earnings per share - basic

$

1.46

$

1.42

$

4.45

$

3.57

Earnings per share - diluted

$

1.46

$

1.42

$

4.45

$

3.56

Dividends per share

$

0.50

$

0.20

$

0.92

$

0.60

See accompanying notes to unaudited consolidated financial statements

4

Table of Contents

ITEM 1. Financial Statements Continued:

BANK FIRST CORPORATION

Consolidated Statements of Comprehensive Income

(In thousands) (Unaudited)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

Net Income

$

11,218

$

10,954

$

34,280

$

26,516

Other comprehensive (loss) income :

 

 

 

 

Unrealized (losses) gains on available for sale securities:

 

  

 

  

 

  

 

  

Unrealized holding (losses) gains arising during period

 

(931)

 

593

 

(1,902)

 

8,230

Amortization of unrealized holding gains on securities transferred from available for sale to held to maturity

 

 

 

(1)

 

(102)

Reclassification adjustment for losses (gains) included in net income

 

3

 

 

3

 

(3,233)

Income tax benefit (expense)

 

250

 

(160)

 

512

 

(1,453)

Total other comprehensive (loss) income

 

(678)

 

433

 

(1,388)

 

3,442

Comprehensive income

$

10,540

$

11,387

$

32,892

$

29,958

See accompanying notes to unaudited consolidated financial statements.

5

Table of Contents

ITEM 1. Financial Statements Continued:

BANK FIRST CORPORATION

Consolidated Statement of Stockholders’ Equity

(In thousands, except share and per share data) (Unaudited)

Accumulated

Serial

Additional

Other

Total

Preferred

Common

Paid-in

Retained

Treasury

Comprehensive

Stockholders'

    

Stock

    

Stock

    

Capital

    

Earnings

    

Stock

    

Income (loss)

    

Equity

Balance at January 1, 2020

$

$

79

$

63,085

$

189,494

$

(24,941)

$

2,494

$

230,211

Net income

 

 

 

 

7,266

 

 

 

7,266

Other comprehensive income

 

 

 

 

 

 

1,021

 

1,021

Purchase of treasury stock

 

 

 

 

 

(2,968)

 

 

(2,968)

Issuance of treasury stock as deferred compensation payout

 

 

 

 

 

3,368

 

 

3,368

Cash dividends ($0.20 per share)

 

 

 

 

(1,431)

 

 

 

(1,431)

Amortization of stock-based compensation

 

 

 

215

 

 

 

 

215

Vesting of restricted stock awards

 

 

 

(628)

 

 

628

 

 

Balance at March 31, 2020

79

62,672

195,329

(23,913)

3,515

237,682

Net income

 

 

 

 

8,296

 

 

 

8,296

Other comprehensive income

 

 

 

 

 

 

1,988

 

1,988

Cash dividends ($0.20 per share)

 

 

 

 

(1,543)

 

 

 

(1,543)

Amortization of stock-based compensation

 

 

 

296

 

 

 

 

296

Vesting of restricted stock awards

(66)

66

Shares issued in the acquisition of Tomah Bancshares, Inc. (575,641 shares)

 

6

 

29,375

 

 

 

 

29,381

Balance at June 30, 2020

85

92,277

202,082

(23,847)

5,503

276,100

Net income

10,954

10,954

Other comprehensive income

433

433

Purchase of treasury stock

(116)

(116)

Cash dividends ($0.20 per share)

(1,550)

(1,550)

Amortization of stock-based compensation

283

283

Balance at September 30, 2020

$

$

85

$

92,560

$

211,486

$

(23,963)

$

5,936

$

286,104

Balance at January 1, 2021

$

$

85

$

92,847

$

221,393

$

(25,227)

$

5,759

$

294,857

Net income

11,514

11,514

Other comprehensive loss

(1,236)

(1,236)

Purchase of treasury stock

(402)

(402)

Sale of treasury stock

23

23

Cash dividends ($0.21 per share)

(1,618)

(1,618)

Amortization of stock-based compensation

304

304

Vesting of restricted stock awards

(1,046)

1,046

Balance at March 31, 2021

85

92,105

231,289

(24,560)

4,523

303,442

Net income

11,548

11,548

Other comprehensive income

526

526

Purchase of treasury stock

(2,858)

(2,858)

Sale of treasury stock

21

21

Cash dividends ($0.21 per share)

(1,615)

(1,615)

Amortization of stock-based compensation

366

366

Vesting of restricted stock awards

(45)

45

Balance at June 30, 2021

85

92,426

241,222

(27,352)

5,049

311,430

Net income

11,218

11,218

Other comprehensive loss

(678)

(678)

Purchase of treasury stock

(3,271)

(3,271)

Sale of treasury stock

21

21

Cash dividends ($0.50 per share)

(3,821)

(3,821)

Amortization of stock-based compensation

363

363

Balance at September 30, 2021

$

$

85

$

92,789

$

248,619

$

(30,602)

$

4,371

$

315,262

See accompanying notes to unaudited consolidated financial statements.

6

Table of Contents

ITEM 1. Financial Statements Continued:

BANK FIRST CORPORATION

Consolidated Statements of Cash Flows

(In thousands) (Unaudited)

Nine Months Ended September 30, 

    

2021

    

2020

Cash flows from operating activities:

Net income

$

34,280

$

26,516

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

Provision for loan losses

 

2,500

 

5,475

Depreciation and amortization of premises and equipment

 

1,384

 

1,116

Amortization of intangibles

 

1,053

 

1,114

Net amortization of securities

 

586

 

505

Amortization of stock-based compensation

 

1,033

 

794

Accretion of purchase accounting valuations

 

(750)

 

(4,338)

Net change in deferred loan fees and costs

 

(99)

 

5,258

Change in fair value of mortgage servicing rights (“MSR”) and other investments

728

 

1,468

Gain on sale and disposal of premises and equipment

 

(43)

 

(Gain) Loss on sale of OREO and valuation allowance

 

(206)

 

1,411

Proceeds from sales of mortgage loans

 

235,023

 

149,229

Originations of mortgage loans held for sale

 

(232,053)

 

(147,185)

Gain on sales of mortgage loans

 

(6,204)

 

(3,096)

Realized loss (gain) on sale of securities

3

(3,233)

Undistributed income of UFS joint venture

 

(1,780)

 

(2,467)

Undistributed income of Ansay joint venture

 

(2,204)

 

(2,571)

Net earnings on life insurance

 

(575)

 

(544)

Decrease (Increase) in other assets

 

822

 

(1,715)

Decrease in other liabilities

 

(8,835)

 

(5,416)

Net cash provided by operating activities

 

24,663

 

22,321

Cash flows from investing activities, net of effects of business combination:

 

  

 

  

Activity in securities available for sale and held to maturity:

 

  

 

  

Sales

 

9,087

 

59,697

Maturities, prepayments, and calls

28,307

65,655

Purchases

 

(22,463)

 

(28,764)

Net increase in loans

 

(16,833)

 

(348,814)

Dividends received from UFS

 

1,981

 

1,797

Dividends received from Ansay

 

1,368

 

1,119

Proceeds from sale of OREO

 

1,892

 

4,085

Net purchases of Federal Home Loan Bank (“FHLB”) stock

(640)

Net purchases of Federal Reserve Bank (“FRB”) stock

(2,760)

Proceeds from life insurance

264

Proceeds from sale of premises and equipment

 

548

 

25

Purchases of premises and equipment

 

(2,896)

 

(5,518)

Net cash received in business combination

35,296

Net cash provided by (used in) investing activities

 

1,255

 

(218,822)

7

Table of Contents

ITEM 1. Financial Statements Continued:

BANK FIRST CORPORATION

Consolidated Statements of Cash Flows (Continued)

(In thousands) (Unaudited)

Nine Months Ended September 30, 

    

2021

    

2020

Cash flows from financing activities, net of effects of business combination:

  

    

  

Net increase in deposits

$

150,541

$

256,947

Net decrease in securities sold under repurchase agreements

 

(18,975)

 

(22,788)

Proceeds from advances of notes payable

 

5,000

 

87,000

Repayment of notes payable

 

(19,230)

 

(124,750)

Proceeds from issuance of subordinated debt

2,000

Dividends paid

 

(7,054)

 

(4,524)

Proceeds from sales of common stock

 

65

 

Repurchase of common stock

 

(6,531)

 

(3,084)

Net cash provided by financing activities

 

103,816

 

190,801

Net increase (decrease) in cash and cash equivalents

 

129,734

 

(5,700)

Cash and cash equivalents at beginning of period

 

170,219

 

86,452

Cash and cash equivalents at end of period

$

299,953

$

80,752

Supplemental disclosures of cash flow information:

 

  

 

  

Cash paid during the period for:

Interest

$

7,064

$

11,712

Income taxes

 

12,260

 

5,050

Supplemental schedule of noncash activities:

 

 

Loans transferred to OREO

 

 

1,892

MSR resulting from sale of loans

 

1,447

 

980

Amortization of unrealized holding gains on securities transferred from available for sale to held to maturity recognized in other comprehensive income, net of tax

 

(1)

 

(81)

Change in unrealized gains and losses on investment securities available for sale, net of tax

 

(1,387)

 

3,523

Payment of deferred compensation through issuance of treasury stock

 

 

3,368

Acquisition:

Fair value of assets acquired

$

$

209,918

Fair value of liabilities assumed

191,701

Net assets acquired

$

$

18,217

Common stock issued in acquisition

29,381

See accompanying notes to consolidated financial statements.

8

Table of Contents

BANK FIRST CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

NOTE 1 – BASIS OF PRESENTATION

Bank First Corporation (the “Company”) provides a variety of financial services to individual and corporate customers through its wholly-owned subsidiary, Bank First, N.A. (the “Bank”). The Bank operates as a full-service financial institution with a primary market area including, but not limited to, the counties in which the Bank’s branches are located. The Bank has twenty-one locations located in Manitowoc, Outagamie, Brown, Winnebago, Sheboygan, Waupaca, Ozaukee, Monroe, and Jefferson counties in Wisconsin. The Company and Bank are subject to the regulations of certain federal agencies and undergo periodic examinations by those regulatory authorities.

These interim unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures required by GAAP have been omitted or abbreviated. These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (“Annual Report”).

The unaudited consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The results for interim periods are not necessarily indicative of results for a full year.

Critical Accounting Policies and Estimates

Preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, the allowance for loan losses (“ALL”), valuation of loans in acquisition transactions, useful lives for depreciation and amortization, fair value of financial instruments, other-than-temporary impairment calculations, valuation of deferred tax assets, uncertain income tax positions and contingencies. Estimates that are particularly susceptible to significant change for the Company include the determination of the ALL, the determination and assessment of deferred tax assets and liabilities, and the valuation of loans acquired in acquisition transactions; therefore, these are critical accounting policies. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: external market factors such as market interest rates and employment rates, changes to operating policies and procedures, changes in applicable banking or tax regulations, and changes to deferred tax estimates. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period presented.

There have been no material changes or developments with respect to the assumptions or methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as previously disclosed in the Company’s Annual Report.

Recent Accounting Developments Adopted

In October 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-08, “Codification Improvements to Subtopic 310-20, Receivables and Nonrefundable Fees and Other Costs. This ASU clarifies the requirements for entities to reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 of the stated subtopic for each reporting period. The ASU was published to clarify the Codification and correct its unintended application and was effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2020. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements as all premiums within its securities portfolio were already being amortized to the earliest call date prior to implementation.

9

Table of Contents

Recently Issued Not Yet Effective Accounting Standards

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Certain aspects of this ASU were updated in November 2018 by the issuance of ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses”. The main objective of the ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in the ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. During 2019 FASB issued ASU 2019-10 which delayed the effective date of ASU 2016-13 for smaller, publicly traded companies, until interim and annual periods beginning after December 15, 2022. This delay applies to the Company as it was classified as a “Smaller reporting company” as defined in Rule 12b-2 of the Exchange Act as of the date ASU 2019-10 was enacted. Management is currently evaluating the potential impact of this update, although the general expectation in the banking industry is that the implementation of this standard will result in higher required balances in the ALL.

NOTE 2 – ACQUISITIONS

On May 15, 2020, the Company completed a merger with Tomah Bancshares, Inc. (“Timberwood”), a bank holding company headquartered in Tomah, Wisconsin, pursuant to the Agreement and Plan of Bank Merger (“Merger Agreement”), dated as of November 20, 2019, by and among the Company and Timberwood, whereby Timberwood merged with and into the Company, and Timberwood Bank, Timberwood’s wholly-owned banking subsidiary, merged with and into the Bank. Timberwood’s principal activity was the ownership and operation of Timberwood Bank, a state-chartered banking institution that operated one (1) branch in Wisconsin at the time of closing. The merger consideration totaled approximately $29.8 million.

Pursuant to the terms of the Merger Agreement, Timberwood shareholders received 5.1445 shares of the Company’s common stock for each outstanding share of Timberwood common stock, and cash in lieu of any remaining fractional share. Company stock issued totaled 575,641 shares valued at approximately $29.4 million, with cash of $0.4 million comprising the remainder of merger consideration.

For more information concerning this acquisition, see “Note 2 - Acquisition” in the Company’s audited consolidated financial statements included in the Company’s Annual Report.

NOTE 3 – EARNINGS PER SHARE

The two-class method is used in the calculation of basic and diluted earnings per share. Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings. There were no anti-dilutive stock options for the nine months ended September 30, 2021 or 2020.

10

Table of Contents

The following table presents the factors used in the earnings per share computations for the period indicated.

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2021

    

2020

    

2021

    

2020

Basic

Net income available to common shareholders

$

11,218

$

10,954

$

34,280

$

26,516

Less: Earnings allocated to participating securities

(88)

(82)

(266)

(202)

Net income allocated to common shareholders

$

11,130

$

10,872

$

34,014

$

26,314

 

 

 

 

Weighted average common shares outstanding including participating securities

7,665,272

7,731,670

7,698,284

7,424,257

Less: Participating securities (1)

(59,731)

(58,098)

(59,427)

(56,464)

Average shares

7,605,541

7,673,572

7,638,857

7,367,793

Basic earnings per common shares

$

1.46

$

1.42

$

4.45

$

3.57

Diluted

Net income available to common shareholders

$

11,218

$

10,954

$

34,280

$

26,516

Weighted average common shares outstanding for basic earnings per common share

7,605,541

7,673,572

7,638,857

7,367,793

Add: Dilutive effects of stock based compensation awards

19,250

17,754

19,971

44,880

Average shares and dilutive potential common shares

7,624,791

7,691,326

7,658,828

7,412,673

Diluted earnings per common share

$

1.46

$

1.42

$

4.45

$

3.56

(1)Participating securities are restricted stock awards whereby the stock certificates have been issued, are included in outstanding shares, receive dividends and can be voted, but have not vested.

NOTE 4 – SECURITIES

The Company’s securities available for sale as of September 30, 2021 and December 31, 2020 is summarized as follows:

    

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

Estimated

Cost

Gains

Losses

Fair Value

September 30, 2021

 

  

 

  

 

  

 

  

U.S. Treasury securities

$

9,597

$

115

$

$

9,712

Obligations of U.S. Government sponsored agencies

 

15,688

 

289

 

(237)

 

15,740

Obligations of states and political subdivisions

65,435

3,880

69,315

Mortgage-backed securities

30,601

1,619

32,220

Corporate notes

 

19,285

 

395

 

(96)

 

19,584

Certificates of deposit

1,784

21

1,805

Total available for sale securities

$

142,390

$

6,319

$

(333)

$

148,376

December 31, 2020

 

 

 

 

Obligations of U.S. Government sponsored agencies

$

18,276

$

556

$

(53)

$

18,779

Obligations of states and political subdivisions

67,653

4,564

72,217

Mortgage-backed securities

 

41,804

 

2,395

 

 

44,199

Corporate notes

 

27,358

 

470

 

(85)

 

27,743

Certificates of deposit

2,063

38

2,101

Total available for sale securities

$

157,154

$

8,023

$

(138)

$

165,039

11

Table of Contents

The Company’s securities held to maturity as of September 30, 2021 and December 31, 2020 is summarized as follows:

    

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

Estimated

Cost

Gains

Losses

Fair Value

September 30, 2021

Obligations of states and political subdivisions

$

5,912

$

13

$

$

5,925

December 31, 2020

 

  

 

  

 

  

 

  

Obligations of states and political subdivisions

$

6,669

$

19

$

$

6,688

The following table shows the fair value and gross unrealized losses of securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

Less Than 12 Months

Greater Than 12 Months

Total

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

Value

Losses

Value

Losses

Value

Losses

September 30, 2021 - Available for Sale

Obligations of U.S. Government sponsored agencies

$

$

$

4,579

$

(237)

$

4,579

$

(237)

Corporate notes

 

8,750

 

(96)

 

 

 

8,750

 

(96)

Totals

$

8,750

$

(96)

$

4,579

$

(237)

$

13,329

$

(333)

December 31, 2020 - Available for Sale

 

  

 

  

 

  

 

  

 

  

 

  

Obligations of U.S. Government sponsored agencies

$

5,640

$

(53)

$

$

$

5,640

$

(53)

Corporate notes

 

7,890

 

(85)

 

 

 

7,890

 

(85)

Totals

$

13,530

$

(138)

$

$

$

13,530

$

(138)

As of September 30, 2021, the Company does not consider its securities with unrealized losses to be other-than-temporarily impaired, as the unrealized losses in each category have occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration. The Company has the intent and ability to hold its securities to maturity or until par is recovered. There were no other-than-temporary impairments charged to earnings during the nine months ended September 30, 2021 or 2020.

The following is a summary of amortized cost and estimated fair value of securities by contractual maturity as of September 30, 2021. Contractual maturities will differ from expected maturities for mortgage-backed securities because borrowers may have the right to call or prepay obligations without penalties.

Available for Sale

Held to Maturity

    

Amortized

    

Estimated

    

Amortized

    

Estimated

Cost

Fair Value

Cost

Fair Value

Due in one year or less

$

1,139

$

1,143

$

715

$

715

Due after one year through 5 years

 

11,346

 

12,024

3,493

3,506

Due after 5 years through ten years

 

37,948

 

38,701

1,704

1,704

Due after 10 years

 

61,356

 

64,288

Subtotal

 

111,789

 

116,156

5,912

5,925

Mortgage-backed securities

 

30,601

 

32,220

Total

$

142,390

$

148,376

$

5,912

$

5,925

The following is a summary of the proceeds from sales of securities available for sale and held to maturity, as well as gross gains and losses for the nine months ended September 30, 2021 and 2020.

2021

2020

Proceeds from sales of securities

$

9,087

$

59,697

Gross gains on sales

 

 

3,284

Gross losses on sales

 

(3)

 

(51)

12

Table of Contents

NOTE 5 – LOANS, ALLOWANCE FOR LOAN LOSSES, AND CREDIT QUALITY

The following table presents total loans by portfolio segment and class of loan as of September 30, 2021 and December 31, 2020:

    

September 30, 

December 31, 

2021

    

2020

Commercial/industrial

$

355,773

$

447,344

Commercial real estate - owner occupied

 

567,906

 

549,619

Commercial real estate - non-owner occupied

 

542,455

 

443,144

Construction and development

 

116,957

 

140,042

Residential 1‑4 family

 

572,821

 

545,818

Consumer

 

33,008

 

30,359

Other

 

22,816

 

38,054

Subtotals

 

2,211,736

 

2,194,380

ALL

 

(20,237)

 

(17,658)

Loans, net of ALL

 

2,191,499

 

2,176,722

Deferred loan fees and costs

 

(2,821)

 

(2,920)

Loans, net

$

2,188,678

$

2,173,802

The ALL by loan type as of September 30, 2021 and 2020 is summarized as follows:

    

    

Commercial

    

Commercial

    

    

    

    

    

Real Estate -

Real Estate  -

Construction

Commercial /

Owner

Non - Owner

and

Residential

Industrial

Occupied

Occupied

Development

1-4 Family

Consumer

Other

Total

ALL - January 1, 2021

$

2,049

$

6,108

$

3,904

$

1,027

$

3,960

$

201

$

409

$

17,658

Charge-offs

 

(48)

(289)

 

 

 

 

(21)

 

(358)

Recoveries

 

38

343

5

 

33

 

12

 

1

 

5

 

437

Provision

 

971

805

677

 

(194)

 

408

 

30

 

(197)

 

2,500

ALL - September 30, 2021

 

3,010

6,967

4,586

 

866

 

4,380

 

232

 

196

 

20,237

ALL ending balance individually evaluated for impairment

 

93

392

 

 

 

 

 

485

ALL ending balance collectively evaluated for impairment

$

2,917

$

6,967

$

4,194

$

866

$

4,380

$

232

$

196

$

19,752

Loans outstanding - September 30, 2021

$

355,773

$

567,906

$

542,455

$

116,957

$

572,821

$

33,008

$

22,816

$

2,211,736

Loans ending balance individually evaluated for impairment

 

414

3,467

6,617

 

 

 

 

 

10,498

Loans ending balance collectively evaluated for impairment

$

355,359

$

564,439

$

535,838

$

116,957

$

572,821

$

33,008

$

22,816

$

2,201,238

    

    

Commercial

    

Commercial

    

    

    

    

    

Real Estate  -

Real Estate  -

Construction

Commercial /

Owner

Non - Owner

and

Residential

Industrial

Occupied

Occupied

Development

1-4 Family

Consumer

Other

Total

ALL - January 1, 2020

$

2,320

$

4,587

$

1,578

$

548

$

2,169

$

141

$

53

$

11,396

Charge-offs

 

(631)

 

(773)

 

 

 

(63)

 

(33)

 

(19)

 

(1,519)

Recoveries

 

2

 

873

 

40

 

 

40

 

 

11

 

966

Provision

 

138

 

995

 

2,276

 

474

 

1,259

 

86

 

247

 

5,475

ALL - September 30, 2020

 

1,829

 

5,682

 

3,894

 

1,022

 

3,405

 

194

 

292

 

16,318

ALL ending balance individually evaluated for impairment

 

14

 

483

 

1,098

 

 

 

 

 

1,595

ALL ending balance collectively evaluated for impairment

$

1,815

$

5,199

$

2,796

$

1,022

$

3,405

$

194

$

292

$

14,723

Loans outstanding - September 30, 2020

$

547,750

$

530,476

$

426,463

$

150,139

$

488,925

$

29,684

$

25,552

$

2,198,989

Loans ending balance individually evaluated for impairment

 

533

 

7,334

 

7,904

 

 

 

 

 

15,771

Loans ending balance collectively evaluated for impairment

$

547,217

$

523,142

$

418,559

$

150,139

$

488,925

$

29,684

$

25,552

$

2,183,218

13

Table of Contents

The Company’s past due loans as of September 30, 2021 is summarized as follows:

    

    

90 Days

    

    

30-89 Days

or more

Past Due

Past Due

Accruing

and Accruing

Non-Accrual

Total

Commercial/industrial

$

573

$

$

285

$

858

Commercial real estate - owner occupied

 

129

 

 

3,373

 

3,502

Commercial real estate - non-owner occupied

 

 

 

7,413

 

7,413

Construction and development

 

 

 

19

 

19

Residential 1‑4 family

 

132

 

310

 

456

 

898

Consumer

 

25

 

2

 

3

 

30

Other

 

 

 

 

$

859

$

312

$

11,549

$

12,720

The Company’s past due loans as of December 31, 2020 is summarized as follows:

    

    

90 Days

    

    

30-89 Days

or more

Past Due

Past Due

Accruing

and Accruing

Non-Accrual

Total

Commercial/industrial

$

116

$

$

433

$

549

Commercial real estate - owner occupied

 

 

1,582

 

1,078

 

2,660

Commercial real estate - non-owner occupied

 

 

 

8,087

 

8,087

Construction and development

 

 

 

281

 

281

Residential 1‑4 family

 

1,415

 

142

 

912

 

2,469

Consumer

 

4

 

14

 

5

 

23

Other

 

 

 

 

$

1,535

$

1,738

$

10,796

$

14,069

The Company utilizes a numerical risk rating system for commercial relationships. All other types of relationships (ex: residential, consumer, other) are assigned a “Pass” rating, unless they have fallen 90 days past due or more, at which time they receive a rating of 7. The Company uses split ratings for government guaranties on loans. The portion of a loan that is supported by a government guaranty is included with other Pass credits.

The determination of a commercial loan risk rating begins with completion of a matrix, which assigns scores based on the strength of the borrower’s debt service coverage, collateral coverage, balance sheet leverage, industry outlook, and customer concentration. A weighted average is taken of these individual scores to arrive at the overall rating. This rating is subject to adjustment by the loan officer based on facts and circumstances pertaining to the borrower. Risk ratings are subject to independent review.

Commercial borrowers with ratings between 1 and 5 are considered Pass credits, with 1 being most acceptable and 5 being just above the minimum level of acceptance.

Commercial borrowers rated 6 have potential weaknesses which may jeopardize repayment ability.

Borrowers rated 7 have a well-defined weakness or weaknesses such as the inability to demonstrate significant cash flow for debt service based on analysis of the company’s financial information. These loans remain on accrual status provided full collection of principal and interest is reasonably expected. Otherwise they are deemed impaired and placed on nonaccrual status. Borrowers rated 8 are the same as 7 rated credits with one exception: collection or liquidation in full is not probable.

14

Table of Contents

The breakdown of loans by risk rating as of September 30, 2021 is as follows:

    

Pass (1-5)

    

6

    

7

    

8

    

Total

Commercial/industrial

$

339,455

$

9,331

$

6,987

$

$

355,773

Commercial real estate - owner occupied

 

533,971

 

10,584

 

23,351

 

 

567,906

Commercial real estate - non-owner occupied

 

530,588

 

3,936

 

7,931

 

 

542,455

Construction and development

 

116,551

 

 

406

 

 

116,957

Residential 1‑4 family

 

570,947

 

130

 

1,744

 

 

572,821

Consumer

 

33,002

 

 

6

 

 

33,008

Other

 

22,816

 

 

 

 

22,816

$

2,147,330

$

23,981

$

40,425

$

$

2,211,736

The breakdown of loans by risk rating as of December 31, 2020 is as follows:

    

Pass (1-5)

    

6

    

7

    

8

    

Total

Commercial/industrial

$

440,461

$

2,479

$

4,404

$

$

447,344

Commercial real estate - owner occupied

 

520,075

 

5,844

 

23,700

 

 

549,619

Commercial real estate - non-owner occupied

 

432,444

 

 

10,700

 

 

443,144

Construction and development

 

139,693

 

21

 

328

 

 

140,042

Residential 1‑4 family

 

543,163

 

456

 

2,199

 

 

545,818

Consumer

 

30,359

 

 

 

 

30,359

Other

 

38,054

 

 

 

 

38,054

$

2,144,249

$

8,800

$

41,331

$

$

2,194,380

The ALL represents management’s estimate of probable and inherent credit losses in the loan portfolio. Estimating the amount of the ALL requires the exercise of significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogenous loans based on historical loss experience, and consideration of other qualitative factors such as current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset on the consolidated balance sheets. Loan losses are charged off against the ALL, while recoveries of amounts previously charged off are credited to the ALL. A provision for loan losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

The ALL consists of specific reserves for certain individually evaluated impaired loans and general reserves for collectively evaluated non-impaired loans. Specific reserves reflect estimated losses on impaired loans from management’s analyses developed through specific credit allocations. The specific reserves are based on regular analyses of impaired, non-homogenous loans greater than $250,000. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific loans, including estimating the amount and timing of future cash flows and collateral values. The general reserve is based in part on the Bank’s historical loss experience which is updated quarterly. The general reserve portion of the ALL also includes consideration of certain qualitative factors such as 1) changes in lending policies and/or underwriting practices, 2) national and local economic conditions, 3) changes in portfolio volume and nature, 4) experience, ability and depth of lending management and other relevant staff, 5) levels of and trends in past-due and nonaccrual loans and quality, 6) changes in loan review and oversight, 7) impact and effects of concentrations and 8) other issues deemed relevant.

There are many factors affecting ALL; some are quantitative while others require qualitative judgment. The process for determining the ALL (which management believes adequately considers potential factors which might possibly result in credit losses) includes subjective elements and, therefore, may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses could be required that could adversely affect the Company’s earnings or financial position in future periods. Allocations of the ALL may be made for specific loans but the entire ALL is available for any loan that, in management’s judgment, should be charged off or for which an actual loss is realized. As an integral part of their examination process, various regulatory agencies review the ALL as well. Such agencies may require that changes in the ALL be recognized when such regulators’ credit evaluations differ from those of management based on information available to the regulators at the time of their examinations.

15

Table of Contents

A summary of impaired loans individually evaluated as of September 30, 2021 is as follows:

    

    

Commercial

    

Commercial

    

    

    

    

    

    

Real Estate -

Real Estate -

Construction

Commercial/

Owner

Non-Owner

and

Residential

Industrial

Occupied

Occupied

Development

1-4 Family

Consumer

Other

Unallocated

Total

With an allowance recorded:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Recorded investment

$

414

$

$

6,617

$

$

$

$

$

$

7,031

Unpaid principal balance

 

414

 

 

6,617

 

 

 

 

 

 

7,031

Related allowance

 

93

 

 

392

 

 

 

 

 

 

485

With no related allowance recorded:

 

 

 

 

  

 

 

  

 

  

 

  

 

Recorded investment

$

$

3,467

$

$

$

$

$

$

$

3,467

Unpaid principal balance

 

 

3,467

 

 

 

 

 

 

 

3,467

Related allowance

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

  

 

 

  

 

  

 

  

 

Recorded investment

$

414

$

3,467

$

6,617

$

$

$

$

$

$

10,498

Unpaid principal balance

 

414

 

3,467

 

6,617

 

 

 

 

 

 

10,498

Related allowance

 

93

 

 

392

 

 

 

 

 

 

485

Average recorded investment

$

446

$

2,319

$

7,647

$

$

130

$

$

$

$

10,543

A summary of impaired loans individually evaluated as of December 31, 2020 is as follows:

    

    

Commercial

    

Commercial

    

    

    

    

    

Real Estate -

Real Estate -

Construction

Commercial/

Owner

Non-Owner

and

Residential

Industrial

Occupied

Occupied

Development

1‑4 Family

Consumer

Other

Total

With an allowance recorded:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Recorded investment

$

478

$

$

7,684

$

$

$

$

$

8,162

Unpaid principal balance

 

478

 

 

7,684

 

 

 

 

 

8,162

Related allowance

 

10

 

 

890

 

 

 

 

 

900

With no related allowance recorded:

 

  

 

  

 

 

  

 

  

 

  

 

  

 

  

Recorded investment

$

$

1,171

$

992

$

$

260

$

$

$

2,423

Unpaid principal balance

 

 

1,171

 

992

 

 

260

 

 

 

2,423

Related allowance

 

 

 

 

 

 

 

 

Total:

 

  

 

  

 

 

  

 

  

 

  

 

  

 

  

Recorded investment

$

478

$

1,171

$

8,676

$

$

260

$

$

$

10,585

Unpaid principal balance

 

478

 

1,171

 

8,676

 

 

260

 

 

 

10,585

Related allowance

 

10

 

 

890

 

 

 

 

 

900

Average recorded investment

$

1,178

$

2,535

$

4,338

$

$

130

$

$

$

8,181

Interest recognized while these loans were impaired is considered immaterial to the consolidated financial statements for the nine months ended September 30, 2021 and 2020.

16

Table of Contents

The following table presents loans acquired with deteriorated credit quality as of September 30, 2021 and December 31, 2020. No loans in this table had a related allowance at either date, and therefore, the below disclosures were not expanded to include loans with and without a related allowance.

September 30, 2021

December 31, 2020

Recorded

Unpaid Principal

Recorded

Unpaid Principal

    

Investment

    

Balance

    

Investment

    

Balance

Commercial & Industrial

$

678

$

771

$

805

$

907

Commercial real estate - owner occupied

 

3,803

 

4,655

 

3,860

 

4,718

Commercial real estate - non-owner occupied

 

1,170

 

1,324

 

1,245

 

1,410

Construction and development

 

22

 

25

 

81

 

90

Residential 1‑4 family

 

868

 

1,136

 

870

 

1,162

Consumer

 

 

 

 

Other

 

 

 

 

$

6,541

$

7,911

$

6,861

$

8,287

Due to the nature of these loan relationships, prepayment expectations have not been considered in the determination of future cash flows. Management regularly monitors these loan relationships, and if information becomes available that indicates expected cash flows will differ from initial expectations, it may necessitate reclassification between accretable and non-accretable components of the original discount calculation.

The following table represents the change in the accretable and non-accretable components of discounts on loans acquired with deteriorated credit quality for the nine months ended September 30, 2021, and year ended December 31, 2020:

September 30, 2021

December 31, 2020

Accretable

Non-accretable

Accretable

Non-accretable

    

discount

    

discount

    

discount

    

discount

Balance at beginning of period

$

1,250

$

176

$

222

$

220

Acquired balance, net

 

 

 

1,064

 

727

Reclassifications between accretable and non-accretable

 

20

 

(20)

 

771

 

(771)

Accretion to loan interest income

 

(56)

 

 

(807)

 

Balance at end of period

$

1,214

$

156

$

1,250

$

176

A troubled debt restructuring (“TDR”) includes a loan modification where a borrower is experiencing financial difficulty and we grant a concession to that borrower that we would not otherwise consider except for the borrower’s financial difficulties. These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. Restructuring a loan in lieu of aggressively enforcing the collection of the loan may benefit the Company by increasing the ultimate probability of collection.

A TDR may be either on accrual or nonaccrual status based upon the performance of the borrower and management’s assessment of collectability. If a TDR is placed on nonaccrual status, which could occur based on the same criteria as non-TDR loans, it remains there until a sufficient period of performance under the restructured terms has occurred at which it returned to accrual status, generally 6 months.

As of September 30, 2021 and December 31, 2020 the Company had no specific reserves for TDRs.

As a result of the COVID-19 pandemic, the Bank experienced an increase in customer requests for loan modifications and payment deferrals. Certain provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) act, as extended, signed into law on March 27, 2020, allowed financial institutions the option to exempt loan modifications related to the COVID-19 pandemic that would otherwise be categorized as a TDR from consideration for TDR treatment. Modifications in the scope of the exemption include forbearance agreements, interest-rate modifications, repayment plan changes and any other similar arrangements that would delay payments of principal or interest. This relief is allowable on modifications on loans which were not more than 30 days past due as of December 31, 2019, and that occur after March 1, 2020, and before the earlier of 60 days after the date on which the national emergency related to the COVID-19 outbreak is terminated.

17

Table of Contents

The following table presents the TDRs during the nine months ended September 30, 2021:

Pre-Modification

Post-Modification

Number of

Outstanding Recorded

Outstanding Recorded

    

Contracts

    

Investment

    

Investment

Commercial/ industrial

1

$

12

$

10

Commercial Real Estate

1

111

111

$

123

$

121

The following table presents the TDRs during the nine months September 30, 2020:

Pre-Modification

Post-Modification

Number of 

Outstanding Recorded

Outstanding Recorded

    

Contracts

    

 Investment

    

 Investment

Commercial Real Estate

 

1

$

115

 

$

115

NOTE 6 – MORTGAGE SERVICING RIGHTS

Loans serviced for others are not included in the accompanying consolidated balance sheets. MSRs are recognized as separate assets when loans sold in the secondary market are sold with servicing retained. The Company utilizes a third-party consulting firm to determine an accurate assessment of the MSRs fair value. The third-party firm collects relevant data points from numerous sources. Some of these data points relate directly to the pricing level or relative value of the mortgage servicing while other data points relate to the assumptions used to derive fair value. In addition, the valuation evaluates specific collateral types, and current and historical performance of the collateral in question. The valuation process focuses on the non-distressed secondary servicing market, common industry practices and current regulatory standards. The primary determinants of the fair value of MSRs are servicing fee percentage, ancillary income, expected loan life or prepayment speeds, discount rates, costs to service, delinquency rates, foreclosure losses and recourse obligations. The valuation data also contains interest rate shock analyses for monitoring fair value changes in differing interest rate environments.

Following is an analysis of activity in the MSR asset:

    

Nine Months Ended

    

Year Ended

September 30, 2021

December 31, 2020

Fair value at beginning of period

$

3,726

$

4,287

MSR asset acquired

384

Servicing asset additions

 

1,448

 

1,375

Loan payments and payoffs

 

(1,058)

 

(1,533)

Changes in valuation inputs and assumptions used in the valuation model

 

229

 

(787)

Amount recognized through earnings

 

619

 

(945)

Fair value at end of period

$

4,345

$

3,726

Unpaid principal balance of loans serviced for others

$

682,369

$

612,707

Mortgage servicing rights as a percent of loans serviced for others

 

0.64

 

0.61

The primary economic assumptions utilized by the Company in measuring the value of MSRs were constant prepayment speeds of 15.9 and 16.3 months as of September 30, 2021 and December 31, 2020, respectively, and discount rates of 10.3% as of each period end.

18

Table of Contents

NOTE 7 – NOTES PAYABLE

From time to time the Company utilizes FHLB advances to fund liquidity. At September 30, 2021 and December, 31, 2020, the Company had outstanding balances borrowed from the FHLB of $9.1 million and $23.3 million, respectively. The advances, rate, and maturities of FHLB advances were as follows:

    

    

    

September 30, 

    

December 31, 

Maturity

Rate

2021

2020

Fixed rate, fixed term

 

01/22/2021

 

1.67

%  

$

$

2,000

Fixed rate, fixed term

 

01/25/2021

 

2.37

%  

 

 

5,000

Fixed rate, fixed term

 

01/27/2021

 

1.60

%  

 

 

1,000

Fixed rate, fixed term

 

03/29/2021

 

0.00

%  

 

 

2,377

Fixed rate, fixed term

05/03/2021

2.87

%  

500

Fixed rate, fixed term

05/03/2021

0.00

%  

4,000

Fixed rate, fixed term

05/03/2021

0.00

%  

4,000

Fixed rate, fixed term

06/28/2021

2.00

%  

250

Fixed rate, fixed term

11/03/2021

1.46

%  

400

400

Fixed rate, fixed term

12/08/2021

2.87

%  

500

500

Fixed rate, fixed term

12/27/2021

1.99

%  

250

250

Fixed rate, fixed term

01/24/2022

2.51

%  

250

250

Fixed rate, fixed term

05/02/2022

2.98

%  

500

500

Fixed rate, fixed term

05/16/2022

0.00

%

5,000

Fixed rate, fixed term

06/08/2022

2.92

%  

500

500

Fixed rate, fixed term

11/21/2022

3.02

%  

600

600

Fixed rate, fixed term

11/21/2023

3.06

%  

600

600

Fixed rate, fixed term

01/04/2027

0.00

%  

103

Fixed rate, fixed term

04/22/2030

0.00

%  

508

508

9,108

23,338

Adjustment due to purchase accounting

71

131

$

9,179

$

23,469

Future maturities of borrowings were as follows:

    

September 30, 

    

December 31, 

2021

2020

1 year or less

$

7,400

$

20,277

1 to 2 years

 

600

 

1,850

2 to 3 years

 

600

 

600

3 to 4 years

 

 

4 to 5 years

 

 

Over 5 years

508

611

$

9,108

$

23,338

The Company maintains a $7.5 million line of credit with a commercial bank, which was entered into on May 15, 2021. There were no outstanding balances on this note at September 30, 2021 or December 31, 2020. Any future borrowings will require monthly payments of interest at a variable rate, and will be due in full on May 15, 2022.

NOTE 8 – SUBORDINATED NOTES

During September 2017, the Company entered into subordinated note agreements with three separate commercial banks. The Company had outstanding balances of $11.5 million under these agreements as of September 30, 2021 and December 31, 2020. These notes were all issued with 10-year maturities, carry interest at a variable rate payable quarterly, are callable on or after the sixth anniversary of the issuance dates, and qualify for Tier 2 capital for regulatory purposes.

19

Table of Contents

During July 2020, the Company entered into subordinated note agreements with two separate commercial banks. The Company had outstanding balances of $6.0 million under these agreements as of September 30, 2021 and December 31, 2020. These notes were issued with 10-year maturities, carry interest at a fixed rate of 5.0% through June 30, 2025, and at a variable rate thereafter, payable quarterly. These notes are callable on or after January 1, 2026 and qualify for Tier 2 capital for regulatory purposes.

NOTE 9 – REGULATORY MATTERS

Banks and certain bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.

The Economic Growth, Regulatory Relief, and Consumer Protection Act, signed into law in May 2018 raised the threshold for those bank holding companies subject to the Federal Reserve’s Small Bank Holding Company Policy Statement to $3 billion. As a result, as of the effective date of that change in 2018, the Company was no longer required to comply with the risk-based capital rules applicable to the Bank. The Federal Reserve may, however, require smaller bank holding companies to maintain certain minimum capital levels, depending upon general economic conditions and a bank holding company’s particular condition, risk profile and growth plans.

Under regulatory guidance for non-advanced approaches institutions, the Bank is required to maintain minimum amounts and ratios of common equity Tier I capital to risk-weighted assets, including an additional conservation buffer determined by banking regulators. As of September 30, 2021 and December 31, 2020, this buffer was 2.5%. As of September 30, 2021 and December 31, 2020, the Bank met all capital adequacy requirements to which they are subject.

20

Table of Contents

Actual and required capital amounts and ratios are presented below at period-end:

To Be Well

 

Minimum Capital

Capitalized Under

 

For Capital

Adequacy with

Prompt Corrective

 

Actual

Adequacy Purposes

Capital Buffer

Action Provisions

 

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

September 30, 2021

Total capital (to risk-weighted assets):

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Corporation

$

288,194

 

12.36

%  

NA

 

NA

 

NA

 

NA

 

NA

 

NA

Bank

$

287,489

 

12.33

%  

$

186,599

 

8.00

%  

$

244,911

 

10.50

%  

$

233,249

 

10.00

%

Tier 1 capital (to risk-weighted assets):

 

 

  

 

  

 

  

 

  

 

  

 

  

Corporation

$

251,147

 

10.77

%  

 

NA

 

NA

 

NA

 

NA

 

NA

 

NA

Bank

$

267,252

 

11.46

%  

$

139,949

 

6.00

%  

$

198,261

 

8.50

%  

$

186,599

 

8.00

%

Common Equity Tier 1 capital (to risk-weighted assets):

 

 

  

 

  

 

  

 

  

 

  

 

  

Corporation

$

251,147

 

10.77

%  

 

NA

 

NA

 

NA

 

NA

 

NA

 

NA

Bank

$

267,252

 

11.46

%  

$

104,962

 

4.50

%  

$

163,274

 

7.00

%  

$

151,612

 

6.50

%

Tier 1 capital (to average assets):

  

 

  

 

  

 

  

 

  

 

  

Corporation

$

251,147

 

8.96

%  

 

NA

 

NA

 

NA

 

NA

 

NA

 

NA

Bank

$

267,252

 

9.67

%  

$

110,494

 

4.00

%  

$

110,494

 

4.00

%  

$

138,118

 

5.00

%

December 31, 2020

 

  

 

  

 

 

  

 

  

 

  

 

  

 

  

Total capital (to risk-weighted assets):

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Corporation

$

263,344

 

11.74

%  

 

NA

 

NA

 

NA

 

NA

 

NA

 

NA

Bank

$

263,129

 

11.73

%  

$

179,420

 

8.00

%  

$

235,489

 

10.50

%  

$

224,275

 

10.00

%

Tier 1 capital (to risk-weighted assets):

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Corporation

$

228,186

 

10.17

%  

 

NA

 

NA

 

NA

 

NA

 

NA

 

NA

Bank

$

245,471

 

10.95

%  

$

134,565

 

6.00

%  

$

190,634

 

8.50

%  

$

179,420

 

8.00

%

Common Equity Tier 1 capital (to risk-weighted assets):

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Corporation

$

228,186

 

10.17

%  

 

NA

 

NA

 

NA

 

NA

 

NA

 

NA

Bank

$

245,471

 

10.95

%  

$

100,924

 

4.50

%  

$

156,993

 

7.00

%  

$

145,779

 

6.50

%

Tier 1 capital (to average assets):

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Corporation

$

228,186

 

8.74

%  

 

NA

 

NA

 

NA

 

NA

 

NA

 

NA

Bank

$

245,471

 

9.46

%  

$

103,814

 

4.00

%  

$

103,814

 

4.00

%  

$

129,768

 

5.00

%

NOTE 10 – COMMITMENTS AND CONTINGENCIES

The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate-lock commitments). Rate-lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans. Fair value is based on fees currently charged to enter into similar agreements and for fixed rate commitments also considers the difference between current levels of interest rates and committed rates. The notional amount of rate-lock commitments at September 30, 2021 and December 31, 2020 was approximately $44.0 million and $69.6 million, respectively.

The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

The Company’s exposure to credit loss is represented by the contractual or notional amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments. Since some of the commitments are expected to expire without being drawn upon and some of the commitments may not be drawn upon to the total extent of the commitment, the notional amount of these commitments does not necessarily represent future cash requirements.

21

Table of Contents

The following commitments were outstanding:

Notional Amount

    

September 30, 2021

December 31, 2020

Commitments to extend credit:

 

  

 

  

Fixed

$

87,377

$

72,298

Variable

 

402,114

 

388,738

Credit card arrangements

 

11,432

 

10,867

Letters of credit

 

8,630

 

7,567

NOTE 11 – FAIR VALUE MEASUREMENTS

Accounting guidance establishes a fair value hierarchy to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.

Level 1:        Quoted prices (unadjusted) or identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2:        Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3:        Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Information regarding the fair value of assets measured at fair value on a recurring basis is as follows:

    

Instruments

    

Markets

    

Other

    

Significant

Measured

for Identical

Observable

Unobservable

At Fair

Assets

Inputs

Inputs

Value

(Level 1)

(Level 2)

(Level 3)

September 30, 2021

 

  

 

  

 

  

 

  

Assets

 

  

 

  

 

  

 

  

Securities available for sale

 

  

 

  

 

 

  

U.S. Treasury securities

$

9,712

$

$

9,712

$

Obligations of U.S. Government sponsored agencies

 

15,740

 

 

15,740

 

Obligations of states and political subdivisions

 

69,315

 

 

69,315

 

Mortgage-backed securities

32,220

32,220

Corporate notes

 

19,584

 

 

19,584

 

Certificates of deposit

1,805

1,805

Mortgage servicing rights

 

4,345

 

 

4,345

 

December 31, 2020

 

  

 

  

 

  

 

  

Assets

 

  

 

  

 

  

 

  

Securities available for sale

Obligations of U.S. Government sponsored agencies

$

18,779

$

$

18,779

$

Obligations of states and political subdivisions

72,217

 

 

72,217

Mortgage-backed securities

 

44,199

 

 

44,199

 

Corporate notes

 

27,743

 

 

27,743

 

Certificates of deposit

2,101

2,101

Mortgage servicing rights

3,726

3,726

There were no assets measured on a recurring basis using significant unobservable inputs (Level 3) during these periods.

22

Table of Contents

Information regarding the fair value of assets measured at fair value on a non-recurring basis is as follows:

    

    

Quoted Prices

    

    

In Active

Significant

Assets

Markets

Other

Significant

Measured

for Identical

Observable

Unobservable

At Fair

Assets

Inputs

Inputs

Value

(Level 1)

(Level 2)

(Level 3)

September 30, 2021

 

  

 

  

 

  

 

  

OREO

$

197

$

$

$

197

Impaired Loans, net of impairment reserve

 

16,801

 

 

 

16,801

$

16,998

$

$

$

16,998

December 31, 2020

 

  

 

  

 

  

 

  

OREO

$

1,885

$

$

$

1,885

Impaired Loans, net of impairment reserve

 

16,784

 

 

 

16,784

$

18,669

$

$

$

18,669

The following is a description of the valuation methodologies used by the Company for the items noted in the table above, including the general classification of such instruments in the fair value hierarchy. For individually evaluated impaired loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, the estimated fair value of the underlying collateral for collateral-dependent loans, or the estimated liquidity of the note. For OREO, the fair value is based upon the estimated fair value of the underlying collateral adjusted for the expected costs to sell. The following table shows significant unobservable inputs used in the fair value measurement of Level 3 assets:

    

    

    

    

Weighted

 

Unobservable

Range of

Average

 

Valuation Technique

Inputs

Discounts

 

Discount

As of September 30, 2021

 

  

 

  

 

  

 

  

Other real estate owned

 

Third party appraisals, sales contracts or brokered price options

 

Collateral discounts and estimated costs to sell

 

67

%  

67.0

%

Impaired loans

 

Third party appraisals and discounted cash flows

 

Collateral discounts and discount rates

 

0% - 100

%  

7.3

%

As of December 31, 2020

 

  

 

  

 

  

 

  

Other real estate owned

 

Third party appraisals, sales contracts or brokered price options

 

Collateral discounts and estimated costs to sell

 

23% - 100

%  

40.2

%

Impaired loans

 

Third party appraisals and discounted cash flows

 

Collateral discounts and discount rates

 

0% - 100

%  

7.8

%

The following methods and assumptions were used by the Company to estimate fair value of financial instruments.

Cash and cash equivalents — Fair value approximates the carrying amount.

Securities — The fair value measurement is obtained from an independent pricing service and is based on recent sales of similar securities and other observable market data.

Loans held for sale — Fair value is based on commitments on hand from investors or prevailing market prices.

Loans — Fair value of variable rate loans that reprice frequently are based on carrying value. Fair value of other loans is estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings. Fair value of impaired and other nonperforming loans are estimated using discounted expected future cash flows or the fair value of the underlying collateral, if applicable.

Other investments — The carrying amount reported in the consolidated balance sheets for other investments approximates the fair value of these assets.

23

Table of Contents

Mortgage servicing rights — Fair values were determined using the present value of future cash flows.

Cash value of life insurance — The carrying amount approximates its fair value.

Deposits — Fair value of deposits with no stated maturity, such as demand deposits, savings, and money market accounts, by definition, is the amount payable on demand on the reporting date. Fair value of fixed-rate time deposits is estimated using discounted cash flows applying interest rates currently offered on similar time deposits.

Securities sold under repurchase agreements — The fair value of securities sold under repurchase agreements with variable rates or due on demand is the amount payable at the reporting date. The fair value of securities sold under repurchase agreements with fixed terms is estimated using discounted cash flows with discount rates at interest rates currently offered for securities sold under repurchase agreements of similar remaining values.

Notes payable and subordinated notes — Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. Fair value of borrowings is estimated by discounting future cash flows using the current rates at which similar borrowings would be made. Fair value of borrowed funds due on demand is the amount payable at the reporting date.

Off-balance-sheet instruments — Fair value is based on quoted market prices of similar financial instruments where available. If a quoted market price is not available, fair value is based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the company’s credit standing. Since this amount is immaterial, no amounts for fair value are presented.

The carrying value and estimated fair value of financial instruments at September 30, 2021 and December 31, 2020 follows:

Fair Value

Carrying

September 30, 2021

    

amount

    

Level 1

    

Level 2

    

Level 3

    

Total

Financial assets:

Cash and cash equivalents

$

299,953

$

299,953

$

$

$

299,953

Securities held to maturity

 

5,912

 

 

5,925

 

 

5,925

Securities available for sale

 

148,376

 

 

148,376

 

 

148,376

Loans held for sale

 

2,596

 

 

 

2,596

 

2,596

Loans, net

 

2,188,678

 

 

 

2,190,417

 

2,190,417

Other investments, at cost

 

8,997

 

 

 

8,997

 

8,997

Mortgage servicing rights

 

4,345

 

 

4,345

 

 

4,345

Cash surrender value of life insurance

 

31,705

 

31,705

 

 

 

31,705

Financial liabilities:

 

 

 

Deposits

$

2,471,258

$

$

$

2,427,468

$

2,427,468

Securities sold under repurchase agreements

 

17,402

 

 

17,402

 

17,402

Notes payable

9,179

9,179

9,179

Subordinated notes

 

17,500

17,500

17,500

24

Table of Contents

Fair Value

    

Carrying

    

    

    

    

December 31, 2020

amount

Level 1

Level 2

Level 3

Total

Financial assets:

Cash and cash equivalents

$

170,219

$

170,219

$

$

$

170,219

Securities held to maturity

 

6,669

 

 

6,688

 

 

6,688

Securities available for sale

 

165,039

 

 

165,039

 

 

165,039

Loans held for sale

 

809

 

 

 

809

 

809

Loans, net

 

2,173,802

 

 

 

2,168,865

 

2,168,865

Other investments, at cost

 

8,896

 

 

 

8,896

 

8,896

Mortgage servicing rights

 

3,726

 

 

3,726

 

 

3,726

Cash surrender value of life insurance

31,394

 

31,394

 

 

 

31,394

Financial liabilities:

Deposits

$

2,320,963

$

$

$

2,309,489

$

2,309,489

Securities sold under repurchase agreements

 

36,377

36,377

36,377

Notes payable

23,469

 

 

23,469

 

23,469

Subordinated notes

 

17,500

17,500

17,500

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters that could affect the estimates. Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.

Deposits with no stated maturities are defined as having a fair value equivalent to the amount payable on demand. This prohibits adjusting fair value derived from retaining those deposits for an expected future period of time. This component, commonly referred to as a deposit base intangible, is neither considered in the above amounts nor is it recorded as an intangible asset on the consolidated balance sheet. Significant assets and liabilities that are not considered financial assets and liabilities include premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

NOTE 12 – STOCK BASED COMPENSATION

The Company has made restricted share grants pursuant to the Bank First Corporation 2011 Equity Plan and the Bank First Corporation 2020 Equity Plan, which replaced the 2011 Plan. The purpose of the Plan is to provide financial incentives for selected employees and for the non-employee Directors of the Company, thereby promoting the long-term growth and financial success of the Company. The number of shares of Company stock that may be issued pursuant to awards under the 2020 Plan shall not exceed, in the aggregate, 700,000. As of September 30, 2021, 25,416 shares of Company stock have been awarded under the 2020 Plan. Compensation expense for restricted stock is based on the fair value of the awards of Bank First Corporation common stock at the time of grant. The value of restricted stock grants that are expected to vest is amortized into expense over the vesting periods. For the nine months ended September 30, 2021 and 2020, compensation expense of $1.0 million and $0.8 million, respectively, was recognized related to restricted stock awards.

25

Table of Contents

As of September 30, 2021, there was $2.7 million of unrecognized compensation cost related to non-vested restricted stock awards granted under the plan. That cost is expected to be recognized over a weighted average period of 2.78 years. The aggregate grant date fair value of restricted stock awards that vested during the nine months ended September 30, 2021, was approximately $1.1 million.

For the nine months ended

For the nine months ended

September 30, 2021

September 30, 2020

    

    

Weighted-

    

    

Weighted-

Average Grant-

Average Grant-

Shares

Date Fair Value

Shares

Date Fair Value

Restricted Stock

 

  

 

  

 

  

 

  

Outstanding at beginning of year

 

57,175

$

53.08

 

50,676

$

43.03

Granted

 

25,416

 

70.67

 

27,466

 

60.76

Vested

 

(21,755)

 

50.15

 

(18,623)

 

37.28

Forfeited or cancelled

 

(1,105)

 

62.23

 

(2,344)

 

51.27

Outstanding at end of year

 

59,731

$

61.46

 

57,175

$

53.08

NOTE 13 – LEASES

Accounting standards require lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements, establishing a right-of-use (“ROU”) model that requires a lessee to recognize a ROU lease asset and liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

Lessee Leases

The Company’s lessee leases are operating leases, and consist of leased real estate for branches. Options to extend and renew leases are generally exercised under normal circumstances. Advance notification is required prior to termination, and any noticing period is often limited to the months prior to renewal. Rent escalations are generally specified by a payment schedule, or are subject to a defined formula. The Company also elected the practical expedient to not separate lease and non-lease components for all leases, the majority of which consist of real estate common area maintenance expenses. Generally, leases do not include guaranteed residual values, but instead typically specify that the leased premises are to be returned in satisfactory condition with the Company liable for damages.

For operating leases, the lease liability and ROU asset (before adjustments) are recorded at the present value of future lease payments. Accounting standards require the use of the lease interest rate; however, this rate is typically not known. As an alternative, the use of an entity’s fully secured incremental borrowing rate is permitted. The Company is electing to utilize the Wall Street Journal Prime Rate on the date of lease commencement.

Nine-month period ended

 

    

September 30, 2021

    

September 30, 2020

 

Amortization of ROU Assets - Operating Leases

$

10

$

31

Interest on Lease Liabilities - Operating Leases

 

65

69

Operating Lease Cost (Cost resulting from lease payments)

 

75

100

Weighted Average Lease Term (Years) - Operating Leases

 

32.25

31.51

Weighted Average Discount Rate - Operating Leases

 

5.50

%

5.50

%

26

Table of Contents

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liabilities as of September 30, 2021 is as follows:

    

September 30, 2021

Operating lease payments due:

 

Within one year

$

86

After one but within two years

86

After two but within three years

85

After three but within four years

85

After four years but within five years

92

After five years

3,255

Total undiscounted cash flows

3,689

Discount on cash flows

(2,109)

Total operating lease liabilities

$

1,580

27

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2020, included in our Annual Report and with our unaudited condensed accompanying notes set forth in this Quarterly Report on Form 10-Q for the quarterly period September 30, 2021.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this report are forward-looking statements within the meaning of and subject to the safe harbor protections of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements relating to the Company’s assets, business, cash flows, condition (financial or otherwise), credit quality, financial performance, liquidity, short and long-term performance goals, prospects, results of operations, strategic initiatives, potential future acquisitions, disposition and other growth opportunities. These statements, which are based upon certain assumptions and estimates and describe the Company’s future plans, results, strategies and expectations, can generally be identified by the use of the words and phrases “may,” “will,” “should,” “could,” “would,” “goal,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target,” “aim,” “predict,” “continue,” “seek,” “projection” and other variations of such words and phrases and similar expressions. These forward-looking statements are not historical facts, and are based upon current expectations, estimates and projections about the Company’s industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond the Company’s control. The inclusion of these forward-looking statements should not be regarded as a representation by the Company or any other person that such expectations, estimates and projections will be achieved. Accordingly, the Company cautions investors that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict and that are beyond the Company’s control. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable as of the date of this report, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. A number of factors could cause actual results to differ materially from those contemplated by the forward-looking statement in this report including, without limitation, the risks and other factors set forth in the Company’s Registration Statements under the captions “Cautionary Note Regarding Forward-Looking Statements” and “Risk factors.” Many of these factors are beyond the Company’s ability to control or predict. If one or more events related to these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to be incorrect, actual results may differ materially from the forward-looking statements. Accordingly, investors should not place undue reliance on any such forward-looking statements. Any forward-looking statements speaks only as of the date of this report, and the Company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law. New risks and uncertainties may emerge from time to time, and it is not possible for the Company to predict their occurrence or how they will affect the Company.

We qualify all of our forward-looking statements by these cautionary statements.

OVERVIEW

Bank First Corporation is a Wisconsin corporation that was organized primarily to serve as the holding company for Bank First, N.A. Bank First, N.A., which was incorporated in 1894, is a nationally-chartered bank headquartered in Manitowoc, Wisconsin. It is a member of the Board of Governors of the Federal Reserve System (“Federal Reserve”), and is regulated by the Office of the Comptroller of the Currency (“OCC”). Including its headquarters in Manitowoc, Wisconsin, the Bank has 21 banking locations in Manitowoc, Outagamie, Brown, Winnebago, Sheboygan, Waupaca, Ozaukee, Monroe, and Jefferson counties in Wisconsin. The Bank offers loan, deposit and treasury management products at each of its banking locations.

28

Table of Contents

As with most community banks, the Bank derives a significant portion of its income from interest received on loans and investments. The Bank’s primary source of funding is deposits, both interest-bearing and noninterest-bearing. In order to maximize the Bank’s net interest income, or the difference between the income on interest-earning assets and the expense of interest-bearing liabilities, the Bank must not only manage the volume of these balance sheet items, but also the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities. To account for credit risk inherent in all loans, the Bank maintains an ALL to absorb possible losses on existing loans that may become uncollectible. The Bank establishes and maintains this allowance by charging a provision for loan losses against operating earnings. Beyond its net interest income, the Bank further receives income through the net gain on sale of loans held for sale as well as servicing income which is retained on those sold loans. In order to maintain its operations and bank locations, the Bank incurs various operating expenses which are further described within the “Results of Operations” later in this section.

The Bank is a 49.8% member of a data processing subsidiary, UFS, which provides core data processing, endpoint management cloud services, cyber security and digital banking solutions for over 50 Midwest banks. The Bank, through its 100% owned subsidiary TVG Holdings, Inc., also holds a 40% ownership interest in Ansay, an insurance agency providing clients throughout Wisconsin with insurance and risk management solutions. These unconsolidated subsidiary interests contribute noninterest income to the Bank through their underlying annual earnings.

On October 27, 2017, the Company consummated its merger with Waupaca pursuant to the Agreement and Plan of Bank Merger, dated as of May 11, 2017 and as amended on July 20, 2017, by and among the Company, BFNC Merger Sub, LLC, a wholly-owned subsidiary of the Company, and Waupaca, whereby Waupaca was merged with and into the Company, and First National Bank, Waupaca’s wholly owned banking subsidiary, was merged with and into the Bank. The system integration was completed, and six branches of First National Bank opened on October 30, 2017 as branches of the Bank, expanding the Bank’s presence into Waupaca county.

On July 12, 2019, the Company consummated its merger with Partnership pursuant to the Agreement and Plan of Bank Merger, dated as of January 22, 2019 and as amended on April 30, 2019, by and among the Company and Partnership, whereby Partnership was merged with and into the Company, and Partnership Bank, Partnership’s wholly owned banking subsidiary, was merged with and into the Bank. The system integration was completed, and four branches of Partnership Bank opened on July 15, 2019 as branches of the bank, expanding the Bank’s presence into Ozaukee, Monroe and Jefferson counties.

On May 15, 2020, the Company consummated its merger with Timberwood pursuant to the Agreement and Plan of Bank Merger, dated as of November 20, 2019, by and among the Company and Timberwood, whereby Timberwood was merged with and into the Company, and Timberwood Bank, Timberwood’s wholly owned banking subsidiary, was merged with and into the Bank. The system integration was completed, and the sole branch of Timberwood Bank opened on May 18, 2020 as a branch of the bank, expanding the Bank’s presence in Monroe County.

During the first quarter of 2020, COVID-19 was declared a global pandemic by the World Health Organization and a National Public Health Emergency was declared in the United States. Shortly before the end of March 2020, in response to the COVID-19 pandemic, the government of Wisconsin and of most other states took preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. These preventative and protective actions within Wisconsin were lifted during May 2020.

The impact of the COVID-19 pandemic on the economy continues to evolve. The COVID-19 pandemic and its associated impacts on trade, travel, unemployment, consumer spending, and other economic activities has resulted in less economic activity and could have an adverse effect on our business, financial condition and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and our customers.

Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans and other products and services we offer, which are highly dependent on the business environment in our primary markets. We have actively reached out to our customers to provide guidance, direction and assistance in these uncertain times. We also participated extensively in the Payroll Protection Program (“PPP”), under which we secured funding of approximately 1,875 loans totaling approximately $279.6 million during 2020 as well as approximately 1,132 loans totaling approximately $98.2 million under the new round of funding during the first six months of 2021.

29

Table of Contents

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following tables present certain selected historical consolidated financial data as of the dates or for the period indicated:

At or for the Three Months Ended

At or for the Nine Months Ended

(In thousands, except per share data)

    

9/30/2021

    

6/30/2021

    

3/31/2021

    

12/31/2020

    

9/30/2020

    

9/30/2021

    

9/30/2020

Results of Operations:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Interest income

$

24,898

$

24,003

$

24,442

$

27,094

$

25,928

$

73,343

$

73,606

Interest expense

 

1,964

 

2,189

 

2,339

 

2,623

 

3,003

 

6,492

 

11,242

Net interest income

 

22,934

 

21,814

 

22,103

 

24,471

 

22,925

 

66,851

 

62,364

Provision for loan losses

 

650

 

950

 

900

 

1,650

 

1,350

 

2,500

 

5,475

Net interest income after provision for loan losses

 

22,284

 

20,864

 

21,203

 

22,821

 

21,575

 

64,351

 

56,889

Noninterest income

 

5,028

 

6,574

 

6,210

 

6,744

 

5,115

 

17,812

 

16,776

Noninterest expense

 

12,466

 

12,221

 

12,225

 

13,972

 

12,202

 

36,912

 

39,381

Income before income tax expense

 

14,846

 

15,217

 

15,188

 

15,593

 

14,488

 

45,251

 

34,284

Income tax expense

 

3,628

 

3,669

 

3,674

 

4,063

 

3,534

 

10,971

 

7,768

Net income

$

11,218

$

11,548

$

11,514

$

11,530

$

10,954

$

34,280

$

26,516

Earnings per common share - basic

$

1.46

$

1.50

$

1.49

$

1.49

$

1.42

$

4.45

$

3.57

Earnings per common share - diluted

 

1.46

 

1.50

 

1.49

 

1.49

 

1.42

 

4.45

 

3.56

Common Shares:

 

 

 

 

 

 

 

Basic weighted average

 

7,605,541

 

7,653,317

 

7,657,301

 

7,659,904

 

7,673,572

 

7,638,857

 

7,367,793

Diluted weighted average

 

7,624,791

 

7,668,740

 

7,677,976

 

7,682,101

 

7,691,326

 

7,658,828

 

7,412,673

Outstanding

 

7,641,771

 

7,688,795

 

7,729,216

 

7,709,497

 

7,729,762

 

7,641,771

 

7,729,762

Noninterest income / noninterest expense:

 

 

 

 

 

 

 

Service charges

$

1,491

$

1,596

$

1,467

$

1,586

$

1,343

$

4,554

$

3,417

Income from Ansay

 

756

 

723

 

725

 

169

 

970

 

2,204

 

2,571

Income from UFS

 

751

 

663

 

366

 

599

 

720

 

1,780

 

2,467

Loan servicing income

 

599

 

1,178

 

505

 

194

 

538

 

2,282

 

1,226

Net gain on sales of mortgage loans

 

1,206

 

2,187

 

2,811

 

2,214

 

1,304

 

6,204

 

3,096

Net (loss) gain on sales of securities

 

(3)

 

 

 

 

 

(3)

 

3,233

Other noninterest income

 

228

 

227

 

336

 

1,982

 

240

 

791

 

766

Total noninterest income

$

5,028

$

6,574

$

6,210

$

6,744

$

5,115

$

17,812

$

16,776

Personnel expense

$

6,996

$

7,121

$

7,091

$

7,604

$

6,609

$

21,208

$

19,669

Occupancy, equipment and office

 

1,070

 

968

 

1,210

 

1,352

 

1,171

 

3,248

 

3,367

Data processing

 

1,259

 

1,358

 

1,393

 

1,519

 

1,463

 

4,010

 

3,996

Postage, stationery and supplies

 

204

 

131

 

197

 

204

 

219

 

532

 

668

Net (gain) loss on sales and valuations of other real estate owned

 

 

(73)

 

(133)

 

(16)

 

(32)

 

(206)

 

1,411

Advertising

 

50

 

53

 

49

 

61

 

41

 

152

 

165

Charitable contributions

 

121

 

152

 

126

 

214

 

110

 

399

 

360

Outside service fees

 

741

 

804

 

755

 

1,029

 

888

 

2,300

 

3,083

Amortization of intangibles

 

351

 

351

 

351

 

522

 

418

 

1,053

 

1,114

Penalty for early extinguishment of debt

1,323

Other noninterest expense

 

1,674

 

1,356

 

1,186

 

1,483

 

1,315

 

4,216

 

4,225

Total noninterest expense

$

12,466

$

12,221

$

12,225

$

13,972

$

12,202

$

36,912

$

39,381

Period-end balances:

 

 

 

 

 

 

 

Loans

$

2,208,915

$

2,225,217

$

2,228,892

$

2,191,460

$

2,193,228

$

2,208,915

$

2,193,228

Allowance for loan losses

 

20,237

 

19,547

 

18,531

 

17,658

 

16,318

 

20,237

 

16,318

Investment securities available-for-sale, at fair value

 

148,376

 

153,818

 

167,940

 

165,039

 

173,334

 

148,376

 

173,334

Investment securities held-to-maturity, at cost

 

5,912

 

5,912

 

5,934

 

6,669

 

6,670

 

5,912

 

6,670

Goodwill and other intangibles, net

 

64,089

 

64,440

 

64,288

 

64,639

 

65,110

 

64,089

 

65,110

Total assets

 

2,846,605

 

2,818,950

 

2,846,199

 

2,718,016

 

2,639,247

 

2,846,605

 

2,639,247

Deposits

 

2,472,258

 

2,446,654

 

2,448,035

 

2,320,963

 

2,271,040

 

2,472,258

 

2,271,040

Stockholders’ equity

 

315,262

 

311,430

 

303,442

 

294,857

 

286,104

 

315,262

 

286,104

Book value per common share

 

41.26

 

40.50

 

39.26

 

38.25

 

37.01

 

41.26

 

37.01

Tangible book value per common share (1)

 

33.44

 

32.69

 

31.42

 

30.35

 

29.12

 

33.44

 

29.12

Average balances:

 

 

 

 

 

 

 

Loans

$

2,218,324

$

2,247,026

$

2,196,142

$

2,206,207

$

2,140,008

$

2,220,570

$

1,973,716

Interest-earning assets

 

2,659,584

 

2,633,850

 

2,547,783

 

2,465,713

 

2,423,168

 

2,614,140

 

2,255,165

Total assets

 

2,861,959

 

2,835,580

 

2,750,471

 

2,671,967

 

2,626,136

 

2,816,409

 

2,448,544

Deposits

 

2,479,799

 

2,453,156

 

2,355,888

 

2,316,793

 

2,260,065

 

2,430,068

 

2,078,580

Interest-bearing liabilities

 

1,738,895

 

1,723,395

 

1,694,711

 

1,663,642

 

1,636,606

 

1,719,162

 

1,567,768

Goodwill and other intangibles, net

 

59,969

 

60,363

 

60,782

 

60,836

 

61,276

 

60,368

 

54,633

Stockholders’ equity

 

313,868

 

308,201

 

300,331

 

289,916

 

281,656

 

307,517

 

257,308

Financial ratios (2):

 

 

 

 

 

 

  

 

  

Return on average assets

 

1.57

%  

 

1.63

%  

 

1.67

%  

 

1.71

%  

 

1.67

%  

 

1.62

%  

 

1.44

%  

Return on average common equity

 

14.30

%  

 

14.99

%  

 

15.34

%  

 

15.78

%  

 

15.56

%  

 

14.86

%  

 

13.74

%  

Average equity to average assets

 

10.97

%  

 

10.87

%  

 

10.92

%  

 

10.85

%  

 

10.73

%  

 

10.92

%  

 

10.51

%  

Stockholders’ equity to assets

 

11.08

%  

 

11.05

%  

 

10.66

%  

 

10.85

%  

 

10.84

%  

 

11.08

%  

 

10.84

%  

Tangible equity to tangible assets (1)

 

9.17

%  

 

9.11

%  

 

8.72

%  

 

8.80

%  

 

8.73

%  

 

9.17

%  

 

8.73

%  

Loan yield

 

4.25

%  

 

4.13

%  

 

4.34

%  

 

4.62

%  

 

4.65

%  

 

4.24

%  

 

4.78

%  

Earning asset yield

 

3.76

%  

 

3.71

%  

 

3.95

%  

 

4.44

%  

 

4.33

%  

 

3.80

%  

 

4.44

%  

Cost of funds

 

0.45

%  

 

0.51

%  

 

0.56

%  

 

0.63

%  

 

0.73

%  

 

0.50

%  

 

0.96

%  

Net interest margin, taxable equivalent

 

3.47

%  

 

3.37

%  

 

3.57

%  

 

4.01

%  

 

3.84

%  

 

3.47

%  

 

3.77

%  

Net loan charge-offs to average loans

 

(0.01)

%  

 

(0.01)

%  

 

0.00

%  

 

0.01

%  

 

0.20

%  

 

0.00

%  

 

0.03

%  

Nonperforming loans to total loans

 

0.53

%  

 

0.55

%  

 

0.63

%  

 

0.57

%  

 

0.84

%  

 

0.53

%  

 

0.84

%  

Nonperforming assets to total assets

 

0.42

%  

 

0.45

%  

 

0.52

%  

 

0.52

%  

 

0.79

%  

 

0.42

%  

 

0.79

%  

Allowance for loan losses to loans

 

0.92

%  

 

0.88

%  

 

0.83

%  

 

0.81

%  

 

0.74

%  

 

0.92

%  

 

0.74

%  

30

Table of Contents

(1)These measures are not measures prepared in accordance with GAAP, and are therefore considered to be non-GAAP financial measures. See “GAAP reconciliation and management explanation of non-GAAP financial measures” for a reconciliation of these measures to their most comparable GAAP measures.
(2)Income statement-related ratios for partial year periods are annualized.

GAAP RECONCILIATION AND MANAGEMENT EXPLANATION OF NON-GAAP FINANCIAL MEASURES

We identify certain financial measures discussed in the Report as being “non-GAAP financial measures.” The non-GAAP financial measures presented in this Report are tangible book value per common share and tangible equity to tangible assets.

In accordance with the SEC’s rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows.

The non-GAAP financial measures that we discuss in this Report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in our selected historical consolidated financial data may differ from that of other companies reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures we have presented in our selected historical consolidated financial data when comparing such non-GAAP financial measures. The following discussion and reconciliations provide a more detailed analysis of these non-GAAP financial measures.

Tangible book value per common share and tangible equity to tangible assets are non-GAAP measures that exclude the impact of goodwill and other intangibles used by the Company’s management to evaluate capital adequacy. Because intangible assets such as goodwill and other intangibles vary extensively from company to company, we believe that the presentation of this information allows investors to more easily compare the Company’s capital position to other companies. The most directly comparable financial measures calculated in accordance with GAAP are book value per common share, return on average common equity and stockholders’ equity to total assets.

At or for the Three Months Ended

At or for the Nine Months Ended

 

(In thousands, except per share data)

    

9/30/2021

    

6/30/2021

3/31/2021

    

12/31/2020

    

9/30/2020

    

9/30/2021

    

9/30/2020

 

Tangible Assets

 

  

 

  

 

  

 

  

 

  

 

  

Total assets

$

2,846,605

$

2,818,950

$

2,846,199

$

2,718,016

$

2,639,247

$

2,846,605

$

2,639,247

Adjustments:

 

 

 

 

 

  

 

Goodwill

 

(55,357)

 

(55,357)

(55,472)

 

(55,472)

 

(55,022)

 

(55,357)

 

(55,022)

Core deposit intangible, net of amortization

 

(4,386)

 

(4,738)

(5,089)

 

(5,440)

 

(5,962)

 

(4,386)

 

(5,962)

Tangible assets

$

2,786,862

$

2,758,855

$

2,785,638

$

2,657,104

$

2,578,263

$

2,786,862

$

2,578,263

Tangible Common Equity

 

 

 

 

 

  

 

Total stockholders’ equity

$

315,262

$

311,430

$

303,442

$

294,857

$

286,104

$

315,262

$

286,104

Adjustments:

 

 

 

 

 

  

 

Goodwill

 

(55,357)

 

(55,357)

(55,472)

 

(55,472)

 

(55,022)

 

(55,357)

 

(55,022)

Core deposit intangible, net of amortization

 

(4,386)

 

(4,738)

(5,089)

 

(5,440)

 

(5,962)

 

(4,386)

 

(5,962)

Tangible common equity

$

255,519

$

251,335

$

242,881

$

233,945

$

225,120

$

255,519

$

225,120

Book value per common share

$

41.26

$

40.50

$

39.26

$

38.25

$

37.01

$

41.26

$

37.01

Tangible book value per common share

 

33.44

 

32.69

31.42

 

30.35

 

29.12

 

33.44

 

29.12

Total stockholders’ equity to total assets

 

11.08

%

 

11.05

%  

10.66

%  

 

10.85

%  

 

10.84

%  

 

11.08

%  

 

10.84

%

Tangible common equity to tangible assets

 

9.17

%

 

9.11

%  

8.72

%  

 

8.80

%  

 

8.73

%  

 

9.17

%  

 

8.73

%

31

Table of Contents

RESULTS OF OPERATIONS

Results of Operations for the Three Months Ended September 30, 2021 and September 30, 2020

General. Net income increased $0.3 million to $11.2 million for three months ended September 30, 2021, compared to $11.0 million for the same period in 2020. This increase was primarily due to a reduction in required provision for loan losses during the third quarter of 2021, compared to the third quarter of 2020. This reduction was the result of strong credit quality metrics as well as greater clarity on the impacts of COVID in the current year third quarter.

Net Interest Income. The management of interest income and expense is fundamental to our financial performance. Net interest income, the difference between interest income and interest expense, is the largest component of the Company’s total revenue. Management closely monitors both total net interest income and the net interest margin (net interest income divided by average earning assets). We seek to maximize net interest income without exposing the Company to an excessive level of interest rate risk through our asset and liability policies. Interest rate risk is managed by monitoring the pricing, maturity and repricing options of all classes of interest-bearing assets and liabilities. Our net interest margin can also be adversely impacted by the reversal of interest on nonaccrual loans and the reinvestment of loan payoffs into lower yielding investment securities and other short-term investments.

Net interest and dividend income totaled $22.9 million for the three months ended September 30, 2021, matching the third quarter of 2020. Tax equivalent net interest margin decreased 0.37% to 3.47% for the three-months ended September 30, 2021, down from 3.84% for the same period in 2020. Net interest margin decreased by 0.22% due to a decrease in purchase accounting accretion quarter-over-quarter which added to a decrease of 0.15% in core net interest margin. Interest-earnings assets increased by $236.4 million quarter-over-quarter, causing the increase in net interest income despite the reduction in net interest margin. Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes on both volume and mix and pricing decisions, and external factors include changes in market interest rates, competition and the shape of the interest rate yield curve.

Interest Income. Total interest income decreased $1.0 million, or 4.0%, to $24.9 million for the three months ended September 30, 2021 compared to $25.9 million for the same period in 2020. The decrease in total interest income was primarily due a reduction of 0.57% in yield on interest earnings assets, offset to a degree by the aforementioned increase in interest-earning assets.

Interest Expense. Interest expense decreased $1.0 million, or 34.6%, to $2.0 million for the three months ended September 30, 2021 compared to $3.0 million for the same period in 2020. The decrease in interest expense was primarily due to the lower overall interest rate environment, leading to a 0.28% decline in cost of funds quarter-over-quarter. This decline in cost of funds more than overcame a 6.3% increase in interest-bearing liabilities in these respective quarters.

Interest expense on interest-bearing deposits decreased by $0.9 million to $1.8 million for the three months ended September 30, 2021 from $2.7 million for the same period in 2020. The average cost of interest-bearing deposits was 0.42% for the three months ended September 30, 2021, compared to 0.69% for the same period in 2020.

Provision for Loan Losses. Credit risk is inherent in the business of making loans. We establish an ALL through charges to earnings, which are shown in the statements of operations as the provision for loan losses. Specifically identifiable and quantifiable known losses are promptly charged off against the allowance. The provision for loan losses is determined by conducting a quarterly evaluation of the adequacy of our ALL and charging the shortfall or excess, if any, to the current quarter’s expense. This has the effect of creating variability in the amount and frequency of charges to earnings. The provision for loan losses and level of allowance for each period are dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in our market area. The determination of the amount is complex and involves a high degree of judgment and subjectivity.

We recorded a provision for loan losses of $0.7 million for the three months ended September 30, 2021 compared to $1.4 million for the same period in 2020. We recorded net recoveries of $40,000 for the three months ended September 30, 2021 compared to net charge-offs of $1.3 million for the same period in 2020. The ALL was $20.2 million, or 0.92% of total loans, at September 30, 2021 compared to $16.3 million, or 0.74% of total loans at September 30, 2020.

Noninterest Income. Noninterest income is an important component of our total revenues. A significant portion of our noninterest income is associated with service charges and income from the Bank’s subsidiaries, Ansay and UFS. Other sources of noninterest income include loan servicing fees, gains on sales of mortgage loans, and other income from strategic alliances.

32

Table of Contents

Noninterest income decreased $0.1 million to $5.0 million for the three months ended September 30, 2021 compared to $5.1 million for the same period in 2020. Income from service charges increased by 11.0% due to an expanded base of customer relationships, many of which were garnered during the Company’s exhaustive efforts to provide PPP loans to struggling businesses in our markets during the previous 18 months, as well as continued maturing of newer markets for the Company resulting from our recent acquisitions. Income from our investment in Ansay decreased by 22.1% as a result of a continued difficult operating environment due to COVID. Loan servicing income increased by 11.3% resulting from continued additions to the Company’s serviced portfolios. Net gains on sales of mortgage loans declined quarter-over-quarter as the Company experienced a slight decline in secondary market loan originations, combined with lower profitability on a per-unit basis of each loan sold.

The major components of our noninterest income are listed below:

Three Months Ended September 30, 

    

2021

    

2020

    

$ Change

    

% Change

    

(In thousands)

Noninterest Income

 

  

 

  

 

  

 

  

 

Service Charges

$

1,491

$

1,343

$

148

11

%

Income from Ansay

 

756

 

970

 

(214)

 

(22)

%

Income from UFS

 

751

 

720

 

31

 

4

%

Loan Servicing income

 

599

 

538

 

61

 

11

%

Net gain on sales of mortgage loans

 

1,206

 

1,304

 

(98)

 

(8)

%

Net loss on sales of securities

 

(3)

 

 

(3)

 

NM

Other

 

228

 

240

 

(12)

 

(5)

%

Total noninterest income

$

5,028

$

5,115

$

(87)

(2)

%

Noninterest Expense. Noninterest expense increased $0.3 million to $12.5 million for the three months ended September 30, 2021 compared to $12.2 million for the same period in 2020. Personnel expense increased 5.7%, or $0.4 million, primarily as a result of customary annual pay increases. The Company was utilizing significant resources during the third quarter of 2020 to equip our employees and offices to provide a safe working environment during COVID. A reduction in needed expenditures in this regard during the third quarter of 2021 led to a 8.6% decline in occupancy expense quarter-over-quarter. Expenses from significant PPP loan originations as well as the acquisition of Timberwood increased data processing and outside service fee expense during the third quarter of 2020. These circumstances did not continue into the third quarter of 2021, leading to decline of 13.9% and 16.6% in these areas, respectively.

The major components of our noninterest expense are listed below:

Three Months Ended September 30, 

2021

    

2020

    

$ Change

    

% Change

    

(In thousands)

Noninterest Expense

 

  

 

  

 

  

 

  

 

Salaries, commissions, and employee benefits

$

6,996

$

6,609

$

387

6

%

Occupancy

 

1,070

 

1,171

 

(101)

 

(9)

%

Data Processing

 

1,259

 

1,463

 

(204)

 

(14)

%

Postage, stationary, and supplies

 

204

 

219

 

(15)

 

(7)

%

Net gain on sales and valuation of ORE

 

 

(32)

 

32

 

NM

Advertising

 

50

 

41

 

9

 

22

%

Charitable contributions

 

121

 

110

 

11

 

10

%

Outside service fees

 

741

 

888

 

(147)

 

(17)

%

Amortization of intangibles

 

351

 

418

 

(67)

 

(16)

%

Other

 

1,674

 

1,315

 

359

 

27

%

Total noninterest expenses

$

12,466

$

12,202

$

264

2

%

Income Tax Expense. We recorded a provision for income taxes of $3.6 million for the three months ended September 30, 2021 compared to a provision of $3.5 million for the same period during 2020, reflecting effective tax rates of 24.4% for each period. The effective tax rates were reduced from the statutory federal and state income tax rates during both periods as a result of tax-exempt interest income produced by certain qualifying loans and investments in the Bank’s portfolios.

33

Table of Contents

Results of Operations for the Nine Months Ended September 30, 2021 and September 30, 2020

General. Net income increased $7.8 million to $34.3 million for the nine months ended September 30, 2021, compared to $26.5 million for the same period in 2020. This increase was primarily due to the added scale of one office acquired in the Timberwood acquisition during the second quarter of 2020, strong residential mortgage production during the first nine months of 2021, a reduction of funding costs based on lower rate deposits in 2021, and a $3.0 million reduction in provisions for loan losses period-over-period.

Net Interest Income. Net interest and dividend income increased by $4.5 million to $66.9 million for the nine months ended September 30, 2021, compared to $62.4 million for nine months ended September 30, 2020. The increase in net interest income was primarily due to the added scale of the Timberwood acquisition along with a reduction in funding costs on interest bearing liabilities, which declined 0.46% period-over-period. Total average interest-earning assets increased to $2.61 billion for the nine months ended September 30, 2021, compared to $2.26 billion for the same period in 2020. Tax equivalent net interest margin decreased 0.30% to 3.47% for the nine months ended September 30, 2021, down from 3.77% for the same period in 2020. Net interest margin decreased by 0.14% due to a decrease in purchase accounting accretion period-over-period which added to a decrease of 0.16% in core net interest margin. Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes on both volume and mix and pricing decisions, and external factors include changes in market interest rates, competition and the shape of the interest rate yield curve.

Interest Income. Total interest income decreased $0.3 million, or 0.4%, to $73.3 million for the nine months ended September 30, 2021 compared to $73.6 million for the same period in 2020. The decrease in total interest income was primarily due to a reduction of 0.64% in yield on interest-earning assets through nine months of 2021 compared to the same period in 2020, somewhat offset by an increase in average interest-earning assets of $359.0 million period-over-period.

Interest Expense. Interest expense decreased $4.7 million, or 42.3%, to $6.5 million for the nine months ended September 30, 2021 compared to $11.2 million for the same period in 2020. The decrease in interest expense was primarily due to the lower overall interest rate environment, which was counteracted to a certain extent by an increase of $151.4 million in interest-bearing liabilities.

Interest expense on interest-bearing deposits decreased by $4.1 million to $5.9 million for the nine months ended September 30, 2021, from $10.0 million for the same period in 2020. The average cost of interest-bearing deposits was 0.48% for the nine months ended September 30, 2021, compared to 0.91% for the same period in 2020.

Provision for Loan Losses. We recorded a provision for loan losses of $2.5 million for the nine months ended September 30, 2021, compared to $5.5 million for the same period in 2020. We recorded net recoveries of $0.1 million for the nine months ended September 30, 2021 compared to net charge-offs of 0.6 million for the same period in 2020. The ALL was $20.2 million, or 0.92% of total loans, at September 30, 2021 compared to $16.3 million, or 0.74% of total loans at September 30, 2020. The elevated provision during the three quarters of 2020 compared to the provision during the same period of 2021 was primarily the result of heightened economic risks and uncertainties resulting from the COVID-19 pandemic.

Noninterest Income. Noninterest income increased $1.0 million to $17.8 million for the nine months ended September 30, 2021 compared to $16.8 million for the same period in 2020. Income from service charges increased by 33.3% due to an expanded base of customer relationships, many of which were the result of the Timberwood acquisition and PPP loan originations. Income from our investment in Ansay decreased by 14.3% as a result of a continued difficult operating environment due to COVID. Income from our investment in UFS decreased by 27.9% as a result of extra ordinary one-time fees collected in 2020 which did not recur in 2021. Loan servicing income increased by 86.1% resulting from a positive adjustment to the Company’s mortgage servicing rights of $0.6 million during the first half of 2021 which compared favorably to a negative $0.5 million adjustment to these same rights during the first half of 2020. Net gains on sales of mortgage loans saw a very significant increase period-over-period as the Company experienced very robust activity in secondary market loan originations. During the second quarter of 2020 the Company sold $36.6 million of U.S. Treasury notes, resulting in a gain of $3.1 million. There were no similar sales of investments during the first nine months of 2021, causing a negative comparison between periods.

34

Table of Contents

The major components of our noninterest income are listed below:

Nine Months Ended September 30,

 

2021

2020

$ Change

% Change

 

    

(In thousands)

    

    

    

Noninterest Income

 

  

 

  

 

  

 

  

Service Charges

$

4,554

$

3,417

$

1,137

 

33

%

Income from Ansay

 

2,204

 

2,571

 

(367)

 

(14)

%

Income from UFS

 

1,780

 

2,467

 

(687)

 

(28)

%

Loan Servicing income

 

2,282

 

1,226

 

1,056

 

86

%

Net gain on sales of mortgage loans

 

6,204

 

3,096

 

3,108

 

100

%

Net (loss) gain on sales of securities

 

(3)

 

3,233

 

(3,236)

 

NM

Other

 

791

 

766

 

25

 

3

%

Total noninterest income

$

17,812

$

16,776

$

1,036

 

6

%

Noninterest Expense. Noninterest expense decreased $2.5 million to $36.9 million for the nine months ended September 30, 2021 compared to $39.4 million for the same period in 2020. Personnel expense increased 7.8%, or $1.5 million, as a result of the added scale from the Timberwood acquisition in addition to customary annual pay increases. The Timberwood acquisition occurred during the second quarter of 2020, causing significant third-party professional expenses which were not repeated during the first nine months of 2021, leading to a significant reduction in outside service fees. Finally, during the second quarter of 2020, the Company repaid $30.0 million in borrowings from the Federal Home Loan Bank of Chicago prior to the contractual maturity dates of these borrowings, leading to prepayment penalties of $1.3 million. There were no similar prepayment penalties during the first nine months of 2021.

Net gains and losses from sales of ORE and securities are specific to the properties and securities which are sold and will vary greatly period to period, as they did in the first nine months of 2021 compared to the first nine months of 2020.

The major components of our noninterest expense are listed below:

Nine Months Ended September 30,

 

    

2021

    

2020

    

$ Change

    

% Change

 

(In thousands)

Noninterest Expense

 

  

 

  

 

  

 

  

Salaries, commissions, and employee benefits

$

21,208

$

19,669

$

1,539

 

8

%

Occupancy

 

3,248

 

3,367

 

(119)

 

(4)

%

Data Processing

 

4,010

 

3,996

 

14

 

0

%

Postage, stationary, and supplies

 

532

 

668

 

(136)

 

(20)

%

Net (gain) loss on sales and valuation of ORE

 

(206)

 

1,411

 

(1,617)

 

NM

Advertising

 

152

 

165

 

(13)

 

(8)

%

Charitable Contributions

 

399

 

360

 

39

 

11

%

Outside service fees

 

2,300

 

3,083

 

(783)

 

(25)

%

Amortization of intangibles

 

1,053

 

1,114

 

(61)

 

(5)

%

Penalty for early extinguishment of debt

 

 

1,323

 

(1,323)

 

NM

Other

 

4,216

 

4,225

 

(9)

 

(0)

%

Total noninterest expenses

$

36,912

$

39,381

$

(2,469)

 

(6)

%

Income Tax Expense. We recorded a provision for income taxes of $11.0 million for the nine months ended September 30, 2021 compared to a provision of $7.8 million for the same period during 2020, reflecting effective tax rates of 24.2% and 22.7%, respectively. The effective tax rates were reduced from the statutory federal and state income tax rates largely as a result of tax-exempt interest income produced by certain qualifying loans and investments in the Bank’s portfolios.

35

Table of Contents

NET INTEREST MARGIN

Net interest income represents the difference between interest earned, primarily on loans and investments, and interest paid on funding sources, primarily deposits and borrowings. Interest rate spread is the difference between the average rate earned on total interest-earning assets and the average rate paid on total interest-bearing liabilities. Net interest margin is the amount of net interest income, on a fully taxable-equivalent basis, expressed as a percentage of average interest-earning assets. The average rate earned on earning assets is the amount of annualized taxable equivalent interest income expressed as a percentage of average earning assets. The average rate paid on interest-bearing liabilities is equal to annualized interest expense as a percentage of average interest-bearing liabilities.

The following tables set forth the distribution of our average assets, liabilities and stockholders’ equity, and average rates earned or paid on a fully taxable equivalent basis for each of the periods indicated:

Three Months Ended

 

September 30, 2021

September 30, 2020

 

    

    

Interest 

    

    

    

Interest 

    

 

Average 

Income/

Rate Earned/ Paid 

Average 

Income/ 

Rate Earned/ Paid

 

Balance

 Expenses (1)

 (1)

Balance

Expenses (1)

 (1)

 

(dollars in thousands)

 

ASSETS

Interest-earning assets

 

  

 

  

 

  

 

  

 

  

 

  

Loans (2)

 

  

 

  

 

  

 

  

 

  

 

  

Taxable

$

2,132,765

$

90,476

 

4.24

%  

$

2,026,973

$

93,783

 

4.63

%

Tax-exempt

 

85,559

 

3,910

 

4.57

%  

 

113,035

 

5,770

 

5.10

%

Securities

 

 

 

 

 

 

  

Taxable (available for sale)

 

88,821

 

2,933

 

3.30

%  

 

107,171

 

2,735

 

2.55

%

Tax-exempt (available for sale)

 

70,253

 

2,187

 

3.11

%  

 

74,472

 

2,313

 

3.11

%

Tax-exempt (held to maturity)

 

5,912

 

150

 

2.54

%  

 

7,081

 

170

 

2.40

%

Cash and due from banks

 

276,274

 

435

 

0.16

%  

 

94,436

 

111

 

0.12

%

Total interest-earning assets

 

2,659,584

 

100,091

 

3.76

%  

 

2,423,168

 

104,882

 

4.33

%

Non interest-earning assets

 

222,385

 

  

 

  

 

219,144

 

  

 

  

Allowance for loan losses

 

(20,010)

 

  

 

  

 

(16,176)

 

  

 

  

Total assets

$

2,861,959

 

  

 

  

$

2,626,136

 

  

 

  

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

  

 

  

 

  

 

 

  

 

  

Interest-bearing deposits

 

  

 

  

 

  

 

  

 

  

 

  

Checking accounts

$

203,736

$

248

 

0.12

%  

$

195,870

$

267

 

0.14

%

Savings accounts

 

521,635

 

1,927

 

0.37

%  

 

379,599

 

1,491

 

0.39

%

Money market accounts

 

683,275

 

2,111

 

0.31

%  

 

593,470

 

2,542

 

0.43

%

Certificates of deposit

 

260,581

 

2,373

 

0.91

%  

 

376,618

 

5,961

 

1.58

%

Brokered Deposits

 

12,461

 

359

 

2.88

%  

 

20,135

 

567

 

2.82

%

Total interest bearing deposits

 

1,681,688

 

7,018

 

0.42

%  

 

1,565,692

 

10,828

 

0.69

%

Other borrowed funds

 

57,207

 

773

 

1.35

%  

 

70,914

 

1,121

 

1.58

%

Total interest-bearing liabilities

 

1,738,895

 

7,791

 

0.45

%  

 

1,636,606

 

11,949

 

0.73

%

Non-interest bearing liabilities

 

 

 

  

 

 

 

  

Demand Deposits

 

798,111

 

 

  

 

694,373

 

 

  

Other liabilities

 

11,085

 

 

  

 

13,501

 

 

  

Total Liabilities

 

2,548,091

 

 

  

 

2,344,480

 

 

  

Shareholders’ equity

 

313,868

 

 

  

 

281,656

 

 

  

Total liabilities & shareholders’ equity

$

2,861,959

 

 

  

$

2,626,136

 

 

  

Net interest income on a fully taxable equivalent basis

 

  

 

92,300

 

  

 

  

 

92,933

 

  

Less taxable equivalent adjustment

 

  

 

(1,312)

 

  

 

  

 

(1,732)

 

  

Net interest income

 

  

$

90,988

 

  

 

  

$

91,201

 

  

Net interest spread (3)

 

  

 

 

3.32

%  

 

  

 

  

 

3.60

%

Net interest margin (4)

 

  

 

  

 

3.47

%  

 

  

 

  

 

3.84

%

(1)Annualized on a fully taxable equivalent basis calculated using a federal tax rate of 21% for the three months ended September 30, 2021 and 2020.
(2)Nonaccrual loans are included in average amounts outstanding.
(3)Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(4)Net interest margin represents net interest income on a fully tax equivalent basis as a percentage of average interest-earning assets.

36

Table of Contents

Nine Months Ended

 

September 30,2021

September 30,2020

 

Interest

Rate

Interest

Rate

 

Average

Income/

Earned/

Average

Income/

Earned/

 

    

Balance

    

Expenses (1)

    

Paid (1)

    

Balance

    

Expenses (1)

    

Paid (1)

 

(dollars in thousands)

 

ASSETS

 

  

 

  

 

  

 

  

 

  

 

  

Interest-earning assets

 

  

 

  

 

  

 

  

 

  

 

  

Loans (2)

 

  

 

  

 

  

 

  

 

  

 

  

Taxable

$

2,132,037

$

90,072

 

4.22

%  

$

1,857,288

$

88,326

 

4.76

%

Tax-exempt

 

88,533

 

4,100

 

4.63

%  

 

116,428

 

5,960

 

5.12

%

Securities

 

  

 

  

 

  

 

  

 

  

 

  

Taxable (available for sale)

 

97,677

 

2,612

 

2.67

%  

 

116,792

 

2,907

 

2.49

%

Tax-exempt (available for sale)

 

70,546

 

2,217

 

3.14

%  

 

66,160

 

2,134

 

3.23

%

Taxable (held to maturity)

 

 

 

 

12,113

 

289

 

2.39

%

Tax-exempt (held to maturity)

 

6,161

 

156

 

2.53

%  

 

9,010

 

239

 

2.65

%

Cash and due from banks

 

219,186

 

262

 

0.12

%  

 

77,374

 

216

 

0.28

%

Total interest-earning assets

 

2,614,140

 

99,419

 

3.80

%  

 

2,255,165

 

100,071

 

4.44

%

Non interest-earning assets

 

221,231

 

 

  

 

207,466

 

  

 

  

Allowance for loan losses

 

(18,962)

 

 

  

 

(14,087)

 

  

 

  

Total assets

$

2,816,409

 

  

$

2,448,544

 

  

 

  

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing deposits

 

  

 

  

 

  

 

  

 

  

 

  

Checking accounts

$

212,197

$

252

 

0.12

%  

$

194,592

$

796

 

0.41

%

Savings accounts

 

480,285

 

1,752

 

0.36

%  

 

343,196

 

1,915

 

0.56

%

Money market accounts

 

656,922

 

2,183

 

0.33

%  

 

542,993

 

3,388

 

0.62

%

Certificates of deposit

 

288,805

 

3,266

 

1.13

%  

 

371,170

 

6,793

 

1.83

%

Brokered Deposits

 

15,607

 

444

 

2.84

%  

 

18,090

 

523

 

2.89

%

Total interest bearing deposits

 

1,653,816

 

7,897

 

0.48

%  

 

1,470,041

 

13,415

 

0.91

%

Other borrowed funds

 

65,346

 

784

 

1.20

%  

 

97,727

 

1,602

 

1.64

%

Total interest-bearing liabilities

 

1,719,162

 

8,681

 

0.50

%  

 

1,567,768

 

15,017

 

0.96

%

Non-interest bearing liabilities

 

  

 

  

 

  

 

  

 

  

 

  

Demand Deposits

 

776,252

 

 

  

 

608,359

 

  

 

  

Other liabilities

 

13,478

 

 

  

 

15,109

 

  

 

  

Total Liabilities

 

2,508,892

 

 

  

 

2,191,236

 

  

 

  

Shareholders’ equity

 

307,517

 

 

  

 

257,308

 

  

 

  

Total liabilities & sharesholders' equity

$

2,816,409

 

  

$

2,448,544

 

  

 

  

Net interest income on a fully taxable equivalent basis

 

 

90,738

 

  

 

  

 

85,054

 

  

Less taxable equivalent adjustment

 

 

(1,359)

 

  

 

  

 

(1,750)

 

  

Net interest income

$

89,379

 

  

 

  

$

83,304

 

  

Net interest spread (3)

 

 

3.30

%  

 

  

 

  

 

3.48

%  

Net interest margin (4)

 

 

3.47

%  

 

  

 

  

 

3.77

%  

(1)Annualized on a fully taxable equivalent basis calculated using a federal tax rate of 21% for the nine months ended September 30, 2021 and 2020.
(2)Nonaccrual loans are included in average amounts outstanding.
(3)Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(4)Net interest margin represents net interest income on a fully tax equivalent basis as a percentage of average interest-earning assets.

37

Table of Contents

Rate/Volume Analysis

The following tables describe the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected our interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volumes (changes in average balance multiplied by prior year average rate) and (ii) changes attributable to changes in rate (change in average interest rate multiplied by prior year average balance), while (iii) changes attributable to the combined impact of volumes and rates have been allocated proportionately to separate volume and rate categories.

Three Months Ended September 30, 2021

Nine Months Ended September 30, 2021

Compared with

Compared with

Three Months Ended September 30, 2020

Nine Months Ended September 30, 2020

Increase/(Decrease) Due to Change in

Increase/(Decrease) Due to Change in

    

Volume

    

Rate

    

Total

    

Volume

    

Rate

    

Total

 

(dollars in thousands)

 

(dollars in thousands)

Interest income

 

  

 

  

 

  

 

  

 

  

 

  

Loans

 

  

 

  

 

  

 

  

 

  

 

  

Taxable

$

4,738

$

(8,045)

$

(3,307)

$

12,235

$

(10,489)

$

1,746

Tax-exempt

 

(1,300)

 

(560)

 

(1,860)

 

(1,331)

 

(529)

 

(1,860)

Securities

 

 

 

 

 

 

Taxable (AFS)

 

(519)

 

717

 

198

 

(500)

 

205

 

(295)

Tax-exempt (AFS)

 

(131)

 

5

 

(126)

 

139

 

(56)

 

83

Taxable (HTM)

 

 

 

 

(144)

 

(145)

 

(289)

Tax-exempt (HTM)

 

(29)

 

9

 

(20)

 

(73)

 

(10)

 

(83)

Cash and due from banks

 

275

 

49

 

324

 

223

 

(177)

 

46

Total interest income

 

3,034

 

(7,825)

 

(4,791)

 

10,549

 

(11,201)

 

(652)

Interest expense

 

 

  

 

 

 

 

Deposits

 

  

 

  

 

 

 

 

Checking accounts

$

10

$

(29)

$

(19)

$

66

$

(610)

$

(544)

Savings accounts

 

529

 

(93)

 

436

 

623

 

(786)

 

(163)

Money market accounts

 

347

 

(778)

 

(431)

 

608

 

(1,813)

 

(1,205)

Certificates of deposit

 

(1,509)

 

(2,079)

 

(3,588)

 

(1,296)

 

(2,231)

 

(3,527)

Brokered Deposits

 

(221)

 

13

 

(208)

 

(71)

 

(8)

 

(79)

Total interest bearing deposits

 

(843)

 

(2,967)

 

(3,810)

 

(69)

 

(5,449)

 

(5,518)

Other borrowed funds

 

(199)

 

(149)

 

(348)

 

(452)

 

(366)

 

(818)

Total interest expense

 

(1,042)

 

(3,116)

 

(4,158)

 

(521)

 

(5,815)

 

(6,336)

Change in net interest income

$

4,076

$

(4,709)

$

(633)

$

11,071

$

(5,387)

$

5,684

CHANGES IN FINANCIAL CONDITION

Total Assets. Total assets increased $128.6 million, or 4.7%, to $2.85 billion at September 30, 2021, from $2.72 billion at December 31, 2020.

Cash and Cash Equivalents. Cash and cash equivalents increased by $129.8 million to $300.0 million at September 30, 2021 from $170.2 million at December 31, 2020.

Investment Securities. The carrying value of total investment securities decreased by $17.4 million to $154.3 million at September 30 2021, from $171.7 million at December 31, 2020.

Loans. Net loans increased by $14.9 million, totaling $2.19 billion at September 30, 2021 compared to $2.17 billion at December 31, 2020.

Bank-Owned Life Insurance. At September 30, 2021, our investment in bank-owned life insurance was $31.7 million, an increase of $0.3 million from $31.4 million at December 31, 2020.

Deposits. Deposits increased $151.3 million, or 6.5%, to $2.47 billion at September 30, 2021 from $2.32 billion at December 31, 2020.

38

Table of Contents

Borrowings. At September 30, 2021, borrowings consisted of advances from the FHLB of Chicago, as well as subordinated debt to other banks. FHLB borrowings decreased to $9.2 million at September 30, 2021, from $23.5 million at December 31, 2020. Subordinated debt owed to other banks totaled $17.5 million at September 30, 2021 and December 31, 2020.

Stockholders’ Equity. Total stockholders’ equity increased $20.4 million, or 6.9%, to $315.3 million at September 30, 2021, from $294.9 million at December 31, 2020.

LOANS

Our lending activities are conducted principally in Wisconsin. The Bank makes commercial and industrial loans, commercial real estate loans, construction and development loans, residential real estate loans, and a variety of consumer loans and other loans. Much of the loans made by the Bank are secured by real estate collateral. The Bank’s commercial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower, with liquidation of the underlying real estate collateral typically being viewed as the primary source of repayment in the event of borrower default. Although commercial business loans are also often collateralized by equipment, inventory, accounts receivable, or other business assets, the liquidation of collateral in the event of default is often an insufficient source of repayment. Repayment of the Bank’s residential loans are generally dependent on the health of the employment market in the borrowers’ geographic areas and that of the general economy with liquidation of the underlying real estate collateral being typically viewed as the primary source of repayment in the event of borrower default.

Our loan portfolio is our most significant earning asset, comprising 77.6% and 80.6% of our total assets as of September 30, 2021 and December 31, 2020, respectively. Our strategy is to grow our loan portfolio by originating quality commercial and consumer loans that comply with our credit policies and that produce revenues consistent with our financial objectives. We believe our loan portfolio is well-balanced, which provides us with the opportunity to grow while monitoring our loan concentrations.

Loans increased $17.5 million, or 0.8%, to $2.21 billion as of September 30, 2021 as compared to $2.19 billion as of December 31, 2020. This increase during the first nine months of 2021 has been comprised of a decrease of $91.4 million or 20.5% in commercial and industrial loans, an increase of $117.5 million or 11.8% in commercial real estate loans, a decrease of $23.3 million or 16.6% in construction and development loans, an increase of $27.1 million or 5.0% in residential 1-4 family loans and a decrease of $12.5 million or 18.2% in consumer and other loans.

39

Table of Contents

The following table presents the balance and associated percentage of each major category in our loan portfolio at September 30, 2021, December 31, 2020, and September 30, 2020:

September 30, 

December 31, 

September 30, 

 

    

2021

    

% of Total

    

2020

    

% of Total

    

2020

    

% of Total

 

 

(dollars in thousands)

Commercial & industrial

 

  

 

  

 

  

 

  

 

  

 

  

Commercial & industrial

$

355,773

16

%  

$

447,344

 

20

%  

$

547,750

25

%

Deferred costs net of unearned fees

 

(2,159)

0

%  

 

(2,352)

 

0

%  

 

(5,247)

0

%

Total commercial & industrial

 

353,614

16

%  

 

444,992

 

20

%  

 

542,503

25

%

Commercial real estate

 

 

  

 

  

 

  

Owner Occupied

 

567,906

26

%  

 

549,619

 

25

%  

 

530,476

24

%

Non-owner occupied

 

542,455

25

%  

 

443,144

 

20

%  

 

426,463

19

%

Deferred costs net of unearned fees

 

(596)

0

%  

 

(514)

 

0

%  

 

(250)

0

%

Total commercial real estate

 

1,109,765

50

%  

 

992,249

 

45

%  

 

956,689

44

%

Construction & Development

 

 

  

 

  

 

  

Construction & Development

 

116,957

5

%  

 

140,042

 

7

%  

 

150,139

7

%

Deferred costs net of unearned fees

 

(198)

0

%  

 

32

 

0

%  

 

27

0

%

Total construction & development

 

116,759

5

%  

 

140,074

 

7

%  

 

150,166

7

%

Residential 1-4 family

 

 

  

 

  

 

  

Residential 1-4 family

 

572,821

26

%  

 

545,818

 

25

%  

 

488,925

22

%

Deferred costs net of unearned fees

 

54

0

%  

 

(12)

 

0

%  

 

7

0

%

Total residential 1-4 family

 

572,875

26

%  

 

545,806

 

25

%  

 

488,932

22

%

Consumer

 

 

  

 

  

 

  

Consumer

 

33,008

1

%  

 

30,359

 

1

%  

 

29,684

1

%

Deferred costs net of unearned fees

 

138

0

%  

 

129

 

0

%  

 

133

0

%

Total consumer

 

33,146

2

%  

 

30,488

 

1

%  

 

29,817

1

%

Other Loans

 

 

  

 

  

 

  

Other

 

22,816

1

%  

 

38,054

 

2

%  

 

25,552

1

%

Deferred costs net of unearned fees

 

(60)

0

%  

 

(203)

 

0

%  

 

(431)

0

%

Total other loans

 

22,756

1

%  

 

37,851

 

2

%  

 

25,121

1

%

Total loans

$

2,208,915

100

%  

$

2,191,460

 

100

%  

$

2,193,228

100

%

Our directors and officers and their associates are customers of, and have other transactions with, the Bank in the normal course of business. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collection or present other unfavorable features. At September 30, 2021 and December 31, 2020, total loans outstanding to such directors and officers and their associates were $69.9 million and $67.1 million, respectively. During the nine months ended September 30, 2021, $15.3 million of additions and $12.5 million of repayments were made to these loans. At September 30, 2021 and December 31, 2020, all of the loans to directors and officers were performing according to their original terms, other than standard and customary payment deferrals allowed under the CARES act, which were provided under the same terms as all other customers of the Bank.

Loan categories

The principal categories of our loan portfolio are discussed below:

Commercial and Industrial (C&I). Our C&I portfolio totaled $353.6 million and $445.0 million at September 30, 2021 and December 31, 2020, respectively, and represented 16% and 20% of our total loans at those dates. As a result of forgiveness, PPP loan balances declined from $172.4 at December 31, 2020, to $62.6 million at September 30, 2021, causing the reduction in the C&I portfolio.

Our C&I loan customers represent various small and middle-market established businesses involved in professional services, accommodation and food services, health care, financial services, wholesale trade, manufacturing, distribution, retailing and non-profits. Most clients are privately owned with markets that range from local to national in scope. Many of the loans to this segment are secured by liens on corporate assets and the personal guarantees of the principals. The regional economic strength or weakness

40

Table of Contents

impacts the relative risks in this loan category. There is little concentration in any one business sector, and loan risks are generally diversified among many borrowers.

Commercial Real Estate (CRE). Our CRE loan portfolio totaled $1.1 billion and $992.2 million at September 30, 2021 and December 31, 2020, respectively, and represented 50% and 45% of our total loans at those dates.

Our CRE loans are secured by a variety of property types including multifamily dwellings, retail facilities, office buildings, commercial mixed use, lodging and industrial and warehouse properties. We do not have any specific industry or customer concentrations in our CRE portfolio. Our commercial real estate loans are generally for terms up to ten years, with loan-to-values that generally do not exceed 80%. Amortization schedules are long term and thus a balloon payment is generally due at maturity. Under most circumstances, the Bank will offer to rewrite or otherwise extend the loan at prevailing interest rates.

Construction and Development (C&D). Our C&D loan portfolio totaled $116.8 million and $140.1 million at September 30, 2021 and December 31, 2020, respectively, and represented 5% and 7% of our total loans at those dates.

Our C&D loans are generally for the purpose of creating value out of real estate through construction and development work, and also include loans used to purchase recreational use land. Borrowers typically provide a copy of a construction or development contract which is subject to bank acceptance prior to loan approval. Disbursements are handled by a title company. Borrowers are required to inject their own equity into the project prior to any note proceeds being disbursed. These loans are, by their nature, intended to be short term and are refinanced into other loan types at the end of the construction and development period.

Residential 1 – 4 Family. Residential 1 – 4 family loans held in portfolio amounted to $572.9 million and $545.8 million at September 30, 2021 and December 31, 2020, respectively, and represented 26% and 25% of our total loans at those dates.

We offer fixed and adjustable-rate residential mortgage loans with maturities up to 30 years. One-to-four family residential mortgage loans are generally underwritten according to Fannie Mae guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” We generally originate both fixed and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency, which is generally $424,100 for one-unit properties. In addition, we also offer loans above conforming lending limits typically referred to as “jumbo” loans. These loans are typically underwritten to the same guidelines as conforming loans; however, we may choose to hold a jumbo loan within its portfolio with underwriting criteria that does not exactly match conforming guidelines.

We do not offer reverse mortgages nor do we offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on his loan, resulting in an increased principal balance during the life of the loan. We also do not offer “subprime loans” (loans that are made with low down payments to borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (defined as loans having less than full documentation).

Residential real estate loans are originated both for sale to the secondary market as well as for retention in the Bank’s loan portfolio. The decision to sell a loan to the secondary market or retain within the portfolio is determined based on a variety of factors including but not limited to our asset/liability position, the current interest rate environment, and customer preference. Servicing rights are retained on all loans sold to the secondary market.

We were servicing mortgage loans sold to others without recourse of approximately $682.4 million at September 30, 2021 and $612.7 million at December 31, 2020.

Loans sold with the retention of servicing assets result in the capitalization of servicing rights. Loan servicing rights are included in other assets and are carried at fair value. The net balance of capitalized servicing rights amounted to $4.3 million and $3.7 million at September 30, 2021 and December 31, 2020.

Consumer Loans. Our consumer loan portfolio totaled $33.1 million and $30.5 million at September 30, 2021 and December 31, 2020, respectively, and represented 2% and 1% of our total loans at those dates. Consumer loans include secured and unsecured loans, lines of credit and personal installment loans.

41

Table of Contents

Consumer loans generally have greater risk compared to longer-term loans secured by improved, owner-occupied real estate, particularly consumer loans that are secured by rapidly depreciable assets. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan repayments are dependent on the borrower’s continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

Other Loans. Our other loans totaled $22.8 million and $37.9 million at September 30, 2021 and December 31, 2020, respectively, and are immaterial to the overall loan portfolio. The other loans category consists primarily of over-drafted depository accounts, loans utilized to purchase or carry securities and loans to nonprofit organizations.

Loan Portfolio Maturities. The following tables summarize the dollar amount of loans maturing in our portfolio based on their loan type and contractual terms to maturity at September 30, 2021 and December 31, 2020, respectively. The tables do not include any estimate of prepayments, which can significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.

One Year or

One to Five

Over Five

As of September 30, 2021

Less

Years

Years

Total

(dollars in thousands)

Commercial & industrial

    

$

84,177

    

$

186,370

    

$

83,067

    

$

353,614

Commercial real estate

92,433

448,376

568,956

1,109,765

Construction & Development

27,194

21,578

67,987

116,759

Residential 1-4 family

12,446

56,978

503,451

572,875

Consumer and other

5,666

27,881

22,355

55,902

Total

$

221,916

$

741,183

$

1,245,816

$

2,208,915

One Year or

One to Five

Over Five

As of December 31, 2020

Less

Years

Years

Total

(dollars in thousands)

Commercial & industrial

    

$

52,315

    

$

306,198

    

$

86,479

    

$

444,992

Commercial real estate

112,260

410,469

469,520

992,249

Construction & Development

29,789

15,164

95,121

140,074

Residential 1-4 family

19,641

59,375

466,790

545,806

Consumer and other

5,990

44,324

18,025

68,339

Total

$

219,995

$

835,530

$

1,135,935

$

2,191,460

The following tables summarize the dollar amount of loans maturing in our portfolio based on whether the loan has a fixed or variable rate of interest and their contractual terms to maturity at September 30, 2021 and December 31, 2020, respectively. The tables do not include any estimate of prepayments, which can significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.

    

One Year

    

One to Five

    

Over Five

    

As of September 30, 2021

or Less

Years

Years

Total

 

(dollars in thousands)

Predetermined interest rates

    

$

111,452

    

$

959,829

    

$

821,329

    

$

1,892,610

Floating or adjustable interest rates

110,464

81,354

424,487

616,305

Total

$

221,916

$

1,041,183

$

1,245,816

$

2,508,915

    

One Year

    

One to Five

    

Over Five

    

As of December 31, 2020

or Less

Years

Years

Total

 

(dollars in thousands)

Predetermined interest rates

    

$

141,578

    

$

574,071

    

$

389,942

    

$

1,105,591

Floating or adjustable interest rates

136,700

97,641

396,411

630,752

Total

$

278,278

$

671,712

$

786,353

$

1,736,343

42

Table of Contents

NONPERFORMING LOANS AND TROUBLED DEBT RESTRUCTURINGS

In order to operate with a sound risk profile, we focus on originating loans that we believe to be of high quality. We have established loan approval policies and procedures to assist us in maintaining the overall quality of our loan portfolio. When delinquencies in our loans exist, we rigorously monitor the levels of such delinquencies for any negative or adverse trends. From time to time, we may modify loans to extend the term or make other concessions to help a borrower with a deteriorating financial condition stay current on their loan and to avoid foreclosure. We generally do not forgive principal or interest on loans or modify the interest rates on loans to rates that are below market rates. Furthermore, we are committed to collecting on all of our loans and, as a result, at times have lower net charge-offs compared to many of our peer banks. We believe that our commitment to collecting on all of our loans results in higher loan recoveries.

Our nonperforming assets consist of nonperforming loans and foreclosed real estate. Nonperforming loans are those on which the accrual of interest has stopped, as well as loans that are contractually 90 days past due on which interest continues to accrue. The composition of our nonperforming assets is as follows:

    

September 30,

    

December 31, 

    

September 30,

 

2021

2020

2020

 

 

(dollars in thousands)

Nonaccruals

$

11,549

$

10,796

$

17,808

Loans past due > 90 days, but still accruing

 

312

 

1,738

 

75

Total nonperforming loans

$

11,861

$

12,534

$

17,883

Accruing troubled debt restructured loans

$

1,232

$

1,132

$

1,223

Nonperforming loans as a percent of gross loans

 

0.53

%  

 

0.57

%  

 

0.84

%

Nonperforming loans as a percent of total assets

 

0.42

%  

 

0.46

%  

 

0.68

%

At September 30, 2021 and December 31, 2020, impaired loans had specific reserves of $0.5 million and $0.9 million, respectively.

Nonaccrual Loans

Loans are typically placed on nonaccrual status when any payment of principal and/or interest is 90 days or more past due, unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. Loans are also placed on nonaccrual status when management believes, after considering economic and business conditions, that the principal or interest will not be collectible in the normal course of business. We monitor closely the performance of our loan portfolio. In addition to the monitoring and review of loan performance internally, we have also contracted with an independent organization to review our commercial and retail loan portfolios. The status of delinquent loans, as well as situations identified as potential problems, is reviewed on a regular basis by senior management.

Troubled Debt Restructurings

A troubled debt restructuring includes a loan modification where a borrower is experiencing financial difficulty and we grant a concession to that borrower that we would not otherwise consider except for the borrower’s financial difficulties. These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. Restructuring a loan in lieu of aggressively enforcing the collection of the loan may benefit the Company by increasing the ultimate probability of collection.

A TDR may be either on accrual or nonaccrual status based upon the performance of the borrower and management’s assessment of collectability. If a TDR is placed on nonaccrual status, which would occur based on the same criteria as non-TDR loans, it remains there until a sufficient period of performance under the restructured terms has occurred at which it returned to accrual status, generally 6 months.

As of September 30, 2021 and December 31, 2020 the Company had no specific reserves for TDRs.

43

Table of Contents

During 2020 the Bank experienced an increase in customer requests for loan modifications and payment deferrals as a result of impacts of the COVID-19 pandemic. The CARES act, signed into law on March 27, 2020, allowed financial institutions the option to exempt loan modifications related to the COVID-19 pandemic that would otherwise be categorized as a TDR from consideration for TDR treatment. Modifications in the scope of the exemption include forbearance agreements, interest-rate modifications, repayment plan changes and any other similar arrangements that would delay payments of principal or interest. This relief was allowable on modifications on loans which were not more than 30 days past due as of December 31, 2019, and that occur after March 1, 2020, and before the earlier of 60 days after the date on which the national emergency related to the COVID-19 outbreak is terminated. The Company granted payment deferrals to over 625 customers on loans totaling over $271.5 million. These deferrals were primarily for lengths in the range of 60 to 180 days, and were a combination of deferrals of principal payments only (89.7% by dollar value) or both principal and interest payments (10.3% by dollar value). None of these deferrals remained as of September 30, 2021.

Classified loans

Accounting standards require the Company to identify loans, where full repayment of principal and interest is doubtful, as impaired loans. These standards require that impaired loans be valued at the present value of expected future cash flows, discounted at the loan’s effective interest rate, or using one of the following methods: the observable market price of the loan or the fair value of the underlying collateral if the loan is collateral dependent. We have implemented these standards in our quarterly review of the adequacy of the ALL, and identify and value impaired loans in accordance with guidance on these standards. As part of the review process, we also identify loans classified as watch, which have a potential weakness that deserves management’s close attention.

Loans totaling $64.4 million and $50.1 million were classified substandard under the Bank’s policy at September 30, 2021 and December 31, 2020, respectively. The following table sets forth information related to the credit quality of our loan portfolio at September 30, 2021 and December 31, 2020.

Loan type (in thousands)

    

Pass

    

Watch

    

Substandard

    

Total

As of September 30, 2021 (unaudited)

Commercial & industrial

$

324,307

$

12,989

$

16,318

$

353,614

Commercial real estate

 

995,847

 

68,116

 

45,802

 

1,109,765

Construction & Development

 

111,059

 

5,294

 

406

 

116,759

Residential 1-4 family

 

567,766

 

3,235

 

1,874

 

572,875

Consumer

 

33,136

 

4

 

6

 

33,146

Other loans

 

22,756

 

 

 

22,756

Total loans

$

2,054,871

$

89,638

$

64,406

$

2,208,915

Loan type (in thousands)

    

Pass

    

Watch

    

Substandard

    

Total

As of December 31, 2020

 

  

 

  

 

  

 

  

Commercial & industrial

$

413,467

$

24,642

$

6,883

$

444,992

Commercial real estate

 

848,909

 

103,096

 

40,244

 

992,249

Construction & Development

 

134,313

 

5,412

 

349

 

140,074

Residential 1-4 family

 

535,463

 

7,688

 

2,655

 

545,806

Consumer

 

30,479

 

9

 

 

30,488

Other loans

37,428

423

37,851

Total loans

$

2,000,059

$

141,270

$

50,131

$

2,191,460

ALLOWANCE FOR LOAN LOSSES

ALL represents management’s estimate of probable and inherent credit losses in the loan portfolio. Estimating the amount of the ALL require the exercise of significant judgment and the use of estimates related to the amount and timing of expected future cash flows or impaired loans, estimated losses on pools of homogenous loans based on historical loss experience, and consideration of other qualitative factors such as current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset on the consolidated balance sheets. Loan losses are charged off against the ALL, while recoveries of amounts previously charged off are credited to the ALL. A provision for loan losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

44

Table of Contents

The ALL consists of specific reserves for certain individually evaluated impaired loans and general reserves for collectively evaluated non-impaired loans. Specific reserves reflect estimated losses on impaired loans from management’s analyses developed through specific credit allocations. The specific reserves are based on regular analyses of impaired, non-homogenous loans greater than $250,000. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific loans, including estimating the amount and timing of future cash flows and collateral values. The general reserve is based in part on the Bank’s historical loss experience which is updated quarterly. The general reserve portion of the ALL also includes consideration of certain qualitative factors such as (1) changes in lending policies and/or underwriting practices, (2) national and local economic conditions, (3) changes in portfolio volume and nature, (4) experience, ability and depth of lending management and other relevant staff, (5) levels of and trends in past-due and nonaccrual loans and quality, (6) changes in loan review and oversight, (7) impact and effects of concentrations and (8) other issues deemed relevant.

There are many factors affecting ALL; some are quantitative while others require qualitative judgment. The process for determining the ALL (which management believes adequately considers potential factors which might possibly result in credit losses) includes subjective elements and, therefore, may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provision for loan losses could be required that could adversely affect our earnings or financial position in future periods. Allocations of the ALL may be made for specific loans but the entire ALL is available for any loan that, in management’s judgment, should be charged off or for which an actual loss is realized. As an integral part of their examination process, various regulatory agencies review the ALL as well. Such agencies may require that changes in the ALL be recognized when such regulators’ credit evaluations differ from those of management based on information available to the regulators at the time of their examinations.

The following table summarizes the changes in our ALL for the periods indicated:

    

Nine months ended

    

Year ended 

    

Nine months ended

 

September 30, 

December 31, 

September 30, 

 

2021

2020

2020

 

(dollars in thousands)

Period-end loans outstanding (net of unearned discount and deferred loan fees)

 

$

2,208,915

 

$

2,191,460

 

$

2,193,228

 

Average loans outstanding (net of unearned discount and deferred loan fees)

 

$

2,218,324

 

$

2,032,157

 

$

1,973,716

 

Balance of allowance for loan losses at the beginning of period

 

$

17,658

 

$

11,396

 

$

11,396

 

Loans charged-off:

 

 

 

 

Commercial & industrial

 

48

 

1,087

 

631

 

Commercial real estate - owner occupied

 

289

 

783

 

773

 

Commercial real estate - non-owner occupied

 

0

 

0

 

0

 

Construction & Development

 

0

 

33

 

0

 

Residential 1-4 family

 

0

 

63

 

63

 

Consumer

 

0

 

90

 

33

 

Other Loans

 

21

 

35

 

19

 

Total loans charged-off

$

358

$

2,091

$

1,519

Recoveries of loans previously charged off:

 

 

 

Commercial & industrial

 

38

 

4

 

2

Commercial real estate - owner occupied

 

343

 

1,129

 

873

Commercial real estate - non-owner occupied

 

5

 

40

 

40

Construction & Development

 

33

 

0

 

0

Residential 1-4 family

 

12

 

42

 

40

Consumer

 

1

 

0

 

0

Other Loans

 

5

 

13

 

11

Total recoveries of loans previously charged off:

 

437

 

1,228

 

966

Net Loan charge-offs

$

(79)

$

863

$

553

Provision charged to operating expense

 

2,500

 

7,125

 

5,475

Balance at end of period

$

20,237

$

17,658

$

16,318

Ratio of net charge offs during the year to average loans outstanding

 

(0.00)

%  

 

0.04

%  

 

0.03

%  

Ratio of allowance for loan losses to loans outstanding

 

0.92

%  

 

0.81

%  

 

0.74

%  

45

Table of Contents

The level of charge-offs depends on many factors, including the national and regional economy. Cyclical lagging factors may result in charge-offs being higher than historical levels. Although the allowance is allocated between categories, the entire allowance is available to absorb losses attributable to all loan categories. Management believes that the current ALL is adequate.

The following table summarizes an allocation of the ALL and the related percentage of loans outstanding in each category for the periods below.

September 30, 

December 31, 

September 30, 

 

2021

2020

2020

 

(in thousands, except %)

    

Amount

    

% of Loans

    

Amount

    

% of Loans

    

Amount

    

% of Loans

Loan Type:

 

 

 

Commercial & industrial

$

3,010

 

16

%  

$

2,049

 

20

%  

$

1,829

 

25

%

Commercial real estate - owner occupied

 

6,967

 

26

%  

 

6,108

 

25

%  

 

5,682

 

24

%

Commercial real estate - non-owner occupied

 

4,586

 

25

%  

 

3,904

 

20

%  

 

3,894

 

19

%

Construction & Development

 

866

 

5

%  

 

1,027

 

7

%  

 

1,022

 

7

%

Residential 1-4 family

 

4,380

 

26

%  

 

3,960

 

25

%  

 

3,405

 

22

%

Consumer

 

232

 

2

%  

 

201

 

1

%  

 

194

 

1

%

Other Loans

 

196

 

1

%  

 

409

 

2

%  

 

292

 

1

%

Total allowance

$

20,237

100

%  

$

17,658

100

%  

$

16,318

100

%

SOURCES OF FUNDS

General. Deposits traditionally have been our primary source of funds for our investment and lending activities. We also borrow from the FHLB of Chicago to supplement cash needs, to lengthen the maturities of liabilities for interest rate risk management purposes and to manage our cost of funds. Our additional sources of funds are scheduled payments and prepayments of principal and interest on loans and investment securities and fee income and proceeds from the sales of loans and securities.

Deposits. Our current deposit products include non-interest bearing and interest-bearing checking accounts, savings accounts, money market accounts, and certificate of deposits. As of September 30, 2021, deposit liabilities accounted for approximately 86.8% of our total liabilities and equity. We accept deposits primarily from customers in the communities in which our branches and offices are located, as well as from small businesses and other customers throughout our lending area. We rely on our competitive pricing and products, quality customer service, and convenient locations and hours to attract and retain deposits. Deposit rates and terms are based primarily on current business strategies, market interest rates, liquidity requirements and our deposit growth goals.

Total deposits were $2.47 billion and $2.32 billion as of September 30, 2021 and December 31, 2020, respectively. Noninterest-bearing deposits at September 30, 2021 and December 31, 2020, were $790.2 million and $715.6 million, respectively, while interest-bearing deposits were $1.68 billion and $1.61 billion at September 30, 2021 and December 31, 2020, respectively.

At September 30, 2021, we had a total of $265.0 million in certificates of deposit, including $12.5 million of brokered deposits. Based on historical experience and our current pricing strategy, we believe we will retain a majority of these accounts upon maturity, although our long-term strategy is to minimize reliance on certificates of deposits by increasing relationship deposits in lower earning savings and demand deposit accounts.

46

Table of Contents

The following tables set forth the average balances of our deposits for the periods indicated:

Nine months ended

Year ended

Nine months ended

September 30, 2021

December 31, 2020

September 30, 2020

Weighted

Weighted

Weighted

    

Amount

    

Percent

    

average rate

    

Amount

    

Percent

    

average rate

    

Amount

    

Percent

    

average rate

    

    

(dollars in thousands)

Noninterest-bearing demand deposits

    

$

776,252

    

32.0

%  

N/A

    

$

634,939

    

29.7

%  

N/A

    

$

608,539

    

29.3

%  

N/A

Interest-bearing checking deposits

 

212,197

 

8.7

%  

0.12

%  

 

194,718

 

9.1

%  

0.34

%  

 

194,592

 

9.4

%  

0.41

%

Savings deposits

 

480,285

 

19.8

%  

0.36

%  

 

356,091

 

16.7

%  

0.50

%  

 

343,196

 

16.5

%  

0.56

%

Money market accounts

 

656,922

 

27.0

%  

0.33

%  

 

563,847

 

26.4

%  

0.55

%  

 

542,993

 

26.1

%  

0.62

%

Certificates of deposit

 

288,805

 

11.9

%  

1.13

%  

 

367,054

 

17.2

%  

1.74

%  

 

371,170

 

17.9

%  

1.83

%

Brokered deposits

 

15,607

 

0.6

%  

2.84

%  

 

18,428

 

0.9

%  

2.88

%  

 

18,090

 

0.8

%  

2.89

%

Total

$

2,430,068

 

100

%  

$

2,135,077

100

%  

$

2,078,580

 

100

%  

Certificates of deposit of $100,000 or greater by maturity are as follows:

September 30, 

December 31, 

September 30, 

    

2021

    

2020

    

2020

    

(dollars in thousands)

Less than 3 months remaining

$

13,271

$

33,672

$

28,922

3 to 6 months remaining

 

21,264

 

43,163

 

33,558

6 to 12 months remaining

 

31,314

 

31,614

 

65,671

12 months or more remaining

 

46,104

 

45,611

 

45,127

Total

$

111,953

$

154,060

$

173,278

Retail certificates of deposit of $100,000 or greater totaled $112.0 million and $154.1 million at September 30, 2021 and December 31, 2020, respectively. Interest expense on retail certificates of deposit of $100,000 or greater was $1.3 million for the nine months ended September 30, 2021, and $3.1 million for the year ended December 31, 2020.

The following table sets forth certificates of deposit classified by interest rate as of the dates indicated:

September 30, 

December 31, 

September 30, 

    

2021

    

2020

    

2020

(dollars in thousands)

Interest Rate:

Less than 1.00%

$

172,286

$

115,478

$

86,110

1.00% to 1.99%

 

29,974

 

105,376

 

142,162

2.00% to 2.99%

 

40,072

 

98,275

 

127,921

3.00% to 3.99%

 

22,658

 

29,182

 

30,419

Total

$

264,990

$

348,311

$

386,612

47

Table of Contents

Borrowings

Securities sold under repurchase agreements

The Company has securities sold under repurchase agreements which have contractual maturities up to one year from the transaction date with variable and fixed rate terms. The agreements to repurchase require that the Company (seller) repurchase identical securities as those that are sold. The securities underlying the agreements are under the Company’s control.

The following table summarizes securities sold under repurchase agreements, and the weighted average interest rates paid:

Nine months ended

Year ended

Nine months ended

 

(dollars in thousands)

    

September 30, 2021

    

December 31, 2020

    

September 30, 2020

 

Average daily amount of securities sold under repurchase agreements during the period

$

35,638

$

34,984

$

39,179

Weighted average interest rate on average daily securities sold under repurchase agreements

 

0.03

%  

 

0.32

%  

 

0.37

%

Maximum outstanding securities sold under repurchase agreements at any month-end

$

57,532

$

79,718

$

79,718

Securities sold under repurchase agreements at period end

$

17,402

$

36,377

$

23,894

Weighted average interest rate on securities sold under repurchase agreements at period end

 

0.06

%  

 

0.04

%  

 

0.01

%

Borrowings

The Company’s borrowings have historically consisted primarily of FHLB of Chicago advances collateralized by a blanket pledge agreement on the Company’s FHLB capital stock and retail and commercial loans held in the Company’s portfolio. There were $9.1 million of advances outstanding from the FHLB at September 30, 2021, and $23.3 million as of December 31, 2020.

The total loans pledged as collateral were $878.2 million at September 30, 2021 and $825.3 million at December 31, 2020. The company had no outstanding letters of credit from the FHLB at September 30, 2021 and $0.8 million outstanding at December 31, 2020.

The following table summarizes borrowings, which consist of borrowings from the FHLB, and the weighted average interest rates paid:

Nine months

Year ended

Nine months

    

ended 

December 31, 

ended

(dollars in thousands)

 

September 30, 2021

    

2020

    

September 30, 2020

Average daily amount of borrowings outstanding during the period

$

12,208

$

35,622

$

39,384

Weighted average interest rate on average daily borrowing

 

0.36

%  

 

1.37

%  

 

1.48

%  

Maximum outstanding borrowings at any month-end

$

15,338

$

58,800

$

58,800

Borrowing outstanding at period end

$

9,108

$

23,338

$

24,988

Weighted average interest rate on borrowing at period end

 

1.07

%  

 

1.22

%  

 

1.29

%  

Lines of credit and other borrowings.

We maintain a $7.5 million line of credit with another commercial bank, which was entered into on May 15, 2021. There were no outstanding balances on this note at March 31, 2021. Any future borrowings will required monthly payments of interest at a variable rate, and will be due in full on May 15, 2022.

48

Table of Contents

During September 2017, the Company entered into subordinated note agreements with three separate commercial banks. As of September 30, 2021 and December 31, 2020, outstanding balances under these agreements totaled $11.5 million. These notes were all issued with 10-year maturities, carry interest at a variable rate payable quarterly, are callable on or after the sixth anniversary of their issuance dates, and qualify for Tier 2 capital for regulatory purposes.

During July 2020, the Company entered into subordinated note agreements with two separate commercial banks. As of September 30, 2021 and December 31, 2020, outstanding balances under these agreements totaled $6.0 million. These notes were issued with 10-year maturities, will carry interest at a fixed rate of 5.0% through June 30, 2025, and at a variable rate thereafter, payable quarterly. These notes are callable on or after January 1, 2026 and qualify for Tier 2 capital for regulatory purposes.

INVESTMENT SECURITIES

Our securities portfolio consists of securities available for sale and securities held to maturity. Securities are classified as held to maturity or available for sale at the time of purchase. Obligations of states and political subdivisions and mortgage-backed securities, all of which are issued by U.S. government agencies or U.S. government-sponsored enterprises, make up the largest components of the securities portfolio. We manage our investment portfolio to provide an adequate level of liquidity as well as to maintain neutral interest rate-sensitive positions, while earning an adequate level of investment income without taking undue or excessive risk.

Securities available for sale consist of obligations of states and political subdivision, mortgage-backed securities, and corporate notes. Securities classified as available for sale, which management has the intent and ability to hold for an indefinite period of time, but not necessarily to maturity, are carried at fair value, with unrealized gains and losses, net of related deferred income taxes, included in stockholders’ equity as a separate component of other comprehensive income. The fair value of securities available for sale totaled $148.4 million and included gross unrealized gains of $6.3 million and gross unrealized losses of $0.3 at September 30, 2021. At December 31, 2020, the fair value of securities available for sale totaled $165.0 million and included gross unrealized gains of $8.0 million and gross unrealized losses of $0.1 million.

Securities classified as held to maturity consist of obligations of states and political subdivisions. These securities, which management has the intent and ability to hold to maturity, are reported at amortized cost. Securities held to maturity totaled $5.9 million and $6.7 million at September 30, 2021 and December 31, 2020, respectively.

The Company recognized a net loss on sale of available for sale securities of $3,000 during the nine-months ended September 30, 2021. The Company recognized a net gain on sale of available for sale securities of $0.1 million during the nine-months ended September 30, 2020. The Company recognized a net gain of $3.1 million on sale of held to maturity securities during the nine-months ended September 30, 2020.

The following table sets forth the fair value of available for sale investment securities, the amortized costs of held to maturity and the percentage distribution at the dates indicated:

September 30,

December 31, 

2021

2020

    

Amount

    

Percent

    

Amount

    

Percent

(dollars in thousands)

Available for sale securities, at estimated fair value

U.S. Treasury securities

$

9,712

 

6

%  

$

 

0

%  

Obligations of U.S. Government sponsored agencies

15,740

 

11

%  

18,779

 

11

%  

Obligations of states and political subdivisions

 

69,315

 

47

%  

 

72,217

 

44

%  

Mortgage-backed securities

 

32,220

 

22

%  

 

44,199

 

27

%  

Corporate notes

 

19,584

 

13

%  

 

27,743

 

17

%  

Certificates of deposit

1,805

1

%

2,101

1

%  

Total securities available for sale

148,376

 

100

%  

165,039

 

100

%  

Held to maturity securities, at amortized cost

 

 

 

 

  

Obligations of states and political subdivisions

 

5,912

 

100

%  

 

6,669

 

100

%  

Total

$

154,288

 

  

$

171,708

 

  

49

Table of Contents

The following tables set forth the composition and maturities of investment securities as of September 30, 2021 and December 31, 2020. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

After One, But

After Five, But

 

Within One Year

Within Five Years

Within Ten Years

After Ten Years

Total

 

Weighted

Weighted

Weighted

Weighted

Weighted

 

Amortized

Average

Amortized

Average

Amortized

Average

Amortized

Average

Amortized

Average

 

    

Cost

    

Yield (1)

    

Cost

    

Yield (1)

    

Cost

    

Yield (1)

    

Cost

    

Yield (1)

    

Cost

    

Yield (1)

 

(dollars in thousands)

At September 30, 2021

Available for sale securities

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

U.S. Treasury securities

 

$

 

0.0

%  

$

 

0.0

%  

$

9,597

 

1.6

%  

$

 

0.0

%  

$

9,597

 

1.6

%

Obligations of U.S. Government sponsored agencies

305

 

0.1

%  

 

0.0

%  

1,928

 

2.1

%  

13,455

 

1.8

%  

15,688

 

1.8

%

Obligations of states and political subdivisions

 

587

 

3.2

%  

 

4,840

 

3.7

%  

 

13,576

 

3.3

%  

 

46,432

 

3.4

%  

 

65,435

 

3.4

%

Mortgage-backed securities

 

3

 

5.0

%  

 

13,603

 

2.5

%  

 

10,859

 

3.0

%  

 

6,137

 

2.5

%  

 

30,602

 

2.7

%

Corporate notes

 

247

 

0.7

%  

 

4,969

 

3.3

%  

 

12,846

 

3.6

%

 

1,469

 

5.1

%  

 

19,531

 

3.6

%

Certificates of deposit

0.0

%  

1,537

1.1

%  

0.0

%

0.0

%

1,537

1.1

%  

Total available for sale securities

$

1,142

 

1.8

%  

$

24,949

 

2.8

%  

$

48,806

 

2.9

%  

$

67,493

 

3.0

%  

$

142,390

 

3.0

%

Held to maturity securities

 

 

 

 

  

 

 

  

 

 

  

 

 

  

Obligations of states and political subdivisions

$

715

 

2.3

%  

$

3,493

 

2.6

%  

$

1,704

 

3.0

%  

$

 

$

5,912

2.7

%

Total

$

1,857

 

2.0

%  

$

28,442

 

2.8

%  

$

50,510

 

2.9

%  

$

67,493

 

3.0

%  

$

148,302

 

2.9

%

After One, But

After Five, But

 

Within One Year

Within Five Years

Within Ten Years

After Ten Years

Total

 

Weighted

Weighted

Weighted

Weighted

Weighted

 

Amortized

Average

Amortized

Average

Amortized

Average

Amortized

Average

Amortized

Average

 

    

Cost

    

Yield (1)

    

Cost

    

Yield (1)

    

Cost

    

Yield (1)

    

Cost

    

Yield (1)

    

Cost

    

Yield (1)

 

 

(dollars in thousands)

At December 31, 2020

Available for sale securities

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Obligations of U.S.

Government sponsored agencies

 

$

302

 

(0.4)

%  

$

310

 

0.1

%  

$

2,184

 

2.1

%  

$

15,480

 

1.8

%  

$

18,276

 

1.8

%

Obligations of states and political subdivisions

 

 

593

 

3.2

%  

 

4,724

 

3.7

%  

 

13,412

 

3.3

%  

 

48,924

 

3.4

%  

 

67,653

 

3.4

%

Mortgage-backed securities

 

 

1,585

 

2.2

%  

 

15,554

 

2.5

%  

 

14,864

 

2.9

%  

 

9,801

 

2.6

%  

 

41,804

 

2.6

%

Corporate notes

 

11,960

 

2.9

%  

 

4,961

 

3.3

%  

 

 

0.0

%

 

10,437

 

0.9

%  

 

27,358

 

2.2

%

Certificates of deposit

501

 

1.3

%  

1,562

 

1.0

%  

 

0.0

%

 

0.0

%

2,063

 

1.1

%  

Total available for sale securities

$

14,941

 

2.7

%  

$

27,111

 

2.7

%  

$

30,460

 

3.0

%  

$

84,642

 

2.7

%  

$

157,154

 

2.8

%

Held to maturity securities

 

Obligations of states and political subdivisions

$

751

 

1.8

%  

$

3,523

 

2.6

%  

$

2,395

 

2.9

%  

$

 

$

6,669

2.6

%

Total

$

15,692

 

2.6

%  

$

30,634

 

2.7

%  

$

32,855

 

3.0

%  

$

84,642

 

2.7

%  

$

163,823

 

2.8

%

(1)

Weighted Average Yield is shown on a fully taxable equivalent basis using a federal tax rate of 21% at September 30, 2021 and December 31, 2020, respectively.

The Company evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (1) credit quality of individual securities and their issuers are assessed; (2) the length of time and the extent to which the fair value has been less than cost; (3) the financial condition and near-term prospects of the issuer; and (4) that the Company does not have the intent to sell the security and it is more likely than not that it will not have to sell the security before recovery of its cost basis.

As of September 30, 2021, 5 debt securities had gross unrealized losses, with an aggregate depreciation of 0.2% from our amortized cost basis. The largest unrealized loss percentage of any single security was 4.93% (or $237,000 of its amortized cost. This was also the largest unrealized dollar loss of any security.

As of December 31, 2020, 6 debt securities had gross unrealized losses, with an aggregate depreciation of 0.1% from our amortized cost basis. The largest unrealized loss percentage of any single security was 1.9% (or $74,000) of its amortized cost. This was also the largest unrealized dollar loss of any single security.

The unrealized losses on these debt securities arose primarily due to changing interest rates and are considered to be temporary.

50

Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

Impact of Inflation and Changing Prices. Our consolidated financial statements and related notes have been prepared in accordance with GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on our performance than they would on industrial companies.

Liquidity. Liquidity is defined as the Company’s ability to generate adequate cash to meet its needs for day-to-day operations and material long and short-term commitments. Liquidity is the risk of potential loss if we were unable to meet our funding requirements at a reasonable cost. We are expected to maintain adequate liquidity at the Bank to meet the cash flow requirements of customers who may be either depositors wishing to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Our asset and liability management policy is intended to cause the Bank to maintain adequate liquidity and, therefore, enhance our ability to raise funds to support asset growth, meet deposit withdrawals and lending needs, maintain reserve requirements and otherwise sustain our operations.

We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all of our short-term and long-term cash requirements. We manage our liquidity based on demand and specific events and uncertainties to meet current and future financial obligations of a short-term nature. We also monitor our liquidity requirements in light of interest rate trends, changes in the economy and the scheduled maturity and interest rate sensitivity of the investment and loan portfolios and deposits. Our objective in managing liquidity is to respond to the needs of depositors and borrowers as well as to increase earnings enhancement opportunities in a changing marketplace.

Our liquidity is maintained through investment portfolio, deposits, borrowings from the FHLB, and lines available from correspondent banks. Our highest priority is placed on growing noninterest bearing deposits through strong community involvement in the markets that we serve. Borrowings and brokered deposits are considered short-term supplements to our overall liquidity but are not intended to be relied upon for long-term needs. We believe that our present position is adequate to meet our current and future liquidity needs, and management knows of no trend or event that will have a material impact on the Company’s ability to maintain liquidity at satisfactory levels.

Capital Adequacy. Total stockholders’ equity was $315.3 million at September 30, 2021 compared to $294.9 million at December 31, 2020.

Our capital management consists of providing adequate equity to support our current and future operations. The Bank is subject to various regulatory capital requirements administered by state and federal banking agencies, including the Federal Reserve and the OCC. Failure to meet minimum capital requirements may prompt certain actions by regulators that, if undertaken, could have a direct material adverse effect on our financial condition and results of operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measure of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and the classifications are also subject to qualitative judgment by the regulator in regard to components, risk weighting and other factors.

51

Table of Contents

The Bank is subject to the following risk-based capital ratios: a common equity Tier 1 (“CET1”) risk-based capital ratio, a Tier 1 risk-based capital ratio, which includes CET1 and additional Tier 1 capital, and a total capital ratio, which includes Tier 1 and Tier 2 capital. CET1 is primarily comprised of the sum of common stock instruments and related surplus net of treasury stock, retained earnings, and certain qualifying minority interests, less certain adjustments and deductions, including with respect to goodwill, intangible assets, mortgage servicing assets and deferred tax assets subject to temporary timing differences. Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred stock, tier 1 minority interests and grandfathered trust preferred securities. Tier 2 capital consists of instruments disqualified from Tier 1 capital, including qualifying subordinated debt, other preferred stock and certain hybrid capital instruments, and a limited amount of loan loss reserves up to a maximum of 1.25% of risk-weighted assets, subject to certain eligibility criteria. The capital rules also define the risk-weights assigned to assets and off-balance sheet items to determine the risk-weighted asset components of the risk-based capital rules, including, for example, certain “high volatility” commercial real estate, past due assets, structured securities and equity holdings.

The leverage capital ratio, which serves as a minimum capital standard, is the ratio of Tier 1 capital to quarterly average assets net of goodwill, certain other intangible assets, and certain required deduction items. The required minimum leverage ratio for all banks is 4%.

Failure to be well-capitalized or to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our operations or financial condition. For example, only a well-capitalized depository institution may accept brokered deposits without prior regulatory approval. Failure to be well-capitalized or to meet minimum capital requirements could also result in restrictions on the Bank’s ability to pay dividends or otherwise distribute capital or to receive regulatory approval of applications or other restrictions on its growth.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, requires the federal bank regulatory agencies to take “prompt corrective action” regarding depository institutions that do not meet minimum capital requirements. FDICIA establishes five regulatory capital tiers: “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized”, and “critically undercapitalized”. A depository institution’s capital tier will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. The FDICIA imposes progressively more restrictive restraints on operations, management and capital distributions, depending on the category in which an institution is classified. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions may not accept brokered deposits absent a waiver from the FDIC, are subject to growth limitations and are required to submit capital restoration plans for regulatory approval. A depository institution’s holding company must guarantee any required capital restoration plan, up to an amount equal to the lesser of 5 percent of the depository institution’s assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. Federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. All of the federal bank regulatory agencies have adopted regulations establishing relevant capital measures and relevant capital levels for federally insured depository institutions. The Bank was well capitalized at September 30, 2021, and brokered deposits are not restricted.

To be well-capitalized, the Bank must maintain at least the following capital ratios:

6.5% CET1 to risk-weighted assets;
8.0% Tier 1 capital to risk-weighted assets;
10.0% Total capital to risk-weighted assets; and
5.0% leverage ratio.

The Bank’s regulatory capital ratios were above the applicable well-capitalized standards and met the then-applicable capital conservation buffer. Based on current estimates, we believe that the Bank will continue to exceed all applicable well-capitalized regulatory capital requirements and the capital conservation buffer in 2021.

52

Table of Contents

The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Economic Growth Act”) signed into law in May 2018 scaled back certain requirements of the Dodd-Frank Act and provided other regulatory relief. Among the provisions of the Economic Growth Act was a requirement that the Federal Reserve raise the asset threshold for those bank holding companies subject to the Federal Reserve’s Small Bank Holding Company Policy Statement (“Policy Statement”) to $3 billion. As a result, as of the effective date of that change in 2018, the Company was no longer required to comply with the risk-based capital rules applicable to the Bank as described above. The Federal Reserve may however, require smaller bank holding companies subject to the Policy Statement to maintain certain minimum capital levels, depending upon general economic conditions and a bank holding company’s particular condition, risk profile and growth plans.

As a result of the Economic Growth Act, the federal banking agencies were also required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s Tier 1 capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under prompt corrective action statutes. The federal banking agencies may consider a financial institutions risk profile when evaluation whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies set the minimum capital for the new Community Bank Leverage Ratio at 9%. The Bank does not intend to opt into the Community Bank Leverage Ratio Framework.

On December 21, 2018, federal banking agencies issued a joint final rule to revise their regulatory capital rules to (i) address the upcoming implementation of the “current expected credit losses” (“CECL”) accounting standard under GAAP; (ii) provide an optional three-year phase-in period for the day-one adverse regulatory capital effects that banking organizations are expected to experience upon adopting CECL; and (iii) require the use of CECL in stress tests beginning with the 2020 capital planning and stress testing cycle for certain banking organizations. for more information regarding Accounting Standards Update No. 2016-13, which introduced CECL as the methodology to replace the current “incurred loss” methodology for financial assets measured at amortized cost, and changed the approaches for recognizing and recording credit losses on available-for-sale debt securities and purchased credit impaired financial assets, including the required implementation date for the Company, see the Company’s Annual Report.

Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance-sheet items. The following table reflects capital ratios computed utilizing the implemented Basel III regulatory capital framework discussed above:

Minimum Capital

 

Required for

 

Capital Adequacy

Minimum To Be

 

Plus Capital

Well-Capitalized

 

Minimum Capital

Conservation Buffer

Under Prompt

 

Required for

Basel III Fully

Corrective Action

 

Actual

Capital Adequacy

Phased In

Provisions

 

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

 

(dollars in thousands)

 

At September 30, 2021

    

  

    

  

    

  

    

  

    

  

    

  

    

  

    

  

Bank First Corporation:

Total capital (to risk-weighted assets)

$

288,194

 

12.4

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

Tier I capital (to risk-weighted assets)

251,147

 

10.8

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

Common equity tier I capital (to risk-weighted assets)

251,147

 

10.8

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

Tier I capital (to average assets)

251,147

 

9.0

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

Bank First, N.A:

 

 

 

  

 

  

  

 

  

 

  

Total capital (to risk-weighted assets)

$

287,489

 

12.3

%  

186,599

 

8.0

%  

244,911

 

10.5

%  

233,249

 

10.0

%

Tier I capital (to risk-weighted assets)

267,252

 

11.5

%  

139,949

 

6.0

%  

198,261

 

8.5

%  

186,599

 

8.0

%

Common equity tier I capital (to risk-weighted assets)

267,252

 

11.5

%  

104,962

 

4.5

%  

163,274

7.0

%  

151,612

6.5

%  

Tier I capital (to average assets)

267,252

 

9.7

%  

110,494

 

4.0

%  

110,494

 

4.0

%  

138,118

 

5.0

%

At December 31, 2020

    

  

    

  

    

  

    

  

    

  

    

  

    

  

    

  

Bank First Corporation:

Total capital (to risk-weighted assets)

$

263,344

 

11.7

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

Tier I capital (to risk-weighted assets)

228,186

 

10.2

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

Common equity tier I capital (to risk-weighted assets)

228,186

 

10.2

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

Tier I capital (to average assets)

228,186

 

8.7

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

Bank First, N.A:

 

 

 

  

 

  

  

 

  

 

  

Total capital (to risk-weighted assets)

$

263,129

 

11.7

%  

179,420

 

8.0

%  

235,489

 

10.50

%  

224,275

 

10.0

%

Tier I capital (to risk-weighted assets)

245,471

 

10.9

%  

134,565

 

6.0

%  

190,634

 

8.50

%  

179,420

 

8.0

%

Common equity tier I capital (to risk-weighted assets)

245,471

 

10.9

%  

100,924

 

4.5

%  

156,993

7.00

%  

145,779

6.5

%  

Tier I capital (to average assets)

245,471

 

9.5

%  

103,814

 

4.0

%  

103,814

 

4.00

%  

129,768

 

5.0

%

As previously mentioned, the Company carried $17.5 million of subordinated debt as of September 30, 2021 and December 31, 2020, respectively, which is included in total capital for the Company in the tables above.

53

Table of Contents

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

We are party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments primarily include commitments to originate and sell loans, standby and direct pay letters of credit, unused lines of credit and unadvanced portions of construction and development loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in these particular classes of financial instruments.

Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby and direct pay letters of credit and unadvanced portions of construction and development loans is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Off-Balance Sheet Arrangements. Our significant off-balance-sheet arrangements consist of the following:

Unused lines of credit
Standby and direct pay letters of credit
Credit card arrangements

Off-balance sheet arrangement means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the registrant is a party, under which the registrant has (1) any obligation under a guarantee contract, (2) retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement, (3) any obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument, or (4) any obligation, including a contingent obligation, arising out of a variable interest.

Loan commitments are made to accommodate the financial needs of our customers. Standby and direct pay letters of credit commit us to make payments on behalf of customers when certain specified future events occur. Both arrangements have credit risk essentially the same as that involved in extending loans to clients and are subject to our normal credit policies. Collateral (e.g., securities, receivables, inventory, equipment, etc.) is obtained based on management’s credit assessment of the customer.

Loan commitments and standby and direct pay letters of credit do not necessarily represent our future cash requirements because while the borrower has the ability to draw upon these commitments at any time, these commitments often expire without being drawn upon. Our off-balance sheet arrangements at the dates indicated were as follows:

    

Amounts of Commitments Expiring - By Period as of September 30, 2021

    

Less Than One

    

One to Three

    

Three to Five

    

Other Commitments

Total

 

Year

 

Years

 

Years

 

After Five Years

 

(dollars in thousands)

Unused lines of credit

$

489,491

$

218,293

$

84,451

$

61,553

$

125,194

Standby and direct pay letters of credit

 

8,630

 

5,488

 

2,768

 

372

 

2

Credit card arrangements

 

11,432

 

 

 

 

11,432

Total commitments

$

509,553

$

223,781

$

87,219

$

61,925

$

136,628

    

Amounts of Commitments Expiring - By Period as of December 31, 2020

Less Than

One to

Three to

After Five

Other Commitments

Total

One Year

Three Years

Five Years

Years

(dollars in thousands)

Unused lines of credit

$

461,036

$

249,691

$

83,557

$

26,295

$

101,493

Standby and direct pay letters of credit

 

7,567

 

5,800

 

1,400

 

364

 

3

Credit card arrangements

 

10,867

 

 

 

 

10,867

Total commitments

$

479,470

$

255,491

$

84,957

$

26,659

$

112,363

54

Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest rate risk inherent in its lending, investment and deposit-taking activities. To that end, management actively monitors and manages its interest rate risk exposure.

Our profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact our earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis. We monitor the impact of changes in interest rates on its net interest income using several tools.

Our primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on our net interest income and capital, while configuring our asset-liability structure to obtain the maximum yield-cost spread on that structure. We rely primarily on our asset-liability structure to control interest rate risk.

Interest Rate Sensitivity. Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay home mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and LIBOR (basis risk).

An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.

The Company actively manages its interest rate sensitivity position. The objectives of interest rate risk management are to control exposure of net interest income to risks associated with interest rate movements and to achieve sustainable growth in net interest income. The Company’s ALCO, using policies and procedures approved by the Company’s board of directors, is responsible for the management of the Company’s interest rate sensitivity position. The Company manages interest rate sensitivity by changing the mix, pricing and re-pricing characteristics of its assets and liabilities, through the management of its investment portfolio, its offerings of loan and selected deposit terms and through wholesale funding. Wholesale funding consists of, but is not limited to, multiple sources including borrowings with the FHLB of Chicago, the Federal Reserve Bank of Chicago’s discount window and certificates of deposit from institutional brokers.

The Company uses several tools to manage its interest rate risk including interest rate sensitivity analysis, or gap analysis, market value of portfolio equity analysis, interest rate simulations under various rate scenarios and net interest margin reports. The results of these reports are compared to limits established by the Company’s ALCO policies and appropriate adjustments are made if the results are outside the established limits.

There are an infinite number of potential interest rate scenarios, each of which can be accompanied by differing economic/political/regulatory climates; can generate multiple differing behavior patterns by markets, borrowers, depositors, etc.; and, can last for varying degrees of time. Therefore, by definition, interest rate risk sensitivity cannot be predicted with certainty. Accordingly, the Company’s interest rate risk measurement philosophy focuses on maintaining an appropriate balance between theoretical and practical scenarios; especially given the primary objective of the Company’s overall asset/liability management process is to facilitate meaningful strategy development and implementation.

Therefore, we model a set of interest rate scenarios capturing the financial effects of a range of plausible rate scenarios; the collective impact of which will enable the Company to clearly understand the nature and extent of its sensitivity to interest rate changes. Doing so necessitates an assessment of rate changes over varying time horizons and of varying/sufficient degrees such that the impact of embedded options within the balance sheet are sufficiently examined.

55

Table of Contents

The following tables demonstrate the annualized result of an interest rate simulation and the estimated effect that a parallel interest rate shift, or “shock,” in the yield curve and subjective adjustments in deposit pricing might have on the Company’s projected net interest income over the next 12 months.

This simulation assumes that there is no growth in interest-earning assets or interest-bearing liabilities over the next 12 months. The changes to net interest income shown below are in compliance with the Company’s policy guidelines. As of September 30, 2021:

Change in Interest Rates

    

Percentage Change in

(in Basis Points)

 

Net Interest Income

+400

 

9.0%

+300

 

7.6%

+200

 

6.3%

+100

 

3.7%

-100

 

(1.5)%

As of December 31, 2020:

Change in Interest Rates

    

Percentage Change in 

(in Basis Points)

Net Interest Income

+400

 

4.7%

+300

 

4.2%

+200

 

3.9%

+100

 

2.7%

-100

 

(3.3)%

Economic Value of Equity Analysis. We also analyze the sensitivity of the Company’s financial condition to changes in interest rates through our economic value of equity model. This analysis measures the difference between estimated changes in the present value of the Company’s assets and estimated changes in the present value of the Company’s liabilities assuming various changes in current interest rates. The Company’s economic value of equity analysis as of September 30, 2021 estimated that, in the event of an instantaneous 200 basis point increase in interest rates, the Company would experience a 13.8% increase in the economic value of equity. At the same date, our analysis estimated that, in the event of an instantaneous 100 basis point decrease in interest rates, the Company would experience a 8.4% decrease in the economic value of equity. The estimates of changes in the economic value of our equity require us to make certain assumptions including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain and, as a result, we cannot precisely predict the impact of changes in interest rates on the economic value of our equity. Although our economic value of equity analysis provides an indication of our interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on the economic value of our equity and will differ from actual results.

56

Table of Contents

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), undertook an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report, and, based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report, in recording, processing, summarizing and reporting in a timely manner the information that the Company is required to disclose in its reports under the Exchange Act and in accumulating and communicating to the Company’s management, including the Company’s CEO and CFO, such information as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

No changes were made to our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PART II. OTHER INFORMATION

ITEM 1.       LEGAL PROCEEDINGS

We are a party to various litigation in the normal course of business. Management, after consulting with our legal counsel, believes that any liability resulting from litigation will not have a material effect on our financial position, results of operations or liquidity.

ITEM 1A.     RISK FACTORS

Additional information regarding risk factors appears in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements” of this Form 10-Q and in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020. There have been no material changes during the quarterly period ended September 30, 2021 to the risk factors previously disclosed in the Company’s Annual Report.

57

Table of Contents

ITEM 2.       UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)None.
(b)None.
(c)Issuer Purchases of Equity Securities

On April 20, 2021, the Company reactivated its share repurchase program, pursuant to which the Company may repurchase up to $12 million of its common stock, par value $0.01 per share, for a period of one (1) year. The program was announced in a Current Report on Form 8-K on April 20, 2021. The table below sets forth information regarding repurchases of our common stock during the third quarter of 2021 under that program and other repurchases.

    

    

    

Total Number

    

Maximum Number

of Shares Repurchased as

of Shares

Part of

that May Yet Be

Total Number of Shares

Average Price Paid per

Publicly Announced

Purchased Under the

(in thousands, except per share data)

 Repurchased

 Share(1)

Plans or Programs

Plans or Programs(2)

July 2021

 

22,350

$

69.60

 

22,350

 

109,643

August 2021

 

5,022

 

69.57

 

5,022

 

104,621

September 2021

 

19,943

 

68.49

 

19,943

 

84,678

Total

 

47,315

$

69.13

 

47,315

 

84,678

(1)

The average price paid per share is calculated on a trade date basis for all open market transactions and excludes commissions and other transaction expenses.

(2)

Based on the closing per share price as of September 30, 2021 ($70.87).

ITEM 3.       DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.       MINE SAFETY DISCLOSURES

None.

ITEM 5.       OTHER INFORMATION

None

58

Table of Contents

ITEM 6.       EXHIBITS

Exhibit Index

Exhibit Number

    

Description

31.1

Rule 13a-14(a) Certification of Chief Executive Officer*

31.2

Rules 13a-14(a) Certification of Chief Financial Officer*

32.1

Section 1350 Certification of Chief Executive Officer and Chief Financial Officer**

101 INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

*Filed herewith.

**Furnished herewith.

59

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

BANK FIRST CORPORATION

DATE:

November 9, 2021

BY:

/s/Kevin M. LeMahieu

Kevin M. LeMahieu

Chief Financial Officer

(Principal Financial and Accounting Officer)

60