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BFC Bank First

Filed: 8 Nov 21, 7:00pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2021

OR

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

For the transition period from ____________ to ____________

Commission file number: 001-38676

BANK FIRST CORPORATION

(Exact name of registrant as specified in its charter)

WISCONSIN

    

39-1435359

(State or other jurisdiction of incorporation or organization)

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

402 North 8th Street, Manitowoc, Wisconsin

    

54220

(Address of principal executive offices)

(Zip Code)

(920) 652-3100

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

Emerging growth company

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

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

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

Title of each class

    

Trading Symbol(s)

    

Name on each exchange on which registered

Common Stock, par value $0.01 per share

 

BFC

 

The Nasdaq Stock Market LLC

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

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS:

BANK FIRST CORPORATION

Consolidated Balance Sheets

(In thousands, except share and per share data)

    

September 30,2021

    

December 31, 2020

(Unaudited)

(Audited)

Assets

Cash and due from banks

$

32,340

$

36,255

Interest-bearing deposits

 

1,256

 

5,195

Federal funds sold

 

266,357

 

128,769

Cash and cash equivalents

 

299,953

 

170,219

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

 

5,912

 

6,669

Securities available for sale, at fair value

 

148,376

 

165,039

Loans held for sale

2,596

809

Loans, net

 

2,188,678

 

2,173,802

Premises and equipment, net

 

44,181

 

43,183

Goodwill

 

55,357

 

55,472

Other investments

 

8,997

 

8,896

Cash value of life insurance

 

31,705

 

31,394

Identifiable intangible assets, net

 

8,731

 

9,167

Other real estate owned (“OREO”)

 

197

 

1,885

Investment in minority-owned subsidiaries

 

42,940

 

42,305

Other assets

 

8,982

 

9,176

TOTAL ASSETS

$

2,846,605

$

2,718,016

Liabilities and Stockholders’ Equity

 

 

  

Liabilities:

 

  

 

  

Deposits:

 

  

 

  

Interest-bearing deposits

$

1,681,062

$

1,605,317

Noninterest-bearing deposits

 

790,196

 

715,646

Total deposits

 

2,471,258

 

2,320,963

Securities sold under repurchase agreements

 

17,402

 

36,377

Notes payable

 

9,179

 

23,469

Subordinated notes

 

17,500

 

17,500

Other liabilities

 

16,004

 

24,850

Total liabilities

 

2,531,343

 

2,423,159

Stockholders’ equity:

 

  

 

  

Serial preferred stock - $0.01 par value

 

  

 

  

Authorized - 5,000,000 shares

 

0

 

0

Common stock - $0.01 par value

 

  

 

  

Authorized - 20,000,000 shares

 

  

 

  

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

 

  

 

  

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

 

85

 

85

Additional paid-in capital

 

92,789

 

92,847

Retained earnings

 

248,619

 

221,393

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

 

(30,602)

 

(25,227)

Accumulated other comprehensive income

 

4,371

 

5,759

Total stockholders’ equity

 

315,262

 

294,857

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

2,846,605

$

2,718,016

See accompanying notes to consolidated financial statements.

3

ITEM 1. Financial Statements Continued:

BANK FIRST CORPORATION

Consolidated Statements of Income

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

    

Three months ended September 30, 

Nine months ended September 30, 

2021

    

2020

    

2021

    

2020

Interest income:

Loans, including fees

$

23,584

$

24,719

$

69,792

$

69,648

Securities:

 

 

 

 

Taxable

 

739

 

688

 

1,953

 

2,393

Tax-exempt

 

465

 

493

 

1,402

 

1,403

Other

 

110

 

28

 

196

 

162

Total interest income

 

24,898

 

25,928

 

73,343

 

73,606

Interest expense:

 

 

 

 

Deposits

 

1,769

 

2,721

 

5,906

 

10,043

Securities sold under repurchase agreements

 

3

 

4

 

8

 

110

Borrowed funds

 

192

 

278

 

578

 

1,089

Total interest expense

 

1,964

 

3,003

 

6,492

 

11,242

Net interest income

 

22,934

 

22,925

 

66,851

 

62,364

Provision for loan losses

 

650

 

1,350

 

2,500

 

5,475

Net interest income after provision for loan losses

 

22,284

 

21,575

 

64,351

 

56,889

Noninterest income:

 

 

 

 

Service charges

 

1,491

 

1,343

 

4,554

 

3,417

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

 

756

 

970

 

2,204

 

2,571

Income from UFS, LLC (“UFS”)

 

751

 

720

 

1,780

 

2,467

Loan servicing income

 

599

 

538

 

2,282

 

1,226

Net gain on sales of mortgage loans

 

1,206

 

1,304

 

6,204

 

3,096

Net (loss) gain on sales of securities

(3)

(3)

3,233

Other

 

228

 

240

 

791

 

766

Total noninterest income

 

5,028

 

5,115

 

17,812

 

16,776

Noninterest expense:

 

 

 

 

Salaries, commissions, and employee benefits

 

6,996

 

6,609

 

21,208

 

19,669

Occupancy

 

1,070

 

1,171

 

3,248

 

3,367

Data processing

 

1,259

 

1,463

 

4,010

 

3,996

Postage, stationery, and supplies

 

204

 

219

 

532

 

668

Net (gain) loss on sales and valuations of OREO

 

 

(32)

 

(206)

 

1,411

Advertising

 

50

 

41

 

152

 

165

Charitable contributions

 

121

 

110

 

399

 

360

Outside service fees

 

741

 

888

 

2,300

 

3,083

Amortization of intangibles

 

351

 

418

 

1,053

 

1,114

Penalty for early extinguishment of debt

1,323

Other

 

1,674

 

1,315

 

4,216

 

4,225

Total noninterest expense

 

12,466

 

12,202

 

36,912

 

39,381

Income before provision for income taxes

 

14,846

 

14,488

 

45,251

 

34,284

Provision for income taxes

 

3,628

 

3,534

 

10,971

 

7,768

Net Income

$

11,218

$

10,954

$

34,280

$

26,516

Earnings per share - basic

$

1.46

$

1.42

$

4.45

$

3.57

Earnings per share - diluted

$

1.46

$

1.42

$

4.45

$

3.56

Dividends per share

$

0.50

$

0.20

$

0.92

$

0.60

See accompanying notes to unaudited consolidated financial statements

4

ITEM 1. Financial Statements Continued:

BANK FIRST CORPORATION

Consolidated Statements of Comprehensive Income

(In thousands) (Unaudited)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

Net Income

$

11,218

$

10,954

$

34,280

$

26,516

Other comprehensive (loss) income :

 

 

 

 

Unrealized (losses) gains on available for sale securities:

 

  

 

  

 

  

 

  

Unrealized holding (losses) gains arising during period

 

(931)

 

593

 

(1,902)

 

8,230

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

 

 

 

(1)

 

(102)

Reclassification adjustment for losses (gains) included in net income

 

3

 

 

3

 

(3,233)

Income tax benefit (expense)

 

250

 

(160)

 

512

 

(1,453)

Total other comprehensive (loss) income

 

(678)

 

433

 

(1,388)

 

3,442

Comprehensive income

$

10,540

$

11,387

$

32,892

$

29,958

See accompanying notes to unaudited consolidated financial statements.

5

ITEM 1. Financial Statements Continued:

BANK FIRST CORPORATION

Consolidated Statement of Stockholders’ Equity

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

Accumulated

Serial

Additional

Other

Total

Preferred

Common

Paid-in

Retained

Treasury

Comprehensive

Stockholders'

    

Stock

    

Stock

    

Capital

    

Earnings

    

Stock

    

Income (loss)

    

Equity

Balance at January 1, 2020

$

0

$

79

$

63,085

$

189,494

$

(24,941)

$

2,494

$

230,211

Net income

 

0

 

0

 

0

 

7,266

 

0

 

0

 

7,266

Other comprehensive income

 

0

 

0

 

0

 

0

 

0

 

1,021

 

1,021

Purchase of treasury stock

 

0

 

0

 

0

 

0

 

(2,968)

 

0

 

(2,968)

Issuance of treasury stock as deferred compensation payout

 

0

 

0

 

0

 

0

 

3,368

 

0

 

3,368

Cash dividends ($0.20 per share)

 

0

 

0

 

0

 

(1,431)

 

0

 

0

 

(1,431)

Amortization of stock-based compensation

 

0

 

0

 

215

 

0

 

0

 

0

 

215

Vesting of restricted stock awards

 

0

 

0

 

(628)

 

0

 

628

 

0

 

0

Balance at March 31, 2020

0

79

62,672

195,329

(23,913)

3,515

237,682

Net income

 

0

 

0

 

0

 

8,296

 

0

 

0

 

8,296

Other comprehensive income

 

0

 

0

 

0

 

0

 

0

 

1,988

 

1,988

Cash dividends ($0.20 per share)

 

0

 

0

 

0

 

(1,543)

 

0

 

0

 

(1,543)

Amortization of stock-based compensation

 

0

 

0

 

296

 

0

 

0

 

0

 

296

Vesting of restricted stock awards

0

0

(66)

0

66

0

0

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

0

 

6

 

29,375

 

0

 

0

 

0

 

29,381

Balance at June 30, 2020

0

85

92,277

202,082

(23,847)

5,503

276,100

Net income

0

0

0

10,954

0

0

10,954

Other comprehensive income

0

0

0

0

0

433

433

Purchase of treasury stock

0

0

0

0

(116)

0

(116)

Cash dividends ($0.20 per share)

0

0

0

(1,550)

0

0

(1,550)

Amortization of stock-based compensation

0

0

283

0

0

0

283

Balance at September 30, 2020

$

0

$

85

$

92,560

$

211,486

$

(23,963)

$

5,936

$

286,104

Balance at January 1, 2021

$

0

$

85

$

92,847

$

221,393

$

(25,227)

$

5,759

$

294,857

Net income

0

0

0

11,514

0

0

11,514

Other comprehensive loss

0

0

0

0

0

(1,236)

(1,236)

Purchase of treasury stock

0

0

0

0

(402)

0

(402)

Sale of treasury stock

0

0

0

0

23

0

23

Cash dividends ($0.21 per share)

0

0

0

(1,618)

0

0

(1,618)

Amortization of stock-based compensation

0

0

304

0

0

0

304

Vesting of restricted stock awards

0

0

(1,046)

0

1,046

0

0

Balance at March 31, 2021

0

85

92,105

231,289

(24,560)

4,523

303,442

Net income

0

0

0

11,548

0

0

11,548

Other comprehensive income

0

0

0

0

0

526

526

Purchase of treasury stock

0

0

0

0

(2,858)

0

(2,858)

Sale of treasury stock

0

0

0

0

21

0

21

Cash dividends ($0.21 per share)

0

0

0

(1,615)

0

0

(1,615)

Amortization of stock-based compensation

0

0

366

0

0

0

366

Vesting of restricted stock awards

0

0

(45)

0

45

0

0

Balance at June 30, 2021

0

85

92,426

241,222

(27,352)

5,049

311,430

Net income

0

0

0

11,218

0

0

11,218

Other comprehensive loss

0

0

0

0

0

(678)

(678)

Purchase of treasury stock

0

0

0

0

(3,271)

0

(3,271)

Sale of treasury stock

0

0

0

0

21

0

21

Cash dividends ($0.50 per share)

0

0

0

(3,821)

0

0

(3,821)

Amortization of stock-based compensation

0

0

363

0

0

0

363

Balance at September 30, 2021

$

0

$

85

$

92,789

$

248,619

$

(30,602)

$

4,371

$

315,262

See accompanying notes to unaudited consolidated financial statements.

6

ITEM 1. Financial Statements Continued:

BANK FIRST CORPORATION

Consolidated Statements of Cash Flows

(In thousands) (Unaudited)

Nine Months Ended September 30, 

    

2021

    

2020

Cash flows from operating activities:

Net income

$

34,280

$

26,516

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

 

 

Provision for loan losses

 

2,500

 

5,475

Depreciation and amortization of premises and equipment

 

1,384

 

1,116

Amortization of intangibles

 

1,053

 

1,114

Net amortization of securities

 

586

 

505

Amortization of stock-based compensation

 

1,033

 

794

Accretion of purchase accounting valuations

 

(750)

 

(4,338)

Net change in deferred loan fees and costs

 

(99)

 

5,258

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

728

 

1,468

Gain on sale and disposal of premises and equipment

 

(43)

 

0

(Gain) Loss on sale of OREO and valuation allowance

 

(206)

 

1,411

Proceeds from sales of mortgage loans

 

235,023

 

149,229

Originations of mortgage loans held for sale

 

(232,053)

 

(147,185)

Gain on sales of mortgage loans

 

(6,204)

 

(3,096)

Realized loss (gain) on sale of securities

3

(3,233)

Undistributed income of UFS joint venture

 

(1,780)

 

(2,467)

Undistributed income of Ansay joint venture

 

(2,204)

 

(2,571)

Net earnings on life insurance

 

(575)

 

(544)

Decrease (Increase) in other assets

 

822

 

(1,715)

Decrease in other liabilities

 

(8,835)

 

(5,416)

Net cash provided by operating activities

 

24,663

 

22,321

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

 

  

 

  

Activity in securities available for sale and held to maturity:

 

  

 

  

Sales

 

9,087

 

59,697

Maturities, prepayments, and calls

28,307

65,655

Purchases

 

(22,463)

 

(28,764)

Net increase in loans

 

(16,833)

 

(348,814)

Dividends received from UFS

 

1,981

 

1,797

Dividends received from Ansay

 

1,368

 

1,119

Proceeds from sale of OREO

 

1,892

 

4,085

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

0

(640)

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

0

(2,760)

Proceeds from life insurance

264

0

Proceeds from sale of premises and equipment

 

548

 

25

Purchases of premises and equipment

 

(2,896)

 

(5,518)

Net cash received in business combination

0

35,296

Net cash provided by (used in) investing activities

 

1,255

 

(218,822)

7

ITEM 1. Financial Statements Continued:

BANK FIRST CORPORATION

Consolidated Statements of Cash Flows (Continued)

(In thousands) (Unaudited)

Nine Months Ended September 30, 

    

2021

    

2020

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

  

    

  

Net increase in deposits

$

150,541

$

256,947

Net decrease in securities sold under repurchase agreements

 

(18,975)

 

(22,788)

Proceeds from advances of notes payable

 

5,000

 

87,000

Repayment of notes payable

 

(19,230)

 

(124,750)

Proceeds from issuance of subordinated debt

0

2,000

Dividends paid

 

(7,054)

 

(4,524)

Proceeds from sales of common stock

 

65

 

0

Repurchase of common stock

 

(6,531)

 

(3,084)

Net cash provided by financing activities

 

103,816

 

190,801

Net increase (decrease) in cash and cash equivalents

 

129,734

 

(5,700)

Cash and cash equivalents at beginning of period

 

170,219

 

86,452

Cash and cash equivalents at end of period

$

299,953

$

80,752

Supplemental disclosures of cash flow information:

 

  

 

  

Cash paid during the period for:

Interest

$

7,064

$

11,712

Income taxes

 

12,260

 

5,050

Supplemental schedule of noncash activities:

 

 

Loans transferred to OREO

 

0

 

1,892

MSR resulting from sale of loans

 

1,447

 

980

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

 

(1)

 

(81)

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

 

(1,387)

 

3,523

Payment of deferred compensation through issuance of treasury stock

 

0

 

3,368

Acquisition:

Fair value of assets acquired

$

0

$

209,918

Fair value of liabilities assumed

0

191,701

Net assets acquired

$

0

$

18,217

Common stock issued in acquisition

0

29,381

See accompanying notes to consolidated financial statements.

8

BANK FIRST CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

NOTE 1 – BASIS OF PRESENTATION

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

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

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

Critical Accounting Policies and Estimates

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

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

Recent Accounting Developments Adopted

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

9

Recently Issued Not Yet Effective Accounting Standards

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

NOTE 2 – ACQUISITIONS

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

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

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

NOTE 3 – EARNINGS PER SHARE

The two-class method is used in the calculation of basic and diluted earnings per share. Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings. There were 0 anti-dilutive stock options for the nine months ended September 30, 2021 or 2020.

10

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

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2021

    

2020

    

2021

    

2020

Basic

Net income available to common shareholders

$

11,218

$

10,954

$

34,280

$

26,516

Less: Earnings allocated to participating securities

(88)

(82)

(266)

(202)

Net income allocated to common shareholders

$

11,130

$

10,872

$

34,014

$

26,314

 

 

 

 

Weighted average common shares outstanding including participating securities

7,665,272

7,731,670

7,698,284

7,424,257

Less: Participating securities (1)

(59,731)

(58,098)

(59,427)

(56,464)

Average shares

7,605,541

7,673,572

7,638,857

7,367,793

Basic earnings per common shares

$

1.46

$

1.42

$

4.45

$

3.57

Diluted

Net income available to common shareholders

$

11,218

$

10,954

$

34,280

$

26,516

Weighted average common shares outstanding for basic earnings per common share

7,605,541

7,673,572

7,638,857

7,367,793

Add: Dilutive effects of stock based compensation awards

19,250

17,754

19,971

44,880

Average shares and dilutive potential common shares

7,624,791

7,691,326

7,658,828

7,412,673

Diluted earnings per common share

$

1.46

$

1.42

$

4.45

$

3.56

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

NOTE 4 – SECURITIES

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

    

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

Estimated

Cost

Gains

Losses

Fair Value

September 30, 2021

 

  

 

  

 

  

 

  

U.S. Treasury securities

$

9,597

$

115

$

$

9,712

Obligations of U.S. Government sponsored agencies

 

15,688

 

289

 

(237)

 

15,740

Obligations of states and political subdivisions

65,435

3,880

69,315

Mortgage-backed securities

30,601

1,619

32,220

Corporate notes

 

19,285

 

395

 

(96)

 

19,584

Certificates of deposit

1,784

21

1,805

Total available for sale securities

$

142,390

$

6,319

$

(333)

$

148,376

December 31, 2020

 

 

 

 

Obligations of U.S. Government sponsored agencies

$

18,276

$

556

$

(53)

$

18,779

Obligations of states and political subdivisions

67,653

4,564

72,217

Mortgage-backed securities

 

41,804

 

2,395

 

 

44,199

Corporate notes

 

27,358

 

470

 

(85)

 

27,743

Certificates of deposit

2,063

38

2,101

Total available for sale securities

$

157,154

$

8,023

$

(138)

$

165,039

11

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

    

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

Estimated

Cost

Gains

Losses

Fair Value

September 30, 2021

Obligations of states and political subdivisions

$

5,912

$

13

$

0

$

5,925

December 31, 2020

 

  

 

  

 

  

 

  

Obligations of states and political subdivisions

$

6,669

$

19

$

0

$

6,688

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

Less Than 12 Months

Greater Than 12 Months

Total

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

Value

Losses

Value

Losses

Value

Losses

September 30, 2021 - Available for Sale

Obligations of U.S. Government sponsored agencies

$

0

$

0

$

4,579

$

(237)

$

4,579

$

(237)

Corporate notes

 

8,750

 

(96)

 

 

 

8,750

 

(96)

Totals

$

8,750

$

(96)

$

4,579

$

(237)

$

13,329

$

(333)

December 31, 2020 - Available for Sale

 

  

 

  

 

  

 

  

 

  

 

  

Obligations of U.S. Government sponsored agencies

$

5,640

$

(53)

$

0

$

0

$

5,640

$

(53)

Corporate notes

 

7,890

 

(85)

 

0

 

0

 

7,890

 

(85)

Totals

$

13,530

$

(138)

$

0

$

0

$

13,530

$

(138)

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

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

Available for Sale

Held to Maturity

    

Amortized

    

Estimated

    

Amortized

    

Estimated

Cost

Fair Value

Cost

Fair Value

Due in one year or less

$

1,139

$

1,143

$

715

$

715

Due after one year through 5 years

 

11,346

 

12,024

3,493

3,506

Due after 5 years through ten years

 

37,948

 

38,701

1,704

1,704

Due after 10 years

 

61,356

 

64,288

Subtotal

 

111,789

 

116,156

5,912

5,925

Mortgage-backed securities

 

30,601

 

32,220

Total

$

142,390

$

148,376

$

5,912

$

5,925

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

2021

2020

Proceeds from sales of securities

$

9,087

$

59,697

Gross gains on sales

 

 

3,284

Gross losses on sales

 

(3)

 

(51)

12

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

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

    

September 30, 

December 31, 

2021

    

2020

Commercial/industrial

$

355,773

$

447,344

Commercial real estate - owner occupied

 

567,906

 

549,619

Commercial real estate - non-owner occupied

 

542,455

 

443,144

Construction and development

 

116,957

 

140,042

Residential 1‑4 family

 

572,821

 

545,818

Consumer

 

33,008

 

30,359

Other

 

22,816

 

38,054

Subtotals

 

2,211,736

 

2,194,380

ALL

 

(20,237)

 

(17,658)

Loans, net of ALL

 

2,191,499

 

2,176,722

Deferred loan fees and costs

 

(2,821)

 

(2,920)

Loans, net

$

2,188,678

$

2,173,802

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

    

    

Commercial

    

Commercial

    

    

    

    

    

Real Estate -

Real Estate  -

Construction

Commercial /

Owner

Non - Owner

and

Residential

Industrial

Occupied

Occupied

Development

1-4 Family

Consumer

Other

Total

ALL - January 1, 2021

$

2,049

$

6,108

$

3,904

$

1,027

$

3,960

$

201

$

409

$

17,658

Charge-offs

 

(48)

(289)

0

 

0

 

0

 

0

 

(21)

 

(358)

Recoveries

 

38

343

5

 

33

 

12

 

1

 

5

 

437

Provision

 

971

805

677

 

(194)

 

408

 

30

 

(197)

 

2,500

ALL - September 30, 2021

 

3,010

6,967

4,586

 

866

 

4,380

 

232

 

196

 

20,237

ALL ending balance individually evaluated for impairment

 

93

0

392

 

0

 

0

 

0

 

0

 

485

ALL ending balance collectively evaluated for impairment

$

2,917

$

6,967

$

4,194

$

866

$

4,380

$

232

$

196

$

19,752

Loans outstanding - September 30, 2021

$

355,773

$

567,906

$

542,455

$

116,957

$

572,821

$

33,008

$

22,816

$

2,211,736

Loans ending balance individually evaluated for impairment

 

414

3,467

6,617

 

0

 

0

 

0

 

0

 

10,498

Loans ending balance collectively evaluated for impairment

$

355,359

$

564,439

$

535,838

$

116,957

$

572,821

$

33,008

$

22,816

$

2,201,238

    

    

Commercial

    

Commercial

    

    

    

    

    

Real Estate  -

Real Estate  -

Construction

Commercial /

Owner

Non - Owner

and

Residential

Industrial

Occupied

Occupied

Development

1-4 Family

Consumer

Other

Total

ALL - January 1, 2020

$

2,320

$

4,587

$

1,578

$

548

$

2,169

$

141

$

53

$

11,396

Charge-offs

 

(631)

 

(773)

 

0

 

0

 

(63)

 

(33)

 

(19)

 

(1,519)

Recoveries

 

2

 

873

 

40

 

0

 

40

 

0

 

11

 

966

Provision

 

138

 

995

 

2,276

 

474

 

1,259

 

86

 

247

 

5,475

ALL - September 30, 2020

 

1,829

 

5,682

 

3,894

 

1,022

 

3,405

 

194

 

292

 

16,318

ALL ending balance individually evaluated for impairment

 

14

 

483

 

1,098

 

0

 

0

 

0

 

0

 

1,595

ALL ending balance collectively evaluated for impairment

$

1,815

$

5,199

$

2,796

$

1,022

$

3,405

$

194

$

292

$

14,723

Loans outstanding - September 30, 2020

$

547,750

$

530,476

$

426,463

$

150,139

$

488,925

$

29,684

$

25,552

$

2,198,989

Loans ending balance individually evaluated for impairment

 

533

 

7,334

 

7,904

 

0

 

0

 

0

 

0

 

15,771

Loans ending balance collectively evaluated for impairment

$

547,217

$

523,142

$

418,559

$

150,139

$

488,925

$

29,684

$

25,552

$

2,183,218

13

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

    

    

90 Days

    

    

30-89 Days

or more

Past Due

Past Due

Accruing

and Accruing

Non-Accrual

Total

Commercial/industrial

$

573

$

0

$

285

$

858

Commercial real estate - owner occupied

 

129

 

0

 

3,373

 

3,502

Commercial real estate - non-owner occupied

 

0

 

0

 

7,413

 

7,413

Construction and development

 

0

 

0

 

19

 

19

Residential 1‑4 family

 

132

 

310

 

456

 

898

Consumer

 

25

 

2

 

3

 

30

Other

 

0

 

0

 

0

 

0

$

859

$

312

$

11,549

$

12,720

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

    

    

90 Days

    

    

30-89 Days

or more

Past Due

Past Due

Accruing

and Accruing

Non-Accrual

Total

Commercial/industrial

$

116

$

0

$

433

$

549

Commercial real estate - owner occupied

 

0

 

1,582

 

1,078

 

2,660

Commercial real estate - non-owner occupied

 

0

 

0

 

8,087

 

8,087

Construction and development

 

0

 

0

 

281

 

281

Residential 1‑4 family

 

1,415

 

142

 

912

 

2,469

Consumer

 

4

 

14

 

5

 

23

Other

 

0

 

0

 

0

 

0

$

1,535

$

1,738

$

10,796

$

14,069

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

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

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

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

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

14

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

    

Pass (1-5)

    

6

    

7

    

8

    

Total

Commercial/industrial

$

339,455

$

9,331

$

6,987

$

0

$

355,773

Commercial real estate - owner occupied

 

533,971

 

10,584

 

23,351

 

0

 

567,906

Commercial real estate - non-owner occupied

 

530,588

 

3,936

 

7,931

 

0

 

542,455

Construction and development

 

116,551

 

0

 

406

 

0

 

116,957

Residential 1‑4 family

 

570,947

 

130

 

1,744

 

0

 

572,821

Consumer

 

33,002

 

0

 

6

 

0

 

33,008

Other

 

22,816

 

0

 

0

 

0

 

22,816

$

2,147,330

$

23,981

$

40,425

$

0

$

2,211,736

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

    

Pass (1-5)

    

6

    

7

    

8

    

Total

Commercial/industrial

$

440,461

$

2,479

$

4,404

$

0

$

447,344

Commercial real estate - owner occupied

 

520,075

 

5,844

 

23,700

 

0

 

549,619

Commercial real estate - non-owner occupied

 

432,444

 

0

 

10,700

 

0

 

443,144

Construction and development

 

139,693

 

21

 

328

 

0

 

140,042

Residential 1‑4 family

 

543,163

 

456

 

2,199

 

0

 

545,818

Consumer

 

30,359

 

0

 

0

 

0

 

30,359

Other

 

38,054

 

0

 

0

 

0

 

38,054

$

2,144,249

$

8,800

$

41,331

$

0

$

2,194,380

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

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

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

15

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

    

    

Commercial

    

Commercial

    

    

    

    

    

    

Real Estate -

Real Estate -

Construction

Commercial/

Owner

Non-Owner

and

Residential

Industrial

Occupied

Occupied

Development

1-4 Family

Consumer

Other

Unallocated

Total

With an allowance recorded:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Recorded investment

$

414

$

0

$

6,617

$

0

$

0

$

0

$

0

$

0

$

7,031

Unpaid principal balance

 

414

 

0

 

6,617

 

0

 

0

 

0

 

0

 

0

 

7,031

Related allowance

 

93

 

0

 

392

 

0

 

0

 

0

 

0

 

0

 

485

With no related allowance recorded:

 

 

 

 

  

 

 

  

 

  

 

  

 

Recorded investment

$

0

$

3,467

$

0

$

0

$

0

$

0

$

0

$

0

$

3,467

Unpaid principal balance

 

0

 

3,467

 

0

 

0

 

0

 

0

 

0

 

0

 

3,467

Related allowance

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

Total:

 

 

 

 

  

 

 

  

 

  

 

  

 

Recorded investment

$

414

$

3,467

$

6,617

$

0

$

0

$

0

$

0

$

0

$

10,498

Unpaid principal balance

 

414

 

3,467

 

6,617

 

0

 

0

 

0

 

0

 

0

 

10,498

Related allowance

 

93

 

0

 

392

 

0

 

0

 

0

 

0

 

0

 

485

Average recorded investment

$

446

$

2,319

$

7,647

$

0

$

130

$

0

$

0

$

0

$

10,543

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

    

    

Commercial

    

Commercial

    

    

    

    

    

Real Estate -

Real Estate -

Construction

Commercial/

Owner

Non-Owner

and

Residential

Industrial

Occupied

Occupied

Development

1‑4 Family

Consumer

Other

Total

With an allowance recorded:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Recorded investment

$

478

$

0

$

7,684

$

0

$

0

$

0

$

0

$

8,162

Unpaid principal balance

 

478

 

0

 

7,684

 

0

 

0

 

0

 

0

 

8,162

Related allowance

 

10

 

0

 

890

 

0

 

0

 

0

 

0

 

900

With no related allowance recorded:

 

  

 

  

 

 

  

 

  

 

  

 

  

 

  

Recorded investment

$

0

$

1,171

$

992

$

0

$

260

$

0

$

0

$

2,423

Unpaid principal balance

 

0

 

1,171

 

992

 

0

 

260

 

0

 

0

 

2,423

Related allowance

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

Total:

 

  

 

  

 

 

  

 

  

 

  

 

  

 

  

Recorded investment

$

478

$

1,171

$

8,676

$

0

$

260

$

0

$

0

$

10,585

Unpaid principal balance

 

478

 

1,171

 

8,676

 

0

 

260

 

0

 

0

 

10,585

Related allowance

 

10

 

0

 

890

 

0

 

0

 

0

 

0

 

900

Average recorded investment

$

1,178

$

2,535

$

4,338

$

0

$

130

$

0

$

0

$

8,181

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

16

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

September 30, 2021

December 31, 2020

Recorded

Unpaid Principal

Recorded

Unpaid Principal

    

Investment

    

Balance

    

Investment

    

Balance

Commercial & Industrial

$

678

$

771

$

805

$

907

Commercial real estate - owner occupied

 

3,803

 

4,655

 

3,860

 

4,718

Commercial real estate - non-owner occupied

 

1,170

 

1,324

 

1,245

 

1,410

Construction and development

 

22

 

25

 

81

 

90

Residential 1‑4 family

 

868

 

1,136

 

870

 

1,162

Consumer

 

0

 

0

 

0

 

0

Other

 

0

 

0

 

0

 

0

$

6,541

$

7,911

$

6,861

$

8,287

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

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

September 30, 2021

December 31, 2020

Accretable

Non-accretable

Accretable

Non-accretable

    

discount

    

discount

    

discount

    

discount

Balance at beginning of period

$

1,250

$

176

$

222

$

220

Acquired balance, net

 

0

 

0

 

1,064

 

727

Reclassifications between accretable and non-accretable

 

20

 

(20)

 

771

 

(771)

Accretion to loan interest income

 

(56)

 

0

 

(807)

 

0

Balance at end of period

$

1,214

$

156

$

1,250

$

176

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

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

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

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

17

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

Pre-Modification

Post-Modification

Number of

Outstanding Recorded

Outstanding Recorded

    

Contracts

    

Investment

    

Investment

Commercial/ industrial

1

$

12

$

10

Commercial Real Estate

1

111

111

$

123

$

121

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

Pre-Modification

Post-Modification

Number of 

Outstanding Recorded

Outstanding Recorded

    

Contracts

    

 Investment

    

 Investment

Commercial Real Estate

 

1

$

115

 

$

115

NOTE 6 – MORTGAGE SERVICING RIGHTS

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

Following is an analysis of activity in the MSR asset:

    

Nine Months Ended

    

Year Ended

September 30, 2021

December 31, 2020

Fair value at beginning of period

$

3,726

$

4,287

MSR asset acquired

384

Servicing asset additions

 

1,448

 

1,375

Loan payments and payoffs

 

(1,058)

 

(1,533)

Changes in valuation inputs and assumptions used in the valuation model

 

229

 

(787)

Amount recognized through earnings

 

619

 

(945)

Fair value at end of period

$

4,345

$

3,726

Unpaid principal balance of loans serviced for others

$

682,369

$

612,707

Mortgage servicing rights as a percent of loans serviced for others

 

0.64

 

0.61

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

18

NOTE 7 – NOTES PAYABLE

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

    

    

    

September 30, 

    

December 31, 

Maturity

Rate

2021

2020

Fixed rate, fixed term

 

01/22/2021

 

1.67

%  

$

$

2,000

Fixed rate, fixed term

 

01/25/2021

 

2.37

%  

 

 

5,000

Fixed rate, fixed term

 

01/27/2021

 

1.60

%  

 

 

1,000

Fixed rate, fixed term

 

03/29/2021

 

0.00

%  

 

 

2,377

Fixed rate, fixed term

05/03/2021

2.87

%  

500

Fixed rate, fixed term

05/03/2021

0.00

%  

4,000

Fixed rate, fixed term

05/03/2021

0.00

%  

4,000

Fixed rate, fixed term

06/28/2021

2.00

%  

250

Fixed rate, fixed term

11/03/2021

1.46

%  

400

400

Fixed rate, fixed term

12/08/2021

2.87

%  

500

500

Fixed rate, fixed term

12/27/2021

1.99

%  

250

250

Fixed rate, fixed term

01/24/2022

2.51

%  

250

250

Fixed rate, fixed term

05/02/2022

2.98

%  

500

500

Fixed rate, fixed term

05/16/2022

0.00

%

5,000

Fixed rate, fixed term

06/08/2022

2.92

%  

500

500

Fixed rate, fixed term

11/21/2022

3.02

%  

600

600

Fixed rate, fixed term

11/21/2023

3.06

%  

600

600

Fixed rate, fixed term

01/04/2027

0.00

%  

103

Fixed rate, fixed term

04/22/2030

0.00

%  

508

508

9,108

23,338

Adjustment due to purchase accounting

71

131

$

9,179

$

23,469

Future maturities of borrowings were as follows:

    

September 30, 

    

December 31, 

2021

2020

1 year or less

$

7,400

$

20,277

1 to 2 years

 

600

 

1,850

2 to 3 years

 

600

 

600

3 to 4 years

 

 

4 to 5 years

 

 

Over 5 years

508

611

$

9,108

$

23,338

The Company maintains a $7.5 million line of credit with a commercial bank, which was entered into on May 15, 2021. There were 0 outstanding balances on this note at September 30, 2021 or December 31, 2020. Any future borrowings will require monthly payments of interest at a variable rate, and will be due in full on May 15, 2022.

NOTE 8 – SUBORDINATED NOTES

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

19

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

NOTE 9 – REGULATORY MATTERS

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

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

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

20

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

To Be Well

 

Minimum Capital

Capitalized Under

 

For Capital

Adequacy with

Prompt Corrective

 

Actual

Adequacy Purposes

Capital Buffer

Action Provisions

 

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

September 30, 2021

Total capital (to risk-weighted assets):

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Corporation

$

288,194

 

12.36

%  

NA

 

NA

 

NA

 

NA

 

NA

 

NA

Bank

$

287,489

 

12.33

%  

$

186,599

 

8.00

%  

$

244,911

 

10.50

%  

$

233,249

 

10.00

%

Tier 1 capital (to risk-weighted assets):

 

 

  

 

  

 

  

 

  

 

  

 

  

Corporation

$

251,147

 

10.77

%  

 

NA

 

NA

 

NA

 

NA

 

NA

 

NA

Bank

$

267,252

 

11.46

%  

$

139,949

 

6.00

%  

$

198,261

 

8.50

%  

$

186,599

 

8.00

%

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

 

 

  

 

  

 

  

 

  

 

  

 

  

Corporation

$

251,147

 

10.77

%  

 

NA

 

NA

 

NA

 

NA

 

NA

 

NA

Bank

$

267,252

 

11.46

%  

$

104,962

 

4.50

%  

$

163,274

 

7.00

%  

$

151,612

 

6.50

%

Tier 1 capital (to average assets):

  

 

  

 

  

 

  

 

  

 

  

Corporation

$

251,147

 

8.96

%  

 

NA

 

NA

 

NA

 

NA

 

NA

 

NA

Bank

$

267,252

 

9.67

%  

$

110,494

 

4.00

%  

$

110,494

 

4.00

%  

$

138,118

 

5.00

%

December 31, 2020

 

  

 

  

 

 

  

 

  

 

  

 

  

 

  

Total capital (to risk-weighted assets):

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Corporation

$

263,344

 

11.74

%  

 

NA

 

NA

 

NA

 

NA

 

NA

 

NA

Bank

$

263,129

 

11.73

%  

$

179,420

 

8.00

%  

$

235,489

 

10.50

%  

$

224,275

 

10.00

%

Tier 1 capital (to risk-weighted assets):

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Corporation

$

228,186

 

10.17

%  

 

NA

 

NA

 

NA

 

NA

 

NA

 

NA

Bank

$

245,471

 

10.95

%  

$

134,565

 

6.00

%  

$

190,634

 

8.50

%  

$

179,420

 

8.00

%

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

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Corporation

$

228,186

 

10.17

%  

 

NA

 

NA

 

NA

 

NA

 

NA

 

NA

Bank

$

245,471

 

10.95

%  

$

100,924

 

4.50

%  

$

156,993

 

7.00

%  

$

145,779

 

6.50

%

Tier 1 capital (to average assets):

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Corporation

$

228,186

 

8.74

%  

 

NA

 

NA

 

NA

 

NA

 

NA

 

NA

Bank

$

245,471

 

9.46

%  

$

103,814

 

4.00

%  

$

103,814

 

4.00

%  

$

129,768

 

5.00

%

NOTE 10 – COMMITMENTS AND CONTINGENCIES

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

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

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

21

The following commitments were outstanding:

Notional Amount

    

September 30, 2021

December 31, 2020

Commitments to extend credit:

 

  

 

  

Fixed

$

87,377

$

72,298

Variable

 

402,114

 

388,738

Credit card arrangements

 

11,432

 

10,867

Letters of credit

 

8,630

 

7,567

NOTE 11 – FAIR VALUE MEASUREMENTS

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

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

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

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

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

    

Instruments

    

Markets

    

Other

    

Significant

Measured

for Identical

Observable

Unobservable

At Fair

Assets

Inputs

Inputs

Value

(Level 1)

(Level 2)

(Level 3)

September 30, 2021

 

  

 

  

 

  

 

  

Assets

 

  

 

  

 

  

 

  

Securities available for sale

 

  

 

  

 

 

  

U.S. Treasury securities

$

9,712

$

0

$

9,712

$

0

Obligations of U.S. Government sponsored agencies

 

15,740

 

0

 

15,740

 

0

Obligations of states and political subdivisions

 

69,315

 

0

 

69,315

 

0

Mortgage-backed securities

32,220

32,220

Corporate notes

 

19,584

 

0

 

19,584

 

0

Certificates of deposit

1,805

0

1,805

0

Mortgage servicing rights

 

4,345

 

0

 

4,345

 

0

December 31, 2020

 

  

 

  

 

  

 

  

Assets

 

  

 

  

 

  

 

  

Securities available for sale

Obligations of U.S. Government sponsored agencies

$

18,779

$

0

$

18,779

$

0

Obligations of states and political subdivisions

72,217

 

0

 

72,217

0

Mortgage-backed securities

 

44,199

 

0

 

44,199

 

0

Corporate notes

 

27,743

 

0

 

27,743

 

0

Certificates of deposit

2,101

2,101

Mortgage servicing rights

3,726

0

3,726

0

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

22

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

    

    

Quoted Prices

    

    

In Active

Significant

Assets

Markets

Other

Significant

Measured

for Identical

Observable

Unobservable

At Fair

Assets

Inputs

Inputs

Value

(Level 1)

(Level 2)

(Level 3)

September 30, 2021

 

  

 

  

 

  

 

  

OREO

$

197

$

0

$

0

$

197

Impaired Loans, net of impairment reserve

 

16,801

 

0

 

0

 

16,801

$

16,998

$

0

$

0

$

16,998

December 31, 2020

 

  

 

  

 

  

 

  

OREO

$

1,885

$

0

$

0

$

1,885

Impaired Loans, net of impairment reserve

 

16,784

 

0

 

0

 

16,784

$

18,669

$

0

$

0

$

18,669

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

    

    

    

    

Weighted

 

Unobservable

Range of

Average

 

Valuation Technique

Inputs

Discounts

 

Discount

As of September 30, 2021

 

  

 

  

 

  

 

  

Other real estate owned

 

Third party appraisals, sales contracts or brokered price options

 

Collateral discounts and estimated costs to sell

 

67

%  

67.0

%

Impaired loans

 

Third party appraisals and discounted cash flows

 

Collateral discounts and discount rates

 

0% - 100

%  

7.3

%

As of December 31, 2020

 

  

 

  

 

  

 

  

Other real estate owned

 

Third party appraisals, sales contracts or brokered price options

 

Collateral discounts and estimated costs to sell

 

23% - 100

%  

40.2

%

Impaired loans

 

Third party appraisals and discounted cash flows

 

Collateral discounts and discount rates

 

0% - 100

%  

7.8

%

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

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

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

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

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

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

23

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

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

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

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

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

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

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

Fair Value

Carrying

September 30, 2021

    

amount

    

Level 1

    

Level 2

    

Level 3

    

Total

Financial assets:

Cash and cash equivalents

$

299,953

$

299,953

$

0

$

0

$

299,953

Securities held to maturity

 

5,912

 

0

 

5,925

 

0

 

5,925

Securities available for sale

 

148,376

 

0

 

148,376

 

0

 

148,376

Loans held for sale

 

2,596

 

0

 

0

 

2,596

 

2,596

Loans, net

 

2,188,678

 

0

 

0

 

2,190,417

 

2,190,417

Other investments, at cost

 

8,997

 

0

 

0

 

8,997

 

8,997

Mortgage servicing rights

 

4,345

 

0

 

4,345

 

0

 

4,345

Cash surrender value of life insurance

 

31,705

 

31,705

 

0

 

0

 

31,705

Financial liabilities:

 

 

 

Deposits

$

2,471,258

$

0

$

0

$

2,427,468

$

2,427,468

Securities sold under repurchase agreements

 

17,402

 

0

 

17,402

 

0

17,402

Notes payable

9,179

0

9,179

0

9,179

Subordinated notes

 

17,500

0

17,500

0

17,500

24

Fair Value

    

Carrying

    

    

    

    

December 31, 2020

amount

Level 1

Level 2

Level 3

Total

Financial assets:

Cash and cash equivalents

$

170,219

$

170,219

$

0

$

0

$

170,219

Securities held to maturity

 

6,669

 

0

 

6,688

 

0

 

6,688

Securities available for sale

 

165,039

 

0

 

165,039

 

0

 

165,039

Loans held for sale

 

809

 

0

 

0

 

809

 

809

Loans, net

 

2,173,802

 

0

 

0

 

2,168,865

 

2,168,865

Other investments, at cost

 

8,896

 

0

 

0

 

8,896

 

8,896

Mortgage servicing rights

 

3,726

 

0

 

3,726

 

0

 

3,726

Cash surrender value of life insurance

31,394

 

31,394

 

0

 

0

 

31,394

Financial liabilities:

Deposits

$

2,320,963

$

0

$

0

$

2,309,489

$

2,309,489

Securities sold under repurchase agreements

 

36,377

0

36,377

0

36,377

Notes payable

23,469

 

0

 

23,469

 

0

23,469

Subordinated notes

 

17,500

0

17,500

0

17,500

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

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

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

NOTE 12 – STOCK BASED COMPENSATION

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

25

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

For the nine months ended

For the nine months ended

September 30, 2021

September 30, 2020

    

    

Weighted-

    

    

Weighted-

Average Grant-

Average Grant-

Shares

Date Fair Value

Shares

Date Fair Value

Restricted Stock

 

  

 

  

 

  

 

  

Outstanding at beginning of year

 

57,175

$

53.08

 

50,676

$

43.03

Granted

 

25,416

 

70.67

 

27,466

 

60.76

Vested

 

(21,755)

 

50.15

 

(18,623)

 

37.28

Forfeited or cancelled

 

(1,105)

 

62.23

 

(2,344)

 

51.27

Outstanding at end of year

 

59,731

$

61.46

 

57,175

$

53.08

NOTE 13 – LEASES

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

Lessee Leases

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

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

Nine-month period ended

 

    

September 30, 2021

    

September 30, 2020

 

Amortization of ROU Assets - Operating Leases

$

10

$

31

Interest on Lease Liabilities - Operating Leases

 

65

69

Operating Lease Cost (Cost resulting from lease payments)

 

75

100

Weighted Average Lease Term (Years) - Operating Leases

 

32.25

31.51

Weighted Average Discount Rate - Operating Leases

 

5.50

%

5.50

%

26

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

    

September 30, 2021

Operating lease payments due:

 

Within one year

$

86

After one but within two years

86

After two but within three years

85

After three but within four years

85

After four years but within five years

92

After five years

3,255

Total undiscounted cash flows

3,689

Discount on cash flows

(2,109)

Total operating lease liabilities

$

1,580

27

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

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

FORWARD-LOOKING STATEMENTS

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

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

OVERVIEW

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

28

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

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

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

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

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

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

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

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

29

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

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

At or for the Three Months Ended

At or for the Nine Months Ended

(In thousands, except per share data)

    

9/30/2021

    

6/30/2021

    

3/31/2021

    

12/31/2020

    

9/30/2020

    

9/30/2021

    

9/30/2020

Results of Operations:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Interest income

$

24,898

$

24,003

$

24,442

$

27,094

$

25,928

$

73,343

$

73,606

Interest expense

 

1,964

 

2,189

 

2,339

 

2,623

 

3,003

 

6,492

 

11,242

Net interest income

 

22,934

 

21,814

 

22,103

 

24,471

 

22,925

 

66,851

 

62,364

Provision for loan losses

 

650

 

950

 

900

 

1,650

 

1,350

 

2,500

 

5,475

Net interest income after provision for loan losses

 

22,284

 

20,864

 

21,203

 

22,821

 

21,575

 

64,351

 

56,889

Noninterest income

 

5,028

 

6,574

 

6,210

 

6,744

 

5,115

 

17,812

 

16,776

Noninterest expense

 

12,466

 

12,221

 

12,225

 

13,972

 

12,202

 

36,912

 

39,381

Income before income tax expense

 

14,846

 

15,217

 

15,188

 

15,593

 

14,488

 

45,251

 

34,284

Income tax expense

 

3,628

 

3,669

 

3,674

 

4,063

 

3,534

 

10,971

 

7,768

Net income

$

11,218

$

11,548

$

11,514

$

11,530

$

10,954

$

34,280

$

26,516

Earnings per common share - basic

$

1.46

$

1.50

$

1.49

$

1.49

$

1.42

$

4.45

$

3.57

Earnings per common share - diluted

 

1.46

 

1.50

 

1.49

 

1.49

 

1.42

 

4.45

 

3.56

Common Shares:

 

 

 

 

 

 

 

Basic weighted average

 

7,605,541

 

7,653,317

 

7,657,301

 

7,659,904

 

7,673,572

 

7,638,857

 

7,367,793

Diluted weighted average

 

7,624,791

 

7,668,740

 

7,677,976

 

7,682,101

 

7,691,326

 

7,658,828

 

7,412,673

Outstanding

 

7,641,771

 

7,688,795

 

7,729,216

 

7,709,497

 

7,729,762

 

7,641,771

 

7,729,762

Noninterest income / noninterest expense:

 

 

 

 

 

 

 

Service charges

$

1,491

$

1,596

$

1,467

$

1,586

$

1,343

$

4,554

$

3,417

Income from Ansay

 

756

 

723

 

725

 

169

 

970

 

2,204

 

2,571

Income from UFS

 

751

 

663

 

366

 

599

 

720

 

1,780

 

2,467

Loan servicing income

 

599

 

1,178

 

505

 

194

 

538

 

2,282

 

1,226

Net gain on sales of mortgage loans

 

1,206

 

2,187

 

2,811

 

2,214

 

1,304

 

6,204

 

3,096

Net (loss) gain on sales of securities

 

(3)

 

 

 

 

 

(3)

 

3,233

Other noninterest income

 

228

 

227

 

336

 

1,982

 

240

 

791

 

766

Total noninterest income

$

5,028

$

6,574

$

6,210

$

6,744

$

5,115

$

17,812

$

16,776

Personnel expense

$

6,996

$

7,121

$

7,091

$

7,604

$

6,609

$

21,208

$

19,669

Occupancy, equipment and office

 

1,070

 

968

 

1,210

 

1,352

 

1,171

 

3,248

 

3,367

Data processing

 

1,259

 

1,358

 

1,393

 

1,519

 

1,463

 

4,010

 

3,996

Postage, stationery and supplies

 

204

 

131

 

197

 

204

 

219

 

532

 

668

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

 

 

(73)

 

(133)

 

(16)

 

(32)

 

(206)

 

1,411

Advertising

 

50

 

53

 

49

 

61

 

41

 

152

 

165

Charitable contributions

 

121

 

152

 

126

 

214

 

110

 

399

 

360

Outside service fees

 

741

 

804

 

755

 

1,029

 

888

 

2,300

 

3,083

Amortization of intangibles

 

351

 

351

 

351

 

522

 

418

 

1,053

 

1,114

Penalty for early extinguishment of debt

1,323

Other noninterest expense

 

1,674

 

1,356

 

1,186

 

1,483

 

1,315

 

4,216

 

4,225

Total noninterest expense

$

12,466

$

12,221

$

12,225

$

13,972

$

12,202

$

36,912

$

39,381

Period-end balances:

 

 

 

 

 

 

 

Loans

$

2,208,915

$

2,225,217

$

2,228,892

$

2,191,460

$

2,193,228

$

2,208,915

$

2,193,228

Allowance for loan losses

 

20,237

 

19,547

 

18,531

 

17,658

 

16,318

 

20,237

 

16,318

Investment securities available-for-sale, at fair value

 

148,376

 

153,818

 

167,940

 

165,039

 

173,334

 

148,376

 

173,334

Investment securities held-to-maturity, at