EDGAR 10-K Filing

Company CIK: 1746109
Filing Year: 2022
Filename: 1746109_10-K_2022_0001410578-22-000397.json

---

ITEM 1. BUSINESS
ITEM 1. BUSINESS
General Overview
Bank First Corporation is a Wisconsin corporation that was organized in April 1982 to serve as the holding company for Bank First, N.A., a national banking association founded in 1894. The Bank is a wholly-owned subsidiary of the Company. The Company and the Bank are headquartered in Manitowoc, Wisconsin, and the Bank is a member of the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and regulated by the Office of the Comptroller of the Currency (the “OCC”). The Bank has twenty-one (21) offices, including its headquarters, in Manitowoc, Outagamie, Brown, Winnebago, Sheboygan, Waupaca, Ozaukee, Monroe, and Jefferson counties in the State of Wisconsin. We serve businesses, professionals and consumers with a wide variety of financial services, including retail and commercial banking. Some of the products that we offer include checking accounts, savings accounts, money market accounts, cash management accounts, certificates of deposit, commercial and industrial loans, commercial real estate loans, construction and development loans, residential mortgages, consumer loans, credit cards, online banking, telephone banking and mobile banking.
The Bank has four subsidiaries: UFS, LLC (“UFS”), Bank First Investments, Inc., TVG Holdings, Inc. (“TVG”) and BFC Title, LLC. UFS is a Wisconsin limited liability company organized in 2014, in which the Bank is a 49.8% member. UFS provides core data processing, endpoint management, cloud services, cyber security, and digital banking solutions to the Bank and many other community banks in and around Wisconsin. Bank First Investments, Inc. is a Wisconsin corporation organized in 2011, and is wholly-owned by the Bank. Bank First Investments, Inc.’s purpose is to provide investment and safekeeping services to the Bank. TVG is a Wisconsin corporation organized in 2009. It is a wholly-owned subsidiary of the Bank, and its purpose is to hold the Bank’s 40% ownership interest in Ansay & Associates, LLC (“Ansay”). Ansay is one of the nation’s largest independent insurance providers, and the Bank’s minority ownership of Ansay allows the Bank to provide diversified services to our customers without the risk and expense of an in-house insurance department. BFC Title, LLC is a Wisconsin limited liability company organized in 2020. It is a wholly-owned subsidiary of the Bank, and its purpose is to hold the Bank’s 5.88% ownership interest in Generations Title, LLC, a Wisconsin title company. Aside from the Bank, the Company also has another wholly-owned subsidiary, Veritas Asset Holdings, LLC, a troubled asset liquidation company.
As of December 31, 2021, we had total consolidated assets of $2.94 billion, total loans of $2.24 billion, total deposits of $2.53 billion and total stockholders’ equity of $322.7 million. The Bank employs approximately 287 full-time equivalent employees (“FTE”), and has an assets-to-FTE ratio of approximately $10.2 million. For more information, see the Bank’s website at www.bankfirst.com.
Recent acquisitions
Partnership Community Bancshares, Inc.
On July 12, 2019, the Company completed a merger with Partnership Community Bancshares, Inc. (“Partnership”), a bank holding company headquartered in Cedarburg, Wisconsin, 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 merged with and into the Company, and Partnership Bank, Partnership’s wholly-owned banking subsidiary, merged with and into the Bank. Partnership’s principal activity was the ownership and operation of Partnership Bank, a state-chartered banking institution that operated four (4) branches in Wisconsin at the time of closing. The merger consideration totaled approximately $49.6 million.
Pursuant to the terms of the Merger Agreement, Partnership shareholders had the option to receive either 0.34879 shares of the Company’s common stock or $17.3001 in cash for each outstanding share of Partnership common stock, and cash in lieu of any remaining fractional share. The stock versus cash elections by the Partnership shareholders were subject to final consideration being made up of approximately $14.3 million in cash and 534,731 shares of Company common stock, valued at approximately $35.3 million (based on a value of $66.03 per share on the closing date).
Timberwood Bancshares, Inc.
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, 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.
Denmark Bancshares, Inc.
On January 18, 2022, the Company entered into an Agreement and Plan of Merger with Denmark Bancshares, Inc., a Wisconsin corporation, whereby Denmark will be merged with and into the Company. Pursuant to entering into the Merger Agreement, the Bank and Denmark’s wholly-owned subsidiary bank, Denmark State Bank, will enter into a Plan of Bank Merger whereby Denmark State Bank will be merged with and into the Bank immediately following the merger of Denmark with the Company. The Merger Agreement has been unanimously approved by the boards of directors of the Company and Denmark. The transaction is expected to close in the early third quarter of 2022, subject to customary closing conditions, including regulatory approvals and shareholder approvals from both the Company’s and Denmark’s shareholders.
Pursuant to the terms of the Merger Agreement, Denmark shareholders will have the right to receive, at each shareholder’s election, either $38.10 in cash or 0.5276 of a share of the Company’s common stock, subject to share reconciliation, proration, and allocation procedures, such that at least 80% of Denmark shares will receive stock consideration and no more than 20% of Denmark shares will receive cash consideration. Notwithstanding the foregoing, the aggregate merger consideration is subject to a downward adjustment if Denmark’s tangible equity capital (as calculated per the Merger Agreement) is less than $67,565,297 at the time of closing of the Merger.
The Company accounts for these transactions under the acquisition method of accounting, and thus, the financial position and results of operations of acquired institutions prior to the consummation date are not included in the accompanying consolidated financial statements. The acquisition method of accounting requires assets purchased and liabilities assumed to be recorded at their respective fair values at the date of acquisition. The Company determines the fair value of core deposit intangibles, securities, premises and equipment, loans, other assets and liabilities, deposits and borrowings with the assistance of third party valuations, appraisals, and third party advisors. The estimated fair values are subject to refinement for up to one year after deal consummation as additional information becomes available relative to the closing date fair values.
Strategic Plan
The Bank is a relationship-based community bank focused on providing innovative products and services that are value driven to the communities we serve. The Bank’s culture celebrates diversity, creativity, and responsiveness, with the highest ethical standards. Employees are supported and encouraged to develop their careers. They are empowered with the tools to be successful and are held accountable for the results they deliver to our customers and shareholders. We maintain a strong credit culture as a foundation of sound asset quality, and we embrace innovation and provide the solutions our customers need and expect. The Bank’s vision is to remain an independent community bank and plans to sustain its independence by remaining one of the top-performing providers of financial services in Wisconsin. The Bank focuses on creating value for its customers and shareholders by forging strong relationships and offering personalized and innovative solutions.
Our strategic priorities are organized around the CAMELS ratings, including Capital, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Rates. We have also added a sixth category to prioritize our strategic goals surrounding Information Technology. Under the heading of Capital, our priorities include (i) growing capital through strong earnings, (ii) maintaining and assessing short and long-term capital goals, (iii) maintaining contingent capital options, and (iv) educating and creating awareness of our Dividend Reinvestment Plan (“DRIP”). Under the heading of Asset Quality, our priorities include (i) maintaining a strong credit culture; (ii) being cognizant of layering of risk; (iii) optimizing the credit life cycle and enhancing credit administration; and (iv) hiring and training well to support our credit culture. Under the heading of Management, our priorities are (i) to review and reassess our organizational structure; (ii) to continue to enhance our succession plan; (iii) to build trust; (iv) to provide consistent and clear messaging to our employees, customers and shareholders; and (v) to sustain and build upon employee engagement. Under the Earnings heading, our priorities include (i) growing relationships; (ii) improving the quality of data across platforms; (iii) exploring and evaluating current and alternative revenue sources; (iv) to structure a cross-solving program; (v) to evaluate and pursue prudent acquisitions; and (vi) to enhance brand awareness. Under the Liquidity heading, our priorities are (i) to deploy excess liquidity; (ii) to optimize our customer portfolio; (iii) to develop the right relationships; and (iv) to maintain an efficient bank network. Under the heading of Sensitivity to Market Rates, our priorities include (i) minimizing optionality; (ii) to assess, determine and implement a deposit mix for the current environment; and (iii) to maintain rate neutrality with a preference towards asset sensitivity. Finally, under the heading of Information Technology, our strategic priorities include (i) optimizing our digital strategy to match internal and external customer expectations; (ii) enhancing and growing our vendor relationships; (iii) developing a robust data roadmap; (iv) establishing a Chief Information Officer role and organizational structure for the Information Technology function; and (v) monitoring the current cybersecurity environment and training employees on risks and appropriate actions.
Market Area
Bank First is a full-service community bank, offering business and retail products and services in communities throughout Wisconsin. Our branches are located in Brown, Jefferson, Manitowoc, Monroe, Outagamie, Ozaukee, Sheboygan, Waupaca, and Winnebago counties. Our main office is located at 402 N. 8th Street, Manitowoc, Wisconsin. In addition, we are currently in the process of constructing a new operations center along the I-43 corridor in Manitowoc. Furthermore, with the proposed acquisition of Denmark, we will also enter into the Shawano County upon the completion of the merger. Based on the deposit market share reports published by the FDIC on June 30, 2021, Bank First ranks in top two of market share in four of the nine counties in which its branches are located.
The nine counties in which the Bank has offices have an estimated aggregate population of 1,104,554, based on U.S. Census data, and total deposits of approximately $28.64 billion as of June 30, 2021, according to the most recent data published by the FDIC.
Competition
The banking business is highly competitive, and we face competition in our market areas from many other local, regional, and national financial institutions. Competition among financial institutions is based on interest rates offered on deposit accounts, interest rates charged on loans, other credit and service charges relating to loans, the quality and scope of the services rendered, the convenience of banking facilities, and, in the case of loans to commercial borrowers, relative lending limits. We compete with commercial banks, credit unions, savings institutions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other mutual funds, fintech companies, as well as regional and national financial institutions that operate offices in our market areas and elsewhere. The competing major commercial banks have greater resources that may provide them a competitive advantage by enabling them to maintain numerous branch offices, mount extensive advertising campaigns and invest in new technologies. The increasingly competitive environment is the result of changes in regulation, changes in technology and product delivery systems, additional financial service providers, and the accelerating pace of consolidation among financial services providers.
The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems.
Some of our non-banking competitors have fewer regulatory constraints and may have lower cost structures. In addition, some of our competitors have assets, capital and lending limits greater than that of the Bank, have greater access to capital markets and offer a broader range of products and services than the Bank. These institutions may have the ability to finance wide-ranging advertising campaigns and may also be able to offer lower rates on loans and higher rates on deposits than we can offer. Some of these institutions offer services, such as international banking, which we do not directly offer, except for a limited suite of services such as international wires and currency exchange.
We compete with these institutions by focusing on our position as an independent, community bank and rely upon local promotional activities, personal relationships established by our officers, directors, and employees with our customers, and specialized services tailored to meet the needs of the communities served. We provide innovative products to our customers that are value-driven. We actively cultivate relationships with our customers that extend beyond a single loan to a full suite of products that serve the needs of our retail and commercial customers. Our goal is to develop long-standing connections with our customers and the communities that we serve. While our position varies by market, our management believes that it can compete effectively as a result of local market knowledge, local decision making, and awareness of customer needs.
Our Business
General
We emphasize a range of lending services, including commercial and residential real estate loans, construction and development loans, commercial and industrial loans, and consumer loans. Our customers are generally individuals, small to medium-sized businesses and professional firms that are located in or conduct a substantial portion of their business in our market areas. At December 31, 2021, we had total loans receivable of $2.24 billion, representing approximately 81.9% of our total earning assets. As of December 31, 2021, we had 24 nonaccrual loans totaling approximately $7.2 million, or 0.3% of total loans. For additional discussion related to nonperforming loans, see the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section as well as the notes to the consolidated financial statements.
Loan Approval
Certain credit risks are inherent in making loans. These include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual borrowers. We attempt to mitigate repayment risks by adhering to our comprehensive and robust internal credit policies and procedures. These policies and procedures include officer and customer lending limits, with approval process for larger loans, documentation examination, and follow-up procedures for any exceptions to credit policies. Our loan approval policies provide for various levels of officer lending authority. The Bank currently employs both a signature process through the line of business as well as credit administration and a committee process which involves the Bank’s board of directors each month. Both approvals and reviews of the credit actions are underwritten by an independent set of credit analysts who report to credit administration. For our loan commitments, a serial sign-off process is utilized up to $5,000,000, requiring multiple signatures for a loan approval. This process ensures that the necessary parties at all authority levels are aware of and approve the commitment. The Bank’s board of directors is involved in credits above this level after they have been through the serial sign-off process. We do not make any loans to any director, executive officer of the Bank, or the related interests of each, unless the loan is approved by the full board of directors of the Bank and is on terms not more favorable than would be available to a person not affiliated with the Bank.
Credit Administration and Loan Review
Our loan review consists of both commercial and retail review where loan files are reviewed and risk ratings are validated. Both were fully outsourced by the end of 2019 to a firm that specializes in file review and risk rating. Our policy for reviewing commercial credit files consisted of selecting a percentage of specific files on an annual basis as defined in our loan review plan, and reviewing them for risk rating and policy compliance. Our retail review consists of selecting a percentage of specific files on an annual basis, and reviewing them for policy compliance.
Lending Limits
Our lending activities are subject to a variety of lending limits imposed by federal law. In general, the Bank is subject to a legal limit on loans to a single borrower equal to 15% of the Bank’s capital and unimpaired surplus. This legal lending limit will increase or decrease as the Bank’s level of capital increases or decreases. In addition to the legal lending, management and the board of directors have established a more conservative, internal lending limit. The Bank’s legal and internal lending limits are a safety and soundness measure intended to prevent one person or a relatively small and economically related group of persons from borrowing an unduly large amount of the Bank’s funds. It is also intended to safeguard the Bank’s depositors by diversifying the risk of loan losses among a relatively large number of creditworthy borrowers engaged in various types of businesses. Based upon the capitalization of the Bank at December 31, 2021, the Bank’s legal lending limit was $43.8 million and the Bank’s internal lending limit was $35.0 million. Our board of directors will adjust the internal lending limit as deemed necessary to continue to mitigate risk and serve the Bank’s clients. We are also able to sell participations in our larger loans to other financial institutions, which allows us to manage the risk involved in these loans and to meet the lending needs of our clients requiring extensions of credit in excess of these limits.
Real Estate Loans
The principal component of our loan portfolio is loans secured by real estate. Real estate loans are subject to the same general risks as other loans and are particularly sensitive to fluctuations in the value of real estate. Fluctuations in the value of real estate and rising interest rates, as well as other factors arising after a loan has been made, could negatively affect a borrower’s cash flow, creditworthiness, and ability to repay the loan. We obtain a security interest in real estate whenever possible, in addition to any other available collateral, in order to increase the likelihood of the ultimate repayment of the loan.
As of December 31, 2021, loans secured by real estate made up approximately $1.68 billion, or 75.3%, of our loan portfolio. These loans generally will fall into one of two categories:
● Commercial Real Estate. Commercial real estate loans generally have terms of 10 years or less, although payments may be structured on a longer amortization basis. We evaluate each borrower on an individual basis and attempt to determine their business risks and credit profile. We attempt to reduce credit risk in the commercial real estate portfolio by emphasizing loans on owner-occupied industrial, office, and retail buildings where the loan-to-value ratio, established by independent appraisals, does not generally exceed 85% of cost or appraised value. We also generally require that a borrower’s cash flow exceed 110% of monthly debt service obligations. In order to ensure secondary sources of payment and liquidity to support a loan request, we typically review all of the personal financial statements of the principal owners and require their personal guaranties. Commercial real estate loans are generally viewed as having more risk of default than residential real estate loans. They are also typically larger than residential real estate loans and consumer loans and depend on cash flows from the owner’s business or the property to service the debt. Because our loan portfolio contains a number of commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in our levels of nonperforming assets. As of December 31, 2021, commercial real estate loans made up approximately $1.11 billion or 49.7% of our loan portfolio.
● Residential Mortgage Loans and Home Equity Loans. We originate and hold short-term and long-term first mortgages and traditional second mortgage residential real estate loans. Generally, we limit the loan-to-value ratio on our residential real estate loans to 90%. We offer fixed and adjustable rate residential real estate loans with terms of up to 30 years. We also offer a variety of lot loan options to consumers to purchase the lot on which they intend build their home. We also offer traditional home equity loans and lines of credit. Our underwriting criteria for, and the risks associated with, home equity loans and lines of credit are generally the same as those for first mortgage loans. Home equity loans typically have terms of 20 years or less. We generally limit the extension of credit to 90% of the available equity of each property. As of December 31, 2021, residential mortgage loans and home equity loans made up approximately $571.8 million or 25.6% of our loan portfolio.
Commercial and Industrial Loans
We have significant expertise in small to middle market commercial and industrial lending. Our success is the result of our product and market expertise, and our focus on delivering high-quality, customized and quick turnaround service for our clients due to our focus on maintaining an appropriate balance between prudent, disciplined underwriting, on the one hand, and flexibility in our decision making and responsiveness to our clients, on the other hand, which has allowed us to grow our commercial and industrial loan portfolio while maintaining strong asset quality. As of December 31, 2021, commercial and industrial loans made up approximately $366.2 million or 16.4% of our loan portfolio.
We provide a mix of variable and fixed rate commercial and industrial loans. The loans are typically made to small- and medium-sized businesses involved in professional services, accommodation and food services, health care, wholesale trade, financial institutions, manufacturing, distribution, retailing and non-profits. We extend commercial business loans for working capital, accounts receivable and inventory financing and other business purposes. Generally, short-term loans have maturities ranging from 3 months to 1 year, and “term loans” have maturities ranging from 3 to 20 years. Lines of credit are generally intended to finance current transactions and typically provide for periodic principal payments, with interest payable monthly. Term loans generally provide for floating and fixed interest rates, with monthly payments of both principal and interest.
Construction and Development Loans
We offer fixed and adjustable rate residential and commercial construction loan financing to builders and developers and to consumers who wish to build their own home. The term of construction and development loans generally is limited to 9 to 24 months, although payments may be structured on a longer amortization basis. Most loans will mature and require payment in full upon completion and either the sale of the property or refinance into a permanent loan. We believe that construction and development loans generally carry a higher degree of risk than long-term financing of stabilized, rented, and owner-occupied properties because repayment depends on the ultimate completion of the project and usually on the subsequent sale of the property. Specific risks include:
● cost overruns;
● mismanaged construction;
● inferior or improper construction techniques;
● economic changes or downturns during construction;
● a downturn in the real estate market;
● rising interest rates which may prevent sale of the property; and
● failure to sell or stabilize completed projects in a timely manner.
We attempt to reduce risk associated with construction and development loans by obtaining personal guaranties and by keeping the maximum loan-to-value ratio at or below 85% of the lesser of cost or appraised value, depending on the project type. Generally, we do not have interest reserves built into loan commitments but require periodic cash payments for interest from the borrower’s cash flow. As of December 31, 2021, construction and development loans made up approximately $132.5 million or 5.9% of our loan portfolio.
Consumer Loans
We make a variety of loans to individuals for personal and household purposes, including secured and unsecured installment loans and revolving lines of credit. Consumer loans are underwritten based on the borrower’s income, current debt level, past credit history, and the availability and value of collateral. Consumer rates are both fixed and variable, with negotiable terms. Our installment loans typically amortize over periods up to seven years. Although we typically require monthly principal and interest payments on our loan products, we will offer consumer loans at interest only with a single maturity date when a specific source of repayment is available. Consumer loans are generally considered to have greater risk than first or second mortgages on real estate because they may be unsecured, or, if they are secured, the value of the collateral may be difficult to assess and more likely to decrease in value than real estate. As of December 31, 2021, consumer loans made up approximately $32.1 million or 1.4% of our loan portfolio.
Mortgage Banking Activities
Our mortgage banking operations include correspondent or secondary market lending, and in-house mortgage lending (included in residential mortgage and home equity loan totals above). We conduct secondary market lending through Fannie Mae, Federal Home Loan Bank of Chicago, U.S. Dept. of Agriculture, and the Wisconsin Housing and Economic Development Authority. We also offer a number of in-house mortgage products, including adjustable rate mortgages at one, three, five, seven, ten, and fifteen years, and fixed rate mortgages at up to thirty years. We also offer an eleven-month construction loan, a construction to permanent loan, and a twelve-month bridge loan.
Deposit Products
We offer a full range of traditional deposit services through our branch network in our market areas that are typically available in most banks and savings institutions, including checking accounts, commercial accounts, savings accounts and other time deposits of various types, ranging from money market accounts to long-term certificates of deposit. Transaction accounts and time deposits are tailored to and offered at rates competitive to those offered in our primary market areas. We also offer retirement accounts and health savings accounts. Our customers include individuals, businesses, associations, organizations and governmental authorities. We believe that our branch infrastructure will assist us in obtaining deposits from local customers in the future. Our deposits are insured by the FDIC up to statutory limits.
Securities
We manage our securities portfolio and cash to maintain adequate liquidity and to ensure the safety and preservation of invested principal, with a secondary focus on yield and returns. Specific goals of our investment portfolio are as follows:
● provide a ready source of balance sheet liquidity, ensuring adequate availability of funds to meet fluctuations in loan demand, deposit balances and other changes in balance sheet volumes and composition;
● serve as a means for diversification of our assets with respect to credit quality, maturity and other attributes;
● serve as a tool for modifying our interest rate risk profile pursuant to our established policies; and
● provide collateral to secure municipal and business deposits.
Our investment portfolio is comprised primarily of U.S. government securities, mortgage-backed securities backed by government-sponsored entities, and taxable and tax-exempt municipal securities.
Our investment policy is reviewed annually by our board of directors. Overall investment goals are established by our board, CEO, and members of our Asset Liability Committee (“ALCO”). Our board of directors has delegated the responsibility of monitoring our investment activities to our ALCO. Day-to-day activities pertaining to the securities portfolio are conducted under the supervision of our CEO. We actively monitor our investments on an ongoing basis to identify any material changes in the securities. We also review our securities for potential other-than-temporary impairment at least quarterly.
Human Capital Resources
Throughout COVID-19, the health and safety of our employees, customers, and communities we serve has been our top priority, and we continue to do our best to update guidelines and practices in accordance with recommendations by the Center for Disease Control and Prevention and new data as it becomes available. In response to COVID-19, we quickly implemented extensive safety measures to protect our employees, including heightened sanitary precautions, protective supplies, suspended non-essential business travel, directed employees to work remotely when possible and limited in-person meetings. We also implemented flexible scheduling and compensation arrangements for employees affected by COVID-19.
Our Company culture emphasizes our longstanding dedication to being respectful to others and having a workforce that is representative of the communities we serve. Diversity, equity and inclusion are fundamental to our culture. We believe in attracting, retaining and promoting quality talent and recognize that diversity makes us stronger as a Company. Our talent acquisition teams partner with hiring managers in sourcing and presenting a diverse slate of qualified candidates to strengthen our organization.
We believe employees to be our greatest asset and that our future success depends on our ability to attract, retain and develop employees. Professional development is a key priority, which is facilitated through our many corporate development initiatives including extensive training programs, corporate mentoring, leadership programs, educational reimbursement and professional speaker series.
As part of our effort to attract and retain employees, we offer a broad range of benefits, including health, dental and vision insurance, life and disability insurance, cell phone and health club reimbursement, an employee assistance program, educational tuition reimbursement, annual clothing allowance, an employee referral program, 401(k) retirement plan, profit sharing, a flex spending cafeteria plan, and generous paid time off. We believe our compensation package and benefits are competitive with others in our industry. For additional information regarding our employee benefit plans, see “Note 17 - Employee Benefit Plans” to our consolidated financial statements included in this report.
As of December 31, 2021, we had approximately 287 FTEs. None of our employees are represented by any collective bargaining unit or is a party to a collective bargaining agreement. We consider our relationship with our employees to be good and have not experienced interruptions of operations due to labor disagreements.
General Corporate Information
Our principal executive offices are located at 402 N. 8th Street, Manitowoc, Wisconsin 54220, and our telephone number at that address is (920) 652-3100. Additional information can be found on our website: www.bankfirstwi.bank. The information contained on our website is not incorporated in this document by reference.
Public Information
Persons interested in obtaining information on the Company may read and copy any materials that we file with the U.S. Securities and Exchange Commission ("SEC"). The Commission maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. We make available, free of charge, on or through our website, www.bankfirstwi.bank, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other filings pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and amendments to such filings, as soon as reasonably practicable after each is electronically filed with, or furnished to, the SEC.
Supervision and Regulation
We are extensively regulated under federal and state law. The following is a brief summary that does not purport to be a complete description of all regulations that affect us or all aspects of those regulations. This discussion is qualified in its entirety by reference to the particular statutory and regulatory provisions described below and is not intended to be an exhaustive description of the statutes or regulations applicable to the Company’s and the Bank’s business. In addition, proposals to change the laws and regulations governing the banking industry are frequently raised at both the state and federal levels. The likelihood and timing of any changes in these laws and regulations, and the impact such changes may have on us and the Bank, are difficult to predict. In addition, bank regulatory agencies may issue enforcement actions, policy statements, interpretive letters and similar written guidance applicable to us or the Bank. Changes in applicable laws, regulations or regulatory guidance, or their interpretation by regulatory agencies or courts may have a material adverse effect on our and the Bank’s business, operations, and earnings. Supervision and regulation of banks, their holding companies and affiliates is intended primarily for the protection of depositors and customers, the Deposit Insurance Fund (“DIF”) of the FDIC, and the U.S. banking and financial system rather than holders of our capital stock.
Regulation of the Company
We are registered as a bank holding company with the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). As such, we are subject to comprehensive supervision and regulation by the Federal Reserve and are subject to its regulatory reporting requirements. Federal law subjects bank holding companies, such as the Company, to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations. Violations of laws and regulations, or other unsafe and unsound practices, may result in regulatory agencies imposing fines or penalties, cease-and-desist orders, or taking other enforcement actions. Under certain circumstances, these agencies may enforce these remedies directly against officers, directors, employees and other parties participating in the affairs of a bank or bank holding company.
Activity Limitations. Bank holding companies are generally restricted to engaging in the business of banking, managing or controlling banks and certain other activities determined by the Federal Reserve to be closely related to banking. In addition, the Federal Reserve has the power to order a bank holding company or its subsidiaries to terminate any nonbanking activity or terminate its ownership or control of any nonbank subsidiary, when it has reasonable cause to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness, or stability of any bank subsidiary of that bank holding company.
Source of Strength Obligations. A bank holding company is required to act as a source of financial and managerial strength to its subsidiary bank and to maintain resources adequate to support its bank. The term “source of financial strength” means the ability of a company, such as us, that directly or indirectly owns or controls an insured depository institution, such as the Bank, to provide financial assistance to such insured depository institution in the event of financial distress. The appropriate federal banking agency for the depository institution (in the case of the Bank, this agency is the OCC) may require reports from us to assess our ability to serve as a source of strength and to enforce compliance with the source of strength requirements by requiring us to provide financial assistance to the Bank in the event of financial distress. If we were to enter bankruptcy or become subject to the orderly liquidation process established by the Dodd-Frank Act, any commitment by us to a federal bank regulatory agency to maintain the capital of the Bank would be assumed by the bankruptcy trustee or the FDIC, as appropriate, and entitled to a priority of payment.
Acquisitions. The BHC Act permits acquisitions of banks by bank holding companies, such that we and any other bank holding company, whether located in Wisconsin or elsewhere, may acquire a bank located in any other state, subject to certain deposit-percentage, age of bank charter requirements, and other restrictions. The BHC Act requires that a bank holding company obtain the prior approval of the Federal Reserve before (i) acquiring direct or indirect ownership or control of more than 5% of the voting shares of any additional bank or bank holding company, (ii) taking any action that causes an additional bank or bank holding company to become a subsidiary of the bank holding company, or (iii) merging or consolidating with any other bank holding company. The Federal Reserve may not approve any such transaction that would result in a monopoly or would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any section of the United States, or the effect of which may be substantially to lessen competition or to tend to create a monopoly in any section of the country, or that in any other manner would be in restraint of trade, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider: (1) the financial and managerial resources of the companies involved, including pro forma capital ratios; (2) the risk to the stability of the United States banking or financial system; (3) the convenience and needs of the communities to be served, including performance under the Community Reinvestment Act ("CRA"); and (4) the effectiveness of the companies in combatting money laundering.
Change in Control. Federal law restricts the amount of voting stock of a bank holding company or a bank that a person may acquire without the prior approval of banking regulators. Under the Change in Bank Control Act and the regulations thereunder, a person or group must give advance notice to the Federal Reserve before acquiring control of any bank holding company, such as the Company, and the OCC before acquiring control of any national bank, such as the Bank. Upon receipt of such notice, the bank regulatory agencies may approve or disapprove the acquisition. The Change in Bank Control Act creates a rebuttable presumption of control if a person or group acquires the power to vote 10% or more of our outstanding common stock. The overall effect of such laws is to make it more difficult to acquire a bank holding company and a bank by tender offer or similar means than it might be to acquire control of another type of corporation. Consequently, shareholders of the Company may be less likely to benefit from the rapid increases in stock prices that may result from tender offers or similar efforts to acquire control of other companies. Investors should be aware of these requirements when acquiring shares of our stock.
Governance and Financial Reporting Obligations. We are required to comply with various corporate governance and financial reporting requirements under the Sarbanes-Oxley Act of 2002, as well as rules and regulations adopted by the SEC, the Public Company Accounting Oversight Board (“PCAOB”), and Nasdaq. In particular, we are required to include management and independent registered public accounting firm reports on internal controls as part of our Annual Report on Form 10- K in order to comply with Section 404 of the Sarbanes-Oxley Act. We have evaluated our controls, including compliance with the SEC rules on internal controls, and have and expect to continue to spend significant amounts of time and money on compliance with these rules. Our failure to comply with these internal control rules may materially adversely affect our reputation, ability to obtain the necessary certifications to financial statements, and the values of our securities. The assessments of our financial reporting controls as of December 31, 2021 are included in this report under “Item 9A. Controls and Procedures.”
Corporate Governance. The Dodd-Frank Act addresses many investor protections, corporate governance, and executive compensation matters that will affect most U.S. publicly traded companies. The Dodd-Frank Act (1) grants shareholders of U.S. publicly traded companies an advisory vote on executive compensation; (2) enhances independence requirements for Compensation Committee members; and (3) requires companies listed on national securities exchanges to adopt incentive-based compensation claw-back policies for executive officers.
Incentive Compensation. The Dodd-Frank Act required the banking agencies and the SEC to establish joint rules or guidelines for financial institutions with more than $1 billion in assets, such as us and the Bank, which prohibit incentive compensation arrangements that the agencies determine to encourage inappropriate risks by the institution. The banking agencies issued proposed rules in 2011 and previously issued guidance on sound incentive compensation policies. In 2016, the Federal Reserve and the OCC also proposed rules that would, depending upon the assets of the institution, directly regulate incentive compensation arrangements and would require enhanced oversight and recordkeeping. As of December 31, 2021, these rules have not been implemented. We and the Bank have undertaken efforts to ensure that our incentive compensation plans do not encourage inappropriate risks, consistent with three key principles- that incentive compensation arrangements should appropriately balance risk and financial rewards, be compatible with effective controls and risk management, and be supported by strong corporate governance.
Shareholder Say-On-Pay Votes. The Dodd-Frank Act requires public companies to take shareholders’ votes on proposals addressing compensation (known as say-on-pay), the frequency of a say-on-pay vote, and the golden parachutes available to executives in connection with change-in-control transactions. Public companies must give shareholders the opportunity to vote on the compensation at least every three years and the opportunity to vote on frequency at least every six years, indicating whether the say-on-pay vote should be held annually, biennially, or triennially. The say-on-pay, the say-on-parachute and the say-on-frequency votes are explicitly nonbinding and cannot override a decision of our board of directors.
Other Regulatory Matters. We and our subsidiaries are subject to oversight by the SEC, the Financial Industry Regulatory Authority, (“FINRA”), the PCAOB, Nasdaq and various state securities regulators. We and our subsidiaries have from time to time received requests for information from regulatory authorities in various states, including state attorneys general, securities regulators and other regulatory authorities, concerning our business practices. Such requests are considered incidental to the normal conduct of business.
Capital Requirements
The Bank is required under federal law to maintain certain minimum capital levels based on ratios of capital to total assets and capital to risk-weighted assets. The required capital ratios are minimums, and the federal banking agencies may determine that a banking organization, based on its size, complexity or risk profile, must maintain a higher level of capital in order to operate in a safe and sound manner. Risks such as concentration of credit risks and the risks arising from non-traditional activities, as well as the institution’s exposure to a decline in the economic value of its capital due to changes in interest rates, and an institution’s ability to manage those risks are important factors that are to be taken into account by the federal banking agencies in assessing an institution’s overall capital adequacy. The following is a brief description of the relevant provisions of these capital rules and their potential impact on our capital levels.
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 4.0%.
In addition, the capital rules require a capital conservation buffer of CET1 of 2.5% above each of the minimum capital ratio requirements (CET1, Tier 1, and total risk-based capital), which is designed to absorb losses during periods of economic stress. These buffer requirements must be met for a bank to be able to pay dividends, engage in share buybacks or make discretionary bonus payments to executive management without restriction.
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.
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.
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 Bank was well capitalized at December 31, 2021, and brokered deposits are not restricted.
In 2021, 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 2022.
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 notes to the Company’s consolidated financial statements for the year ended December 31, 2021.
Payment of Dividends
We are a legal entity separate and distinct from the Bank and our other subsidiaries. Our primary source of cash, other than securities offerings, is dividends from the Bank. The prior approval of the OCC is required if the total of all dividends declared by a national bank (such as the Bank) in any calendar year will exceed the sum of such bank’s net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits any national bank from paying dividends that would be greater than such bank’s undivided profits after deducting statutory bad debts in excess of such bank’s allowance for possible loan losses.
In addition, we and the Bank are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal bank regulatory authority may prohibit the payment of dividends where it has determined that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The OCC and the Federal Reserve have indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsound and unsafe banking practice. The OCC and the Federal Reserve have each indicated that depository institutions and their holding companies should generally pay dividends only out of current operating earnings.
Under a Federal Reserve policy adopted in 2009, the board of directors of a bank holding company must consider different factors to ensure that its dividend level is prudent relative to maintaining a strong financial position, and is not based on overly optimistic earnings scenarios, such as potential events that could affect its ability to pay, while still maintaining a strong financial position. As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should consult with the Federal Reserve and eliminate, defer or significantly reduce the bank holding company’s dividends if:
● its net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends;
● its prospective rate of earnings retention is not consistent with its capital needs and overall current and prospective financial condition; or
● it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
Prior approval by the OCC is required if the total of all dividends declared by a national bank in any calendar year exceeds the bank’s profits for that year combined with its retained net profits for the preceding two calendar years.
Regulation of the Bank
As a national bank, our primary bank subsidiary, Bank First, N.A., is subject to comprehensive supervision and regulation by the OCC and is subject to its regulatory reporting requirements. The deposits of the Bank are insured by the FDIC up to applicable limits and, accordingly, the Bank is also subject to certain FDIC regulations and the FDIC has backup examination authority and some enforcement powers over the Bank. The Bank also is subject to certain Federal Reserve regulations.
In addition, as discussed in more detail below, the Bank and any other of our subsidiaries that offer consumer financial products and services are subject to regulation and potential supervision by the Consumer Financial Protection Bureau (“CFPB”). Authority to supervise and examine the Company and the Bank for compliance with federal consumer laws remains largely with the Federal Reserve and the OCC, respectively. However, the CFPB may participate in examinations on a “sampling basis” and may refer potential enforcement actions against such institutions to their primary regulators. The CFPB also may participate in examinations of our other direct or indirect subsidiaries that offer consumer financial products or services. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are stricter than those regulations promulgated by the CFPB, and state attorneys general are permitted to enforce certain federal consumer financial protection rules adopted by the CFPB. As the Company and the Bank each had less than $10 billion in consolidated assets in 2021, they are not subject to the routine supervision of the CFPB, but this may change in the future as the Company and the Bank grow.
Broadly, regulations applicable to the Bank include limitations on loans to a single borrower and to its directors, officers and employees; restrictions on the opening and closing of branch offices; the maintenance of required capital and liquidity ratios; the granting of credit under equal and fair conditions; the disclosure of the costs and terms of such credit; requirements to maintain reserves against deposits and loans; limitations on the types of investment that may be made by the Bank; and requirements governing risk management practices. The Bank is permitted under federal law to branch on a de novo basis across state lines where the laws of that state would permit a bank chartered by that state to open a de novo branch.
Transactions with Affiliates and Insiders. The Bank is subject to restrictions on extensions of credit and certain other transactions between the Bank and the Company or any nonbank affiliate. Generally, these covered transactions with either the Company or any affiliate are limited to 10% of the Bank’s capital and surplus, and all such transactions between the Bank and the Company and all of its nonbank affiliates combined are limited to 20% of the Bank’s capital and surplus. Loans and other extensions of credit from the Bank to the Company or any affiliate generally are required to be secured by eligible collateral in specified amounts. In addition, any transaction between the Bank and the Company or any affiliate are required to be on an arm’s length basis. Federal banking laws also place similar restrictions on certain extensions of credit by insured banks, such as the Bank, to their directors, executive officers and principal shareholders.
Reserves. Historically, Federal Reserve rules required depository institutions, such as the Bank, to maintain reserves against their transaction accounts, primarily interest bearing and non-interest bearing checking accounts. The Federal Reserve announced that reserve requirement ratios were reduced to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.
FDIC Insurance Assessments and Depositor Preference. The Bank’s deposits are insured by the FDIC’s DIF up to the limits under applicable law, which currently are set at $250,000 per depositor, per insured bank, for each account ownership category. The Bank is subject to FDIC assessments for its deposit insurance. The FDIC calculates quarterly deposit insurance assessments based on an institution’s average total consolidated assets less its average tangible equity, and applies one of four risk categories determined by reference to its capital levels, supervisory ratings, and certain other factors. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits.
Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by a bank’s federal regulatory agency. In addition, the Federal Deposit Insurance Act provides that, in the event of the liquidation or other resolution of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution, including those of the parent bank holding company.
Standards for Safety and Soundness. The Federal Deposit Insurance Act requires the federal bank regulatory agencies to prescribe, by regulation or guideline, operational and managerial standards for all insured depository institutions relating to: (1) internal controls; (2) information systems and audit systems; (3) loan documentation; (4) credit underwriting; (5) interest rate risk exposure; and (6) asset quality. The federal banking agencies have adopted regulations and Interagency Guidelines Establishing Standards for Safety and Soundness to implement these required standards. These guidelines set forth the safety and soundness standards used to identify and address problems at insured depository institutions before capital becomes impaired. Under the regulations, if a regulator determines that a bank fails to meet any standards prescribed by the guidelines, the regulator may require the bank to submit an acceptable plan to achieve compliance, consistent with deadlines for the submission and review of such safety and soundness compliance plans.
Anti-Money Laundering. A continued focus of governmental policy relating to financial institutions in recent years has been combating money laundering and terrorist financing. The USA PATRIOT Act broadened the application of anti-money laundering regulations to apply to additional types of financial institutions such as broker-dealers, investment advisors and insurance companies, and strengthened the ability of the U.S. government to help prevent, detect and prosecute international money laundering and the financing of terrorism. The principal provisions of Title III of the USA PATRIOT Act require that regulated financial institutions: (i) establish an anti-money laundering program that includes training and audit components; (ii) comply with regulations regarding the verification of the identity of any person seeking to open an account; (iii) take additional required precautions with non-U.S. owned accounts; and (iv) perform certain verification and certification of money laundering risk for their foreign correspondent banking relationships. Failure of a financial institution to comply with the USA PATRIOT Act's requirements could have serious legal and reputational consequences for the institution. The Bank has augmented its systems and procedures to meet the requirements of these regulations and will continue to revise and update its policies, procedures and controls to reflect changes required by law.
FinCEN has adopted rules that require financial institutions to obtain beneficial ownership information with respect to legal entities with which such institutions conduct business, subject to certain exclusions and exemptions. Bank regulators are focusing their examinations on anti-money laundering compliance, and we continue to monitor and augment, where necessary, our anti-money laundering compliance programs.
Banking regulators will consider compliance with the Act's money laundering provisions in acting upon merger and acquisition proposals.
Bank regulators routinely examine institutions for compliance with these anti-money laundering obligations and recently have been active in imposing “cease-and-desist” and other regulatory orders and money penalty sanctions against institutions found to be in violation of these requirements. Sanctions for violations of the Act can be imposed in an amount equal to twice the sum involved in the violating transaction, up to $1 million. On January 1, 2021, Congress passed federal legislation that made sweeping changes to federal anti-money laundering laws to be implemented in subsequent years.
Economic Sanctions. The Office of Foreign Assets Control (“OFAC”) is responsible for helping to ensure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and acts of Congress. OFAC publishes, and routinely updates, lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts, including the Specially Designated Nationals and Blocked Persons List. If we find a name on any transaction, account or wire transfer that is on an OFAC list, we must undertake certain specified activities, which could include blocking or freezing the account or transaction requested, and we must notify the appropriate authorities.
Concentrations in Lending. During 2006, the federal bank regulatory agencies released guidance on “Concentrations in Commercial Real Estate Lending” (the “Guidance”) and advised financial institutions of the risks posed by commercial real estate (“CRE”) lending concentrations. The Guidance requires that appropriate processes be in place to identify, monitor and control risks associated with real estate lending concentrations. Higher allowances for loan losses and capital levels may also be required. The Guidance is triggered when CRE loan concentrations exceed either:
● Total reported loans for construction, land development, and other land of 100% or more of a bank’s total risk-based capital; or
● Total reported loans secured by multifamily and nonfarm nonresidential properties and loans for construction, land development, and other land of 300% or more of a bank’s total risk-based capital.
The Guidance also applies when a bank has a sharp increase in CRE loans or has significant concentrations of CRE secured by a particular property type. See Item 1A. Risk Factors -- We have a concentration in commercial real estate lending which could cause our regulators to restrict our ability to grow - for a discussion of our risks regarding CRE exposure.
Community Reinvestment Act. The Bank is subject to the provisions of the CRA, which imposes a continuing and affirmative obligation, consistent with their safe and sound operation, to help meet the credit needs of entire communities where the Bank accepts deposits, including low- and moderate-income neighborhoods. The OCC’s assessment of the Bank’s CRA record is made available to the public. Further, a less than satisfactory CRA rating will slow, if not preclude, expansion of banking activities. Following the enactment of the Gramm-Leach-Bliley Act (“GLB”), CRA agreements with private parties must be disclosed and annual CRA reports must be made to a bank’s primary federal regulator. Federal CRA regulations require, among other things, that evidence of discrimination against applicants on a prohibited basis, and illegal or abusive lending practices be considered in the CRA evaluation. In May 2020, the OCC issued new final regulations meant to strengthen and modernize the CRA regulations, with an effective date of October 1, 2020. However, on December 14, 2021, the OCC issued a final rule rescinding its 2020 CRA Rule and replacing it with a rule based largely on the prior rules adopted jointly by the federal banking agencies in 1995. The Bank had a rating of “Satisfactory” in its most recent CRA evaluation.
Privacy and Data Security. The GLB generally prohibits disclosure of consumer information to non-affiliated third parties unless the consumer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to customers annually. Financial institutions, however, will be required to comply with state law if it is more protective of consumer privacy than the GLB. The GLB also directed federal regulators, including the FDIC and the OCC, to prescribe standards for the security of consumer information. The Bank is subject to such standards, as well as standards for notifying customers in the event of a security breach. Under federal law, the Bank must disclose its privacy policy to consumers, permit customers to opt out of having nonpublic customer information disclosed to third parties in certain circumstances, and allow customers to opt out of receiving marketing solicitations based on information about the customer received from another subsidiary. States may adopt more extensive privacy protections. We are similarly required to have an information security program to safeguard the confidentiality and security of customer information and to ensure proper disposal. Customers must be notified when unauthorized disclosure involves sensitive customer information that may be misused. On November 18, 2021, the federal banking agencies issued a new rule effective in 2022 that requires banks to notify their regulators within 36 hours of a “computer-security incident” that rises to the level of a “notification incident.”
Furthermore, the federal banking regulators regularly issue guidance regarding cybersecurity intended to enhance cyber risk management. A financial institution is expected to implement multiple lines of defense against cyberattacks and ensure that their risk management procedures address the risk posed by potential cyber threats. A financial institution is further expected to maintain procedures to effectively respond to a cyberattack and resume operations following any such attack. The Company has adopted and implemented an Information Security Program to comply with the regulatory cybersecurity guidance.
Consumer Regulation. Activities of the Bank are subject to a variety of statutes and regulations designed to protect consumers. These laws and regulations include, among numerous other things, provisions that:
● limit the interest and other charges collected or contracted for by the Bank, including new rules respecting the terms of credit cards and of debit card overdrafts;
● govern the Bank’s disclosures of credit terms to consumer borrowers;
● require the Bank to provide information to enable the public and public officials to determine whether it is fulfilling its obligation to help meet the housing needs of the community it serves;
● prohibit the Bank from discriminating on the basis of race, creed or other prohibited factors when it makes decisions to extend credit;
● govern the manner in which the Bank may collect consumer debts; and
● prohibit unfair, deceptive or abusive acts or practices in the provision of consumer financial products and services.
Mortgage Regulation. The CFPB adopted a rule that implements the ability-to-repay and qualified mortgage provisions of the Dodd-Frank Act (the “ATR/QM rule”), which requires lenders to consider, among other things, income, employment status, assets, payment amounts, and credit history before approving a mortgage, and provides a compliance “safe harbor” for lenders that issue certain “qualified mortgages.” The ATR/QM rule defines a “qualified mortgage” to have certain specified characteristics, and generally prohibit loans with negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years from being qualified mortgages. The rule also establishes general underwriting criteria for qualified mortgages, including that monthly payments be calculated based on the highest payment that will apply in the first five years of the loan and that the borrower have a total debt-to-income ratio that is less than or equal to 43%. While “qualified mortgages” will generally be afforded safe harbor status, a rebuttable presumption of compliance with the ability-to-repay requirements will attach to “qualified mortgages” that are “higher priced mortgages” (which are generally subprime loans). In addition, the securitizer of asset-backed securities must retain not less than 5 percent of the credit risk of the assets collateralizing the asset-backed securities, unless subject to an exemption for asset-backed securities that are collateralized exclusively by residential mortgages that qualify as “qualified residential mortgages.”
The CFPB has also issued rules to implement requirements of the Dodd-Frank Act pertaining to mortgage loan origination (including with respect to loan originator compensation and loan originator qualifications) as well as integrated mortgage disclosure rules. In addition, the CFPB has issued rules that require servicers to comply with new standards and practices with regard to: error correction; information disclosure; force-placement of insurance; information management policies and procedures; requiring information about mortgage loss mitigation options be provided to delinquent borrowers; providing delinquent borrowers access to servicer personnel with continuity of contact about the borrower’s mortgage loan account; and evaluating borrowers’ applications for available loss mitigation options. These rules also address initial rate adjustment notices for adjustable-rate mortgages (ARMs), periodic statements for residential mortgage loans, and prompt crediting of mortgage payments and response to requests for payoff amounts.
In 2020, the CARES Act granted certain forbearance rights and protection against foreclosure to borrowers with a "federally backed mortgage loan," including certain first or subordinate lien loans designed principally for the occupancy of one to four families. These consumer protections continued during the COVID-19 pandemic.
Non-Discrimination Policies. The Bank is also subject to, among other things, the provisions of the Equal Credit Opportunity Act (“ECOA”) and the Fair Housing Act (“FHA”), both of which prohibit discrimination based on race or color, religion, national origin, sex, and familial status in any aspect of a consumer or commercial credit or residential real estate transaction. The Department of Justice (“DOJ”), and the federal bank regulatory agencies have issued an Interagency Policy Statement on Discrimination in Lending that provides guidance to financial institutions in determining whether discrimination exists, how the agencies will respond to lending discrimination, and what steps lenders might take to prevent discriminatory lending practices. The DOJ has increased its efforts to prosecute what it regards as violations of the ECOA and FHA.

---

ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
In addition to the other information contained in this Form 10-K, you should carefully consider the risks described below, as well as the risk factors and uncertainties discussed in our other public filings with the SEC under the caption "Risk Factors" in evaluating us and our business and making or continuing an investment in our stock. Our operations and financial results are subject to various risks and uncertainties, including, but not limited, to the material risks described below. Many of these risks are beyond our control although efforts are made to manage those risks while simultaneously optimizing operational and financial results. The occurrence of any of the following risks, as well as risks of which we are currently unaware or currently deem immaterial, could materially and adversely affect our assets, business, cash flows, condition (financial or otherwise), liquidity, prospects, results of operations and the trading price of our common stock. It is impossible to predict or identify all such factors and, as a result, you should not consider the following factors to be a complete discussion of the risks, uncertainties and assumptions that could materially and adversely affect our assets, business, cash flows, condition (financial or otherwise), liquidity, prospects, results of operations and the trading price of our common stock.
In addition, certain statements in the following risk factors constitute forward-looking statements. Please refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements” beginning on page 1 of this Annual Report on Form 10- K.
Risks related to our business
Difficult or volatile conditions in the national financial markets, and the U.S. economy generally, may adversely affect our lending activity or other businesses, as well as our financial condition.
Our business and financial performance are vulnerable to weak economic conditions in the financial markets and economic conditions generally or specifically in the state of Wisconsin, the principal market in which we conduct business. A deterioration in economic conditions in our primary market areas caused by inflation, recession, pandemics, outbreaks of hostilities or other international or domestic occurrences, unemployment, plant or business closings or downsizing, changes in securities markets or other factors could result in the following consequences, any of which could materially and adversely affect our business: increased loan delinquencies; problem assets and foreclosures; significant write-downs of asset values; lower demand for our products and services; reduced low cost or noninterest-bearing deposits; intangible asset impairment; and collateral for loans made by us, especially real estate, may decline in value, in turn reducing our customers’ ability to repay outstanding loans, and reducing the value of assets and collateral associated with our existing loans.
Effective March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0 to 0.25 percent in response to the economic disruption that occurred at the outset of the COVID-19 pandemic, which has continued into 2022. We expect a long duration of reduced interest rates to negatively impact our net interest income, margin, cost of borrowing and future profitability and to have a material adverse effect on our financial results. However, we expect the Federal Reserve to raise rates more than once in the next twelve months. Increasing interest rates can have a negative impact on our business by reducing the amount of money our customers borrow or by adversely affecting their ability to repay outstanding loan balances that may increase due to adjustments in their variable rates. In addition, in a rising interest rate environment we may have to offer more attractive interest rates to depositors to compete for deposits, or pursue other sources of liquidity, such as wholesale funds. Higher income volatility from changes in interest rates and spreads to benchmark indices could result in a decrease in net interest income and a decrease in current fair market values of our assets. Fluctuations in interest rates impacts both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, or financial condition. A prolonged period of volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies.
Additionally, we conduct our banking operations primarily in Wisconsin. As of December 31, 2021, approximately 95.51% of our loans and approximately 96.67% of our deposits were made to borrowers or received from depositors who live and/or primarily conduct business in Wisconsin. Therefore, our success will depend in large part upon the general economic conditions in this area, which we cannot predict with certainty. This geographic concentration imposes risks from lack of geographic diversification, as adverse economic developments in Wisconsin, among other things, could affect the volume of loan originations, increase the level of nonperforming assets, increase the rate of foreclosure losses on loans and reduce the value of our loans and loan servicing portfolio. Any regional or local economic downturn that affects Wisconsin or existing or prospective borrowers or property values in such areas may affect us and our profitability more significantly and adversely than our competitors whose operations are less geographically concentrated.
We face strong competition from financial services companies and other companies that offer banking services.
We conduct our banking operations primarily in Wisconsin. Many of our competitors offer the same, or a wider variety of, banking services within our market areas, and we compete with them for the same customers. These competitors include banks with nationwide operations, regional banks and community banks. In many instances these national and regional banks have greater resources than we do, and the smaller community banks may have stronger ties in local markets than we do, which may put us at a competitive disadvantage. We also face competition from many other types of financial institutions, including fintech companies, thrift institutions, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In addition, a number of out-of-state financial institutions have opened offices and solicit deposits in our market areas. Increased competition in our markets may result in reduced loans and deposits, as well as reduced net interest margin and profitability. We compete with many forms of payments offered by both bank and non-bank providers, including a variety of new and evolving alternative payment mechanisms, systems and products, such as aggregators and web-based and wireless payment platforms or technologies, digital or “crypto” currencies, prepaid systems and payment services targeting users of social networks, communications platforms and online gaming. Our future success may depend, in part, on our ability to use technology competitively to offer products and services that provide convenience to customers and create additional efficiencies in our operations. If we are unable to attract and retain banking clients, we may be unable to continue to grow our loan and deposit portfolios, and our business, financial condition and results of operations may be adversely affected.
If we do not effectively manage our asset quality and credit risk, we could experience loan losses.
Making any loan involves various risks, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and cash flows available to service debt, and risks resulting from changes in economic and market conditions. Our credit risk approval and monitoring procedures may fail to identify or reduce these credit risks, and they cannot completely eliminate all credit risks related to our loan portfolio. If the overall economic climate, including employment rates, real estate markets, interest rates and general economic growth, in the United States, generally, or Wisconsin, specifically, experiences material disruption, our borrowers may experience difficulties in repaying their loans, the collateral we hold may decrease in value or become illiquid, and the levels of nonperforming loans, charge-offs and delinquencies could rise and require additional provisions for loan losses, which would cause our net income and return on equity to decrease. The future effects of the continued COVID-19 pandemic on economic activity could negatively affect the collateral values associated with our existing loans, the ability to liquidate the real estate collateral securing our residential and commercial real estate loans, our ability to maintain loan origination volume and to obtain additional financing, the future demand for or profitability of our lending and services, and the financial condition and credit risk of our customers. Further, in the event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent us from making our business decisions or may result in a delay in our taking certain remediation actions, such as foreclosure. If borrowers fail to repay their loans, our financial condition and results of operations would be adversely affected.
Our provision and allowance for loan losses may not be adequate to cover actual credit losses.
We make various assumptions and judgments about the collectability of our loan and lease portfolio and utilize these assumptions and judgments when determining the provision and allowance for loan losses. The determination of the appropriate level of the provision for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes, as we have experienced. Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the amount reserved in the allowance for loan losses. In addition, bank regulatory agencies periodically review our provision and the total allowance for loan losses and may require an increase in the allowance for loan losses or future provisions for loan losses, based on judgments different than those of management. Any increases in the provision or allowance for loan losses will result in a decrease in our net income and, potentially, capital, and may have a material adverse effect on our financial condition or results of operations.
The current expected credit loss standard established by the Financial Accounting Standards Board will require significant data requirements and changes to methodologies.
In the aftermath of the 2007-2008 financial crisis, the Financial Accounting Standards Board, or FASB, decided to review how banks estimate losses in the ALL calculations, and it issued the final Current Expected Credit Loss, or CECL, standard on June 16, 2016. Currently, the impairment model used by financial institutions is based on incurred losses, and loans are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms. This model will be replaced by the CECL model that will become effective for the Company for the fiscal year beginning after December 15, 2022 in which financial institutions will be required to use historical information, current conditions, and reasonable forecasts to estimate the expected loss over the life of the loan. The Company will record a one-time adjustment to its credit loss allowance, as of the beginning of the first quarter of 2023, equal to the difference between the amounts of its credit loss allowance under the incurred loss methodology and CECL. Moreover, the new accounting standard is likely, as a result of its requirement to estimate and recognize expected credit losses on new assets, to introduce greater volatility in our provision for credit loans and allowance for loan losses. The Company is currently evaluating the magnitude of the one-time cumulative adjustment to its allowance and of the ongoing impact of the CECL model on its loan loss allowance and results of operations.
Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing our real estate loans and result in loan and other losses.
As of December 31, 2021, approximately 75.30% of our loan portfolio was comprised of loans with real estate as a primary or secondary component of collateral. This includes collateral consisting of income producing and residential construction properties, which properties tend to be more sensitive to general economic conditions and downturns in real estate markets. As a result, adverse developments affecting real estate values in our market areas could increase the credit risk associated with our real estate loan portfolio. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the area in which the real estate is located. Adverse changes affecting real estate values and the liquidity of real estate in one or more of our markets could increase the credit risk associated with our loan portfolio, and could result in losses that would adversely affect credit quality, financial condition, and results of operation. Negative changes in the economy affecting real estate values and liquidity in our market areas could significantly impair the value of property pledged as collateral on loans and affect our ability to sell the collateral upon foreclosure without a loss or additional losses. Collateral may have to be sold for less than the outstanding balance of the loan, which could result in losses on such loans. Such declines and losses could have a material adverse impact on our business, results of operations and growth prospects. If real estate values decline, it is also more likely that we would be required to increase our ALLL, which could adversely affect our financial condition, results of operations and cash flows.
We may be materially and adversely affected by the creditworthiness and liquidity of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks and other institutional customers. Many of these transactions expose us to credit risk in the event of a default by, or questions or concerns about the creditworthiness of, a counterparty or client, or concerns about the financial services industry generally. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to us. Any such losses could have a material adverse effect on us.
We may not be able to meet our unfunded credit commitments, or adequately reserve for losses associated with our unfunded credit commitments.
A commitment to extend credit is a formal agreement to lend funds to a client as long as there is no violation of any condition established under the agreement. The actual borrowing needs of our customers under these credit commitments have historically been lower than the contractual amount of the commitments. A significant portion of these commitments expire without being drawn upon. Because of the credit profile of our customers, we typically have a substantial amount of total unfunded credit commitments, which is not reflected on our balance sheet. Actual borrowing needs of our customers may exceed our expected funding requirements, especially during a challenging economic environment when our client companies may be more dependent on our credit commitments due to the lack of available credit elsewhere, the increasing costs of credit, or the limited availability of financings from other sources. Any failure to meet our unfunded credit commitments in accordance with the actual borrowing needs of our customers may have a material adverse effect on our business, financial condition, results of operations or reputation.
Changes in interest rates could have an adverse impact on our results of operations and financial condition.
Our earnings and financial condition are dependent to a large degree upon net interest income, which is the difference, or spread, between interest earned on loans, securities and other interest-earning assets and interest paid on deposits, borrowings and other interest-bearing liabilities. When market rates of interest change, the interest we receive on our assets and the interest we pay on our liabilities may fluctuate. This may cause decreases in our spread and may adversely affect our earnings and financial condition.
Interest rates are highly sensitive to many factors including, without limitation: the rate of inflation; economic conditions; federal monetary policies; and stability of domestic and foreign markets.
Although we have implemented procedures we believe will reduce the potential effects of changes in interest rates on our net interest income, these procedures may not always be successful. Accordingly, changes in levels of market interest rates could materially and adversely affect our net interest income and our net interest margin, asset quality, loan and lease origination volume, liquidity or overall profitability.
If we are unable to grow our noninterest income, our growth prospects will be impaired.
Taking advantage of opportunities to develop new, and expand existing, streams of noninterest income, including service charges, loan servicing fees and income from the Bank’s unconsolidated subsidiaries, is a part of our long-term growth strategy. If we are unsuccessful in our attempts to grow our noninterest income, our long-term growth will be impaired. Furthermore, focusing on these noninterest income streams may divert management’s attention and resources away from our core banking business, which could impair our core business, financial condition and operating results.
Our future success is largely dependent upon our ability to successfully execute our business strategy.
Our future success, including our ability to achieve our growth and profitability goals, is dependent on the ability of our management team to execute on our long-term business strategy, which requires them to, among other things:
maintain and enhance our reputation; attract and retain experienced and talented bankers in each of our markets; maintain adequate funding sources, including by continuing to attract stable, low-cost deposits;enhance our market penetration in our metropolitan markets and maintain our leadership position in our community markets; improve our operating efficiency; implement new technologies to enhance the client experience and keep pace with our competitors; identify attractive acquisition targets, close on such acquisitions on favorable terms and successfully integrate acquired businesses; attract and maintain commercial banking relationships with well-qualified businesses, real estate developers and investors with proven track records in our market areas; attract sufficient loans that meet prudent credit standards; originate conforming residential mortgage loans for resale into secondary market to provide mortgage banking income; maintain adequate liquidity and regulatory capital and comply with applicable federal and state banking regulations; manage our credit, interest rate and liquidity risks; develop new, and grow our existing, streams of noninterest income; oversee the performance of third-party service providers that provide material services to our business; and control expenses in line with current projections.
Failure to achieve these strategic goals could adversely affect our ability to successfully implement our business strategies and could negatively impact our business, growth prospects, financial condition and results of operations. Further, if we do not manage our growth effectively, our business, financial condition, results of operations and future prospects could be negatively affected, and we may not be able to continue to implement our business strategy and successfully conduct our operations.
We follow a relationship-based operating model and our ability to maintain our reputation is critical to the success of our business.
We are a community bank, and our reputation is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining bankers and other associates who share our core values of being an integral part of the communities we serve, delivering superior service to our clients and caring about our clients and associates. Furthermore, maintaining our reputation also depends on our ability to protect our brand name and associated intellectual property. If our reputation is negatively affected by the actions of our associates or otherwise, our business and operating results may be materially adversely affected.
We depend on our executive officers and other key individuals to continue the implementation of our long-term business strategy and could be harmed by the loss of their services and our inability to make up for such loss with qualified replacements.
We believe that our continued growth and future success will depend in large part on the skills of our management team and our ability to motivate and retain these individuals and other key individuals. The loss of any of their service could reduce our ability to successfully implement our long-term business strategy, our business could suffer and the value of our common stock could be materially adversely affected.
The success of our operating model depends on our ability to attract and retain talented bankers and associates in each of our markets.
We strive to attract and retain these bankers in each of our markets by fostering an entrepreneurial environment, empowering them with local decision making authority and providing them with sufficient infrastructure and resources to support their growth while also providing management with appropriate oversight. However, the competition for bankers in each of our markets is intense. We compete for talent with both smaller banks that may be able to offer bankers with more responsibility and autonomy and larger banks that may be able to offer bankers with higher compensation, resources and support. As a result, we may not be able to effectively compete for talent across our markets. Further, our bankers may leave us to work for our competitors and, in some instances, may take important banking and lending relationships with them to our competitors. If we are unable to attract and retain talented bankers in our markets, our business, growth prospects and financial results could be materially and adversely affected.
Acquisitions may disrupt our business and dilute stockholder value, and integrating acquired companies may be more difficult, costly, or time-consuming than we expect.
Our pursuit of acquisitions may disrupt our business, and any equity that we issue as merger consideration may have the effect of diluting the value of your investment. In addition, we may fail to realize some or all of the anticipated benefits of completed acquisitions. We anticipate that the integration of businesses that we may acquire in the future will be a time-consuming and expensive process, even if the integration process is effectively planned and implemented.
In addition, our acquisition activities could be material to our business and involve a number of significant risks, including the following:
incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, resulting in our attention being diverted from the operating of our existing business; using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks with respect to the target company or the assets and liabilities that we seek to acquire; exposure to potential asset quality issues of the target company; intense competition from other banking organizations and other potential acquirers, many of which have substantially greater resources than we do; potential exposure to unknown or contingent liabilities of banks and businesses we acquire, including, without limitation, liabilities for regulatory and compliance issues; inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and other projected benefits of the acquisition; incurring time and expense required to integrate the operations and personnel of the combined businesses; inconsistencies in standards, procedures, and policies that would adversely affect our ability to maintain relationships with customers and employees; experiencing higher operating expenses relative to operating income from the new operations; creating an adverse short-term effect on our results of operations; losing key employees and customers; significant problems related to the conversion of the financial and customer data of the entity; integration of acquired customers into our financial and customer product systems; potential changes in banking or tax laws or regulations that may affect the target company; or risks of impairment to goodwill.
If difficulties arise with respect to the integration process, the economic benefits expected to result from acquisitions might not occur. As with any merger of financial institutions, there also may be business disruptions that cause us to lose customers or cause customers to move their business to other financial institutions. Failure to successfully integrate businesses that we acquire could have an adverse effect on our profitability, return on equity, return on assets, or our ability to implement our strategy, any of which in turn could have a material adverse effect on our business, financial condition, and results of operations.
Our funding sources may prove insufficient to replace deposits and support our future growth.
Deposits, cash flows from operations (including from our mortgage business) and investment securities for sale are the primary sources of funds for our lending activities and general business purposes. However, from time to time we also obtain advances from the Federal Home Loan Bank (“FHLB”), purchase federal funds, engage in overnight borrowing from the Federal Reserve and correspondent banks and sell loans. While we believe our current funding sources to be adequate, our future growth may be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available on acceptable terms to accommodate future growth, which could have a material adverse effect on our financial condition, results of operations or cash flows.
Decreased residential mortgage origination, volume and pricing decisions of competitors may adversely affect our profitability.
Our mortgage operation originates and sells residential mortgage loans and services residential mortgage loans. Changes in interest rates, housing prices, regulations by the applicable governmental authorities and pricing decisions by our loan competitors may adversely affect demand for our residential mortgage loan products, the revenue realized on the sale of loans, revenues received from servicing such loans for others, and ultimately reduce our net income. New regulations, increased regulatory reviews, and/or changes in the structure of the secondary mortgage markets which we would utilize to sell mortgage loans may be introduced and may increase costs and make it more difficult to operate a residential mortgage origination business.
System failure or breaches of our network security, or the security of our data processing subsidiary, including as a result of cyberattacks or data security breaches, could subject us to increased operating costs as well as litigation and other liabilities.
The computer systems and network infrastructure we use may be vulnerable to physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes breakdowns or disruptions in our client relationship management, general ledger, deposit, loan and other systems could damage our reputation, result in a loss of client business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on us.
Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure. Information security risks have generally increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties. Our operations rely on the secure processing, transmission and storage of confidential information in our computer systems and networks. Although we believe we have robust information security procedures and controls, our technologies, systems, networks, and our clients’ devices may become the target of cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our clients’ confidential, proprietary and other information, or otherwise disrupt our or our clients’ business operations. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. In addition, as the regulatory environment related to information security, data collection and use, and privacy becomes increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could also result in additional costs.
We are under continuous threat of loss due to hacking and cyberattacks especially as we continue to expand client capabilities to utilize internet and other remote channels to transact business. While we are not aware of any successful hacking or cyberattacks into our computer or other information technology systems, or those of our data processing subsidiary, there can be no assurance that we will not be the victim of successful hacking or cyberattacks in the future that could cause us to suffer material losses. The occurrence of any cyberattack or information security breach could result in potential liability to clients, reputational damage and the disruption of our operations, and regulatory concerns, all of which could adversely affect our business, financial condition or results of operations.
The financial services industry is undergoing rapid technological changes and we may not have the resources to implement new technology to stay current with these changes.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. These trends were accelerated by the COVID-19 pandemic, increasing demand for mobile banking solutions. In addition to better serving clients, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend in part upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands for convenience as well as to provide secure electronic environments and create additional efficiencies in our operations as we continue to grow and expand our market area. Many of our larger competitors have substantially greater resources to invest in technological improvements and have invested significantly more than us in technological improvements. As a result, they may be able to offer additional or more convenient products compared to those that we will be able to provide, which would put us at a competitive disadvantage. Accordingly, we may not be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our clients, which could impair our growth and profitability.
We are subject to certain operational risks, including, but not limited to, client or employee fraud and data processing system failures and errors.
Employee errors and employee and client misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our clients or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence. We maintain a system of internal controls and insurance coverage to mitigate against operational risks. If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.
In addition, we rely heavily upon information supplied by third parties, including the information contained in credit applications, property appraisals, title information, equipment pricing and valuation and employment and income documentation, in deciding which loans we will originate, as well as the terms of those loans. If any of the information upon which we rely is misrepresented, either fraudulently or inadvertently, and the misrepresentation is not detected prior to asset funding, the value of the asset may be significantly lower than expected, or we may fund a loan that we would not have funded or on terms we would not have extended.
We depend on a number of third-party service providers and our operations could be interrupted if these third-party service providers experience difficulty, terminate their services or fail to comply with banking regulations.
We depend on a number of relationships with third-party service providers. Specifically, we receive core systems processing, essential web hosting and other Internet systems, deposit processing and other processing services from third-party service providers. If these third-party service providers experience difficulties, or terminate their services, and we are unable to replace them with other service providers, particularly on a timely basis, our operations could be interrupted. If an interruption were to continue for a significant period of time, our business, financial condition and results of operations could be adversely affected, perhaps materially. Even if we are able to replace third-party service providers, it may be at a higher cost to us, which could adversely affect our business, financial condition and results of operations.
We may need to raise additional capital in the future.
We are required to meet certain regulatory capital requirements and maintain sufficient liquidity. We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs, which could include the possibility of financing acquisitions. Our ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, and on our financial condition and performance. Accordingly, we may be unable to raise additional capital if needed or on terms acceptable to us. Further, such additional capital could result in dilution to our existing shareholders. If we or the Bank fail to maintain capital to meet regulatory requirements, our financial condition, liquidity and results of operations, as well as our ability to maintain compliance with regulatory capital requirements, would be materially and adversely affected.
Changes in accounting standards could materially impact our financial statements.
From time to time, FASB or the SEC may change the financial accounting and reporting standards that govern the preparation of our financial statements. Such changes may result in us being subject to new or changing accounting and reporting standards. In addition, the bodies that interpret the accounting standards (such as banking regulators or outside auditors) may change their interpretations or positions on how these standards should be applied. These changes may be beyond our control, can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retrospectively, or apply an existing standard differently, also retrospectively, in each case resulting in our needing to revise or restate prior period financial statements.
Risks related to our common stock
Applicable laws and regulations restrict both the ability of the Bank to pay dividends to the Company and the ability of the Company to pay dividends to our shareholders.
Both the Company and the Bank are subject to various regulatory restrictions relating to the payment of dividends. In addition, the Federal Reserve has the authority to prohibit bank holding companies from engaging in unsafe or unsound practices in conducting their business. These federal and state laws, regulations and policies are described in greater detail in “Business- Supervision and Regulation-Payment of Dividends,” but generally look to factors such as previous results and net income, capital needs, asset quality, existence of enforcement or remediation proceedings, and overall financial condition.
For the foreseeable future, the majority, if not all, of the Company’s revenue will be from any dividends paid to the Company by the Bank. Accordingly, our ability to pay dividends also depends on the ability of the Bank to pay dividends to us. Furthermore, the present and future dividend policy of the Bank is subject to the discretion of its board of directors.
We cannot guarantee that the Company or the Bank will be permitted by financial condition or applicable regulatory restrictions to pay dividends, that the board of directors of the Bank will elect to pay dividends to us, nor can we guarantee the timing or amount of any dividend actually paid.
Our stock price may be volatile.
The market price of our common stock may be volatile and could be subject to wide fluctuations in price in response to various factors, some of which are beyond our control. In addition, if the market for stocks in our industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management which could materially adversely affect our business, financial condition or results of operations.
Future sales of our common stock or securities convertible into our common stock may dilute our shareholders’ ownership in us and may adversely affect us or the market price of our common stock.
We are generally not restricted from issuing additional shares of our common stock up to the authorized number of shares set forth in our charter. We may issue additional shares of our common stock or securities convertible into our common stock in the future pursuant to current or future employee stock option plans, employee stock grants, upon exercise of warrants or in connection with future acquisitions or financings. We cannot predict the size of any such future issuances or the effect, if any, that any such future issuances will have on the trading price of our common stock. Any such future issuances of shares of our common stock or securities convertible into common stock may have a dilutive effect on the holders of our common stock and could have a material negative effect on the trading price of our common stock.
Future sales of our common stock in the public market could lower our share price, and any additional capital raised by us through the sale of equity or convertible debt securities may dilute our shareholders ownership in us and may adversely affect us or the market price of our common stock.
We may sell additional shares of our common stock in public offerings, and issue additional shares of common stock or convertible securities to finance future acquisitions. We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares that may be issued in connection with acquisitions), or the perception that such issuance could occur, may adversely affect prevailing market prices for our common stock.
The accuracy of our financial statements and related disclosures could be affected if the judgments, assumptions or estimates used in our critical accounting policies are inaccurate.
The preparation of financial statements and related disclosure in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Our critical accounting policies, which are included in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, describe those significant accounting policies and methods used in the preparation of our consolidated financial statements that we consider “critical” because they require judgments, assumptions and estimates that materially affect our consolidated financial statements and related disclosures. As a result, if future events differ significantly from the judgments, assumptions and estimates in our critical accounting policies, those events or assumptions could have a material impact on our consolidated financial statements and related disclosures.
We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various regulatory and reporting requirements that are applicable to public companies that are emerging growth companies, including, but not limited to, exemptions from being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even if we comply with the greater obligations of public companies that are not emerging growth companies, we may avail ourselves of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as we are an emerging growth company. We will remain an emerging growth company for up to five years, though we will cease to be an emerging growth company earlier if we have more than $1 billion in annual gross revenues, have more than $700 million in market value of our common stock held by non-affiliates, or issue more than $1 billion of non-convertible debt in a three-year period. Investors and securities analysts may find it more difficult to evaluate our common stock because we will rely on one or more of these exemptions and, as a result, investor confidence or the market price of our common stock may be materially and adversely affected.
Our securities are not FDIC insured.
Securities that we issue, including our common stock, are not savings or deposit accounts or other obligations of any bank, insured by the FDIC, any other governmental agency or instrumentality, or any private insurer, and are subject to investment risk, including the possible loss of our shareholders’ investments.
Risks related to the business environment and our industry
Inflation could negatively impact our business, our profitability and our stock price.
Prolonged periods of inflation may impact our profitability by negatively impacting our fixed costs and expenses, including increasing funding costs and expense related to talent acquisition and retention, and negatively impacting the demand for our products and services. Additionally, inflation may lead to a decrease in consumer and clients purchasing power and negatively affect the need or demand for our products and services. If significant inflation continues, our business could be negatively affected by, among other things, increased default rates leading to credit losses which could decrease our appetite for new credit extensions. These inflationary pressures could result in missed earnings and budgetary projections causing our stock price to suffer.
The COVID-19 pandemic has adversely impacted, and will likely continue to adversely impact, our business, financial condition, liquidity, capital and results of operations.
The extent and duration to which the continuing COVID-19 pandemic will impact our business in the future is unknown and will depend on future developments, which are highly uncertain and outside our control. These developments include the duration and severity of the pandemic (including the possibility of further surges of new or existing COVID-19 variants of concern), supply chain disruptions, decreased demand for our products and services or those of our borrowers, which could increase our credit risk, rising inflation, our ability to maintain sufficient qualified personnel due to labor shortages, talent attrition, employee illness, quarantine, willingness to return to work, face-coverings and other safety requirements, or travel and other restrictions, and the actions taken by governments, businesses and individuals to contain the impact of COVID-19, as well as further actions taken by governmental authorities to limit the resulting economic impact. It is also possible that the pandemic and its aftermath will lead to a prolonged economic slowdown in sectors disproportionately affected by the pandemic or recession in the U.S. economy or the world economy in general.
ESG risks could adversely affect our reputation and shareholder, employee, client and third party relationships and may negatively affect our stock price.
Our business faces increasing public scrutiny related to environmental, social and governance (“ESG”) activities. We risk damage to our brand and reputation if we fail to act responsibly in a number of areas, such as diversity, equity, inclusion, environmental stewardship, human capital management, support for our local communities, corporate governance and transparency, or fail to consider ESG factors in our business operations.
Furthermore, as a result of our diverse base of clients and business partners, we may face potential negative publicity based on the identity of our clients or business partners and the public’s (or certain segments of the public’s) view of those entities. Such publicity may arise from traditional media sources or from social media and may increase rapidly in size and scope. If our client or business partner relationships were to become intertwined in such negative publicity, our ability to attract and retain clients, business partners, and employees may be negatively impacted, and our stock price may also be negatively impacted. Additionally, we may face pressure to not do business in certain industries that are viewed as harmful to the environment or are otherwise negatively perceived, which could impact our growth.Additionally, investors and shareholder advocates are placing ever increasing emphasis on how corporations address ESG issues in their business strategy when making investment decisions and when developing their investment theses and proxy recommendations. We may incur meaningful costs with respect to our ESG efforts and if such efforts are negatively perceived, our reputation and stock price may suffer.
The Company is subject to extensive government regulation and supervision, which may interfere with our ability to conduct our business and may negatively impact our financial results.
The Company, primarily through the Bank and certain non-bank subsidiaries, are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds and the safety and soundness of the banking system as a whole, and not shareholders. These regulations affect the Bank’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect the Company and/or the Bank in substantial and unpredictable ways. Such changes could subject the Company and/or the Bank to additional costs, limit the types of financial services and products the Company and/or the Bank may offer, and/or limit the pricing the Company and/or the Bank may charge on certain banking services, among other things. Compliance personnel and resources may increase our costs of operations and adversely impact our earnings.
Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations. While the Company has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. See “Business - Supervision and Regulation”.
Federal regulatory agencies, including the Federal Reserve and the OCC, periodically conduct examinations of our business, including for compliance with laws and regulations, and our failure to comply with any supervisory actions to which we are or become subject as a result of such examinations may adversely affect our business.
Federal regulatory agencies, including the Federal Reserve and the OCC, periodically conduct examinations of our business, including our compliance with laws and regulations. If, as a result of an examination, an agency were to determine that the financial, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of any of our operations had become unsatisfactory, or violates any law or regulation, such agency may take certain remedial or enforcement actions it deems appropriate to correct any deficiency. Remedial or enforcement actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced against a bank, to direct an increase in the bank’s capital, to restrict the bank’s growth, to assess civil monetary penalties against a bank’s officers or directors, and to remove officers and directors. The CFPB also has authority to take enforcement actions, including cease-and-desist orders or civil monetary penalties, if it finds that we offer consumer financial products and services in violation of federal consumer financial protection laws.
If we were unable to comply with future regulatory directives, or if we were unable to comply with the terms of any future supervisory requirements to which we may become subject, then we could become subject to a variety of supervisory actions and orders, including cease-and-desist orders, prompt corrective actions, memoranda of understanding and other regulatory enforcement actions. Such supervisory actions could, among other things, impose greater restrictions on our business, as well as our ability to develop any new business. We could also be required to raise additional capital, dispose of certain assets and liabilities within a prescribed time period, or both. Failure to implement remedial measures as required by financial regulatory agencies could result in additional orders or penalties from federal and state regulators, which could trigger one or more of the remedial actions described above. The terms of any supervisory action and associated consequences with any failure to comply with any supervisory action could have a material negative effect on our business, operating flexibility and overall financial condition.
We have a concentration in commercial real estate lending which could cause our regulators to restrict our ability to grow.
As a part of their regulatory oversight, the federal regulators have issued the Commercial Real Estate (“CRE”) Concentration Guidance on sound risk management practices with respect to a financial institution’s concentrations in commercial real estate lending activities. These guidelines were issued in response to the agencies’ concerns that rising CRE concentrations might expose financial institutions to unanticipated earnings and capital volatility in the event of adverse changes in the commercial real estate market. Existing guidance reinforces and enhances existing regulations and guidelines for safe and sound real estate lending by providing supervisory criteria, including numerical indicators to assist in identifying institutions with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny. The guidance does not limit a banks’ commercial real estate lending, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. The CRE Concentration Guidance identifies certain concentration levels that, if exceeded, will expose the institution to additional supervisory analysis with regard to the institution’s CRE concentration risk. The CRE Concentration Guidance is designed to promote appropriate levels of capital and sound loan and risk management practices for financial institutions with a concentration of CRE loans. In general, the CRE Concentration Guidance establishes the following supervisory criteria as preliminary indications of possible CRE concentration risk: (1) the institution’s total construction, land development and other land loans represent 100% or more of total risk-based capital; or (2) total non-owner occupied CRE loans as defined in the regulatory guidelines represent 300% or more of total risk-based capital, and the institution’s CRE loan portfolio has increased by 50% or more during the prior 36-month period. Pursuant to the CRE Concentration Guidelines, loans secured by owner-occupied commercial real estate are not included for purposes of CRE Concentration calculation. Although we are actively working to manage our CRE concentration and believe that our underwriting policies, management information systems, independent credit administration process, and monitoring of real estate loan concentrations are currently sufficient to address the CRE Concentration Guidance, the OCC or other federal regulators could become concerned about our CRE loan concentrations, and they could limit our ability to grow by, among other things, restricting their approvals for the establishment or acquisition of branches, or approvals of mergers or other acquisition opportunities.
Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market operations in U.S. government securities, adjustments of the discount rate and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits. The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.
The Federal Reserve may require us to commit capital resources to support the Bank.
The Federal Reserve, which examines us and the Bank, requires a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. In addition, the Dodd-Frank Act directs the federal bank regulators to require that all companies that directly or indirectly control an insured depository institution serve as a source of strength for the institution. Under these requirements, in the future, we could be required to provide financial assistance to the Bank if it experiences financial distress.
A capital injection may be required at times when we do not have the resources to provide it, and therefore we may be required to borrow the funds. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the holding company’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the holding company in order to make the required capital injection becomes more difficult and expensive and will adversely impact the holding company’s cash flows, financial condition, results of operations and prospects.
The Company may be subject to more stringent capital requirements.
The Bank is subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital which the Bank must maintain. From time to time, the regulators implement changes to these regulatory capital adequacy guidelines. If the Bank fails to meet these minimum capital guidelines and other regulatory requirements, our financial condition would be materially and adversely affected. We may also be required to satisfy additional capital adequacy standards as determined by the Federal Reserve. These requirements, and any other new regulations, could adversely affect our ability to pay dividends, or could require us to reduce business levels or to raise capital, including in ways that may adversely affect our financial condition or results of operations.
Our deposit insurance premiums could be substantially higher in the future, which could have a material adverse effect on our future earnings.
The FDIC insures deposits at FDIC-insured depository institutions, such as the Bank, up to applicable limits. The amount of a particular institution’s deposit insurance assessment is based on that institution’s risk classification under an FDIC risk-based assessment system. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to its regulators. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. Any future additional assessments, increases or required prepayments in FDIC insurance premiums could reduce our profitability, may limit our ability to pursue certain business opportunities or otherwise negatively impact our operations.
We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties.
Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose nondiscriminatory lending requirements on financial institutions. The Department of Justice, CFPB and other federal and state agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. A successful challenge to our performance under the fair lending laws and regulations could adversely impact our rating under the Community Reinvestment Act and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact our reputation, business, financial condition and results of operations.
We could face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The Bank Secrecy Act of 1970, the USA PATRIOT Act and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and file suspicious activity and currency transaction reports as appropriate. FinCEN, established by the U.S. Department of the Treasury to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and engages in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and IRS. There is also increased scrutiny of compliance with the rules enforced by OFAC related to U.S. sanctions regimes. If our policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that we have already acquired or may acquire in the future are deficient, we would be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans, which would negatively impact our business, financial condition and results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. See “Business-Supervision and Regulation.”

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

---

ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
Our main office is located at 402 North 8th Street, Manitowoc, Wisconsin 54220. In addition, the Bank operates twenty-one (21) additional branches located in nine (9) counties in Wisconsin, which includes the branches that were acquired in connection with the Company’s acquisitions of Waupaca, Partnership, and Timberwood. The addresses of these offices are provided below. We believe these premises will be adequate for present and anticipated needs and that we have adequate insurance to cover our owned and leased premises. For each property that we lease, we believe that upon expiration of the lease we will be able to extend the lease on satisfactory terms or relocate to another acceptable location:
Office
Address
City, State, Zip
Lease/Own
Main Office
402 N. 8th Street
Manitowoc, Wisconsin, 54220
Own
Acuity
2800 S. Taylor Drive
Sheboygan, Wisconsin, 53081
Lease
Appleton
4201 W. Wisconsin Avenue
Appleton, Wisconsin, 54913
Lease
Ashwaubenon
2865 S. Ridge Road
Green Bay, Wisconsin, 54304
Own
Bellevue
2747 Manitowoc Road
Green Bay, Wisconsin, 54311
Own
Cedarburg
W61 N529 Washington Avenue
Cedarburg, Wisconsin, 53012
Own
Clintonville
135 S. Main Street
Clintonville, Wisconsin, 54929
Own
Iola
295 E. State Street
Iola, Wisconsin, 54945
Own
Kiel
110 Fremont Street
Kiel, Wisconsin, 53042
Own
Custer Street
2915 Custer Street
Manitowoc, Wisconsin, 54220
Own
Mequon
11740 N. Port Washington Road
Mequon, Wisconsin, 53092
Own
Mishicot
110 Baugniet Street
Mishicot, Wisconsin, 54228
Own
Oshkosh
1159 N. Koeller Street
Oshkosh, Wisconsin, 54902
Own
Plymouth
2700 Eastern Avenue
Plymouth, Wisconsin, 53073
Own
Seymour
689 Woodland Plaza
Seymour, Wisconsin, 54165
Own
Sheboygan
2600 Kohler Memorial Drive
Sheboygan, Wisconsin, 53081
Own
Tomah
110 W. Veterans Street
Tomah, Wisconsin, 54660
Own
Two Rivers
1703 Lake Street
Two Rivers, Wisconsin, 54241
Own
Valders
167 Lincoln Street
Valders, Wisconsin, 54245
Own
Watertown
104 W. Main Street
Watertown, Wisconsin, 54245
Own
Waupaca
111 Jefferson Street
Waupaca, Wisconsin, 54981
Own

---

ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various claims and lawsuits arising in the course of their normal business activities. Although the ultimate outcome of these suits cannot be ascertained at this time, it is the opinion of management that none of these matters, even if it resolved adversely to the Company, will have a material adverse effect on the Company’s consolidated financial position.

---

ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Bank First registered its common stock under Section 12(b) of the Exchange Act on October 23, 2018, in connection with listing on the Nasdaq Capital Market, and trades under the symbol “BFC”. Prior to October 23, 2018, Bank First’s common stock was traded on the OTC Market Group’s Pink tier under the symbol “BFNC”. The trading volume of Bank First’s common stock is less than that of banks with larger market capitalizations, even though Bank First has improved accessibility to its common stock first through the OTC Market Group and more recently through its listing on Nasdaq. As of December 31, 2021, Bank First had approximately 481 shareholders of record, 8,478,383 shares issued and 7,616,539 shares outstanding.
Share Repurchase Program
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 ending on April 19, 2022. 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 fourth quarter of 2021 under that program as well as pursuant to the 2020 Equity Plan 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
Repurchased
Share(1)
Plans or Programs
Plans or Programs(2)
October 2021
11,619
$
69.76
11,619
71,453
November 2021
70.90
70,819
December 2021
12,569
70.44
12,569
58,250
Total
24,822
$
70.13
24,822
58,250
(1)
The average price paid per share is calculated on a trade date basis for all open market transactions and excludes commissions and other transactions expenses.
(2)
Based on the closing price per share as of December 31, 2021 ($72.24).
Performance Graph
The following graph compares the yearly percentage change in cumulative shareholder return on Bank First stock with the cumulative total return of the Russell 2000 Index and the Nasdaq Bank Index for the last five fiscal years (assuming a $100 investment on December 31, 2016 and reinvestment of all dividends). The following performance graph and related information are neither “soliciting material” nor “filed” with the SEC, nor shall such information be incorporated by reference into any future filings under the Securities Act or the Exchange Act, except to the extent the Company specifically incorporates it by reference into such filing.
Period Ending
Index
12/31/16
12/31/17
12/31/18
12/31/19
12/31/20
12/31/21
BFC
$
100.00
$
133.64
$
144.18
$
219.58
$
205.91
$
233.21
Russell 2000
100.00
113.14
99.37
122.94
145.52
165.45
Nasdaq Bank
100.00
116.25
93.46
123.50
106.67
144.05

---

ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. RESERVED

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes. Historical results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not indicate trends in operations or results of operations for any future periods. We are a bank holding company and we conduct all of our material business operations through the Bank. As a result, the discussion and analysis above relates to activities primarily conducted at the Bank level.
We have made, and will continue to make, various forward-looking statements with respect to financial and business matters. Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see the “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this Annual Report.
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 Federal Reserve, and is regulated by the 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.
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 ALLL 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, LLC, which provides core data processing, endpoint management cloud services, cyber security and digital banking solutions for over 60 Midwest banks. The Bank, through its 100% owned subsidiary TVG Holdings, Inc., also holds a 40% ownership interest in Ansay & Associates, LLC, an insurance agency providing clients primarily located in Wisconsin with insurance and risk management solutions. These unconsolidated subsidiary interests contribute noninterest income to the Bank through their underlying annual earnings.
As of December 31, 2021, the Company had total consolidated assets of $2.94 billion, total loans of $2.24 billion, total deposits of $2.53 billion and total stockholders’ equity of $322.7 million. The Company employs approximately 287 full-time equivalent employees and has an assets-to-FTE ratio of approximately $10.2 million. For more information, see the Company’s website at www.bankfirst.com.
Recent acquisitions
Partnership Community Bancshares, Inc.
On July 12, 2019, the Company completed a merger with Partnership, a bank holding company headquartered in Cedarburg, Wisconsin, 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 merged with and into the Company, and Partnership Bank, Partnership’s wholly-owned banking subsidiary, merged with and into the Bank. Partnership’s principal activity was the ownership and operation of Partnership Bank, a state-chartered banking institution that operated four (4) branches in Wisconsin at the time of closing. The merger consideration totaled approximately $49.6 million.
Pursuant to the terms of the Merger Agreement, Partnership shareholders had the option to receive either 0.34879 shares of the Company’s common stock or $17.3001 in cash for each outstanding share of Partnership common stock, and cash in lieu of any remaining fractional share. The stock versus cash elections by the Partnership shareholders were subject to final consideration being made up of approximately $14.3 million in cash and 534,659 shares of Company common stock, valued at approximately $35.3 million (based on a value of $66.03 per share on the closing date).
Timberwood Bancshares, Inc.
On May 15, 2020, the Company completed a merger with Timberwood, a bank holding company headquartered in Tomah, WI, 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. 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.
Denmark Bancshares, Inc.
On January 18, 2022, the Company entered into an Agreement and Plan of Merger with Denmark Bancshares, Inc. (“Denmark”), a Wisconsin Corporation, pursuant to which Denmark will merge with and into the Company and Denmark’s banking subsidiary, Denmark State Bank, will merge with and into the Bank. The transaction is expected to close during the third quarter of 2022 and is subject to, among other items, approval by the shareholders of both institutions and regulatory agencies. Merger consideration will consist of up to 20% cash and no less than 80% of the common stock of the Company, and will total approximately $119 million, subject to the fair market value of the Company’s common stock on the date of closing. Based on results as of December 31, 2021, the combined company would have total assets of approximately $3.6 billion, loans of approximately $2.7 billion, and deposits of approximately $3.1 billion.
The Company accounts for these transactions under the acquisition method of accounting, and thus, the financial position and results of operations of acquired institutions prior to the consummation date are not included in the accompanying consolidated financial statements. The acquisition method of accounting required assets purchased and liabilities assumed to be recorded at their respective fair values at the date of acquisition. The Company determines the fair value of core deposit intangibles, securities, premises and equipment, loans, other assets and liabilities, deposits and borrowings with the assistance of third party valuations, appraisals, and third party advisors. The estimated fair values are subject to refinement for up to one year after the consummation as additional information becomes available relative to the closing date fair values.
COVID-19 and Recent Events
The U.S. economy contracted in the first half of 2020, ending the longest expansionary period in U.S. history, due to the COVID-19 pandemic. During March 2020, in an effort to lessen the impact of COVID-19 on consumers and businesses, the Federal Reserve reduced the federal funds rate 1.5 percentage points to 0.00 to 0.25 percent and the U.S. government enacted the CARES Act, the largest economic stimulus package in the nation’s history. The Company responded to the pandemic, beginning in March 2020, by supporting our clients, employees, and communities with such measures as remote work capabilities and branch service enhancements, loan payment deferrals, and accelerated investments in several technology initiatives that provided more convenience and a better digital experience as clients adapted to this highly virtual environment. The Company participated in the PPP and funded approximately 2,998 loans totaling approximately $377.5 million under the programs available in both 2020 and 2021.
Additional government spending measures and the availability of vaccines improved consumer confidence and demand, and the economy largely reopened in 2021, leading to a reduction in the unemployment rate and accelerated GDP growth. While 2021 has seen a recovery in the U.S. economy compared to 2020, uncertainty and market disruptions such as additional coronavirus variants, pandemic-related supply chain issues and labor shortages persist. The economic expansion has been met with inflationary pressures that are expected to result in the Federal Open Market Committee policy-tightening in 2022, likely including multiple interest rate hikes. With a strong asset-sensitive balance sheet and our strong position in our markets, we expect increases in loan demand and interest rates should improve returns going forward.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform to GAAP in the United States and general practices within the financial institution industry. Significant accounting and reporting policies are summarized below.
Business Combinations
We account for business combinations under the acquisition method of accounting in accordance with Accounting Standards Codification (ASC) 805, Business Combinations (ASC 805). We recognize the full fair value of the assets acquired and liabilities assumed and immediately expense transaction costs. There is no separate recognition of the acquired ALLL on the acquirer’s balance sheet as credit related factors are incorporated directly into the fair value of the net tangible and intangible assets acquired. If the amount of consideration exceeds the fair value of assets purchased less the fair value of liabilities assumed, goodwill is recorded. Alternatively, if the amount by which the fair value of assets purchased exceeds the fair value of liabilities assumed and consideration paid, a gain (bargain purchase gain) is recorded. Fair values are subject to refinement for up to one year after the closing date of an acquisition as information relative to closing date fair values becomes available. Results of operations of the acquired business are included in the statement of income from the effective date of the acquisition.
Allowance for Loan and Lease Losses - Originated
The ALLL is established through a provision for loan losses charged to expense as losses are estimated to have occurred. Loan losses are charged against the allowance when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.
Management regularly evaluates the ALLL using general economic conditions, our past loan loss experience, composition of the portfolio, credit worthiness of the borrowers, the estimated value of the underlying collateral, the assumptions about cash flow, determination of loss factors for estimating credit losses and other relevant factors. This evaluation is inherently subjective since it requires material estimates that may be susceptible to significant change.
The ALLL consists of specific reserves for certain impaired loans and general reserves for non-impaired loans. Specific reserves reflect estimated losses on impaired loans from management’s analyses developed through specific credit allocations. The specific credit reserves are based on regular analyses of impaired non-homogenous loans. 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 on our historical loss experience which is updated quarterly. The general reserve portion of the ALLL 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.
Management believes that the current ALLL is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the ALLL. Such agencies may require us to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.
Allowance for Loan and Lease Losses - Acquired
The ALLL for acquired loans is calculated using a methodology similar to that described for originated loans. Performing acquired loans are subsequently evaluated for any required allowance at each reporting date. Such required allowance for each loan pool is compared to the remaining fair value discount for that pool. If greater, the excess is recognized as an addition to the allowance through a provision for loan losses. If less than the discount, no additional allowance is recorded. Charge-offs and losses first reduce any remaining fair value discount for the loan pool and once the discount is depleted, losses are applied against the allowance established for that pool.
For purchase credit impaired loans after an acquisition, cash flows expected to be collected are recast for each loan periodically as determined appropriate by management. If the present value of expected cash flows for a loan is less than its carrying value, impairment is reflected by an increase in the ALLL and a charge to the provision for loan losses. If the present value of the expected cash flows for a loan is greater than its carrying value, any previously established ALLL is reversed and any remaining difference increases the accretable yield which will be taken into income over the remaining life of the loan. Loans which were considered TDRs by the acquired institution prior to the acquisition are not required to be classified as TDRs in our consolidated financial statements unless or until such loans would subsequently meet our criteria to be classified as such, since acquired loans were recorded at their estimated fair values at the time of the acquisition.
Impaired Investment Securities
Unrealized gains or losses considered temporary and the noncredit portion of unrealized losses deemed other-than-temporary are reported as an increase or decrease in accumulated other comprehensive income. The credit-related portion of unrealized losses deemed other-than-temporary is recorded in current period earnings. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. We evaluate securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. As part of such monitoring, the credit quality of individual securities and their issuers are assessed. In addition, management considers the length of time and extent that fair value has been less than cost, the financial condition and near-term prospects of the issuer, and 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. Adjustments to market value that are considered temporary are recorded as a separate component of equity, net of tax. If an impairment of security is identified as other-than-temporary based on information available such as the decline in the credit worthiness of the issuer, external market ratings or the anticipated or realized elimination of associated dividends, such impairments are further analyzed to determine if a credit loss exists. If there is a credit loss, it will be recorded in the consolidated statement of income in the period of identification.
Intangible Assets and Goodwill
Intangible assets consist of the value of core deposits and mortgage servicing assets and the excess of purchase price over fair value of net assets (“goodwill”). The value of core deposits is stated at cost less accumulated amortization and is amortized on a sum of the years digits basis over a period of one to ten years.
Mortgage servicing rights are recognized as separate assets when rights are acquired through purchase or through sale of mortgage loans with servicing retained. Servicing rights acquired through sale of financial assets are recorded based on the fair value of the servicing right. The determination of fair value is based on a valuation model and includes stratifying the mortgage servicing rights by predominant characteristics, such as interest rates and terms, and estimating the fair value of each stratum based on the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as costs to service, a discount rate, and prepayment speeds. Changes in fair value are recorded as an adjustment to earnings.
We perform a “qualitative” assessment of goodwill to determine whether further impairment testing of indefinite-lived intangible assets is necessary on at least an annual basis. If it is determined, as a result of performing a qualitative assessment over goodwill, that it is more likely than not that goodwill is impaired, management will perform an impairment test to determine if the carrying value of goodwill is realizable.
Deferred Tax Assets
Deferred tax assets (“DTA”) and liabilities are determined using the liability method. DTAs and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities and the current enacted tax rates which will be in effect when these differences are expected to reverse. Provision (benefit) for deferred taxes is the result of changes in the DTAs and liabilities. Deferred taxes are reviewed quarterly and would be reduced by a valuation allowance if, based upon the information available, it is more likely than not that some or all of the DTAs will not be realized.
Recent Accounting Developments
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 delated 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. We are currently evaluating the impact of ASU 2016-13 on the consolidated financial statements, although the general expectation in the banking industry is that the implementation of this standard will result in higher required balances in the ALLL.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The updated guidance is effective for all entities from March 12, 2020 through December 31, 2022. The Corporation has been diligent in responding to reference rate reform and does not anticipate a significant impact to its financial statements as a result.
In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables - 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 will be effective for fiscal years, and interim periods within those fiscal years, beginning within those fiscal years, beginning after December 31, 2020. The adoption of this guidance is not expected to have an impact on our consolidated financial statements as all premiums within our securities portfolio were already being amortized to the earliest call date prior to the implementation as required under subtopic 310-20.
RESULTS OF OPERATIONS
Results of Operations for the Years Ended December 31, 2021 and 2020
General. Net income increased $7.4 million, or 19.4%, to $45.4 million for the year ended December 31, 2021, from $38.0 million for the year ended December 31, 2020. The primary reasons for the increase in profitability were increased net interest, a reduced provision for loan losses during 2021, robust retail mortgage lending which led to a large increase in gains on sales of mortgage loans to the secondary market, reduced losses on sales and valuations of OREO and a significant penalty for the early extinguishment of debt during 2020 that did not recur during 2021. This was offset by a small loss on sales of securities during 2021 that compared unfavorably to a gain of $3.2 million on these sales during 2020 as well as a $1.7 million gain on the sale of a branch location during 2020 with no similar gain during 2021.
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 income after provision for loan losses increased by $7.3 million to $87.0 million for the year ended December 31, 2021, from $79.7 million for the year ended December 31, 2020. Interest income on loans decreased by $1.9 million, or 1.9%, from 2020 to 2021. Total average interest-earning assets increased to $2.63 billion for the year ended December 31, 2021 from $2.31 billion for the year ended December 31, 2020. The Bank’s net interest margin decreased 37 basis points to 3.47% for the year ended December 31, 2021, down from 3.84% for the year ended December 31, 2020.
Interest Income. Total interest income decreased $2.3 million, or 2.30%, to $98.4 million for the year ended December 31, 2021, down from $100.7 million for the year ended December 31, 2020. This decrease was primarily due to yield on loans decreasing by 50 basis points from 4.75% during 2020 to 4.25% during 2021, which more than offset the $185.1 million increase in average balances of loans during 2021.
Interest Expense. Interest expense decreased $5.6 million, or 40.1%, to $8.3 million for the year ended December 31, 2021, down from $13.9 million for the year ended December 31, 2020. The decrease was driven by declines in the average cost of interest-bearing liabilities, falling 39 basis points from 0.87% to 0.48%. This decline was primarily the result of a significantly lower interest rate environment that developed through the first half of 2020 and continued throughout 2021.
Interest expense on interest-bearing deposits decreased by $4.9 million to $7.5 million for the year ended December 31, 2021, from $12.5 million for the year ended December 31, 2020. This decrease was primarily due to the aforementioned lower interest rate environment, allowing the Company to significantly reduce crediting interest rates on non-time, interest-bearing deposit accounts. The average cost of interest-bearing deposits was 0.45% for the year ended December 31, 2021, compared to 0.83% for the year ended December 31, 2020.
Provision for Loan Losses. Credit risk is inherent in the business of making loans. We establish an ALLL 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 ALLL 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 $3.1 million for the year ended December 31, 2021, compared to $7.1 million for the year ended December 31, 2020. Provision expense was elevated during 2020 in response to uncertainty created by COVID-19 and society’s response to it. Actual asset quality metrics during the course of 2021 remained strong, however, and allowed for a reduction in provision expense during that year. The ALLL was $20.3 million, or 0.91% of total loans, at December 31, 2021 compared to $17.7 million, or 0.81% of total loans at December 31, 2020. The increase in ALLL coverage to total loans from December 31, 2020, to December 31, 2021, was primarily due to a smaller percentage of the Company’s loan portfolio accounted for under purchase accounting year-over-year. Under the Company’s current allowance methodology, loans which are accounted for under purchase accounting do not require an ALLL reserve allocation.
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 unconsolidated subsidiaries, Ansay and UFS. Other sources of noninterest income include loan servicing fees and gains on sales of mortgage loans.
Noninterest income was $23.5 million for 2021, matching non-interest income during 2020. Service charges increased by $1.1 million, or 22.5%, from 2020 to 2021, as a result of new markets and added scale from three acquisitions during the previous four years. Loan servicing income and net gain on sales of mortgage loans increased by $2.4 million and $2.1 million from 2020 to 2021, respectively, as a result of a robust residential mortgage lending environment during 2021 spurred by historically low mortgage interest rates. Due to uncertainty about liquidity needs in financial markets during the early days of the COVID-19 pandemic, the Company sold approximately $34.0 million in U.S. Treasury Securities during the second quarter of 2020, resulting in a gain on sale of securities of $3.2 million. This compared favorably to small losses on sales of securities during 2021. Finally, the Company recorded a $1.7 million gain on the sale of a branch location during December 2020. There was no similar sale during 2021, causing other noninterest income to decrease year-over-year. The major components of our noninterest income are listed in the table below:
For the Years Ended
December 31,
(In thousands)
Noninterest Income
Service Charges
$
6,128
$
5,003
Income from Ansay & Associates, LLC
2,587
2,740
Income from UFS, LLC
2,556
3,066
Loan Servicing income
3,839
1,420
Net gain on sales of mortgage loans
7,371
5,310
Net gain on sales of securities
(3)
3,233
Other
1,040
2,748
Total noninterest income
$
23,518
$
23,520
Noninterest Expense. Noninterest expense decreased $2.8 million to $50.5 million for the year ended December 31, 2021, down from $53.4 million for the year ended December 31, 2020. Personnel expense increased $1.2 million, or 4.6%, primarily as a result of customary annual salary increases. Occupancy expense decreased $0.5 million, or 11.0%, data processing decreased $0.2 million, or 3.1%, and outside service fees decreased $1.0 million, or 25.2%, primarily as a result of the Company completing an acquisition of another institution during 2020 with no corresponding acquisition during 2021. These areas of noninterest expense are typically elevated during years where acquisitions occur. The Company had sales of two large foreclosed properties scheduled to close late in the first quarter of 2020 which would have resulted in modest losses. Due to the economic turmoil that resulted during the last several weeks of the first quarter of 2020, terms of these sales were negatively impacted. Rather than hold these properties heading into this time of uncertainty, the Company chose to accept the reduced terms, causing significant losses on these sales that were the primary components of $1.4 million in total losses on sales and valuations of other real estate owned during 2020. During 2021 the Company experienced a small overall gain on these types of transactions, creating a very favorable year-over-year comparison. Finally, during the second quarter of 2020 the Company paid off $30.0 million in borrowings from the Federal Home Loan Bank of Chicago which had contractual maturities ranging from August 2022 through August 2024, resulting in prepayment penalties of $1.3 million, but saving the Company $1.7 million in interest over the next four years. There was no similar action during 2021. The major components of our noninterest expense are listed in the table below.
For the Years Ended
December 31,
(In thousands)
Noninterest Expense
Salaries, commissions, and employee benefits
$
28,515
$
27,273
Occupancy
4,198
4,719
Data Processing
5,344
5,515
Postage, stationary, and supplies
Net loss (gain) on sales and valuation of ORE
(20)
1,395
Advertising
Charitable Contributions
Outside service fees
3,076
4,112
Amortization of intangibles
1,405
1,636
Penalty for early extinguishment of debt
-
1,323
Other
6,541
5,708
Total noninterest expenses
$
50,533
$
53,353
Income Tax Expense. We recorded a provision for income taxes of $14.5 million for the year ended December 31, 2021, compared to $11.8 million for the year ended December 31, 2020, reflecting effective tax rates of 24.2% and 23.7%, respectively.
Results of Operations for the Years Ended December 31, 2020 and 2019
General. Net income increased $11.3 million, or 42.5%, to $38.0 million for the year ended December 31, 2020, from $26.7 million for the year ended December 31, 2019. The primary reasons for the increase in profitability were increased net interest and service charge income from the added scale as a result of the acquisitions of Partnership and Timberwood, significant growth in our loan portfolio through participation in PPP, and robust retail mortgage lending which led to a large increase in gains on sales of mortgage loans to the secondary market. This was offset by larger provisions for loan losses during 2020, as well as increased expenses related to personnel, facilities and data processing as part of the same added scale from the aforementioned acquisitions. 2020 profitability was further negatively impacted by higher losses on sales of foreclosed properties and a penalty related to the early extinguishment of long-term debt.
Net Interest Income.
Net interest income after provision for loan losses increased by $15.3 million to $79.7 million for the year ended December 31, 2020, from $64.4 million for the year ended December 31, 2019. Interest income on loans increased by $12.3 million, or 14.9%, from 2019 to 2020. Total average interest-earning assets increased to $2.31 billion for the year ended December 31, 2020 from $1.81 billion for the year ended December 31, 2019. The Bank’s net interest margin decreased 11 basis points to 3.84% for the year ended December 31, 2020, down from 3.95% for the year ended December 31, 2019.
Interest Income. Total interest income increased $11.5 million, or 12.9%, to $100.7 million for the year ended December 31, 2020, up from $89.2 million for the year ended December 31, 2019. As noted, the increase was primarily due to loan growth from the acquisitions of Partnership and Timberwood, as well as participation in PPP. The average balance of loans increased by $466.9 million during 2020.
Interest Expense. Interest expense decreased $5.6 million, or 28.9%, to $13.9 million for the year ended December 31, 2020, down from $19.5 million for the year ended December 31, 2019. The decrease was driven by declines in the average cost of interest-bearing liabilities, falling 70 basis points from 1.57% to 0.87%. This decline was primarily the result of a significantly lower interest rate environment that developed through the first half of 2020.
Interest expense on interest-bearing deposits decreased by $5.4 million to $12.5 million for the year ended December 31, 2020, from $17.9 million for the year ended December 31, 2019. This decrease was primarily due to the aforementioned lower interest rate environment, allowing the Company to significantly reduce crediting interest rates on non-time, interest-bearing deposit accounts. The average cost of interest-bearing deposits was 0.83% for the year ended December 31, 2020, compared to 1.50% for the year ended December 31, 2019.
Provision for Loan Losses. We recorded a provision for loan losses of $7.1 million for the year ended December 31, 2020, compared to $5.3 million for the year ended December 31, 2019. Significant charge-offs occurring during the third quarter of 2019 necessitated increased provisions for loan losses during 2019. These charge-offs were the result of exiting certain relationships during that quarter which were originally acquired as part of the Waupaca transaction. Despite having significantly reduced charge-offs during 2020, economic uncertainties as a result of the COVID-19 pandemic required a build-up of our ALLL, resulting in higher provision expense. The ALLL was $17.7 million, or 0.81% of total loans, at December 31, 2020 compared to $11.4 million, or 0.66% of total loans at December 31, 2019.
Noninterest Income. Noninterest income increased $10.9 million to $23.5 million in 2020 compared to $12.6 million in 2019. Service charges increased by $1.5 million, or 42.7%, from 2019 to 2020, the result of new markets and added scale from three acquisitions in slightly more than three years. Income from Ansay increased by $0.9 million as a result of modestly higher profitability at that organization as well as the increase in our ownership during October 2019. Loan servicing income and net gain on sales of mortgage loans increased by $0.9 and $3.9 million from 2019 to 2020, the result of a robust residential mortgage lending environment during 2020 spurred by historically low mortgage interest rates. Due to uncertainty about liquidity needs in financial markets during the early days of the COVID-19 pandemic, the Company sold approximately $34.0 million in U.S. Treasury Securities during the second quarter of 2020, resulting in a gain on sale of securities of $3.2 million, an increase of $2.6 million over 2019. Finally, the Company recorded a $1.7 million gain on the sale of a branch location during December 2020, causing other noninterest income to increase year-over-year. The major components of our noninterest income are listed in the table below:
For the Years
Ended December 31,
(In thousands)
Noninterest Income
Service Charges
$
5,003
$
3,506
Income from Ansay & Associates, LLC
2,740
1,792
Income from UFS, LLC
3,066
2,935
Loan Servicing income
1,420
Net gain on sales of mortgage loans
5,310
1,401
Net gain on sales of securities
3,233
Noninterest income from strategic alliances
Other
2,673
1,485
Total noninterest income
$
23,520
$
12,632
Noninterest Expense. Noninterest expense increased $10.6 million to $53.4 million for the year ended December 31, 2020, up from $42.8 million for the year ended December 31, 2019. Year-over-year, personnel expense increased $4.4 million, or 19.1%, occupancy expense increased $0.9 million, or 22.3%, data processing increased $1.0 million, or 22.3%, outside service fees increased $1.1 million, or 35.2%, and amortization of intangibles increased $0.6 million, or 53.0% the result of added scale and expenses from acquisitions of Partnership and Timberwood during 2019 and 2020. Postage, stationary, and supplies increased by $0.3 million, or 47.6%, from 2019 to 2020 as a result of costs associated with the Company’s response to the COVID-19 pandemic. The Company had sales of two large foreclosed properties scheduled to close late in the first quarter of 2020 which would have resulted in modest losses. Due to the economic turmoil that resulted during the last several weeks of that quarter, terms of these sales were negatively impacted. Rather than hold these properties heading into this time of uncertainty, the Company chose to accept the reduced terms, causing significant losses on these sales that were the primary components of $1.4 million in total losses on sales and valuations of other real estate owned, compared to gains of $0.1 million during 2019. Finally, during the second quarter of 2020 the Company paid off $30.0 million in borrowings from the Federal Home Loan Bank of Chicago which had contractual maturities ranging from August 2022 through August 2024, resulting in prepayment penalties of $1.3 million, but saving the Company $1.7 million in interest over the next four years. The major components of our noninterest expense are listed in the table below.
For the Years
Ended December 31,
(In thousands)
Noninterest Expense
Salaries, commissions, and employee benefits
$
27,273
$
22,903
Occupancy
4,719
3,860
Data Processing
5,515
4,509
Postage, stationary, and supplies
Net loss (gain) on sales and valuation of ORE
1,395
(73)
Advertising
Charitable Contributions
Outside service fees
4,112
3,041
Amortization of intangibles
1,636
1,069
Penalty for early extinguishment of debt
1,323
-
Other
5,708
6,026
Total noninterest expenses
$
53,353
$
42,760
Income Tax Expense. We recorded a provision for income taxes of $11.8 million for the year ended December 31, 2020, compared to $7.6 million for the year ended December 31, 2019, reflecting effective tax rates of 23.7% and 22.1%, respectively. The effective tax rate for 2020 increased due to the fact that tax- exempt interest remained consistent year-over-year while other taxable components of income increased significantly.
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 shareholders’ equity, and average rates earned or paid on a fully taxable equivalent basis for each of the periods indicated:
For the Year Ended December 31,
Interest
Rate
Interest
Rate
Interest
Rate
Average
Income/
Earned/
Average
Income/
Earned/
Average
Income/
Earned/
Balance
Expenses (1)
Paid (1)
Balance
Expenses (1)
Paid (1)
Balance
Expenses (1)
Paid (1)
(dollars in thousands)
ASSETS
Interest-earning assets
Loans (2)
Taxable
$
2,128,327
$
90,172
4.24
%
$
1,918,490
$
90,698
4.73
%
$
1,465,306
$
78,230
5.34
%
Tax-exempt
88,978
4,113
4.62
%
113,667
5,791
5.09
%
99,955
5,961
5.96
%
Securities
Taxable (available for sale)
103,277
2,788
2.70
%
114,392
3,142
2.75
%
81,454
2,349
2.88
%
Tax-exempt (available for sale)
70,864
2,207
3.11
%
67,903
2,170
3.20
%
52,015
1,848
3.55
%
Taxable (held to maturity)
-
-
0.00
%
9,068
2.38
%
30,566
2.45
%
Tax-exempt (held to maturity)
6,098
2.54
%
8,422
2.61
%
10,930
2.78
%
Cash and due from banks
237,021
0.13
%
76,153
0.24
%
68,873
1,427
2.07
%
Total interest-earning assets
2,634,565
99,745
3.79
%
2,308,095
102,418
4.44
%
1,809,099
90,868
5.02
%
Non interest-earning assets
222,548
211,387
157,058
Allowance for loan losses
(19,320)
(14,800)
(11,804)
Total assets
$
2,837,793
$
2,504,682
$
1,954,353
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits
Checking accounts
$
209,970
$
0.12
%
$
194,718
$
0.34
%
$
90,273
$
1,785
1.98
%
Savings accounts
497,958
1,773
0.36
%
356,091
1,792
0.50
%
261,977
2,570
0.98
%
Money market accounts
664,591
2,115
0.32
%
563,847
3,076
0.55
%
440,773
4,913
1.11
%
Certificates of deposit
278,602
2,967
1.06
%
367,054
6,405
1.74
%
380,117
8,124
2.14
%
Brokered Deposits
14,718
2.85
%
18,428
2.88
%
16,387
2.95
%
Total interest bearing deposits
1,665,839
7,527
0.45
%
1,500,138
12,473
0.83
%
1,189,527
17,875
1.50
%
Other borrowed funds
63,474
1.22
%
88,512
1,392
1.57
%
53,261
1,623
3.05
%
Total interest-bearing liabilities
1,729,313
8,304
0.48
%
1,588,650
13,865
0.88
%
1,242,788
19,498
1.57
%
Non-interest bearing liabilities
Demand Deposits
785,364
634,969
495,039
Other liabilities
12,746
15,559
13,348
Total Liabilities
2,527,423
2,239,178
1,751,175
Shareholders’ equity
310,370
265,504
203,178
Total liabilities & shareholders’ equity
$
2,837,793
$
2,504,682
$
1,954,353
Net interest income on a fully taxable equivalent basis
91,441
88,553
71,370
Less taxable equivalent adjustment
(1,359)
(1,718)
(1,704)
Net interest income
$
90,082
$
86,835
$
69,666
Net interest spread (3)
3.31
%
3.56
%
3.45
%
Net interest margin (4)
3.47
%
3.84
%
3.95
%
(1) Annualized on a fully taxable equivalent basis calculated using a federal tax rate of 21%.
(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.
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.
Twelve Months Ended December 31, 2021
Twelve Months Ended December 31, 2020
Compared with
Compared with
Twelve Months Ended December 31, 2020
Twelve Months Ended December 31, 2019
Increase/(Decrease)
Increase/(Decrease)
Due to Change in
Due to Change in
Volume
Rate
Total
Volume
Rate
Total
(dollars in thousands)
Interest income
Loans
Taxable
$
9,392
$
(9,918)
$
(526)
$
22,173
$
(9,705)
$
12,468
Tax-exempt
(1,176)
(502)
(1,678)
(930)
(170)
Securities
Taxable (AFS)
(301)
(53)
(354)
(116)
Tax-exempt (AFS)
(56)
(200)
Taxable (HTM)
(108)
(108)
(216)
(513)
(20)
(533)
Tax-exempt (HTM)
(59)
(6)
(65)
(66)
(18)
(84)
Cash and due from banks
(112)
(1,383)
(1,246)
Total interest income
8,082
(10,755)
(2,673)
$
23,922
$
(12,372)
$
11,550
Interest expense
Deposits
Checking accounts
$
$
(466)
$
(417)
$
1,070
$
(2,186)
$
(1,116)
Savings accounts
(613)
(19)
(1,510)
(778)
Money market accounts
(1,442)
(961)
1,124
(2,961)
(1,837)
Certificates of deposit
(1,314)
(2,124)
(3,438)
(271)
(1,448)
(1,719)
Brokered Deposits
(106)
(5)
(111)
(11)
Total interest bearing deposits
(296)
(4,650)
(4,946)
2,714
(8,116)
(5,402)
Other borrowed funds
(345)
(270)
(615)
(1,005)
(231)
Total interest expense
(641)
(4,920)
(5,561)
3,488
(9,121)
(5,633)
Change in net interest income
$
8,724
$
(5,836)
$
2,888
$
20,434
$
(3,251)
$
17,183
CHANGES IN FINANCIAL CONDITION
Total Assets. Total assets increased $219.5 million, or 8.1%, to $2.94 billion at December 31, 2021 from $2.72 billion at December 31, 2020.
Cash and Cash Equivalents. Cash and cash equivalents increased by $126.6 million, or 74.4%, to $296.9 million at December 31, 2021 from $170.2 million at December 31, 2020.
Investment Securities. The carrying value of total investment securities increased by $46.9 million to $218.6 million at December 31, 2021 from $171.7 million at December 31, 2020.
Loans. Net loans increased by $41.4 million, or 1.9%, to $2.22 billion at December 31, 2021 from $2.17 billion at December 31, 2020.
Bank-Owned Life Insurance. At December 31, 2021, our investment in bank-owned life insurance was $31.9 million, an increase of $0.5 million from $31.4 million at December 31, 2020.
Deposits. Deposits increased $207.5 million, or 8.9%, to $2.53 billion at December 31, 2021 from $2.32 billion at December 31, 2020.
Borrowings. At December 31, 2021 and 2020, borrowings consisted of advances from the FHLB of Chicago and subordinated debt to other banks. FHLB borrowings totaled $8.0 million and $23.5 million at December 31, 2021 and 2020, respectively. Subordinated debt totaled at $17.5 million at December 31, 2021 and 2020.
Stockholders’ Equity. Total stockholders’ equity increased $27.8 million, or 9.4%, to $322.7 million at December 31, 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 76.1%, 80.6% and 78.6% of our total assets as of December 31, 2021, 2020 and 2019, 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.
Total loans increased $44.1 million, or 2.0%, to $2.24 billion as of December 31, 2021 as compared to $2.19 billion as of December 31, 2020. Our loan growth during the year ended December 31, 2021 has been comprised of an decrease of $78.8 million or 17.7% in commercial and industrial loans, an increase of $119.2 million or 12.0% in commercial real estate loans, a decrease of $7.6 million or 5.4% in construction and development loans, an increase of $26.0 million or 4.8% in residential 1-4 family loans and a decrease of $14.7 million or 21.6% in consumer and other loans.
Total loans increased $455.1 million, or 26.2%, to $2.19 billion as of December 31, 2020 as compared to $1.74 billion as of December 31, 2019. Our loan growth during the year ended December 31, 2020 has been comprised of an increase of $142.6 million or 47.2% in commercial and industrial loans, an increase of $179.1 million or 22.0% in commercial real estate loans, an increase of $7.9 million or 6.0% in construction and development loans, an increase of $97.2 million or 21.7% in residential 1-4 family loans and an increase of $28.3 million or 70.7% in consumer and other loans. The significant increase in loans during the year ended December 31, 2020 is attributable to loans purchased as part of the Timberwood transaction along with significant commercial and industrial loan growth as a result of participating in the PPP loan program.
The following table presents the balance and associated percentage of each major category in our loan portfolio at December 31, 2021, 2020, and 2019:
December 31,
% of
% of
% of
Total
Total
Total
Commercial & industrial
$
366,166
%
$
444,992
%
$
302,380
%
Commercial real estate
Owner Occupied
574,565
%
549,253
%
459,482
%
Non-owner occupied
536,892
%
442,996
%
353,661
%
Construction & Development
132,454
%
140,074
%
132,163
%
Residential 1-4 family
571,845
%
545,806
%
448,630
%
Consumer
32,131
%
30,488
%
29,586
%
Other Loans
21,461
%
37,851
%
10,441
%
Total loans
$
2,235,514
%
$
2,191,460
%
$
1,736,343
%
Our directors and officers and their affiliates 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 December 31, 2021 and December 31, 2020, total loans outstanding to such directors and officers and their affiliates were $73.5 million and $67.1 million, respectively. During the year ended December 31, 2021, $24.7 million of additions and $18.4 million of repayments were made to these loans, compared to $54.7 million of additions and $56.2 million of repayments during the year ended December 31, 2020. At December 31, 2021 and December 31, 2020, all of the loans to directors and officers were performing according to their original terms.
Loan categories
The principal categories of our loan portfolio are discussed below:
Commercial and Industrial (C&I). Our C&I portfolio totaled $366.2 million, $445.0 million and $302.4 million at December 31, 2021, 2020 and 2019, respectively, and represented 16%, 20% and 17% of our total loans, respectively. C&I loans decreased 17.7% during 2021, primarily the result of significant levels of PPP loans being forgiven during the year. C&I loans increased 47.2% during 2020, primarily as a result of loans made through PPP and secondarily as a result of the Timberwood acquisition. C&I loans increased 1.7% in 2019.
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 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 $1.11 billion, $992.2 million and $813.1 million at December 31, 2021, 2020 and 2019, respectively, and represented 50%, 45% and 47% of our total loans, respectively. Our CRE loans increased 12.0% during 2021, primarily as a result of a backlog from 2020 when developers were cautious to start projects during the early stages of COVID-19. Our CRE loans increased 22.0% during 2020, primarily as a result of the Timberwood acquisition. Our CRE loans increased 21.7% during 2019 due primarily to the Partnership acquisition.
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 twenty years, with loan-to-values that generally do not exceed 85%. 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 $132.5 million, $140.1 million and $132.2 million at December 31, 2021, 2020 and 2019, respectively, and represented 6%, 7% and 8% of our total loans, respectively. C&D loans decreased 5.4% during 2021. C&D loans increased 6.0% during 2020. C&D loans increased 117.4% during 2019 due to a combination of loans acquired in the Partnership acquisition and strong development in both owner-occupied and multifamily developments in our markets due to a continued strong economy.
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. Our residential 1-4 family loan portfolio totaled $571.8 million, $545.8 million and $448.6 million at December 31, 2021, 2020 and 2019, respectively, and represented 26%, 25% and 26% of our total loans, respectively. Residential 1-4 family loans increased 4.8% during 2021. Residential 1-4 family loans increased 21.7% during 2020 primarily as a result of the Timberwood transaction. Residential 1-4 family loans increased 21.7% during 2019 primarily as a result of the Partnership transaction.
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. 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 $705.5 million, $612.7 million and $554.4 million at December 31, 2021, 2020 and 2019, respectively.
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 subsequently amortized as an offset to other income over the estimated period of servicing. The net balance of capitalized servicing rights amounted to $5.0 million, $3.7 million and $4.3 million at December 31, 2021, 2020 and 2019, respectively.
Consumer Loans. Our consumer loan portfolio totaled $32.1 million, $30.5 million and $29.6 million at December 31, 2021, 2020 and 2019, respectively, and represented 1%, 1%, and 2% of our total loans, respectively. Consumer loans include secured and unsecured loans, lines of credit and personal installment loans. Our consumer loans increased by 5.4%, 3.0% and 9.8% during 2021, 2020 and 2019, respectively.
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 $21.5 million, $37.9 million and $10.4 million at December 31, 2021, 2020 and 2019, respectively, and are immaterial to the overall loan portfolio. The other loans category consists primarily of overdrawn 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, fixed or variable rate of interest, and contractual terms to maturity at December 31, 2021. 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
Five to Fifteen
Over Fiteen
Less
Years
Years
Years
Total
(dollars in thousands)
Commercial & industrial
$
75,628
$
150,662
$
133,915
$
5,961
$
366,166
Commercial real estate
Owner Occupied
68,774
232,259
242,729
30,803
574,565
Non-owner Occupied
17,615
221,784
285,327
12,166
536,892
Construction & Development
24,412
28,876
48,845
30,321
132,454
Residential 1-4 family
7,715
52,305
202,915
308,910
571,845
Consumer and other
5,238
28,762
16,897
2,695
53,592
Total
$
199,382
$
714,648
$
930,628
$
390,856
$
2,235,514
Fixed Rate Loans:
Commercial & industrial
$
16,892
$
136,998
$
67,051
$
5,564
$
226,505
Commercial real estate
Owner Occupied
31,661
201,756
109,048
7,868
350,333
Non-owner Occupied
15,362
199,228
195,426
410,016
Construction & Development
18,085
20,564
37,186
24,075
99,910
Residential 1-4 family
3,549
42,651
174,231
184,935
405,366
Consumer and other
4,156
28,037
16,792
2,695
51,680
Total
$
89,705
$
629,234
$
599,734
$
225,137
$
1,543,810
Floating Rate Loans:
Commercial & industrial
$
58,736
$
13,664
$
66,864
$
$
139,661
Commercial real estate
Owner Occupied
37,113
30,503
133,681
22,935
224,232
Non-owner Occupied
2,253
22,556
89,901
12,166
126,876
Construction & Development
6,327
8,312
11,659
6,246
32,544
Residential 1-4 family
4,166
9,654
28,684
123,975
166,479
Consumer and other
1,082
-
1,912
Total
$
109,677
$
85,414
$
330,894
$
165,719
$
691,704
NONPERFORMING ASSETS
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:
As of December 31,
(dollars in thousands)
Nonperforming loans
Nonaccrual loans
Commercial & industrial
$
$
$
1,923
Commercial real estate
Owner Occupied
5,884
1,078
2,513
Non-owner Occupied
8,087
Construction & Development
-
Residential 1-4 family
Consumer and other
Total nonaccrual loans
7,241
10,796
5,093
Loans past due > 90 days, but still accruing
Commercial & industrial
-
-
Commercial real estate
Owner Occupied
-
1,582
-
Non-owner Occupied
-
-
-
Construction & Development
-
-
Residential 1-4 family
Consumer and other
Total loans past due > 90 days, but still accruing
1,738
Total nonperforming loans
$
8,240
$
12,534
$
5,447
OREO
Commercial real estate owned
$
-
$
1,742
$
6,404
Residential real estate owned
Bank property real estate owned
-
-
Total OREO
$
$
1,885
$
6,888
Total nonperforming assets ("NPAs")
$
8,390
$
14,419
$
12,335
Accruing troubled debt resructured loans
$
$
1,132
$
1,844
Ratios
Nonaccrual loans to total loans
0.32
%
0.49
%
0.29
%
NPAs to total loans plus OREO
0.38
%
0.66
%
0.71
%
NPAs to total assets
0.29
%
0.53
%
0.56
%
ALLL to Nonaccrual loans
%
%
%
ALLL to total loans
0.91
%
0.81
%
0.66
%
At December 31, 2021, 2020 and 2019, impaired loans had specific reserves of $964,000, $900,000 and $840,000, respectively. Levels of specific reserves are dependent on the specific underlying impaired loans at any given time. Management has evaluated the aforementioned loans and other loans classified as nonperforming and believes that all nonperforming loans have been adequately reserved for in the allowance for loan losses at December 31, 2021.
Our nonperforming assets were elevated during the years ended December 31, 2018 and 2017, primarily due to the acquisition of a troubled institution during 2017, which included $19.4 million of loans which were considered nonperforming. This increase in nonperforming assets was anticipated in conjunction with the acquisition, and management actively managed these relationships out of the Bank through pay downs, refinances with or sales of loans to other institutions, or foreclosure actions. As a result of these actions nonperforming assets declined sharply during 2019. Nonperforming assets trended back up slightly during 2020 primarily due to one commercial real estate loan totaling approximately $7.3 million which was moved to nonaccrual status when a major tenant declared bankruptcy and vacated the facility. Payments continued to be made timely on this loan, and it returned to performing status during 2021, causing a decline in nonperforming assets.
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.
In response to the COVID-19 pandemic, the CARES Act was signed into law. Under the CARES Act, banks may elect to deem that loan modifications do not result in TDRs if they are (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020 and the earlier of (A) 60 days after the date of termination of the national emergency declaration or (B) December 31, 2021. Additionally, in accordance with the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised), other short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs under ASC Subtopic 310-40. This includes short-term (e.g. up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Loans modified under this guidance are not considered TDRs and as such are not identified in the table below. During 2020, 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 or both principal and interest payments. As of December 31, 2020, these totals had decreased to fewer than 20 loans with total balances less than $20.0 million. As of December 31, 2021, only one loan remained with payment deferrals under the CARES Act, totaling $1.1 million.
As of December 31, 2021 and 2020, the Company had specific reserves of $7,000 and $0 for TDRs, respectively, and none of them have subsequently defaulted.
ALLOWANCE FOR LOAN AND LEASE LOSSES
ALLL represents management’s estimate of probable and inherent credit losses in the loan portfolio. Estimating the amount of the ALLL 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 ALLL, while recoveries of amounts previously charged off are credited to the ALLL. 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 ALLL 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 ALLL 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 the ALLL; some are quantitative while others require qualitative judgment. The process for determining the ALLL (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 ALLL may be made for specific loans but the entire ALLL 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 ALLL as well. Such agencies may require that changes in the ALLL 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 ALLL for the years indicated:
Year ended December 31,
(dollars in thousands)
Balance of ALLL at the beginning of period
$
17,658
$
11,396
$
12,248
Net loans charged-off (recovered):
Commercial & industrial
1,083
1,218
Commercial real estate - owner occupied
(346)
4,638
Commercial real estate - non-owner occupied
(5)
(40)
Construction & Development
(143)
Residential 1-4 family
Consumer
Other Loans
Total net loans charged-off
6,102
Provision charged to operating expense
3,100
7,125
5,250
Balance of ALLL at end of period
$
20,315
$
17,658
$
11,396
Ratio of net charge-offs (recoveries) to average loans by loan composition
Commercial & industrial
0.05
%
0.23
%
0.41
%
Commercial real estate - owner occupied
0.05
%
(0.07)
%
1.07
%
Commercial real estate - non-owner occupied
0.00
%
(0.01)
%
0.00
%
Construction & Development
(0.11)
%
0.02
%
0.00
%
Residential 1-4 family
0.02
%
0.00
%
0.04
%
Consumer
0.02
%
0.31
%
0.22
%
Other Loans
0.07
%
0.16
%
0.47
%
Total net charge-offs to average loans
0.02
%
0.04
%
0.39
%
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. The dollar amount of the ALLL increased primarily as a result of loan growth and changes in the portfolio composition. Although the allowance is allocated between categories, the entire allowance is available to absorb losses attributable to all loan categories. Management believes that the ALLL is adequate.
The following table summarizes an allocation of the ALLL and the related percentage of loans outstanding in each category for the periods below.
As of December 31
% of
% of
% of
(in thousands, except %)
Amount
Loans
Amount
Loans
Amount
Loans
Loan Type:
Commercial & industrial
$
3,699
%
$
2,049
%
$
2,320
%
Commercial real estate - owner occupied
5,633
%
6,108
%
4,587
%
Commercial real estate - non-owner occupied
5,151
%
3,904
%
1,578
%
Construction & Development
%
1,027
%
%
Residential 1-4 family
4,445
%
3,960
%
2,169
%
Consumer
%
%
%
Other Loans
%
%
%
Total allowance
$
20,315
%
$
17,658
%
$
11,396
%
SOURCES OF FUNDS
General. Deposits traditionally have been our primary source of funds for our investment and lending activities. We continue to focus on growing core deposits through our relationship driven banking philosophy and community-focused marketing programs. 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 December 31, 2021, deposit liabilities accounted for approximately 86.1% 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 $2.53 billion, $2.32 billion and $1.84 billion as of December 31, 2021, 2020 and 2019, respectively. Noninterest-bearing deposits at December 31, 2021, 2020 and 2019 were $799.9 million, $715.6 million and $476.5 million, respectively, while interest-bearing deposits were $1.73 billion, $1.61 billion and $1.37 billion at December 31, 2021, 2020 and 2019, respectively.
At December 31, 2021, we had a total of $256.2 million in certificates of deposit, including $11.7 million of brokered deposits, of which $5.0 million had remaining maturities of one year or less. Based on historical experience and our current pricing strategy, we believe we will retain a large portion of these accounts upon maturity.
The following tables set forth the average balances of our deposits for the periods indicated:
December 31,
December 31,
December 31,
Amount
Percent
Amount
Percent
Amount
Percent
(dollars in thousands)
Noninterest-bearing demand deposits
$
785,364
32.0
%
$
634,939
29.7
%
$
495,039
29.4
%
Interest-bearing checking deposits
209,970
8.6
%
194,718
9.1
%
90,273
5.4
%
Savings deposits
497,958
20.3
%
356,091
16.7
%
261,977
15.6
%
Money market accounts
664,591
27.1
%
563,847
26.4
%
440,773
26.2
%
Certificates of deposit
278,602
11.4
%
367,054
17.2
%
380,117
22.6
%
Brokered deposits
14,718
0.6
%
18,428
0.9
%
16,387
0.9
%
Total
$
2,451,203
%
$
2,135,077
%
$
1,684,566
%
The following table provides information on maturities of certificates of deposits which exceed FDIC insurance limits of $250,000 as of December 31, 2021:
Time Deposits over FDIC
Portion of Time Deposits in
Insurance Limits
Excess of FDIC Insurance Limits
(dollars in thousands)
3 months or less remaining
$
8,958
$
2,458
Over 3 to 6 months remaining
8,538
4,788
Over 6 to 12 months remaining
5,847
3,597
Over 12 months or more remaining
13,445
5,445
Total
$
36,788
$
16,288
Borrowings
Deposits and investment securities for sale are the primary source of funds for our lending activities and general business purposes. However, we may also obtain advances from the FHLB, purchase federal funds and engage in overnight borrowing from the Federal Reserve, correspondent banks, or enter into repurchase agreements.
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:
Year ended December 31,
(dollars in thousands)
Average daily amount of securities sold under repurchase agreements during the period
$
34,637
$
34,984
$
21,522
Weighted average interest rate on average daily securities sold under repurchase agreements
0.03
%
0.32
%
2.14
%
Maximum outstanding securities sold under repurchase agreements at any month-end
$
57,915
$
79,718
$
45,865
Securities sold under repurchase agreements at period end
$
41,122
$
36,377
$
45,865
Weighted average interest rate on short-term borrowing at period end
0.02
%
0.04
%
1.47
%
Lines of credit and other borrowings
The Company’s other borrowings have historically consisted primarily of short-term 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 $8.0 million, $23.3 million and $39.6 million of advances outstanding from the FHLB at December 31, 2021, 2020, and 2019.
The total loans pledged as collateral were $915.5 million, $825.3 million and $815.2 million at December 31, 2021, 2020 and 2019, respectively. Outstanding letters of credit from the FHLB totaled $0.8 million and $14.4 million at December 31, 2020 and 2019, respectively. There were no outstanding letters of credit from the FHLB at December 31, 2021.
The following table summarizes short-term borrowings (borrowings with maturities of one year or less), which consist of borrowings from the FHLB, and the weighted average interest rates paid:
Year ended December 31,
(dollars in thousands)
Average daily amount of short-term borrowings outstanding during the period
$
11,343
$
35,622
$
16,665
Weighted average interest rate on average daily short-term borrowing
0.33
%
1.37
%
1.90
%
Maximum outstanding short-term borrowings outstanding at any month-end
$
15,338
$
58,800
$
39,800
Short-term borrowing outstanding at period end
$
7,958
$
23,338
$
39,800
Weighted average interest rate on short-term borrowing at period end
0.91
%
1.22
%
1.80
%
The Corporation maintains a $7.5 million line of credit with a commercial bank, which was entered into on May 15, 2020, and renewed on May 15, 2021. There were no outstanding balances on this note at December 31, 2021 or 2020. Any future borrowings will require monthly payments of interest at a variable rate, and will be due in full on May 15, 2022.
During September 2017, the Company entered into subordinated note agreements with three separate commercial banks. The Company had up to twelve months from entering these agreements to borrow funds up to a maximum availability of $22.5 million. As of December 31, 2021 and 2020, the Company had borrowed $11.5 million under these agreements. 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.
On July 22, 2020, the Company entered into subordinated note agreements with two separate commercial banks. The Company had through December 31, 2020, to borrow funds up to a maximum availability of $6.0 million under each agreement, or $12.0 million total. 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. The Company had outstanding balances of $6.0 million under these agreements at December 31, 2021 and 2020.
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 U.S. Treasury securities, 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 $212.7 million and included gross unrealized gains of $5.6 million and gross unrealized losses of $0.7 million at December 31, 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 as of December 31, 2021 and 2020, are carried at their amortized cost of $5.9 million and $6.7 million, respectively.
The Company recognized a net loss on sale of investment securities of $3,000 during the year ended December 31, 2021. The Company recognized a net gain on sale of investment securities of $3.2 million during the year ended December 31, 2020. The Company recognized a net gain of $0.2 million on the sale of an investment previously classified as an “other investment” and also a net gain on sale of investment securities of $0.6 million during the year ended December 31, 2019.
The following tables set forth the composition and maturities of investment securities as of December 31, 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
At December 31, 2021
Cost
Yield (1)
Cost
Yield (1)
Cost
Yield (1)
Cost
Yield (1)
Cost
Yield (1)
(dollars in thousands)
Available for sale securities
U.S. Treasury securities
$
-
0.0
%
$
-
0.0
%
$
49,574
1.4
%
$
-
0.0
%
49,574
1.4
%
Obligations of U.S. Government sponsored agencies
0.2
%
-
0.0
%
12,967
1.4
%
13,451
1.8
%
26,722
1.6
%
Obligations of states and political subdivisions
-
0.0
%
4,367
3.7
%
14,587
3.4
%
64,065
3.1
%
83,019
3.2
%
Mortgage-backed securities
2.6
%
10,559
2.5
%
10,508
3.0
%
5,016
2.5
%
26,143
2.7
%
Corporate notes
-
0.0
%
4,972
3.3
%
14,311
3.6
%
1,477
5.1
%
20,760
3.6
%
Certificates of deposit
0.9
%
1,026
1.2
%
-
0.0
%
-
0.0
%
1,529
1.1
%
Total available for sale securities
$
0.7
%
$
20,924
2.9
%
$
101,947
2.1
%
$
84,009
2.9
%
$
207,747
2.5
%
Held to maturity securities
Obligations of states and political subdivisions
$
2.3
%
$
3,492
2.6
%
$
1,704
0.0
%
$
-
0.0
%
$
5,911
1.8
%
Total
$
1,582
1.5
%
$
24,416
2.8
%
$
103,651
2.1
%
$
84,009
2.9
%
$
213,658
2.5
%
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
At December 31, 2020
Cost
Yield (1)
Cost
Yield (1)
Cost
Yield (1)
Cost
Yield (1)
Cost
Yield (1)
(dollars in thousands)
Available for sale securities
Obligations of U.S.
Government sponsored agencies
$
(0.4)
%
$
0.1
%
$
2,184
2.1
%
$
15,480
1.8
%
$
18,276
1.8
%
Obligations of states and political subdivisions
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
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
$
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%.
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 December 31, 2021, 26 debt securities had gross unrealized losses, with an aggregate depreciation of 0.98% from our amortized cost basis. The largest unrealized loss percentage of any single security was 5.31% (or $256,000) of its amortized cost. This was also the largest unrealized dollar loss of any single security.
As of December 31, 2020, six debt securities had gross unrealized losses, with an aggregate depreciation of 0.08% from our amortized cost basis. The largest unrealized loss percentage of any single security was 1.86% (or $74,000) of its amortized cost. This was also the largest unrealized dollar loss of any single security.
LIQUIDITY AND CAPITAL RESOURCES
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 shareholders’ equity was $322.7 million at December 31, 2021, compared to $294.9 million at December 31, 2020, and $230.2 million at December 31, 2019. Our total shareholders’ equity increased during 2021, 2020 and 2019 as a result of our profitability, reduced by dividends paid and common share repurchases. Growth in shareholders’ equity during 2020 and 2019 was further stimulated by the acquisitions of Timberwood and Partnership in these years, respectively.
Our capital management consists of providing adequate equity to support our current and future operations. We are 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 regards to risk weighting and other factors. See “Business-Supervision and Regulation-Capital Requirements.”
The following table reflects capital ratios computed pursuant to the regulatory capital rules as applicable to the Company and the Bank. As a result of the Economic Growth Act, the Company is no longer required to comply with its risk-based capital rules. For more information, see “Business-Supervision and Regulation-Capital Requirements.”
Minimum Capital Required
Minimum To Be Well-
Minimum Capital
for Capital Adequacy Plus
Capitalized Under Prompt
Required for Capital
Capital Conservation Buffer
Corrective Action
Actual
Adequacy
Basel III Phase-In Schedule
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
(dollars in thousands)
At December 31, 2021
Bank First Corporation:
Total capital (to risk-weighted assets)
$
297,467
12.4
%
N/A
N/A
N/A
N/A
N/A
N/A
Tier I capital (to risk-weighted assets)
259,652
10.9
%
N/A
N/A
N/A
N/A
N/A
N/A
Common equity tier I capital (to risk-weighted assets)
259,652
10.9
%
N/A
N/A
N/A
N/A
N/A
N/A
Tier I capital (to average assets)
259,652
9.3
%
N/A
N/A
N/A
N/A
N/A
N/A
Bank First, N.A:
Total capital (to risk-weighted assets)
$
291,994
12.2
%
191,339
8.0
%
251,133
10.50
%
239,174
10.0
%
Tier I capital (to risk-weighted assets)
271,679
11.4
%
143,505
6.0
%
203,298
8.50
%
191,339
8.0
%
Common equity tier I capital (to risk-weighted assets)
271,679
11.4
%
107,628
4.5
%
167,422
7.00
%
155,463
6.5
%
Tier I capital (to average assets)
271,679
9.7
%
111,825
4.0
%
111,825
4.00
%
139,781
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)
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 December 31, 2021 and 2020, respectively, which is included in total capital for the Company in the tables above.
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 occasionally expire without being drawn upon. Our off-balance sheet arrangements as of December 31, 2021 were as follows:
Amounts of Commitments Expiring - By Period as of December 31, 2021
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
$
502,131
$
235,004
$
72,240
$
54,594
$
140,293
Standby and direct pay letters of credit
9,062
7,172
1,414
Credit card arrangements
10,916
-
-
-
10,916
Total commitments
$
522,109
$
242,176
$
73,654
$
55,067
$
151,212
We closely monitor the amount of our remaining future commitments to borrowers in light of prevailing economic conditions and adjust these commitments as necessary. We will continue this process as new commitments are entered into or existing commitments are renewed.
Effects of Inflation
The effect of inflation on a financial institution differs significantly from the effect on an industrial company. While a financial institution’s operating expenses, particularly salary and employee benefits, are affected by general inflation, the asset and liability structure of a financial institution consists largely of monetary items. Monetary items, such as cash, investments, loans, deposits and other borrowings, are those assets and liabilities which are or will be converted into a fixed number of dollars regardless of changes in prices. As a result, changes in interest rates have a more significant impact on a financial institution’s performance than does general inflation. For additional information regarding interest rates and changes in net interest income see “Quantitative and Qualitative Disclosures about Market Risk-Interest Rate Sensitivity.” Inflation may have impacts on the Bank’s customers, on businesses and consumers and their ability or willingness to invest, save or spend, and perhaps on their ability to repay loans. As such, there would likely be impacts on the general appetite of banking products and the credit health of the Bank’s customer base.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. 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.
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 December 31, 2021:
Change in Interest Rates
Percentage Change in
(in Basis Points)
Net Interest Income
+400
9.3%
+300
7.6%
+200
6.2%
+100
3.6%
(4.3)%
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%
(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 December 31, 2021 estimated that, in the event of an instantaneous 200 basis point increase in interest rates, the Company would experience a 8.89% 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 9.21% 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.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID:57)
Consolidated Financial Statements:
Consolidated balance sheets
Consolidated statements of income
Consolidated statements of comprehensive income
Consolidated statements of changes in shareholders’ equity
Consolidated statements of cash flows
83-84
Notes to consolidated financial statements
85-121
Bank First Corporation and Subsidiaries Manitowoc, Wisconsin
Consolidated Financial Statements
Years Ended December 31, 2021, 2020 and 2019
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
83-84
Notes to Consolidated Financial Statements
85-121
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Bank First Corporation
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Bank First Corporation and Subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Dixon Hughes Goodman LLP
We have served as the Company's auditor since 2019.
Atlanta, Georgia
March 16, 2022
Bank First Corporation and Subsidiaries
Consolidated Balance Sheets
December 31
(In Thousands, except share and per share data)
Assets
Cash and due from banks
$
29,171
$
36,255
Interest-bearing deposits
267,689
133,964
Cash and cash equivalents
296,860
170,219
Securities held to maturity, at amortized cost ($5,922 and $6,688 fair value at December 31, 2021 and 2020, respectively)
5,911
6,669
Securities available for sale, at fair value
212,689
165,039
Loans held for sale
Loans, net
2,215,199
2,173,802
Premises and equipment, net
49,461
43,183
Goodwill
55,357
55,472
Other investments
9,004
8,896
Cash value of life insurance
31,897
31,394
Core deposit intangibles, net
4,035
5,441
Mortgage Servicing Rights ("MSR")
5,016
3,726
Other real estate owned (“OREO”)
1,885
Investment in minority-owned subsidiaries
42,935
42,278
Other assets
8,252
9,203
TOTAL ASSETS
$
2,937,552
$
2,718,016
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Interest-bearing deposits
$
1,728,504
$
1,605,317
Noninterest-bearing deposits
799,936
715,646
Total deposits
2,528,440
2,320,963
Securities sold under repurchase agreements
41,122
36,377
Notes payable
8,011
23,469
Subordinated notes
17,500
17,500
Other liabilities
19,826
24,850
Total liabilities
2,614,899
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 December 31, 2021 and 2020
Outstanding - 7,616,540 and 7,709,497 shares as of December 31, 2021 and 2020, respectively
Additional paid-in capital
93,149
92,847
Retained earnings
258,104
221,393
Treasury stock, at cost - 861,843 and 768,886 shares as of December 31, 2021 and 2020, respectively
(32,294)
(25,227)
Accumulated other comprehensive income
3,609
5,759
Total stockholders’ equity
322,653
294,857
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
2,937,552
$
2,718,016
See accompanying notes to consolidated financial statements.
Bank First Corporation and Subsidiaries
Consolidated Statements of Income
Years Ended December 31
(In Thousands, except per share amounts)
Interest income:
Loans, including fees
$
93,422
$
95,273
$
82,939
Securities:
Taxable
2,788
3,358
3,134
Tax-exempt
1,866
1,888
1,662
Other
1,430
Total interest income
98,386
100,700
89,165
Interest expense:
Deposits
7,527
12,473
17,875
Securities sold under repurchase agreements
Borrowed funds
1,278
1,162
Total interest expense
8,304
13,865
19,498
Net interest income
90,082
86,835
69,667
Provision for loan losses
3,100
7,125
5,250
Net interest income after provision for loan losses
86,982
79,710
64,417
Noninterest income:
Service charges
6,128
5,003
3,506
Income from Ansay and Associates, LLC (“Ansay”)
2,587
2,740
1,792
Income from UFS, LLC (“UFS”)
2,556
3,066
2,935
Loan servicing income
3,839
1,420
Net gain on sales of mortgage loans
7,371
5,310
1,401
Net (loss) gain on sales of securities
(3)
3,233
Net gain on sale of other investments
-
-
Other
1,040
2,748
1,580
Total noninterest income
23,518
23,520
12,632
Noninterest expense:
Salaries, commissions, and employee benefits
28,515
27,273
22,903
Occupancy
4,198
4,719
3,860
Data processing
5,344
5,515
4,509
Postage, stationery, and supplies
Net (gain) loss on sales and valuations of OREO
(20)
1,395
(73)
Advertising
Charitable contributions
Outside service fees
3,076
4,112
3,041
Amortization of intangibles
1,405
1,636
1,069
Penalty for early extinguishment of debt
-
1,323
-
Other
6,541
5,708
6,026
Total noninterest expense
50,533
53,353
42,760
Income before provision for income taxes
59,967
49,877
34,289
Provision for income taxes
14,523
11,831
7,595
Net Income
$
45,444
$
38,046
$
26,694
Earnings per share - basic
$
5.92
$
5.07
$
3.91
Earnings per share - diluted
$
5.92
$
5.07
$
3.87
Dividends per share
$
1.14
$
0.81
$
0.80
See accompanying notes to consolidated financial statements
Bank First Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31
(In Thousands)
Net Income
$
45,444
$
38,046
$
26,694
Other comprehensive (loss) income:
Unrealized (losses) gains on available for sale securities:
Unrealized holding (losses) gains arising during period
(2,946)
7,987
4,378
Amortization of unrealized holding gains on securities transferred from available for sale to held to maturity
(2)
(102)
(44)
Reclassification adjustment for losses (gains) included in net income
(3,233)
(634)
Income tax benefit (expense)
(1,387)
(840)
Total other comprehensive (loss) income
(2,150)
3,265
2,860
Comprehensive income
$
43,294
$
41,311
$
29,554
See accompanying notes to consolidated financial statements.
Bank First Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity
Accumulated
Serial
Additional
Other
Total
Preferred
Common
Paid-in
Retained
Treasury
Comprehensive
Stockholders’
Stock
Stock
Capital
Earnings
Stock
Income (loss)
Equity
(In Thousands, except share and per share amounts)
Balance at January 1, 2019
$
-
$
$
27,601
$
168,363
$
(21,349)
$
(366)
$
174,323
Net income
-
-
-
26,694
-
-
26,694
Change in accounting principle in unconsolidated subsidiary
-
-
-
(100)
-
-
(100)
Other comprehensive income
-
-
-
-
-
2,860
2,860
Purchase of treasury stock
-
-
-
-
(4,205)
-
(4,205)
Issuance of treasury stock as deferred compensation payout
-
-
-
-
Shares issued in the acquisition of Partnership Community Bancshares, Inc. (534,659 shares)
-
35,298
-
-
-
35,303
Cash dividends ($0.80 per share)
-
-
-
(5,463)
-
-
(5,463)
Amortization of stock-based compensation
-
-
-
-
-
Vesting of restricted stock awards
-
-
(525)
-
-
-
Balance at December 31, 2019
-
63,085
189,494
(24,941)
2,494
230,211
Net income
-
-
-
38,046
-
-
38,046
Other comprehensive income
-
-
-
-
-
3,265
3,265
Purchase of treasury stock
-
-
-
-
(4,367)
-
(4,367)
Sale of treasury stock
-
-
-
-
-
Issuance of treasury stock as deferred compensation payout
-
-
-
-
3,368
-
3,368
Cash dividends ($0.81 per share)
-
-
-
(6,147)
-
-
(6,147)
Amortization of stock-based compensation
-
-
1,081
-
-
-
1,081
Vesting of restricted stock awards
-
-
(694)
-
-
-
Shares issued in the acquisition of Tomah Bancshares, Inc. (575,641 shares)
-
29,375
-
-
-
29,381
Balance at December 31, 2020
-
92,847
221,393
(25,227)
5,759
294,857
Net income
-
-
-
45,444
-
-
45,444
Other comprehensive loss
-
-
-
-
-
(2,150)
(2,150)
Purchase of treasury stock
-
-
-
-
(8,272)
-
(8,272)
Sale of treasury stock
-
-
-
-
-
Cash dividends ($1.14 per share)
-
-
-
(8,733)
-
-
(8,733)
Amortization of stock-based compensation
-
-
1,393
-
-
-
1,393
Vesting of restricted stock awards
-
-
(1,091)
-
1,091
-
-
Balance at December 31, 2021
$
-
$
$
93,149
$
258,104
$
(32,294)
$
3,609
$
322,653
See accompanying notes to consolidated financial statements.
Bank First Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31
(In Thousands)
Cash flows from operating activities:
Net income
$
45,444
$
38,046
$
26,694
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
3,100
7,125
5,250
Depreciation and amortization of premises and equipment
1,780
1,536
1,273
Amortization of intangibles
1,405
1,636
1,069
Net amortization of securities
Amortization of stock-based compensation
1,393
1,081
Accretion of purchase accounting valuations
(1,947)
(5,473)
(7,077)
Net change in deferred loan fees and costs
(1,208)
2,417
(216)
(Benefit) expense for deferred income taxes
(1)
(116)
Change in fair value of MSR and other investments
2,262
(Gain) loss from sale and disposal of premises and equipment
(37)
(Gain) loss on sale of OREO and valuation allowance
(20)
1,395
(73)
Proceeds from sales of mortgage loans
295,904
215,903
86,057
Originations of mortgage loans held for sale
(290,372)
(212,190)
(85,983)
Gain on sales of mortgage loans
(7,371)
(5,310)
(1,401)
Realized (gain) loss on sale of securities available for sale and other investments
(3,233)
(868)
Undistributed income of UFS joint venture
(2,556)
(3,066)
(2,935)
Undistributed income of Ansay joint venture
(2,587)
(2,740)
(1,792)
Net earnings on life insurance
(768)
(741)
(625)
Decrease (increase) in other assets
1,862
(1,876)
(720)
(Decrease) increase in other liabilities
(5,013)
6,440
1,268
Net cash provided by operating activities
40,283
43,963
22,648
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
45,506
Maturities, prepayments, and calls
34,033
73,524
13,364
Purchases
(93,767)
(28,764)
(103,848)
Net increase in loans
(41,713)
(343,581)
(36,496)
Dividends received from UFS
2,646
2,103
2,108
Dividends received from Ansay
1,840
1,712
1,329
Proceeds from sale of OREO
1,893
5,472
1,704
Proceeds from sales of other investments
-
-
Net purchases of Federal Home Loan Bank (“FHLB”) stock
-
(640)
(65)
Net purchases of Federal Reserve Bank (“FRB”) stock
-
(2,760)
-
Proceeds from life insurance
-
-
Proceeds from sale of premises and equipment
-
Purchases of premises and equipment
(8,718)
(8,371)
(7,268)
Investment in Ansay
-
-
(13,700)
Net cash received (used) in business combination
-
35,296
(9,771)
Net cash used in investing activities
(93,886)
(206,028)
(106,153)
Bank First Corporation and Subsidiaries
Consolidated Statements of Cash Flows - (continued)
Years Ended December 31
(In Thousands)
Cash flows from financing activities, net of effects of business combination:
Net increase in deposits
$
207,770
$
307,032
$
17,506
Net (decrease) increase in securities sold under repurchase agreements
4,745
(10,305)
14,376
Proceeds from advances of notes payable
5,000
88,000
44,000
Repayment of notes payable
(20,380)
(127,400)
(4,000)
Proceeds from subordinated debt
-
6,000
-
Repayment of subordinated debt
-
(7,000)
-
Dividends paid
(8,733)
(6,147)
(5,463)
Proceeds from sales of common stock
-
Repurchase of common stock
(8,272)
(4,367)
(4,205)
Net cash provided by financing activities
180,244
245,832
62,214
Net increase (decrease) in cash and cash equivalents
126,641
83,767
(21,291)
Cash and cash equivalents at beginning of year
170,219
86,452
107,743
Cash and cash equivalents at end of year
$
296,860
$
170,219
$
86,452
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest
$
7,064
$
14,972
$
18,938
Income taxes
16,760
10,181
6,677
Supplemental schedule of noncash activities:
Loans transferred to OREO
-
1,892
4,927
Closed branch building transferred to OREO
-
-
MSR resulting from sale of loans
1,862
1,375
Amortization of unrealized holding gains on securities transferred from available for sale to held to maturity recognized in other comprehensive income, net of tax
(2)
(81)
(35)
Change in unrealized gains and losses on investment securities available for sale, net of tax
(2,148)
3,346
2,895
Payment of deferred compensation through issuance of treasury stock
-
3,368
Initial recognition of right-of-use lease asset and liability
-
-
1,699
Cancellation of subordinated debt issued to acquired institution
-
-
6,500
Acquisition:
Fair value of assets acquired
$
-
$
209,918
$
307,768
Fair value of liabilities assumed
-
191,701
286,612
Net assets acquired
$
-
$
18,217
$
21,156
Common stock issued in acquisition
$
-
$
29,381
$
35,303
See accompanying notes to consolidated financial statements.
Bank First Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies
The accounting and reporting policies of Bank First Corporation and Subsidiaries ( “Corporation” ) conform to generally accepted accounting principles ( “GAAP” ) in the United States and general practices within the financial institution industry. Significant accounting and reporting policies are summarized below.
Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiaries, Veritas Asset Holdings, LLC ( “Veritas” ) and Bank First, National Association ( “Bank” ). The Bank’s wholly owned subsidiaries are Bank First Investments, Inc., TVG Holdings, Inc. ( “TVG") and BFC Title LLC. All significant intercompany balances and transactions have been eliminated. The Bank and TVG have investments in minority-owned subsidiaries that are accounted for using the equity method in the consolidated financial statements. The Bank owns 49.8% of UFS which provides data processing solutions to over 60 banks in the Midwest. TVG owns 40.0% of Ansay providing clients throughout the Midwest with superior insurance and risk management solutions.
Organization
The Corporation provides a variety of financial services to individual and business customers, primarily located in Wisconsin, through the Bank. The Bank is subject to competition from other traditional and nontraditional financial institutions and is also subjectone to the regulations of certain federal agencies and undergoes periodic examinations by those regulatory authorities including the Office of the Comptroller of the Currency and the Federal Reserve Bank.
Use of Estimates in Preparation of Financial Statements
The preparation of the accompanying consolidated financial statements in conformity with GAAP in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from these estimates. The allowance for loan losses, carrying value of real estate owned, carrying value of goodwill, fair value of mortgage servicing rights, and fair values of financial instruments are inherently subjective and are susceptible to significant change.
Business Combinations
The Corporation accounts for business combinations under the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB” ) Accounting Standards Codification ( “ASC” ) 805, Business Combinations. The Corporation recognizes the full fair value of the assets acquired and liabilities assumed and immediately expenses transaction costs. There is no separate recognition of the acquired allowance for loan losses on the acquirer’s balance sheet as credit related factors are incorporated directly into the fair value of the net tangible and intangible assets acquired. If the amount of consideration exceeds the fair value of assets purchased less the fair value of liabilities assumed, goodwill is recorded. Alternatively, if the amount by which the fair value of assets purchased exceeds the fair value of liabilities assumed and consideration paid, a gain (bargain purchase gain) is recorded. Fair values are subject to refinement for up to one year after the closing date of an acquisition as information relative to closing date fair values becomes available. Results of operations of the acquired business are included in the statement of income from the effective date of the acquisition. Additional information regarding acquisitions is provided in Note 2.
Cash and Cash Equivalents
For purposes of reporting cash flows in the consolidated financial statements, cash and cash equivalents include cash on hand, interest-bearing and noninterest-bearing accounts in other financial institutions, and federal funds sold, all of which have original maturities of three months or less. Generally, federal funds are purchased and sold for one day periods. In the normal course of business, the Corporation maintains cash and due from bank balances with correspondent banks. Accounts at each institution that are insured by the Federal Deposit Insurance Corporation have up to $250,000 of insurance. Total uninsured balances held at December 31, 2021 and 2020 were approximately $992,000 and $5,284,000, respectively. The Bank is required to maintain deposits on hand or with the FRB to meet specific reserve requirements. During 2021 and 2020, in response to liquidity concerns resulting from the COVID-19 pandemic (“COVID”), this reserve requirement was reduced to zero by the FRB.
Securities
Securities are classified as held to maturity or available for sale at the time of purchase. Investment securities classified as held to maturity, which management has the intent and ability to hold to maturity, are reported at amortized cost. Investment 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 net carrying value of debt securities classified as held to maturity or available for sale is adjusted for amortization of premiums and accretion of discounts utilizing the effective interest method over the expected estimated maturity. Such amortization and accretion is included as an adjustment to interest income from securities. Interest and dividends are included in interest income from securities.
Transfers of debt securities into the held to maturity classification from the available for sale classification are made at fair value as of the date of transfer. The unrealized holding gain or loss as of the date of transfer is retained in other comprehensive income and in the carrying value of the held to maturity securities, establishing the amortized cost of the security. These unrealized holding gains and losses as of the date of transfer are amortized or accreted over the remaining life of the security.
Unrealized gains or losses considered temporary and the noncredit portion of unrealized losses deemed other-than-temporary are reported as an increase or decrease in accumulated other comprehensive income. The credit related portion of unrealized losses deemed other-than-temporary is recorded in current period earnings. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. The Bank evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. As part of such monitoring, the credit quality of individual securities and their issuers are assessed. In addition, management considers the length of time and extent that fair value has been less than cost, the financial condition and near-term prospects of the issuer, and that the Corporation 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. Adjustments to market value that are considered temporary are recorded as a separate component of equity, net of tax. If an impairment of security is identified as other-than-temporary based on information available such as the decline in the credit worthiness of the issuer, external market ratings or the anticipated or realized elimination of associated dividends, such impairments are further analyzed to determine if a credit loss exists. If there is a credit loss, it will be recorded in the consolidated statement of income in the period of identification.
Other Investments
Other investments are carried at cost, or, where available, recently observable market prices, which approximates fair value, and consist of FHLB stock, FRB stock, Bankers’ Bancorporation stock and preferred stock in a community development project (sold during 2021). Other investments are evaluated for impairment at least on an annual basis.
Loans Held for Sale
Loans originated and intended for sale in the secondary market, consisting of the current origination of certain fixed-rate mortgage loans, are carried at the lower of cost or estimated fair value in the aggregate. A gain or loss is recognized at the time of the sale reflecting the present value of the difference between the contractual interest rate of the loans sold and the yield to the investor, adjusted for the initial value of mortgage servicing rights associated with loans sold with servicing retained. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.
Loans and Related Interest Income - Originated
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are generally reported at their outstanding unpaid principal balances adjusted for charge-offs and the allowance for loan losses. The accrual of interest on loans is calculated using the simple interest method on daily balances of the principal amount outstanding and is recognized in the period earned utilizing the loan convention applicable by loan type. Loan origination fees, net of certain direct loan origination costs, are deferred and recognized in interest income using the effective interest method over the estimated life of the loan.
The accrual of interest is discontinued when a loan becomes 90 days past due and is not both well collateralized and in the process of collection, or when management believes, after considering economic and business conditions and collection efforts, that the principal or interest will not be collectible in the normal course of business. When loans are placed on nonaccrual or charged off, all unpaid accrued interest is reversed and additional income is recorded only to the extent that payments are received and the collection of principal is reasonably assured. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, when the obligation has performed in accordance with the contractual terms for a reasonable period of time, and future payments of principal and interest are reasonably assured. Loans are considered impaired if it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Total impaired loans are evaluated based on the fair value of the collateral rather than on discounted cash flow basis.
In response to the COVID-19 pandemic, the CARES Act was signed into law. Under the CARES Act, banks may elect to deem that loan modifications do not result in troubled debt restructurings ("TDRs") if they are (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020 and the earlier of (A) 60 days after the date of termination of the national emergency declaration or (B) January 1, 2022. Additionally, in accordance with the lnteragency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised), other short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs under ASC Subtopic 310-40. This includes short-term (e.g. up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented . Loans modified under this guidance are not considered TDRs.
Loans and Related Interest Income - Acquired
Acquired loans are recorded at their estimated fair value at the acquisition date, and are initially classified as either purchase credit impaired ( “PCI” ) loans (i.e. loans that reflect credit deterioration since origination and it is probable at acquisition that the Corporation will be unable to collect all contractually required payments) or purchased non-impaired loans (i.e. performing acquired loans).
PCI loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, Receivables- Loans and Debt Securities Acquired with Deteriorated Credit Quality. The Corporation estimates the amount and timing of expected principal, interest and other cash flows for each loan or pool of loans meeting the criteria above, and determines the excess of the loan’s scheduled contractual principal and contractual interest payments over all cash flows expected to be collected at acquisition as an amount that should not be accreted. These credit discounts (nonaccretable marks) are included in the determination of the initial fair value for acquired loans; therefore, an allowance for loan losses is not recorded at the acquisition date. Differences between the estimated fair values and expected cash flows of acquired loans at the acquisition date that are not credit-based (accretable marks) are subsequently accreted to interest income over the estimated life of the loans using a method that approximates a level yield method if the timing and amount of the future cash flows is reasonably estimable. Subsequent to the acquisition date for PCI loans, increases in cash flows over those expected at the acquisition date result in a move of the discount from nonaccretable to accretable. Decreases in expected cash flows after the acquisition date are recognized through the provision for loan losses.
Performing acquired loans are accounted for under FASB ASC Topic 310-20, Receivables-Nonrefundable Fees and Other Costs. Performance of certain loans may be monitored and based on management’s assessment of the cash flows and other facts available, portions of the accretable difference may be delayed or suspended if management deems appropriate. The Corporation’s policy for determining when to discontinue accruing interest on performing acquired loans and the subsequent accounting for such loans is essentially the same as the policy for originated loans described above.
Allowance for Loan Losses - Originated
The allowance for loan losses ( “ALL” ) is established through a provision for loan losses charged to expense as losses are estimated to have occurred. Loan losses are charged against the allowance when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.
Management regularly evaluates the allowance for loan losses using general economic conditions, the Corporation’s past loan loss experience, composition of the portfolio, and other relevant factors. This evaluation is inherently subjective since it requires material estimates that may be susceptible to significant change.
The ALL consists of specific reserves for certain impaired loans and general reserves for non-impaired loans. Specific reserves reflect estimated losses on impaired loans from management’s analyses developed through specific credit allocations. The specific credit 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 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.
Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.
Allowance for Loan Losses - Acquired
An ALL is calculated using a methodology similar to that described for originated loans. Performing acquired loans are subsequently evaluated for any required allowance at each reporting date. Such required allowance for each loan pool is compared to the remaining fair value discount for that pool. If greater, the excess is recognized as an addition to the allowance through a provision for loan losses. If less than the discount, no additional allowance is recorded. Charge-offs and losses first reduce any remaining fair value discount for the loan pool and once the discount is depleted, losses are applied against the allowance established for that pool.
For PCI loans after acquisition, cash flows expected to be collected are recast for each loan periodically as determined appropriate by management. If the present value of expected cash flows for a loan is less than its carrying value, impairment is reflected by an increase in the ALL and a charge to the provision for loan losses. If the present value of the expected cash flows for a loan is greater than its carrying value, any previously established ALL is reversed and any remaining difference increases the accretable yield which will be taken into income over the remaining life of the loan. Loans which were considered troubled debt restructurings by an acquired institution prior to the acquisition are not required to be classified as troubled debt restructurings in the Corporation’s consolidated financial statements unless or until such loans would subsequently meet criteria to be classified as such, since acquired loans were recorded at their estimated fair values at the time of the acquisition.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation computed on the straight-line method over the estimated useful lives of the assets. Premises and equipment acquired in corporate acquisitions are recorded at estimated fair value on the date of acquisition. Maintenance and repair costs are charged to expense as incurred. Gains or losses on disposition of premises and equipment are reflected in income. Premises and equipment, and other long-term assets, are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Depreciation expense is computed using the straight-line method over the following estimated useful lives.
Buildings and improvements
40 years
Land improvements
20 years
Furniture, fixtures and equipment
2-7 years
Other Real Estate Owned
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure less estimated costs to sell the asset, establishing a new cost basis. Any write downs at the time of foreclosure are charged to the allowance for loan loss. OREO properties acquired in conjunction with corporate acquisitions are recorded at fair value on the date of acquisition. Subsequent to foreclosure, valuations are periodically performed by management, and a valuation allowance is established if fair value declines below carrying value. Costs relating to the development and improvement of the property are capitalized. Revenue and expenses from operations and changes in the valuation allowance are included in other expenses.
Intangible Assets and Goodwill
Intangible assets consist of the value of core deposits, mortgage servicing assets and the excess of purchase price over fair value of net assets (goodwill). Core deposits are stated at cost less accumulated amortization and are amortized on a sum of the year’s digits basis over a period of one to ten years. See Note 2 for additional information on acquisitions completed in 2020 and 2019.
Mortgage servicing rights are recognized as separate assets when rights are acquired through purchase or through sale of mortgage loans with servicing retained. Servicing rights acquired through sale of financial assets are recorded based on the fair value of the servicing right. The determination of fair value is based on a valuation model and includes stratifying the mortgage servicing rights by predominant characteristics, such as interest rates and terms, and estimating the fair value of each stratum based on the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as costs to service, a discount rate, and prepayment speeds. Changes in fair value are recorded as an adjustment to earnings.
The Corporation performs a “qualitative” assessment of goodwill to determine whether further impairment testing of indefinite-lived intangible assets is necessary on at least an annual basis. If it is determined, as a result of performing a qualitative assessment over goodwill, that it is more likely than not that goodwill is impaired, management will perform an impairment test to determine if the carrying value of goodwill is realizable.
The Corporation evaluated goodwill and core deposit intangibles for impairment during 2021, 2020 and 2019, determining that there was no goodwill or core deposit intangible impairment.
Income Taxes
The Corporation files one consolidated federal income tax return and two state returns. Federal income tax expense is allocated to each subsidiary based on an intercompany tax sharing agreement.
Deferred tax assets and liabilities have been determined using the liability method. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities and the current enacted tax rates which will be in effect when these differences are expected to reverse. Provision (benefit) for deferred taxes is the result of changes in the deferred tax assets and liabilities.
Treasury Stock
Common stock shares repurchased by the Corporation are recorded as treasury stock at cost.
Securities Sold Under Repurchase Agreements
The Corporation sells securities under repurchase agreements. These transactions are accounted for as collateralized financing transactions and are recorded at the amounts at which the securities were sold. The Corporation may have to provide additional collateral to the counterparty, as necessary.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Corporation has entered into off-balance-sheet financial instruments including commitments to extend credit, unfunded commitments under lines of credit, and letters of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded.
Advertising
Advertising costs are generally expensed as incurred.
Per Share Computations
Weighted average shares outstanding were 7,680,896, 7,497,862, and 6,820,225 for the years ended December 31, 2021, 2020 and 2019, respectively. All outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends are considered participating securities for basic and diluted earnings per share calculations. There were 59,264, 56,606, and 51,226 average shares of dilutive instruments outstanding during the years ended December 31, 2021, 2020, and 2019.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe that there are any such matters that will have a material effect on the consolidated financial statements at December 31, 2021 and 2020.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Bank, the transferee obtains the right, free of conditions that constrain it from taking advantage of that right, to pledge or exchange the transferred assets and the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity.
Comprehensive Income
GAAP normally requires that recognized revenues, expenses, gains and losses be included in net income. In addition to net income, another component of comprehensive income includes the after-tax effect of changes in unrealized gains and losses on available for sale securities. This item is reported as a separate component of stockholders’ equity. The Corporation presents comprehensive income in the statement of comprehensive income.
Stock-based Compensation
The Corporation uses the fair value method of recognizing expense for stock-based compensation based on the fair value of restricted stock awards at the date of grant as prescribed by accounting standards codification Topic 781-10 Compensation/Stock Compensation.
Mortgage Banking Derivatives
Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest rate on the loan is locked. The Bank enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into in order to hedge the change in interest rates resulting from its commitments to fund loans. The forward commitments for the future delivery of mortgage loans are based on the Bank’s “best efforts” and therefore the Bank is not penalized if a loan is not delivered to the investor if the loan did not get originated. Changes in the fair values of these derivatives generally offset each other and are included in “other income” in the consolidated statements of income.
Reclassifications
Certain 2020 and 2019 amounts have been reclassified to conform to the presentation used in 2021. These reclassifications had no effect on the operations, financial condition or cash flows of the Corporation.
New Accounting Pronouncements
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 Corporation 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. The Corporation is currently evaluating the impact of ASU 2016-13 on the consolidated financial statements, although the general expectation in the banking industry is that the implementation of this standard will result in higher required balances in the ALLL.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The updated guidance is effective for all entities from March 12, 2020 through December 31, 2022. The Corporation has been diligent in responding to reference rate reform and does not anticipate a significant impact to its financial statements as a result.
In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables-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 an impact on the Corporation’s consolidated financial statements as all premiums within its securities portfolio were already being amortized to the earliest call date prior to implementation as required under subtopic 310-20.
Note 2 Acquisitions
Tomah Bancshares, Inc.
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, 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.
The Company accounted for the transaction under the acquisition method of accounting, and thus, the financial position and results of operations of Timberwood prior to the consummation date were not included in the accompanying consolidated financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective fair values at the date of acquisition. The Company determined the fair value of core deposit intangibles, securities, premises and equipment, loans, other assets and liabilities, deposits and borrowings with the assistance of third party valuations, appraisals, and third party advisors. The estimated fair values will be subject to refinement for up to one year after deal consummation as additional information becomes available relative to the closing date fair values.
The fair value of the assets acquired and liabilities assumed on May 15, 2020 was as follows:
As Recorded by
Fair Value
As Recorded by
(in thousands)
Timberwood
Adjustments
the Company
Cash, cash equivalents and securities
$
79,614
$
(656)
$
78,958
Other investments
-
Loans
117,343
1,068
118,411
Premises and equipment, net
2,538
(1,006)
1,532
Core deposit intangible
-
1,697
1,697
Other assets
11,392
(2,605)
8,787
Total assets acquired
$
211,420
$
(1,502)
$
209,918
Deposits
$
170,362
$
$
171,104
Subordinated debt
6,500
-
6,500
Other borrowings
12,938
13,148
Other liabilities
1,923
(974)
Total liabilities assumed
$
191,723
$
(22)
$
191,701
Excess of assets acquired over liabilities assumed
$
19,697
$
(1,480)
$
18,217
Less: purchase price
29,812
Goodwill (originally recorded)
11,595
Refinement to fair value estimates
Goodwill (after refinement)
$
11,900
Partnership Community Bancshares, Inc.
On July 12, 2019, the Corporation completed a merger with Partnership Community Bancshares, Inc. (“Partnership”), a bank holding company headquartered in Cedarburg, Wisconsin, 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 Corporation and Partnership, whereby Partnership merged with and into the Corporation, and Partnership Bank, Partnership’s wholly-owned banking subsidiary, merged with and into the Bank. Partnership’s principal activity was the ownership and operation of Partnership Bank, a state-chartered banking institution that operated four branches in Wisconsin at the time of closing. The merger consideration totaled approximately $49,589,000.
Pursuant to the terms of the Merger Agreement, Partnership shareholders had the option to receive either 0.34879 shares of the Corporation’s common stock or $17.3001 in cash for each outstanding share of Partnership common stock, and cash in lieu of any remaining fractional share. The stock versus cash elections by the Partnership shareholders were subject to final consideration being made up of approximately $14,285,000 in cash and 534,659 shares of Corporation common stock, valued at approximately $35,303,000 (based on a value of $66.03 per share on the closing date).
The purpose of the merger was for strategic reasons beneficial to the Corporation. The acquisition is consistent with its plan to drive growth and efficiency through increased scale, leverage the strengths of each bank across the combined customer base, enhance profitability, and add liquidity and shareholder value.
The Corporation accounted for the transaction under the acquisition method of accounting, and thus, the financial position and results of operations of Partnership prior to the consummation date were not included in the accompanying consolidated financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective fair values at the date of acquisition. The Corporation determined the fair value of core deposit intangibles, securities, premises and equipment, loans, other assets and liabilities, deposits and borrowings with the assistance of third party valuations, appraisals, and third party advisors. The estimated fair values will be subject to refinement for up to one year after the consummation as additional information becomes available relative to the closing date fair values.
The fair value of the assets acquired and liabilities assumed on July 12, 2019 was as follows:
As Recorded by
Partnership
As Recorded by
Community
Fair Value
Bank First
Bancshares
Adjustments
Corporation
(in thousands)
Cash, cash equivalents and securities
$
21,447
$
(291)
$
21,156
Other investments
Loans
276,279
(957)
275,322
Premises and equipment, net
6,066
(2,940)
3,126
Core deposit intangible
-
4,236
4,236
Other assets
3,668
(181)
3,487
Total assets acquired
$
307,901
$
(133)
$
307,768
Deposits
$
268,653
$
$
268,807
Subordinated debt
7,000
7,195
Other borrowings
9,800
(18)
9,782
Other liabilities
(13)
Total liabilities assumed
$
286,294
$
$
286,612
Excess of assets acquired over liabilities assumed
$
21,607
$
(451)
$
21,156
Less: purchase price
49,589
Goodwill
$
28,433
Note 3 Securities
The following is a summary of available for sale securities (dollar amounts in thousands):
Gross
Gross
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
December 31, 2021
U.S. Treasury securities
$
49,574
$
$
(193)
$
49,502
Obligations of U.S. Government sponsored agencies
26,722
(341)
26,546
Obligations of states and political subdivisions
83,019
3,786
(67)
86,738
Mortgage-backed securities
26,143
1,117
(1)
27,259
Corporate notes
20,760
(94)
21,102
Certificates of deposit
1,529
-
1,542
Total available for sale securities
$
207,747
$
5,638
$
(696)
$
212,689
December 31, 2020
Obligations of U.S. Government sponsored agencies
$
18,276
$
$
(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
(85)
27,743
Certificates of deposit
2,063
-
2,101
Total available for sale securities
$
157,154
$
8,023
$
(138)
$
165,039
The following is a summary of held to maturity securities (dollar amounts in thousands):
Gross
Gross
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
December 31, 2021
Obligations of states and political subdivisions
$
5,911
$
$
-
$
5,922
December 31, 2020
Obligations of states and political subdivisions
$
6,669
$
$
-
$
6,688
At December 31, 2021, unrealized losses in the investment securities portfolio related to debt securities. The unrealized losses on these debt securities arose primarily due to changing interest rates and are considered to be temporary. From the December 31, 2021 tables above, 7 out of 9 U.S. Treasury securities, 2 out of 75 mortgage-backed securities, 5 out of 10 obligations of U.S. Government sponsored agency securities, 7 out of 16 corporate notes and 5 out of 121 obligations of states and political subdivisions contained unrealized losses. At December 31, 2021 and 2020, management has both the intent and ability to hold securities containing unrealized losses.
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 (dollar amounts in thousands):
Less Than 12 Months
Greater Than 12 Months
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Value
Losses
Value
Losses
Value
Losses
December 31, 2021 - Available for Sale
U.S. Treasury securities
$
34,746
$
(193)
$
-
$
-
34,746
(193)
Obligations of U.S. Government sponsored agencies
13,185
(86)
4,558
(255)
17,743
(341)
Obligations of states and political subdivisions
8,624
(67)
-
-
8,624
(67)
Mortgage-backed securities
(1)
-
-
(1)
Corporate notes
8,973
(94)
-
-
8,973
(94)
Totals
$
65,782
$
(441)
$
4,558
$
(255)
$
70,340
$
(696)
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)
Contractual maturities will differ from expected maturities for mortgage-backed securities because borrowers may have the right to call or prepay obligations without penalties. The following is a summary of amortized cost and estimated fair value of securities, by contractual maturity, as of December 31, 2021 (dollar amounts in thousands):
Available for Sale
Held to Maturity
Amortized
Estimated
Amortized
Estimated
Cost
Fair Value
Cost
Fair Value
Due in one year or less
$
$
$
$
Due after one year through 5 years
10,365
10,995
3,492
3,503
Due after 5 years through ten years
91,439
91,938
1,704
1,704
Due after 10 years
78,993
81,688
-
-
Subtotal
181,604
185,430
5,911
5,922
Mortgage-backed securities
26,143
27,259
-
-
Total
$
207,747
$
212,689
$
5,911
$
5,922
Following is a summary of the proceeds from sales of securities available for sale, as well as gross gains and losses, from the years ended December 31 (dollar amounts in thousands):
Proceeds from sales of securities
$
9,087
$
59,697
$
45,506
Gross gains on sales
-
3,284
Gross losses on sales
(3)
(51)
(23)
As of December 31, 2021 and 2020, the carrying values of securities pledged to secure public deposits, securities sold under repurchase agreements, and for other purposes required or permitted by law were approximately $134,299,000 and $134,918,000, respectively.
Note 4 Loans
The composition of loans at December 31 is as follows (dollar amounts in thousands):
Commercial/industrial
$
367,284
$
447,344
Commercial real estate - owner occupied
574,960
549,619
Commercial real estate - non-owner occupied
537,077
443,144
Construction and development
132,675
140,042
Residential 1-4 family
571,749
545,818
Consumer
31,992
30,359
Other
21,489
38,054
Subtotals
2,237,226
2,194,380
ALL
(20,315)
(17,658)
Loans, net of ALL
2,216,911
2,176,722
Deferred loan fees and costs
(1,712)
(2,920)
Loans, net
$
2,215,199
$
2,173,802
A summary of the activity in the allowance for loan losses by loan type as of December 31, 2021 and December 31, 2020 is as follows (dollar amounts in thousands):
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
$
$
$
17,658
Charge-offs
(233)
(618)
-
-
(125)
(7)
(36)
(1,019)
Recoveries
Provision
1,830
(200)
1,242
(186)
(210)
3,100
ALL - December 31, 2021
3,699
5,633
5,151
4,445
20,315
ALL ending balance individually evaluated for impairment
-
-
-
-
-
ALL ending balance collectively evaluated for impairment
$
3,629
$
5,633
$
4,257
$
$
4,445
$
$
$
19,351
Loans outstanding - December 31, 2021
$
367,284
$
574,960
$
537,077
$
132,675
$
571,749
$
31,992
$
21,489
$
2,237,226
Loans ending balance individually evaluated for impairment
4,966
1,519
-
-
-
7,197
Loans ending balance collectively evaluated for impairment
$
366,845
$
569,994
$
535,558
$
132,675
$
571,476
$
31,992
$
21,489
$
2,230,029
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
$
$
2,169
$
$
$
11,396
Charge-offs
(1,087)
(783)
-
(33)
(63)
(90)
(35)
(2,091)
Recoveries
1,129
-
-
1,228
Provision
1,175
2,286
1,812
7,125
ALL - December 31, 2020
2,049
6,108
3,904
1,027
3,960
17,658
ALL ending balance individually evaluated for impairment
-
-
-
-
-
ALL ending balance collectively evaluated for impairment
$
2,039
$
6,108
$
3,014
$
1,027
$
3,960
$
$
$
16,758
Loans outstanding - December 31, 2020
$
447,344
$
549,619
$
443,144
$
140,042
$
545,818
$
30,359
$
38,054
$
2,194,380
Loans ending balance individually evaluated for impairment
1,171
8,676
-
-
-
10,585
Loans ending balance collectively evaluated for impairment
$
446,866
$
548,448
$
434,468
$
140,042
$
545,558
$
30,359
$
38,054
$
2,183,795
A summary of past due loans as of December 31, 2021 are as follows (dollar amounts in thousands):
90 Days
30-89 Days
or more
Past Due
Past Due
Accruing
and Accruing
Non-Accrual
Total
Commercial/industrial
$
$
$
$
Commercial real estate - owner occupied
-
-
5,884
5,884
Commercial real estate - non-owner occupied
-
Construction and development
-
-
Residential 1-4 family
2,002
2,686
Consumer
Other
-
-
-
-
$
2,081
$
$
7,241
$
10,321
A summary of past due loans as of December 31, 2020 are as follows (dollar amounts in thousands):
90 Days
30-89 Days
or more
Past Due
Past Due
Accruing
and Accruing
Non-Accrual
Total
12/31/2020 Commercial/industrial
$
$
-
$
$
Commercial real estate - owner occupied
-
1,582
1,078
2,660
Commercial real estate - non-owner occupied
-
-
8,087
8,087
Construction and development
-
-
Residential 1-4 family
1,415
2,469
Consumer
Other
-
-
-
-
$
1,535
$
1,738
$
10,796
$
14,069
Credit Quality:
We utilize a numerical risk rating system for commercial relationships whose total indebtedness equals $250,000 or more. All other types of relationships (ex: residential, consumer, commercial under $250,000 of indebtedness) 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 Corporation 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.
The breakdown of loans by risk rating as of December 31, 2021 is as follows (dollar amounts in thousands):
Pass (1-5)
Total
Commercial/industrial
$
355,469
$
-
$
11,815
$
-
$
367,284
Commercial real estate - owner occupied
570,703
-
4,257
-
574,960
Commercial real estate - non-owner occupied
513,175
-
23,902
-
537,077
Construction and development
131,429
-
1,246
-
132,675
Residential 1-4 family
570,022
1,644
-
571,749
Consumer
31,988
-
-
31,992
Other
21,489
-
-
-
21,489
$
2,194,275
$
$
42,868
$
-
$
2,237,226
The breakdown of loans by risk rating as of December 31, 2020 is as follows (dollar amounts in thousands):
Pass (1-5)
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
-
140,042
Residential 1-4 family
543,163
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 (“PFLL”) 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 PFLL could be required that could adversely affect the Corporation’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.
A summary of impaired loans individually evaluated as of December 31, 2021 is as follows (dollar amounts in thousands):
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
$
$
-
$
1,406
$
-
$
-
$
-
$
-
$
1,763
Unpaid principal balance
-
1,406
-
-
-
-
1,763
Related allowance
-
-
-
-
-
With no related allowance recorded:
Recorded investment
$
$
4,966
$
$
-
$
$
-
$
-
$
5,434
Unpaid principal balance
4,966
-
-
-
5,434
Related allowance
-
-
-
-
-
-
-
-
Total:
Recorded investment
$
$
4,966
$
1,519
$
-
$
$
-
$
-
$
7,197
Unpaid principal balance
4,966
1,519
-
-
-
7,197
Related allowance
-
-
-
-
-
Average recorded investment
$
$
3,069
$
5,098
$
-
$
$
-
$
-
$
8,893
A summary of impaired loans individually evaluated as of December 31, 2020 is as follows (dollar amounts in thousands):
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
$
$
-
$
7,684
$
-
$
-
$
-
$
-
$
8,162
Unpaid principal balance
-
7,684
-
-
-
-
8,162
Related allowance
-
-
-
-
-
With no related allowance recorded:
Recorded investment
$
-
$
1,171
$
$
-
$
$
-
$
-
$
2,423
Unpaid principal balance
-
1,171
-
-
-
2,423
Related allowance
-
-
-
-
-
-
-
-
Total:
Recorded investment
$
$
1,171
$
8,676
$
-
$
$
-
$
-
$
10,585
Unpaid principal balance
1,171
8,676
-
-
-
10,585
Related allowance
-
-
-
-
-
Average recorded investment
$
1,178
$
2,535
$
4,338
$
-
$
$
-
$
-
$
8,181
An analysis of interest income on impaired loans for the years ended December 31 follows (dollar amounts in thousands):
Interest income in accordance with original terms
$
$
$
Interest income recognized
(720)
(519)
(129)
(Increase) Reduction in interest income
$
(41)
$
$
The following table presents loans acquired with deteriorated credit quality as of December 31, 2021 and 2020. No loans in this table had a related allowance at December 31, 2021 and 2020, and therefore, the below disclosures were not expanded to include loans with and without a related allowance (dollar amounts in thousands).
December 31, 2021
December 31, 2020
Unpaid
Unpaid
Recorded
Principal
Recorded
Principal
Investment
Balance
Investment
Balance
Commercial & Industrial
$
$
$
$
Commercial real estate - owner occupied
2,664
3,146
3,860
4,718
Commercial real estate - non-owner occupied
1,018
1,150
1,245
1,410
Construction and development
-
-
Residential 1-4 family
1,124
1,162
Consumer
-
-
-
-
Other
-
-
-
-
$
5,141
$
6,105
$
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 during the year ended December 31, 2021 and 2020 (dollar amounts in thousands):
December 31, 2021
December 31, 2020
Accretable
Non-accretable
Accretable
Non-accretable
discount
discount
discount
discount
Balance at beginning of year
$
1,250
$
$
$
Acquired balance, net
-
-
1,064
Reclassifications between accretable and non-accretable
(27)
(771)
Accretion to loan interest income
(464)
-
(807)
-
Disposals of loans
-
-
-
-
Balance at end of year
$
$
$
1,250
$
A 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. 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, it remains there until a sufficient period of performance under the restructured terms has occurred at which time it is returned to accrual status, generally six months. As of December 31, 2021 and 2020 the Corporation had specific reserves of $7,000 and $0 related to TDR’s, respectively. Loans modified under the guidance of the Cares Act are not considered TDRs and as such are not included in the tables below.
The following table presents the troubled debt restructurings during the year ended December 31, 2021(dollar amounts in thousands):
Pre-Modification
Post-Modification
Number of
Outstanding Recorded
Outstanding Recorded
Contracts
Investment
Investment
Commercial & Industrial
$
$
Commercial Real Estate
Totals
$
$
The following table presents the troubled debt restructurings during the year ended December 31, 2020 (dollar amounts in thousands):
Pre-Modification
Post-Modification
Number of
Outstanding Recorded
Outstanding Recorded
Contracts
Investment
Investment
Commercial Real Estate
$
$
Residential 1-4 Family
Totals
$
$
Note 5 Related Party Matters
Directors, executive officers, and principal shareholders of the Corporation, including their families and firms in which they are principal owners, are considered to be related parties. Loans to officers, directors, and shareholders owning 10% or more of the Corporation, that we are aware of, were made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others and did not involve more than the normal risk of collectability or present other unfavorable features.
A summary of loans to directors, executive officers, principal shareholders, and their affiliates for the years ended December 31 is as follows (dollar amounts in thousands):
Balances at beginning
$
67,131
$
68,554
New loans and advances
24,723
54,758
Repayments
(18,356)
(56,181)
Balance at end
$
73,498
$
67,131
Deposits from directors, executive officers, principal shareholders, and their affiliates totaled approximately $22,665,000 and $26,486,000 as of December 31, 2021 and 2020, respectively.
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 Corporation utilizes a third party consulting firm to determine an accurate assessment of the mortgage servicing rights 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 mortgage servicing rights 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 for the years ended December 31 in servicing rights assets that are measured at fair value (dollar amounts in thousands):
Fair value at beginning of year
$
3,726
$
4,287
MSR asset acquired
-
Servicing asset additions
1,862
1,375
Loan payments and payoffs
(1,319)
(1,533)
Changes in valuation inputs and assumptions used in the valuation model
(787)
Amount recognized through earnings
1,290
(945)
Fair value at end of year
$
5,016
$
3,726
Unpaid principal balance of loans serviced for others
$
705,462
$
612,707
Mortgage servicing rights as a percent of loans serviced for others
0.71
0.61
During the years ended December 31, 2021 and 2020, the Corporation utilized economic assumptions in measuring the initial value of MSRs for loans sold whereby servicing is retained by the Corporation. The economic assumptions used at December 31, 2021 and 2020 included constant prepayment speed of 13.8 and 16.3 months, respectively, and a discount rate of 10.28% at the end of both years. The constant prepayment speeds are obtained from publicly available sources for each of the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation loan programs that the Corporation originates under. The assumptions used by the Corporation are hypothetical and supported by a third party valuation. The Corporation’s methodology for estimating the fair value of MSRs is highly sensitive to changes in assumptions.
The carrying value of the mortgage servicing rights approximates fair market value at December 31, 2021 and 2020. Changes in fair value are recognized through the income statement as loan servicing income.
Note 7 Premises and Equipment
An analysis of premises and equipment at December 31 follows (dollar amounts in thousands):
Land and land improvements
$
9,763
$
4,895
Buildings and building improvements
42,470
39,773
Furniture and equipment
5,955
5,826
Totals
58,188
50,494
Less accumulated depreciation
10,307
8,902
Right-of-use lease asset (see Note 21)
1,580
1,591
Premises and equipment, net
$
49,461
$
43,183
Included in buildings and improvements at December 31, 2021 and 2020, is $1,110,000 and $1,843,000, respectively, in construction in progress. These amounts relate to branch locations which were under construction. These balances begin accumulating depreciation upon being placed in service.
Depreciation and amortization of premises and equipment charged to operating expense totaled approximately $1,778,000, $1,508,000, and $1,272,000 for the years ended December 31, 2021, 2020, and 2019, respectively.
Note 8 Other Real Estate Owned
Changes in OREO for the years ended December 31 were as follows (dollar amounts in thousands):
Beginning of year
$
1,885
$
6,888
Transfers in
1,892
Depreciation
(2)
(28)
(Loss) gain on sale of OREO and valuation allowance
(1,395)
Sales
(1,893)
(5,472)
End of year
$
$
1,885
Activity in the valuation allowance for the years ended December 31 was as follows (dollar amounts in thousands):
Beginning of year
$
$
2,121
$
2,208
Additions charged to expense
Valuation relieved due to sale of OREO
(142)
(2,365)
(100)
End of year
$
$
$
2,121
Note 9 Investment in Minority-owned Subsidiaries
The Corporation has a 49.8% membership interest in UFS. The business operations of UFS consist of providing data processing and other information technology services to the Corporation and other financial institutions. As of December 31, 2021 and 2020, UFS had total assets of $27,914,000 and $26,353,000 and liabilities of $4,493,000 and $3,133,000, respectively. The Corporation’s investment in UFS was $11,605,000 and $11,695,000 at December 31, 2021 and 2020, respectively. The investment is accounted for on the equity method. The Corporation’s undistributed earnings from its investment in UFS were approximately $2,556,000, $3,066,000, and $2,935,000 for the years ended December 31, 2021, 2020 and 2019, respectively. Data processing service fees paid by the Corporation to UFS were approximately $3,754,000, $3,664,000, and $3,248,000 for the years ended December 31, 2021, 2020 and 2019, respectively.
The Corporation has a contract with UFS that was renewed for five years on January 1, 2018.
The Corporation’s proportionate share of earnings of UFS flow through to its tax return. Deferred income taxes of approximately $1,671,000 and $1,469,000 were provided to account for the difference in the tax and book basis of assets and liabilities held at UFS at December 31, 2021 and 2020, respectively. During 2021, 2020 and 2019, the Corporation received $2,646,000, $2,103,000 and $2,108,000 in dividends from UFS, respectively.
TVG, the insurance subsidiary of the Bank, maintained a 40.0%investment in Ansay at December 31, 2021 and 2020. Ansay is an independent insurance agency that has operated in southeastern Wisconsin since 1946, managing the insurance and risk needs of commercial and personal insurance clients in Wisconsin and the Midwest. As of December 31, 2021 and 2020, Ansay had total assets of $80,612,000 and $77,177,000 and liabilities of $39,135,000 and $37,729,000, respectively. The Corporation’s investment in Ansay, which is accounted for using the equity method, was $31,330,000 and $30,583,000 at December 31, 2021 and 2020, respectively. The Corporation recognized undistributed earnings of approximately $2,587,000, $2,740,000 and $1,792,000 and received dividends of $1,840,000, $1,712,000 and $1,329,000 from its investment in Ansay during the years ended December 31, 2021, 2020 and 2019, respectively.
As of December 31, 2021 and 2020, Ansay had term loans with the Bank totaling approximately $16,936,000 and $15,241,000, respectively. Ansay also has available revolving lines of credit totaling $18,940,000 with the Corporation, under which there were outstanding balances of $1,944,000 as of December 31, 2021. There were no balances outstanding under these revolving lines as of December 31, 2020.
Ansay maintained deposits at the Bank totaling $10,304,000 and $12,924,000 as of December 31, 2021 and 2020, respectively.
The CEO of Ansay, Michael G. Ansay, serves as Chairman of the Board of the Corporation. As a related party, during 2021, 2020 and 2019 the Corporation received insurance consulting services and purchased director and officer fidelity bond and commercial insurance coverage through Ansay spending approximately $329,000, $261,000 and $225,000, respectively.
The Corporation’s proportionate share of earnings of Ansay flow through to its tax return. Deferred income taxes of approximately $1,192,000 and $1,235,000 were provided to account for the difference in the tax and book basis of assets and liabilities held at Ansay as of December 31, 2021 and 2020, respectively.
Note 10  Core Deposit Intangibles
The gross carrying amount and accumulated amortization of core deposit intangibles for the years ended December 31 are as follows (dollar amounts in thousands):
Gross
Intangible
Gross
Intangible
Carrying
Accumulated
Carrying
Accumulated
Amount
Amortization
Amount
Amortization
Core deposit intangible
$
9,030
$
4,995
$
9,030
$
3,589
Amortization expense was $1,405,000, $1,636,000 and $1,069,000 for the years ended December 31, 2021, 2020 and 2019, respectively.
The following table shows the estimated future amortization expense of core deposit intangibles. The projections of amortization expense are based on existing asset balances as of December 31, 2021 (dollar amounts in thousands):
Core
Deposit
Intangible
$
1,174
Thereafter
Total
$
4,035
Note 11 Goodwill
Goodwill was $55,357,000 and $55,472,000 at December 31, 2021 and 2020, respectively.
Note 12 Deposits
The composition of deposits at December 31 is as follows (dollar amounts in thousands):
Noninterest-bearing demand deposits
$
799,936
$
715,646
Interest-bearing demand deposits
286,606
223,753
Savings deposits
1,185,727
1,033,253
Time deposits
244,477
329,154
Brokered certificates of deposit
11,694
19,157
Total deposits
$
2,528,440
$
2,320,963
Time deposits of $250,000 or more were approximately $36,788,000 and $55,182,000 at December 31, 2021 and 2020, respectively.
The scheduled maturities of time deposits at December 31, 2021, are summarized as follows (dollar amounts in thousands):
$
155,166
49,538
27,023
5,185
3,718
Thereafter
15,541
Total
$
256,171
Note 13 Securities Sold Under Repurchase Agreements
Securities sold under repurchase agreements have contractual maturities up to one year from the transaction date with variable and fixed rate terms. The agreements to repurchase securities require that the Corporation (seller) repurchase identical securities as those that are sold. The securities underlying the agreements were under the Corporation’s control.
Information concerning securities sold under repurchase agreements at December 31 consists of the following (dollar amounts in thousands):
Outstanding balance at the end of the year
$
41,122
$
36,377
$
45,865
Weighted average interest rate at the end of the year
0.02
%
0.04
%
1.47
%
Average balance during the year
$
34,637
$
34,984
$
21,522
Average interest rate during the year
0.03
%
0.32
%
2.14
%
Maximum month end balance during the year
$
57,915
$
79,718
$
45,865
Note 14 Notes Payable
There were $7,958,000 and $23,338,000 of advances outstanding from the FHLB at December 31, 2021 and 2020, respectively. From time to time the Bank utilized short-term FHLB advances to fund liquidity during these years. The advances, rate, and maturities of FHLB advances as of December 31 were as follows:
Maturity
Rate
(dollars in thousands)
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
%
-
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
%
-
Fixed rate, fixed term
11/03/2021
1.46
%
-
Fixed rate, fixed term
12/08/2021
2.87
%
-
Fixed rate, fixed term
12/27/2021
1.99
%
-
Fixed rate, fixed term
01/24/2022
2.51
%
Fixed rate, fixed term
05/02/2022
2.98
%
Fixed rate, fixed term
05/16/2022
0.00
%
5,000
-
Fixed rate, fixed term
06/08/2022
2.92
%
Fixed rate, fixed term
11/21/2022
3.02
%
Fixed rate, fixed term
11/21/2023
3.06
%
Fixed rate, fixed term
01/04/2027
0.00
%
-
Fixed rate, fixed term
04/22/2030
0.00
%
7,958
23,338
Purchase accounting adjustment
Total notes payable
$
8,011
$
23,469
Future maturities of borrowings were as follows (dollars in thousands):
December 31,
December 31,
1 year or less
$
6,850
$
20,277
1 to 2 years
1,850
2 to 3 years
-
3 to 4 years
-
-
4 to 5 years
-
-
Over 5 years
$
7,958
$
23,338
At December 31, 2021 and 2020, respectively, total loans available to be pledged as collateral on FHLB borrowings were approximately $915,512,000 and $825,300,000 and, of that total, $527,199,000 and $374,100,000 qualified as eligible collateral. The Bank owned $3,353,000 of FHLB stock at December 31, 2021 and 2020. In addition to the fixed rate, fixed term advances noted above, as of December 31, 2020, the Bank had $800,000 of credit outstanding from the FHLB which consisted entirely of letters of credit. There were no such letters of credit as of December 31, 2021. At December 31, 2021 and 2020, the Bank had available liquidity of $519,242,000 and $350,000,000 for future draws, respectively. FHLB stock is included in other investments at December 31, 2021 and 2020. This stock is recorded at cost, which approximates fair value.
The Corporation maintains a $7,500,000 line of credit with a commercial bank, which was entered into on May 15, 2021. There were no outstanding balances on this note at December 31, 2021. Any future borrowings will require monthly payments of interest at a variable rate, and will be due in full on May 15, 2022.
Note 15 Subordinated Debt
During September 2017, the Corporation entered into subordinated note agreements with three separate commercial banks. The Corporation had up to twelve months from entering these agreements to borrow funds up to a maximum availability of $22,500,000. As of December 31, 2021 and 2020, the Corporation had borrowed $11,500,000 under these agreements. 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. The Company had through December 31, 2020, to borrow funds up to a maximum availability of $6,000,000 under each agreement, or $12,000,000 total. 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. The Company had outstanding balances of $6,000,000 under these agreements at December 31, 2021 and 2020.
Note 16 Income Taxes
The components of the provision for income taxes for the years ended December 31 are as follows (dollar amounts in thousands):
Current tax expense:
Federal
$
9,898
$
8,181
$
4,327
State
4,626
3,766
2,412
Total current
14,524
11,947
6,739
Deferred tax expenses (benefit):
Federal
(1)
(82)
State
-
(34)
Total deferred
(1)
(116)
Total provision for income taxes
$
14,523
$
11,831
$
7,595
A summary of the sources of differences between income taxes at the federal statutory rate and the provision for income taxes for the years ended December 31 follows (dollar amounts in thousands):
Tax expense at statutory rate
$
12,593
$
10,474
$
7,201
Increase (decrease) in taxes resulting from:
Tax-exempt interest
(1,074)
(1,369)
(1,320)
State taxes (net of Federal benefit)
3,666
2,987
1,923
Cash surrender value of life insurance
(161)
(156)
(131)
ESOP dividend
(98)
(78)
(93)
Tax credits
-
-
(39)
Nondeductible expenses associated with acquisition
-
-
Other
(403)
(98)
Total provision for income taxes
$
14,523
$
11,831
$
7,595
Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Corporation’s assets and liabilities. Deferred taxes are included in other liabilities of the balance sheet. The major components of the net deferred tax asset (liability) as of December 31 are presented below (dollar amounts in thousands):
Deferred tax assets:
Deferred compensation
$
$
Premises and equipment
-
Allowance for loan losses
5,534
4,810
Accrued vacation and severance
Other real estate owned
Other
Total deferred tax assets
6,144
5,531
Deferred tax liabilities:
Investment in acquisition and discount accretion
(69)
(122)
Premises and equipment
(179)
-
Mortgage servicing rights
(1,366)
(1,006)
Other investments
(323)
(309)
Prepaid expenses
(71)
(71)
Investment in minority owned subsidiaries
(2,867)
(2,704)
Goodwill and other intangibles
(753)
(963)
Purchase accounting
(697)
(538)
Unrealized gain on securities available for sale
(1,335)
(2,129)
Total deferred tax liabilities
(7,660)
(7,842)
Net deferred tax liability
$
(1,516)
$
(2,311)
Tax effects from an uncertain tax position can be recognized in the financial statements only if the position is more likely than not to be sustained on audit, based on the technical merits of the position. The Corporation recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. When applicable, interest and penalties on uncertain tax positions are calculated based on the guidance from the relevant tax authority and included in income tax expense. At December 31, 2021 and 2020, there was no liability for uncertain tax positions. Federal income tax returns for 4 years ended December 31, 2018 through 2021 remain open and subject to review by applicable tax authorities. State income tax returns for 5 years ended December 31, 2017 through 2021 remain open and subject to review by applicable tax authorities.
Note 17 Employee Benefit Plans
Employee Stock Ownership Plan
The Corporation has a defined contribution profit sharing 401(k) plan which includes the provisions for an employee stock ownership plan (“ESOP”). The plan is available to all employees over 18 years of age after completion of three months of service. Employees participating in the plan may elect to defer a minimum of 2% of compensation up to the limits specified by law. All participants of the 401(k) plan are eligible for the ESOP and may allocate their contributions to purchase shares of the Corporation’s stock. As of December 31, 2021 and 2020, the plan held 340,131 and 361,787 shares, respectively. These shares are included in the calculation of the Corporation’s earnings per share. The Corporation may make discretionary contributions up to the limits established by IRS regulations. The discretionary match was 35% of participant contributions up to 10% of the employee’s salary in 2021, 2020, and 2019. The Corporation made additional discretionary contributions to the plan of $600,000, $733,000, $505,000 in 2021, 2020 and 2019, respectively. Total expense associated with the plans was approximately $1,169,000, $1,272,000 and $957,000 in 2021, 2020 and 2019, respectively
Share-based Compensation
The Corporation has made restricted share grants during 2021,2020 and 2019 pursuant to the Bank First National 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 Corporation, thereby promoting the long-term growth and financial success of the Corporation. The Corporation stock to be offered under the Plan pursuant to Stock Appreciation Rights, performance unit awards, and restricted stock and unrestricted Corporation stock awards must be Corporation stock previously issued and outstanding and reacquired by the Corporation. The number of shares of Corporation stock that may be issued pursuant to awards under the 2020 Plan shall not exceed, in the aggregate, 700,000. As of December 31, 2021, 25,815 shares of Corporation stock has 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 year ended December 31, 2021, 2020 and 2019, compensation expense of $1,392,000, $1,081,000 and $685,000, respectively, was recognized related to restricted stock awards.
As of December 31, 2021, there was $2,236,000 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 2.52 years. The aggregate grant date fair value of restricted stock awards that vested during 2021 was approximately $1,091,000.
For the year ended
For the year ended
December 31, 2021
December 31, 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
(2,225)
62.40
(2,344)
51.27
Outstanding at end of year
58,611
$
61.44
57,175
$
53.08
Deferred Compensation Plan
The Corporation has a deferred compensation agreement with one of its former executive officers. The benefits were payable beginning June 30, 2009, the date of termination of employment with the Corporation via retirement. The estimated annual cash benefit payment upon retirement at the age of 70 under the salary continuation plan is $108,011. The payoff is for the participant’s lifetime and is guaranteed to the participant or their surviving beneficiary for a minimum of 15 years. Related expense for this agreement was approximately $15,000, $19,000, and $23,000 for the years ended December 31, 2021, 2020 and 2019, respectively. The vested present value of future payments of approximately $ 255,000 and $348,000 at December 31, 2021 and 2020, respectively, is included in other liabilities. During 2021 and 2020 the discount rate used to present value the future payments of this obligation was 4.95%.
Note 18 Stockholders’ Equity and Regulatory Matters
The Bank, as a national bank, is subject to the dividend restrictions set forth by the Office of the Comptroller of the Currency. Under such restrictions, the Bank may not, without the prior approval of the Office of the Comptroller of the Currency, declare dividends in excess of the sum of the current year’s earnings (as defined) plus the retained earnings (as defined) from the prior two years. The dividends that the Bank could declare without the prior approval of the Office of the Comptroller of the Currency as of December 31, 2021 totaled approximately $77,800,000. The payment of dividends may be further limited because of the need for the Bank to maintain capital ratios satisfactory to applicable regulatory agencies.
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 Corporation 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 December 31, 2021 and 2020, this buffer was 2.50%. As of December 31, 2021 and 2020, the Bank met all capital adequacy requirements to which they are subject.
Actual and required capital amounts and ratios are presented below (dollar amounts in thousands):
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
December 31, 2021
Total capital (to risk-weighted assets):
Corporation
$
297,467
12.44
%
NA
NA
NA
NA
NA
NA
Bank
$
291,994
12.21
%
$
191,339
8.00
%
$
251,133
10.50
%
$
239,174
10.00
%
Tier 1 capital (to risk-weighted assets):
Corporation
$
259,652
10.86
%
NA
NA
NA
NA
NA
NA
Bank
$
271,679
11.36
%
$
143,505
6.00
%
$
203,298
8.50
%
$
191,339
8.00
%
Common Equity Tier 1 capital (to risk-weighted assets):
Corporation
$
259,652
10.86
%
NA
NA
NA
NA
NA
NA
Bank
$
271,679
11.36
%
$
107,628
4.50
%
$
167,422
7.00
%
$
155,463
6.50
%
Tier 1 capital (to average assets):
Corporation
$
259,652
9.29
%
NA
NA
NA
NA
NA
NA
Bank
$
271,679
9.72
%
$
111,825
4.00
%
$
111,825
4.00
%
$
139,781
5.00
%
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
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 19 Segment Information
The Corporation, through the branch network of its subsidiary, the Bank, provides a full range of consumer and commercial financial institution services to individuals and businesses in Wisconsin. These services include credit cards; secured and unsecured consumer, commercial, and real estate loans; demand, time, and savings deposits; and ATM processing. The Corporation also offers a full-line of insurance services through its equity investment in Ansay and offers data processing services through its equity investment in UFS.
While the Corporation’s chief decision makers monitor the revenue streams of various Corporation products and services, operations are managed and financial performance is evaluated on a Corporation-wide basis. Accordingly, all of the Corporation’s financial institution operations are considered by management to be aggregated in one reportable operating segment.
Note 20 Commitments and Contingencies
The Corporation 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 December 31, 2021 and 2020, respectively, was $21,921,000 and $69,600,000.
The Bank 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 Bank’s exposure to credit loss is represented by the contractual or notional amount of these commitments. The Bank 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.
The following commitments were outstanding at December 31 (dollar amounts in thousands):
Notional Amount
Commitments to extend credit:
Fixed
$
90,036
$
72,298
Variable
412,095
388,738
Credit card arrangements
10,916
10,867
Letters of credit
9,062
7,567
Commitments to extend credit are agreements to lend to a customer at fixed or variable rates as long as there is no violation of any condition established in the contract. Commitments have fixed expiration dates or other termination clauses and may require payment of a fee. The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable; inventory; property, plant, and equipment; real estate; and stocks and bonds.
Letters of credit include $100,000 of direct pay letters of credit and $8,962,000 of standby letters of credit. Direct pay letters of credit generally are issued to support the marketing of industrial development revenue and housing bonds and provide that all debt service payments will be paid by drawing on the letter of credit. The letter of credit draws are then repaid by draws from the customer’s bank account. Standby letters of credit are conditional lending commitments issued by the Corporation to guaranty the performance of a customer to a third party. Generally, all standby letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation generally holds collateral supporting these commitments. The majority of the Corporation’s loans, commitments, and letters of credit have been granted to customers in the Corporation’s market area. The concentrations of credit by type are set forth in Note 4. Standby letters of credit were granted primarily to commercial borrowers. Management believes the diversity of the local economy will prevent significant losses in the event of an economic downturn.
Note 21 Leases
In accordance with GAAP, leases where the Corporation is the lessee are recognized on-balance sheet through a right-of-use (“ROU”) model that requires recognition of 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.
The Corporation leases certain properties under operating leases that resulted in the recognition of ROU lease assets of approximately $1,580,000 and $1,591,000 and corresponding lease liabilities of the same value on the Corporation’s Consolidated Balance Sheets as of December 31, 2021 and 2020, respectively.
GAAP provides a number of optional practical expedients in transition. The Corporation has elected the “package of practical expedients,” which permits the Corporation not to reassess under the new standard the prior conclusions about lease identification, lease classification and initial direct costs. The Corporation also elected the use of the hindsight, a practical expedient which permits the use of information available after lease inception to determine the lease term via the knowledge of renewal options exercised not available as of the leases inception. The Corporation elected the short-term lease recognition exemption for all leases that qualify, meaning those with terms under twelve months. ROU assets or lease liabilities are not to be recognized for short-term leases. The Corporation 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. However, since these non-lease items are subject to change, they are treated and disclosed as variable payments in the quantitative disclosures below.
Lessee Leases
The Corporation’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 Corporation 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 Corporation liable for damages.
For operating leases, the lease liability and ROU asset (before adjustments) are recorded at the present value of future lease payments. The Corporation is electing to utilize the Wall Street Journal Prime Rate on the date of lease commencement as the lease interest rate.
For the year ended
December 31, 2021
December 31, 2020
(dollar amounts in Thousands)
Amortization of ROU Assets - Operating Leases
$
$
Interest on Lease Liabilities - Operating Leases
Operating Lease Cost (Cost resulting from lease payments)
New ROU Assets - Operating Leases
-
-
Weighted Average Lease Term (Years) - Operating Leases
32.00
32.75
Weighted Average Discount Rate - Operating Leases
5.50
%
5.50
%
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liabilities is as follows (dollar amounts in thousands):
December 31, 2021
December 31, 2020
Operating lease payments due:
Within one year
$
$
After one but within two years
After two but within three years
After three but within four years
After four years but within five years
After five years
3,231
3,325
Total undiscounted cash flows
3,667
3,765
Discount on cash flows
(2,087)
(2,174)
Total operating lease liabilities
$
1,580
$
1,591
Note 22 Fair Value of Financial Instruments
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 (dollar amounts in thousands):
Instruments
Markets
Other
Significant
Measured
for Identical
Observable
Unobservable
At Fair
Assets
Inputs
Inputs
Value
(Level 1)
(Level 2)
(Level 3)
December 31, 2021
Assets
Securities available for sale
U.S. Treasury securities
$
49,502
$
-
$
49,502
$
-
Obligations of U.S. Government sponsored agencies
26,546
-
26,546
-
Obligations of states and political subdivisions
86,738
-
86,738
-
Mortgage-backed securities
27,259
-
27,259
-
Corporate notes
21,102
-
21,102
-
Certificates of deposit
1,542
-
1,542
-
Mortgage servicing rights
5,016
-
5,016
-
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.
Information regarding the fair value of assets measured at fair value on a non-recurring basis is as follows (dollar amounts in thousands):
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)
December 31, 2021
OREO
$
$
-
$
-
$
Impaired Loans, net of impairment reserve
6,233
-
-
6,233
$
6,383
$
-
$
-
$
6,383
December 31, 2020
OREO
$
1,885
$
-
$
-
$
1,885
Impaired Loans, net of impairment reserve
9,685
-
-
9,685
$
11,570
$
-
$
-
$
11,570
The following is a description of the valuation methodologies used by the Corporation 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 December 31, 2021
Other real estate owned
Third party appraisals, sales contracts or brokered price options
Collateral discounts and estimated costs to sell
18% - 97
%
18.0
%
Impaired loans
Third party appraisals and discounted cash flows
Collateral discounts and discount rates
0% - 100
%
7.4
%
The following methods and assumptions were used by the Corporation 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.
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 Corporation 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 December 31 follows (dollar amounts in thousands):
Fair Value
Carrying
December 31, 2021
amount
Level 1
Level 2
Level 3
Total
Financial assets:
Cash and cash equivalents
$
296,860
$
296,860
$
-
$
-
$
296,860
Securities held to maturity
5,911
-
5,922
-
5,922
Securities available for sale
212,689
-
212,689
-
212,689
Loans held for sale
-
-
Loans, net
2,215,199
-
-
2,210,593
2,210,593
Other investments, at cost
9,004
-
-
9,004
9,004
Mortgage servicing rights
5,016
-
5,016
-
5,016
Cash surrender value of life insurance
31,897
31,897
-
-
31,897
Financial liabilities:
Deposits
$
2,528,440
$
-
$
-
$
2,457,287
$
2,457,287
Securities sold under repurchase agreements
41,122
-
41,122
-
41,122
Notes payable
8,011
-
8,011
-
8,011
Subordinated notes
17,500
-
17,500
-
17,500
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
-
-
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 Corporation’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 Corporation.
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 Corporation’s entire holdings of a particular instrument. Because no market exists for a significant portion of the Corporation’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 23 Parent Company Only Financial Statements
Balance Sheets
December 31
(In Thousands)
Assets
Cash and cash equivalents
$
6,183
$
1,584
Investment in Bank
334,680
312,142
Investment in Veritas
Other assets
TOTAL ASSETS
$
340,909
$
313,773
Liabilities and Stockholders’ Equity
Liabilities
Subordinated notes
$
17,500
$
17,500
Other liabilities
1,416
Total liabilities
18,256
18,916
Stockholders’ equity:
Common stock
Additional paid-in capital
93,149
92,847
Retained earnings
258,104
221,393
Treasury stock, at cost
(32,294)
(25,227)
Accumulated other comprehensive income
3,609
5,759
Total stockholders’ equity
322,653
294,857
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
340,909
$
313,773
Statements of Income
Years Ended December 31
(In Thousands)
Income:
Dividends received from Bank
$
22,361
$
21,406
$
16,335
Equity in undistributed earnings of subsidiaries
24,687
18,104
11,361
Other income
-
(7)
Total income
47,048
39,503
27,930
Other expenses
2,205
2,005
1,611
Benefit for income taxes
(601)
(548)
(375)
Net income
$
45,444
$
38,046
$
26,694
Statements of Cash Flows
Years Ended December 31,
(In thousands)
Cash flow from operating activities:
Net income
$
45,444
$
38,046
$
26,694
Adjustments to reconcile net income to net cash provided by operating activities:
Stock compensation
1,393
1,081
Equity in earnings of subsidiaries (includes dividends)
(47,048)
(39,410)
(27,696)
Changes in other assets and liabilities:
Other assets
(329)
Other liabilities
(660)
(33)
Net cash provided by (used in) operating activities
(870)
(679)
Cash flows from investing activities, net of effects of business combination:
Sale of other investments
-
-
Dividends received from Bank
22,360
21,406
16,335
Dividends received from Veritas
-
2,121
-
Net cash used in business combination
-
(4,474)
(14,241)
Contribution to subsidiaries
-
(65)
(2,620)
Net cash provided by investing activities
22,360
18,988
Cash flows from financing activities, net of effects of business combination:
Repayment of notes payable
-
(10,000)
-
Proceeds from notes payable
-
-
10,000
Repayment of subordinate notes
-
(7,122)
-
Proceeds from subordinated notes
-
6,000
-
Cash dividends paid
(8,733)
(6,147)
(5,463)
Issuance of common stock
-
3,368
Repurchase of common stock
(8,158)
(4,367)
(4,205)
Net cash (used in) provided by financing activities
(16,891)
(18,268)
Net increase (decrease) in cash and cash equivalents
4,599
1,521
(9)
Cash and cash equivalents at beginning
1,584
Cash and cash equivalents at end
$
6,183
$
1,584
$
Supplemental schedule of noncash activities:
Amortization of unrealized holding gains on securities transferred from available for sale to held to maturity recognized in other comprehensive income, net of tax
(2)
(81)
$
(35)
Change in unrealized gains and losses on investment securities available for sale, net of tax
-
3,756
2,958
Note 24 Earnings Per Common Share
See Note 1 for the Corporation’s accounting policy regarding per share computations. Earnings per common share, earnings per share assuming dilution, and related information are summarized as follows:
Years ended December 31,
Basic
Net income available to common shareholders
$
45,444
$
38,046
$
26,694
Less: Earnings allocated to participating securities
$
(351)
$
(287)
$
(200)
Net income allocated to common shareholders
$
45,093
$
37,759
$
26,494
Weighted average common shares outstanding including participating securities
7,680,896
7,497,862
6,820,225
Less: Participating securities (1)
(59,264)
(56,606)
(51,226)
Average shares
7,621,632
7,441,256
6,768,999
Basic earnings per common shares
$
5.92
$
5.07
$
3.91
Diluted
Net income available to common shareholders
$
45,444
$
38,046
$
26,694
Weighted average common shares outstanding for basic earnings per common share
7,621,632
7,441,256
6,768,999
Add: Dilutive effects of stock based compensation awards
21,535
39,821
110,385
Average shares and dilutive potential common shares
7,643,167
7,481,077
6,879,384
Diluted earnings per common share
$
5.92
$
5.07
$
3.87
Note 25 Quarterly Results of Operations
2021 Quarters
Fourth
Third
Second
First
(dollars in thousands, except share and per share data)
Interest income
$
25,043
$
24,898
$
24,003
$
24,442
Interest expense
1,812
1,964
2,189
2,339
Net interest and dividend income
23,231
22,934
21,814
22,103
Provision for loan losses
Net interest and dividend income after provision for loan losses
22,631
22,284
20,864
21,203
Noninterest income
5,706
5,028
6,574
6,210
Noninterest expense
13,620
12,466
12,221
12,225
Income before provision for income taxes
14,717
14,846
15,217
15,188
Provision for income taxes
3,553
3,628
3,669
3,674
Net income
$
11,164
$
11,218
$
11,548
$
11,514
Share data
Average shares outstanding, basic
7,570,128
7,605,541
7,653,317
7,657,301
Average shares outstanding, diluted
7,595,052
7,624,791
7,668,740
7,677,976
Earnings per share, basic
$
1.47
$
1.46
$
1.50
$
1.49
Earnings per share, diluted
$
1.47
$
1.46
$
1.50
$
1.49
2020 Quarters
Fourth
Third
Second
First
(dollars in thousands, except share and per share data)
Interest income
$
27,094
$
25,928
$
24,382
$
23,296
Interest expense
2,623
3,003
3,586
4,653
Net interest and dividend income
24,471
22,925
20,796
18,643
Provision for loan losses
1,650
1,350
3,150
Net interest and dividend income after provision for loan losses
22,821
21,575
17,646
17,668
Noninterest income
6,744
5,115
7,764
3,897
Noninterest expense
13,972
12,202
14,438
12,741
Income before provision for income taxes
15,593
14,488
10,972
8,824
Provision for income taxes
4,063
3,534
2,676
1,558
Net income
$
11,530
$
10,954
$
8,296
$
7,266
Share data
Average shares outstanding, basic
7,659,904
7,673,572
7,395,199
7,028,690
Average shares outstanding, diluted
7,682,101
7,691,326
7,405,995
7,128,246
Earnings per share, basic
$
1.49
$
1.42
$
1.11
$
1.03
Earnings per share, diluted
$
1.49
$
1.42
$
1.11
$
1.02
Note 26 Pending Merger Transaction
On January 18, 2022, the Corporation entered into an Agreement and Plan of Merger with Denmark Bancshares, Inc. (“Denmark”), a Wisconsin Corporation, under which Denmark will merge with and into the Corporation and Denmark’s banking subsidiary, Denmark State Bank, will merge with and into the Bank. The transaction is expected to close during the third quarter of 2022 and is subject to, among other items, approval by the shareholders of both institutions and regulatory agencies. Merger consideration will consist of up to 20% cash and no less than 80% of common stock of the Corporation, and will total approximately $119 million, subject to the fair market value of the Corporation’s common stock on the date of closing. Based on results as of December 31, 2021, the combined company would have total assets of approximately $3.6 billion, loans of approximately $2.7 billion, and deposits of approximately $3.1 billion.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) as of December 31, 2021 was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2021, the Company’s disclosure controls and procedures were effective for ensuring that information the Company is required to disclose in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s senior management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of the financial statements. No matter how well designed, internal control over financial reporting has inherent limitations, including the possibility that a control can be circumvented or overridden, and misstatements due to error or fraud may occur and not be detected. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).
Based on this assessment management has determined that, as of December 31, 2021, the Company’s internal control over financial reporting is effective based on the specified criteria.
This Annual Report does not include an attestation report from our registered public accounting firm regarding our internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit emerging growth companies, which we are, to provide only Management’s Annual Report on Internal Control over Financial Reporting in this Annual Report.
Changes in Internal Controls
There was no change in our internal control over financial reporting that occurred during the fourth quarter ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. There has also been no significant impact to internal controls over financial reporting as a result of the continuing COVID-19 pandemic. The Company is continually monitoring and assessing changes in processes and activities to determine any potential impact on the design and operating effectiveness of internal controls over financial reporting.
Limitations on the Effectiveness of Controls
The Company’s management recognizes that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, errors and instances of fraud, if any, within the Company have been detected.

---

ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required in Part III, Item 10 will be under the headings “Proposal 1-Election of Directors,” “Executive Officers,” “Corporate Governance,” “Committees of the Board of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive proxy statement for the 2022 Annual Meeting of Shareholders, incorporated herein by reference.

---

ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
The information required in Part III, Item 11 will be under the headings “Director Compensation,” “Named Executive Officer Compensation” and “Committees of the Board of Directors” in the Company’s definitive proxy statement for the 2022 Annual Meeting of Shareholders, incorporated herein by reference.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table provides information as of December 31, 2021 with respect to shares of common stock that may be issued under the Company’s equity compensation plans.
Number of
securities
remaining
Number of
Weighted
available for
securities to
average
future issuance
be issued upon
exercise
under equity
exercise
price of
compensation
of outstanding
outstanding
plans (excluding
options,
options,
securities
warrants and
warrants
reflected
rights
and rights
in column (a))
Plan Category
(a)
(b)
(c)
Equity compensation plans approved by security holders
$
674,185
Total at December 31, 2021
$
674,185
(1) On June 8, 2020, the Company's shareholders approved the Company's 2020 Equity Plan, authorizing up to 700,000 shares of stock to be awarded as long-term incentive compensation to employees and non-employee directors over a period of ten (10) years.
The remaining information required in Part III, Item 12 will be under the heading “Common Stock Ownership of Certain Beneficial Owners and Management” in the Company’s definitive proxy statement for the 2022 Annual Meeting of Shareholders, incorporated herein by reference.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required in Part III, Item 13 will be under the headings “Certain Relationships and Related-Party Transactions” and “Corporate Governance” in the Company’s definitive proxy statement for the 2022 Annual Meeting of Shareholders, incorporated herein by reference.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required in Part III, Item 14 will be under the heading “Information Regarding the Company’s Independent Registered Public Accounting Firm” in the Company’s definitive proxy statement for the 2022 Annual Meeting of Shareholders, incorporated herein by reference.
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
The following consolidated financial statements of Bank First and our subsidiaries and related reports of our independent registered public accounting firm are incorporated in this Item 15 by reference from Part II - Item 8. Financial Statements and Supplementary Data of this Report.
Consolidated balance sheets as of December 31, 2021 and 2020
Consolidated statements of income for the years ended December 31, 2021, 2020 and 2019
Consolidated statements of comprehensive income for the years ended December 31, 2021, 2020 and 2019
Consolidated statements of changes in shareholders’ equity for the years ended December 31, 2021, 2020 and 2019
Consolidated statements of cash flows for the years ended December 31, 2021, 2020 and 2019
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
2. Financial Statement Schedules
None are applicable because the required information has been incorporated in the consolidated financial statements and notes thereto of Bank First and our subsidiaries which are incorporated in this Annual Report by reference.
3. Exhibits
The following exhibits are filed or furnished herewith or are incorporated herein by reference to other documents previously filed with the SEC.
EXHIBIT INDEX
Exhibit
No.
Description
2.1
Agreement and Plan of Merger, dated January 18, 2022, by and between Bank First Corporation and Denmark Bancshares, Inc. (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 19, 2022 and incorporated herein by reference).
2.4
Agreement and Plan of Merger, dated November 19, 2019, by and between Bank First Corporation and Tomah Bancshares, Inc. (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on November 19, 2019 and incorporated herein by reference).
3.1
Restated Articles of Incorporation of Bank First Corporation (filed as Exhibit 3.1 to the Company’s Registration Statement on Form 10-12B/A (File No. 001-38676) filed with the SEC on October 17, 2018 and incorporated herein by reference).
3.2
Amended and Restated Bylaws of Bank First Corporation (filed as Exhibit 3.2 to the Company’s Registration Statement on Form 10-12B/A (File No. 001-38676) filed with the SEC on October 17, 2018 and incorporated herein by reference.)
4.1
Form of Certificate of Common Stock of Bank First Corporation (filed as Exhibit 4.1 to the Company’s Registration Statement on Form 10-12B (File No. 001-38676) filed with the SEC on September 24, 2018 and incorporated herein by reference).
4.2
Description of Registered Securities.
10.1
Bank First Corporation 2011 Equity Plan (filed as Exhibit 10.1 to the Company’s Registration Statement on Form 10-12B (File No. 001-38676) filed with the SEC on September 24, 2018 and incorporated herein by reference).*
10.2
Amendments to Bank First National Corporation 2011 Equity Plan (filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K (File No. 001-38676) filed with the SEC on February 22, 2019 and incorporated herein by reference).*
10.3
Bank First Corporation 2020 Equity Plan, as amended*
Exhibit
No.
Description
10.4
Form of Restricted Stock Award Agreement for Named Executive Officers (filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed with the SEC on March 4, 2021 and incorporated herein by reference).*
10.5
Form of Restricted Stock Award Agreement for Non-Employee Directors (filed as Exhibit 99.2 to the Company's Current Report on Form 8-K filed with the SEC on March 4, 2021 and incorporated herein by reference).*
Subsidiaries of Bank First Corporation.
23.1
Consent of Independent Registered Public Accounting Firm (Dixon Hughes Goodman, LLP).
Power of Attorney contained on the signature pages of this 2021 Annual Report on Form 10-K and incorporated herein by reference.
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Interactive Data File.
* Compensatory plan or arrangement.