What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-09 compared with 2021-08-09 · 171 added, 159 removed, 798 unchanged (29% of the section changed)

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 June 30, 2021.

FORWARD-LOOKING STATEMENTS

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At or for the Three Months Ended

At or for the Six Months Ended

At or for the Nine Months Ended

(In thousands, except per share data)

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Net gain on sales of mortgage loans

Net gain on sales of securities

Noninterest income from strategic alliances

Net (loss) gain on sales of securities

Other noninterest income

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(1) These measures are not measures prepared in accordance with GAAP, and are therefore considered to be non-GAAP financial measures.

See “GAAP reconciliation and management explanation of non-GAAP finanical measures” for a reconciliation of these measures to their most comparable GAAP measures.

See “GAAP reconciliation and management explanation of non-GAAP financial measures” for a reconciliation of these measures to their most comparable GAAP measures.

(2) Income statement-related ratios for partial year periods are annualized.

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At or for the Three Months Ended

At or for the Six Months Ended

At or for the Nine Months Ended

(In thousands, except per share data)

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RESULTS OF OPERATIONS

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

Net income increased $3.2 million to $11.5 million for three months ended June 30, 2021, compared to $8.3 million for the same period in 2020.

This increase was primarily due to the reduction of funding costs based on lower rate deposits in 2021, a $2.2 million reduction in provisions for loan losses quarter-over-quarter, and strong residential mortgage production during the second quarter of 2021.

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

Net income increased $0.3 million to $11.2 million for three months ended September 30, 2021, compared to $11.0 million for the same period in 2020.

This increase was primarily due to a reduction in required provision for loan losses during the third quarter of 2021, compared to the third quarter of 2020.

This reduction was the result of strong credit quality metrics as well as greater clarity on the impacts of COVID in the current year third quarter.

Net Interest Income .

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Our net interest margin can also be adversely impacted by the reversal of interest on nonaccrual loans and the reinvestment of loan payoffs into lower yielding investment securities and other short-term investments.

Net interest and dividend income increased by $1.0 million to $21.8 million for the three months ended June 30, 2021 compared to $20.8 million for three months ended June 30, 2020.

The increase in net interest income was primarily due to the reduction in funding costs on interest bearing liabilities, which declined 0.40% quarter-over-quarter.

Tax equivalent net interest margin decreased 0.30% to 3.37% for the three-months ended June 30, 2021, down from 3.67% for the same period in 2020.

Net interest and dividend income totaled $22.9 million for the three months ended September 30, 2021, matching the third quarter of 2020.

Tax equivalent net interest margin decreased 0.37% to 3.47% for the three-months ended September 30, 2021, down from 3.84% for the same period in 2020.

Net interest margin decreased by 0.22% due to a decrease in purchase accounting accretion quarter-over-quarter which added to a decrease of 0.15% in core net interest margin.

Interest-earnings assets increased by $236.4 million quarter-over-quarter, causing the increase in net interest income despite the reduction in net interest margin.

Net interest margin and net interest income are influenced by internal and external factors.

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Interest Income.

Total interest income decreased $0.4 million, or 1.6%, to $24.0 million for the three months ended June 30, 2021 compared to $24.4 million for the same period in 2020.

The decrease in total interest income was primarily due a reduction of 0.58% in yield on interest earnings assets, offset by interest income produced by approximately $377.8 million in PPP loans originated during 2020 and 2021.

The average balance of loans increased by $212.3 million during the three months ended June 30, 2021 compared to the same period in 2020.

Total interest income decreased $1.0 million, or 4.0%, to $24.9 million for the three months ended September 30, 2021 compared to $25.9 million for the same period in 2020.

The decrease in total interest income was primarily due a reduction of 0.57% in yield on interest earnings assets, offset to a degree by the aforementioned increase in interest-earning assets.

Interest Expense.

Interest expense decreased $1.4 million, or 39.0%, to $2.2 million for the three months ended June 30, 2021 compared to $3.6 million for the same period in 2020.

The decrease in interest expense was primarily due to the lower overall interest rate environment.

Interest expense on interest-bearing deposits decreased by $1.2 million to $2.0 million for the three months ended June 30, 2021 from $3.2 million for the same period in 2020.

The average cost of interest-bearing deposits was 0.48% for the three months ended June 30, 2021, compared to 0.88% for the same period in 2020.

Interest expense decreased $1.0 million, or 34.6%, to $2.0 million for the three months ended September 30, 2021 compared to $3.0 million for the same period in 2020.

The decrease in interest expense was primarily due to the lower overall interest rate environment, leading to a 0.28% decline in cost of funds quarter-over-quarter.

This decline in cost of funds more than overcame a 6.3% increase in interest-bearing liabilities in these respective quarters.

Interest expense on interest-bearing deposits decreased by $0.9 million to $1.8 million for the three months ended September 30, 2021 from $2.7 million for the same period in 2020.

The average cost of interest-bearing deposits was 0.42% for the three months ended September 30, 2021, compared to 0.69% for the same period in 2020.

Provision for Loan Losses.

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The determination of the amount is complex and involves a high degree of judgment and subjectivity.

We recorded a provision for loan losses of $1.0 million for the three months ended June 30, 2021 compared to $3.2 million for the same period in 2020.

We recorded net recoveries of $0.1 million for the three months ended June 30, 2021 compared to net charge-offs of $0.1 million for the same period in 2020.

The ALL was $19.5 million, or 0.88% of total loans, at June 30, 2021 compared to $16.1 million, or 0.76% of total loans at June 30, 2020.

We recorded a provision for loan losses of $0.7 million for the three months ended September 30, 2021 compared to $1.4 million for the same period in 2020.

We recorded net recoveries of $40,000 for the three months ended September 30, 2021 compared to net charge-offs of $1.3 million for the same period in 2020.

The ALL was $20.2 million, or 0.92% of total loans, at September 30, 2021 compared to $16.3 million, or 0.74% of total loans at September 30, 2020.

Noninterest Income.

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Other sources of noninterest income include loan servicing fees, gains on sales of mortgage loans, and other income from strategic alliances.

Noninterest income decreased $1.2 million to $6.6 million for the three months ended June 30, 2021 compared to $7.8 million for the same period in 2020.

Income from service charges increased by 37.8% due to an expanded base of customer relationships, many of which were the result of the Timberwood acquisition Income from our investment in UFS decreased by 22.0% as a result of an absence of one-time deconversion fees that existed during 2020.

Loan servicing income increased by 421.2% resulting from significant additions to the Company’s serviced portfolios as well as a positive adjustment to the Company’s mortgage servicing rights of $0.6 million during the second quarter of 2021 which compared favorably to a negative $0.5 million adjustment to these same rights during the second quarter of 2020.

Net gains on sales of mortgage loans saw a very significant increase quarter-over-quarter as the Company continues to experience very robust activity in secondary market loan originations.

Finally, the Company experienced a gain on sale of investment securities totaling $3.2 million during the second quarter of 2020, compared to no gain or loss on sales of investment securities during the second quarter of 2021.

Noninterest income decreased $0.1 million to $5.0 million for the three months ended September 30, 2021 compared to $5.1 million for the same period in 2020.

Income from service charges increased by 11.0% due to an expanded base of customer relationships, many of which were garnered during the Company’s exhaustive efforts to provide PPP loans to struggling businesses in our markets during the previous 18 months, as well as continued maturing of newer markets for the Company resulting from our recent acquisitions.

Income from our investment in Ansay decreased by 22.1% as a result of a continued difficult operating environment due to COVID.

Loan servicing income increased by 11.3% resulting from continued additions to the Company’s serviced portfolios.

Net gains on sales of mortgage loans declined quarter-over-quarter as the Company experienced a slight decline in secondary market loan originations, combined with lower profitability on a per-unit basis of each loan sold.

The major components of our noninterest income are listed below:

Three Months Ended June 30,

Three Months Ended September 30,

(In thousands)

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Net gain on sales of mortgage loans

Net gain on sale of securities

Noninterest income from strategic alliances

Net loss on sales of securities

Total noninterest income

Noninterest Expense.

Noninterest expense decreased $2.2 million to $12.2 million for the three months ended June 30, 2021 compared to $14.4 million for the same period in 2020.

Personnel expense increased 7.8%, or $0.5 million, as a result of the added scale from the Timberwood acquisition in addition to customary annual pay increases.

Postage, stationary and supplies expense decreased $0.2 million, or 52.7%, due to investments made in supplies during the second quarter of 2020 while dealing with the COVID 19 pandemic which were not required during 2021.

During the second quarter of 2021 we recognized gains on sales and valuations of other real estate owned totaling $0.1 million, compared to a loss of $0.5 million during the second quarter of 2020, creating a significant positive variance between the quarters.

The Timberwood acquisition occurred during the second quarter of 2020, causing significant third-party professional expenses which were not repeated during the second quarter of 2021, leading to a significant reduction in outside service fees.

Finally, during the second quarter of 2020, the Company repaid $30.0 million in borrowings from the Federal Home Loan Bank of Chicago prior to the contractual maturity dates of these borrowings, leading to prepayment penalties of $1.3 million.

There were no similar prepayment penalties during the second quarter of 2021.

Noninterest expense increased $0.3 million to $12.5 million for the three months ended September 30, 2021 compared to $12.2 million for the same period in 2020.

Personnel expense increased 5.7%, or $0.4 million, primarily as a result of customary annual pay increases.

The Company was utilizing significant resources during the third quarter of 2020 to equip our employees and offices to provide a safe working environment during COVID.

A reduction in needed expenditures in this regard during the third quarter of 2021 led to a 8.6% decline in occupancy expense quarter-over-quarter.

Expenses from significant PPP loan originations as well as the acquisition of Timberwood increased data processing and outside service fee expense during the third quarter of 2020.

These circumstances did not continue into the third quarter of 2021, leading to decline of 13.9% and 16.6% in these areas, respectively.

The major components of our noninterest expense are listed below:

Three Months Ended June 30,

Three Months Ended September 30,

(In thousands)

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Amortization of intangibles

Penalty for early extinguishment of debt

Total noninterest expenses

Income Tax Expense.

We recorded a provision for income taxes of $3.7 million for the three months ended June 30, 2021 compared to a provision of $2.7 million for the same period during 2020, reflecting effective tax rates of 24.1% and 24.4%, respectively.

We recorded a provision for income taxes of $3.6 million for the three months ended September 30, 2021 compared to a provision of $3.5 million for the same period during 2020, reflecting effective tax rates of 24.4% for each period.

The effective tax rates were reduced from the statutory federal and state income tax rates during both periods as a result of tax-exempt interest income produced by certain qualifying loans and investments in the Bank’s portfolios.

The effective tax rate for the first quarter of 2020 was further lowered by favorable tax treatment related to the payout of a deferred compensation plan during that quarter.

Results of Operations for the Six Months Ended June 30, 2021 and June 30, 2020

Net income increased $7.5 million to $23.1 million for the six months ended June 30, 2021, compared to $15.6 million for the same period in 2020.

This increase was primarily due to the added scale of one office acquired in the Timberwood acquisition during the second quarter of 2020, strong residential mortgage production during the first six months of 2021, a reduction of funding costs based on lower rate deposits in 2021, and a $2.3 million reduction in provisions for loan losses period-over-period.

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

Net income increased $7.8 million to $34.3 million for the nine months ended September 30, 2021, compared to $26.5 million for the same period in 2020.

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

Net Interest Income.

Net interest and dividend income increased by $4.5 million to $43.9 million for the six months ended June 30, 2021, compared to $39.4 million for six months ended June 30, 2020.

Net interest and dividend income increased by $4.5 million to $66.9 million for the nine months ended September 30, 2021, compared to $62.4 million for nine months ended September 30, 2020.

The increase in net interest income was primarily due to the added scale of the Timberwood acquisition along with a reduction in funding costs on interest bearing liabilities, which declined 0.46% period-over-period.

Total average interest-earning assets increased to $2.59 billion for the six months ended June 30, 2021, compared to $2.17 billion for the same period in 2020.

Tax equivalent net interest margin decreased 0.27% to 3.47% for the six months ended June 30, 2021, down from 3.74% for the same period in 2020.

Total average interest-earning assets increased to $2.61 billion for the nine months ended September 30, 2021, compared to $2.26 billion for the same period in 2020.

Tax equivalent net interest margin decreased 0.30% to 3.47% for the nine months ended September 30, 2021, down from 3.77% for the same period in 2020.

Net interest margin decreased by 0.14% due to a decrease in purchase accounting accretion period-over-period which added to a decrease of 0.16% in core net interest margin.

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Interest Income.

Total interest income increased $0.7 million, or 1.61%, to $48.4 million for the six months ended June 30, 2021 compared to $47.7 million for the same period in 2020.

The increase in total interest income was primarily due the added scale of one office acquired in the Timberwood acquisition during the second quarter of 2020 along with interest income produced by approximately $377.8 million in PPP loans originated during 2020 and 2021, offset by lower overall yields on earning assets.

The average balance of interest-earnings assets increased by $420.8 million during the six months ended June 30, 2021 compared to the same period in 2020, offsetting a reduction in yield on interest-earning assets of 0.68% between these two periods.

Total interest income decreased $0.3 million, or 0.4%, to $73.3 million for the nine months ended September 30, 2021 compared to $73.6 million for the same period in 2020.

The decrease in total interest income was primarily due to a reduction of 0.64% in yield on interest-earning assets through nine months of 2021 compared to the same period in 2020, somewhat offset by an increase in average interest-earning assets of $359.0 million period-over-period.

Interest Expense .

Interest expense decreased $3.7 million, or 45.0%, to $4.5 million for the six months ended June 30, 2021 compared to $8.2 million for the same period in 2020.

Interest expense decreased $4.7 million, or 42.3%, to $6.5 million for the nine months ended September 30, 2021 compared to $11.2 million for the same period in 2020.

The decrease in interest expense was primarily due to the lower overall interest rate environment, which was counteracted to a certain extent by an increase of $151.4 million in interest-bearing liabilities.

Interest expense on interest-bearing deposits decreased by $3.2 million to $4.1 million for the six months ended June 30, 2021, from $7.3 million for the same period in 2020.

The average cost of interest-bearing deposits was 0.51% for the six months ended June 30, 2021, compared to 1.04% for the same period in 2020.

Interest expense on interest-bearing deposits decreased by $4.1 million to $5.9 million for the nine months ended September 30, 2021, from $10.0 million for the same period in 2020.

The average cost of interest-bearing deposits was 0.48% for the nine months ended September 30, 2021, compared to 0.91% for the same period in 2020.

Provision for Loan Losses.

We recorded a provision for loan losses of $1.9 million for the six months ended June 30, 2021, compared to $4.1 million for the same period in 2020.

We recorded net recoveries of $39,000 for the six months ended June 30, 2021 compared to net recoveries of 0.6 million for the same period in 2020.

The ALL was $19.5 million, or 0.88% of total loans, at June 30, 2021 compared to $16.1 million, or 0.76% of total loans at June 30, 2020.

The elevated provision during the first half of 2020 compared to the provision during the first half of 2021 was primarily the result of heightened economic risks resulting from the COVID-19 pandemic.

We recorded a provision for loan losses of $2.5 million for the nine months ended September 30, 2021, compared to $5.5 million for the same period in 2020.

We recorded net recoveries of $0.1 million for the nine months ended September 30, 2021 compared to net charge-offs of 0.6 million for the same period in 2020.

The ALL was $20.2 million, or 0.92% of total loans, at September 30, 2021 compared to $16.3 million, or 0.74% of total loans at September 30, 2020.

The elevated provision during the three quarters of 2020 compared to the provision during the same period of 2021 was primarily the result of heightened economic risks and uncertainties resulting from the COVID-19 pandemic.

Noninterest Income.

Noninterest income increased $1.1 million to $12.8 million for the six months ended June 30, 2021 compared to $11.7 million for the same period in 2020.

Income from service charges increased by 47.7% due to an expanded base of customer relationships, many of which were the result of the Timberwood acquisition.

Income from our investment in UFS decreased by 41.1% as a result of the absence of one-time deconversion fees that existed during 2020.

Noninterest income increased $1.0 million to $17.8 million for the nine months ended September 30, 2021 compared to $16.8 million for the same period in 2020.

Income from service charges increased by 33.3% due to an expanded base of customer relationships, many of which were the result of the Timberwood acquisition and PPP loan originations.

Income from our investment in Ansay decreased by 14.3% as a result of a continued difficult operating environment due to COVID.

Income from our investment in UFS decreased by 27.9% as a result of extra ordinary one-time fees collected in 2020 which did not recur in 2021.

Loan servicing income increased by 86.1% resulting from a positive adjustment to the Company’s mortgage servicing rights of $0.6 million during the first half of 2021 which compared favorably to a negative $0.5 million adjustment to these same rights during the first half of 2020.

Net gains on sales of mortgage loans saw a very significant increase period-over-period as the Company continues to experience very robust activity in secondary market loan originations.

Net gains on sales of mortgage loans saw a very significant increase period-over-period as the Company experienced very robust activity in secondary market loan originations.

During the second quarter of 2020 the Company sold $36.6 million of U.S.

Treasury notes, resulting in a gain of $3.1 million.

There were no similar sales of investments during the first half of 2021, causing a negative comparison between those periods.

There were no similar sales of investments during the first nine months of 2021, causing a negative comparison between periods.

The major components of our noninterest income are listed below:

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands)

5 unchanged sentences

Net gain on sales of mortgage loans

Net gain on sales of securities

Noninterest income from strategic alliances

Net (loss) gain on sales of securities

Total noninterest income

Noninterest Expense.

Noninterest expense decreased $2.7 million to $24.5 million for the six months ended June 30, 2021 compared to $27.2 million for the same period in 2020.

Noninterest expense decreased $2.5 million to $36.9 million for the nine months ended September 30, 2021 compared to $39.4 million for the same period in 2020.

Personnel expense increased 7.8%, or $1.5 million, as a result of the added scale from the Timberwood acquisition in addition to customary annual pay increases.

During the first half of 2021 we recognized gains on sales and valuations of other real estate owned totaling $0.2 million, compared to a loss of $1.4 million during the first half of 2020, creating a significant positive variance between the periods.

The Timberwood acquisition occurred during the second quarter of 2020, causing significant third-party professional expenses which were not repeated during the first half of 2021, leading to a significant reduction in outside service fees.

The Timberwood acquisition occurred during the second quarter of 2020, causing significant third-party professional expenses which were not repeated during the first nine months of 2021, leading to a significant reduction in outside service fees.

There were no similar prepayment penalties during the first half of 2021.

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

There were no similar prepayment penalties during the first nine months of 2021.

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

The major components of our noninterest expense are listed below:

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands)

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Postage, stationary, and supplies

Net loss (gain) on sales and valuation of ORE

Net (gain) loss on sales and valuation of ORE

Charitable Contributions

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Income Tax Expense .

We recorded a provision for income taxes of $7.3 million for the six months ended June 30, 2021 compared to a provision of $4.2 million for the same period during 2020, reflecting effective tax rates of 24.2% and 21.4%, respectively.

We recorded a provision for income taxes of $11.0 million for the nine months ended September 30, 2021 compared to a provision of $7.8 million for the same period during 2020, reflecting effective tax rates of 24.2% and 22.7%, respectively.

The effective tax rates were reduced from the statutory federal and state income tax rates largely as a result of tax-exempt interest income produced by certain qualifying loans and investments in the Bank’s portfolios.

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Three Months Ended

June 30, 2021

June 30, 2020

September 30, 2021

September 30, 2020

Rate Earned/ Paid

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Tax-exempt (available for sale)

Taxable (held to maturity)

Tax-exempt (held to maturity)

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Net interest margin (4)

(1) Annualized on a fully taxable equivalent basis calculated using a federal tax rate of 21% for the three months ended June 30, 2021 and 2020.

(1) Annualized on a fully taxable equivalent basis calculated using a federal tax rate of 21% for the three months ended September 30, 2021 and 2020.

(2) Nonaccrual loans are included in average amounts outstanding.

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(4) Net interest margin represents net interest income on a fully tax equivalent basis as a percentage of average interest-earning assets.

Six Months Ended

Nine Months Ended

September 30,2021

September 30,2020

(dollars in thousands)

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Shareholders’ equity

Total liabilities & shareholders' equity

Total liabilities & sharesholders' equity

Net interest income on a fully taxable equivalent basis

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Net interest margin (4)

(1) Annualized on a fully taxable equivalent basis calculated using a federal tax rate of 21% for the six months ended June 30, 2021 and 2020.

(1) Annualized on a fully taxable equivalent basis calculated using a federal tax rate of 21% for the nine months ended September 30, 2021 and 2020.

(2) Nonaccrual loans are included in average amounts outstanding.

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(i) changes attributable to changes in volumes (changes in average balance multiplied by prior year average rate) and (ii) changes attributable to changes in rate (change in average interest rate multiplied by prior year average balance), while (iii) changes attributable to the combined impact of volumes and rates have been allocated proportionately to separate volume and rate categories.

Three Months Ended June 30, 2021

Six Months Ended June 30, 2021

Three Months Ended September 30, 2021

Nine Months Ended September 30, 2021

Compared with

Three Months Ended June 30, 2020

Six Months Ended June 30, 2020

Three Months Ended September 30, 2020

Nine Months Ended September 30, 2020

Increase/(Decrease) Due to Change in

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Total Assets.

Total assets increased $100.9 million, or 3.7%, to $2.82 billion at June 30, 2021, from $2.72 billion at December 31, 2020.

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

Cash and Cash Equivalents.

Cash and cash equivalents increased by $80.9 million to $251.1 million at June 30, 2021 from $170.2 million at December 31, 2020.

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

Investment Securities.

The carrying value of total investment securities decreased by $12.0 million to $159.7 million at June 30 2021, from $171.7 million at December 31, 2020.

Net loans increased by $31.9 million, totaling $2.21 billion at June 30, 2021 compared to $2.17 billion at December 31, 2020.

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

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

Bank-Owned Life Insurance.

At June 30, 2021, our investment in bank-owned life insurance was $31.8 million, an increase of $0.4 million from $31.4 million at December 31, 2020.

Deposits increased $125.7 million, or 5.4%, to $2.45 billion at June 30, 2021 from $2.32 billion at December 31, 2020.

At June 30, 2021, borrowings consisted of advances from the FHLB of Chicago, as well as subordinated debt to other banks.

FHLB borrowings decreased to $9.2 million at June 30, 2021, from $23.5 million at December 31, 2020.

Subordinated debt owed to other banks totaled $17.5 million at June 30, 2021 and December 31, 2020.

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

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

At September 30, 2021, borrowings consisted of advances from the FHLB of Chicago, as well as subordinated debt to other banks.

FHLB borrowings decreased to $9.2 million at September 30, 2021, from $23.5 million at December 31, 2020.

Subordinated debt owed to other banks totaled $17.5 million at September 30, 2021 and December 31, 2020.

Stockholders’ Equity.

Total stockholders’ equity increased $16.5 million, or 5.6%, to $311.4 million at June 30, 2021, from $294.9 million at December 31, 2020.

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

Our lending activities are conducted principally in Wisconsin.

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Repayment of the Bank’s residential loans are generally dependent on the health of the employment market in the borrowers’ geographic areas and that of the general economy with liquidation of the underlying real estate collateral being typically viewed as the primary source of repayment in the event of borrower default.

Our loan portfolio is our most significant earning asset, comprising 78.9% and 80.6% of our total assets as of June 30, 2021 and December 31, 2020, respectively.

Our loan portfolio is our most significant earning asset, comprising 77.6% and 80.6% of our total assets as of September 30, 2021 and December 31, 2020, respectively.

Our strategy is to grow our loan portfolio by originating quality commercial and consumer loans that comply with our credit policies and that produce revenues consistent with our financial objectives.

We believe our loan portfolio is well-balanced, which provides us with the opportunity to grow while monitoring our loan concentrations.

Loans increased $33.8 million, or 1.5%, to $2.23 billion as of June 30, 2021 as compared to $2.19 billion as of December 31, 2020.

This increase during the first six months of 2021 has been comprised of a decrease of $40.6 million or 9.1% in commercial and industrial loans, an increase of $49.9 million or 5.0% in commercial real estate loans, an increase of $0.6 million or 0.4% in construction and development loans, an increase of $26.4 million or 4.8% in residential 1-4 family loans and a decrease of $2.7 million or 3.9% in consumer and other loans.

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

Loans increased $17.5 million, or 0.8%, to $2.21 billion as of September 30, 2021 as compared to $2.19 billion as of December 31, 2020.

This increase during the first nine months of 2021 has been comprised of a decrease of $91.4 million or 20.5% in commercial and industrial loans, an increase of $117.5 million or 11.8% in commercial real estate loans, a decrease of $23.3 million or 16.6% in construction and development loans, an increase of $27.1 million or 5.0% in residential 1-4 family loans and a decrease of $12.5 million or 18.2% in consumer and other loans.

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

September 30,

(dollars in thousands)

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All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collection or present other unfavorable features.

At June 30, 2021 and December 31, 2020, total loans outstanding to such directors and officers and their associates were $67.7 million and $67.1 million, respectively.

During the six months ended June 30, 2021, $9.7 million of additions and $9.2 million of repayments were made to these loans.

At June 30, 2021 and December 31, 2020, all of the loans to directors and officers were performing according to their original terms, other than standard and customary payment deferrals allowed under the CARES act, which were provided under the same terms as all other customers of the Bank.

At September 30, 2021 and December 31, 2020, total loans outstanding to such directors and officers and their associates were $69.9 million and $67.1 million, respectively.

During the nine months ended September 30, 2021, $15.3 million of additions and $12.5 million of repayments were made to these loans.

At September 30, 2021 and December 31, 2020, all of the loans to directors and officers were performing according to their original terms, other than standard and customary payment deferrals allowed under the CARES act, which were provided under the same terms as all other customers of the Bank.

Loan categories

1 unchanged sentence

Commercial and Industrial (C&I).

Our C&I portfolio totaled $404.4 million and $445.0 million at June 30, 2021 and December 31, 2020, respectively, and represented 18% and 20% of our total loans at those dates.

Our C&I portfolio totaled $353.6 million and $445.0 million at September 30, 2021 and December 31, 2020, respectively, and represented 16% and 20% of our total loans at those dates.

As a result of forgiveness, PPP loan balances declined from $172.4 at December 31, 2020, to $62.6 million at September 30, 2021, causing the reduction in the C&I portfolio.

Our C&I loan customers represent various small and middle-market established businesses involved in professional services, accommodation and food services, health care, financial services, wholesale trade, manufacturing, distribution, retailing and non-profits.

1 unchanged sentence

Many of the loans to this segment are secured by liens on corporate assets and the personal guarantees of the principals.

The regional economic strength or weakness impacts the relative risks in this loan category.

The regional economic strength or weakness

impacts the relative risks in this loan category.

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

Commercial Real Estate (CRE).

Our CRE loan portfolio totaled $1.04 billion and $992.2 million at June 30, 2021 and December 31, 2020, respectively, and represented 47% and 45% of our total loans at those dates.

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

Our CRE loans are secured by a variety of property types including multifamily dwellings, retail facilities, office buildings, commercial mixed use, lodging and industrial and warehouse properties.

4 unchanged sentences

Construction and Development (C&D).

Our C&D loan portfolio totaled $140.7 million and $140.1 million at June 30, 2021 and December 31, 2020, respectively, and represented 6% and 7% of our total loans at those dates.

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

Our C&D loans are generally for the purpose of creating value out of real estate through construction and development work, and also include loans used to purchase recreational use land.

4 unchanged sentences

Residential 1 – 4 Family.

Residential 1 – 4 family loans held in portfolio amounted to $572.2 million and $545.8 million at June 30, 2021 and December 31, 2020, respectively, and represented26% and 25% of our total loans at those dates.

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

We offer fixed and adjustable-rate residential mortgage loans with maturities up to 30 years.

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Servicing rights are retained on all loans sold to the secondary market.

We were servicing mortgage loans sold to others without recourse of approximately $662.7 million at June 30, 2021 and $612.7 million at December 31, 2020.

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

Loans sold with the retention of servicing assets result in the capitalization of servicing rights.

Loan servicing rights are included in other assets and are carried at fair value.

The net balance of capitalized servicing rights amounted to $4.3 million and $3.7 million at June 30, 2021 and December 31, 2020.

The net balance of capitalized servicing rights amounted to $4.3 million and $3.7 million at September 30, 2021 and December 31, 2020.

Consumer Loans.

Our consumer loan portfolio totaled $33.5 million and $30.5 million at June 30, 2021 and December 31, 2020, respectively, and represented 2% and 1% of our total loans at those dates.

Our consumer loan portfolio totaled $33.1 million and $30.5 million at September 30, 2021 and December 31, 2020, respectively, and represented 2% and 1% of our total loans at those dates.

Consumer loans include secured and unsecured loans, lines of credit and personal installment loans.

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As a result, consumer loan repayments are dependent on the borrower’s continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

Our other loans totaled $32.2 million and $37.9 million at June 30, 2021 and December 31, 2020, respectively, and are immaterial to the overall loan portfolio.

Our other loans totaled $22.8 million and $37.9 million at September 30, 2021 and December 31, 2020, respectively, and are immaterial to the overall loan portfolio.

The other loans category consists primarily of over-drafted depository accounts, loans utilized to purchase or carry securities and loans to nonprofit organizations.

Loan Portfolio Maturities.

The following tables summarize the dollar amount of loans maturing in our portfolio based on their loan type and contractual terms to maturity at June 30, 2021 and December 31, 2020, respectively.

The following tables summarize the dollar amount of loans maturing in our portfolio based on their loan type and contractual terms to maturity at September 30, 2021 and December 31, 2020, respectively.

The tables do not include any estimate of prepayments, which can significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below.

Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.

As of June 30, 2021

As of September 30, 2021

(dollars in thousands)

11 unchanged sentences

Consumer and other

The following tables summarize the dollar amount of loans maturing in our portfolio based on whether the loan has a fixed or variable rate of interest and their contractual terms to maturity at June 30, 2021 and December 31, 2020, respectively.

The tables do not include any estimate of prepayments, which can significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below.

Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.

As of June 30, 2021

As of September 30, 2021

(dollars in thousands)

16 unchanged sentences

The composition of our nonperforming assets is as follows:

September 30,

(dollars in thousands)

4 unchanged sentences

Nonperforming loans as a percent of total assets

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

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

Nonaccrual Loans

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If a TDR is placed on nonaccrual status, which would occur based on the same criteria as non-TDR loans, it remains there until a sufficient period of performance under the restructured terms has occurred at which it returned to accrual status, generally 6 months.

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

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

During 2020 the Bank experienced an increase in customer requests for loan modifications and payment deferrals as a result of impacts of the COVID-19 pandemic.

4 unchanged sentences

These deferrals were primarily for lengths in the range of 60 to 180 days, and were a combination of deferrals of principal payments only (89.7% by dollar value) or both principal and interest payments (10.3% by dollar value).

As of June 30, 2021, these totals had decreased to negligible levels.

None of these deferrals remained as of September 30, 2021.

Classified loans

3 unchanged sentences

We have implemented these standards in our quarterly review of the adequacy of the ALL, and identify and value impaired loans in accordance with guidance on these standards.

As part of the review process, we also identify loans classified as watch, which, while still considered pass credits, have characteristics which deserve heightened attention by management.

Loans totaling $72.0 million and $50.1 million were classified substandard under the Bank’s policy at June 30, 2021 and December 31, 2020, respectively.

The following table sets forth information related to the credit quality of our loan portfolio at June 30, 2021 and December 31, 2020.

As part of the review process, we also identify loans classified as watch, which have a potential weakness that deserves management’s close attention.

Loans totaling $64.4 million and $50.1 million were classified substandard under the Bank’s policy at September 30, 2021 and December 31, 2020, respectively.

The following table sets forth information related to the credit quality of our loan portfolio at September 30, 2021 and December 31, 2020.

Loan type (in thousands)

As of June 30, 2021 (unaudited)

As of September 30, 2021 (unaudited)

Commercial & industrial

28 unchanged sentences

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

Six months ended

Nine months ended

September 30,

(dollars in thousands)

26 unchanged sentences

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

September 30,

(in thousands, except %)

10 unchanged sentences

Our current deposit products include non-interest bearing and interest-bearing checking accounts, savings accounts, money market accounts, and certificate of deposits.

As of June 30, 2021, deposit liabilities accounted for approximately 86.8% of our total liabilities and equity.

As of September 30, 2021, deposit liabilities accounted for approximately 86.8% of our total liabilities and equity.

We accept deposits primarily from customers in the communities in which our branches and offices are located, as well as from small businesses and other customers throughout our lending area.

1 unchanged sentence

Deposit rates and terms are based primarily on current business strategies, market interest rates, liquidity requirements and our deposit growth goals.

Total deposits were $2.45 billion and $2.32 billion as of June 30, 2021 and December 31, 2020, respectively.

Noninterest-bearing deposits at June 30, 2021 and December 31, 2020, were $782.9 million and $715.6 million, respectively, while interest-bearing deposits were $1.66 billion and $1.61 billion at June 30, 2021 and December 31, 2020, respectively.

At June 30, 2021, we had a total of $285.3 million in certificates of deposit, including $12.5 million of brokered deposits.

Total deposits were $2.47 billion and $2.32 billion as of September 30, 2021 and December 31, 2020, respectively.

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

At September 30, 2021, we had a total of $265.0 million in certificates of deposit, including $12.5 million of brokered deposits.

Based on historical experience and our current pricing strategy, we believe we will retain a majority of these accounts upon maturity, although our long-term strategy is to minimize reliance on certificates of deposits by increasing relationship deposits in lower earning savings and demand deposit accounts.

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

Six months ended

June 30, 2021

Nine months ended

September 30, 2021

December 31, 2020

June 30, 2020

September 30, 2020

(dollars in thousands)

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

September 30,

(dollars in thousands)

3 unchanged sentences

12 months or more remaining

Retail certificates of deposit of $100,000 or greater totaled $125.1 million and $154.1 million at June 30, 2021 and December 31, 2020, respectively.

Interest expense on retail certificates of deposit of $100,000 or greater was $1.0 million for the six months ended June 30, 2021, and $3.1 million for the year ended December 31, 2020.

Retail certificates of deposit of $100,000 or greater totaled $112.0 million and $154.1 million at September 30, 2021 and December 31, 2020, respectively.

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

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

September 30,

(dollars in thousands)

9 unchanged sentences

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

Six months ended

Nine months ended

(dollars in thousands)

June 30, 2021

September 30, 2021

December 31, 2020

June 30, 2020

September 30, 2020

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

4 unchanged sentences

The Company’s borrowings have historically consisted primarily of FHLB of Chicago advances collateralized by a blanket pledge agreement on the Company’s FHLB capital stock and retail and commercial loans held in the Company’s portfolio.

There were $9.1 million of advances outstanding from the FHLB at June 30, 2021, and $23.3 million as of December 31, 2020.

The total loans pledged as collateral were $831.6 million at June 30, 2021 and $825.3 million at December 31, 2020.

The company had no outstanding letters of credit from the FHLB at June 30, 2021 and $0.8 million outstanding at December 31, 2020.

There were $9.1 million of advances outstanding from the FHLB at September 30, 2021, and $23.3 million as of December 31, 2020.

The total loans pledged as collateral were $878.2 million at September 30, 2021 and $825.3 million at December 31, 2020.

The company had no outstanding letters of credit from the FHLB at September 30, 2021 and $0.8 million outstanding at December 31, 2020.

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

(dollars in thousands)

June 30, 2021

June 30, 2020

September 30, 2021

September 30, 2020

Average daily amount of borrowings outstanding during the period

5 unchanged sentences

We maintain a $7.5 million line of credit with another commercial bank, which was entered into on May 15, 2021.

There were no outstanding balances on this note at June 30, 2021.

There were no outstanding balances on this note at March 31, 2021.

Any future borrowings will required monthly payments of interest at a variable rate, and will be due in full on May 15, 2022.

During September 2017, the Company entered into subordinated note agreements with three separate commercial banks.

As of June 30, 2021 and December 31, 2020, outstanding balances under these agreements totaled $11.5 million.

As of September 30, 2021 and December 31, 2020, outstanding balances under these agreements totaled $11.5 million.

These notes were all issued with 10-year maturities, carry interest at a variable rate payable quarterly, are callable on or after the sixth anniversary of their issuance dates, and qualify for Tier 2 capital for regulatory purposes.

During July 2020, the Company entered into subordinated note agreements with two separate commercial banks.

As of June 30, 2021 and December 31, 2020, outstanding balances under these agreements totaled $6.0 million.

As of September 30, 2021 and December 31, 2020, outstanding balances under these agreements totaled $6.0 million.

These notes were issued with 10-year maturities, will carry interest at a fixed rate of 5.0% through June 30, 2025, and at a variable rate thereafter, payable quarterly.

9 unchanged sentences

Securities classified as available for sale, which management has the intent and ability to hold for an indefinite period of time, but not necessarily to maturity, are carried at fair value, with unrealized gains and losses, net of related deferred income taxes, included in stockholders’ equity as a separate component of other comprehensive income.

The fair value of securities available for sale totaled $153.8 million and included gross unrealized gains of $7.1 million and gross unrealized losses of $0.1 at June 30, 2021.

The fair value of securities available for sale totaled $148.4 million and included gross unrealized gains of $6.3 million and gross unrealized losses of $0.3 at September 30, 2021.

At December 31, 2020, the fair value of securities available for sale totaled $165.0 million and included gross unrealized gains of $8.0 million and gross unrealized losses of $0.1 million.

1 unchanged sentence

These securities, which management has the intent and ability to hold to maturity, are reported at amortized cost.

Securities held to maturity totaled $5.9 million and $6.7 million at June 30, 2021 and December 31, 2020, respectively.

The Company had no recognized gains or losses on sales of securities during the six-months ended June 30, 2021.

The Company recognized a net gain on sale of available for sale securities of $0.1 million during the six-months ended June 30, 2020.

The Company recognized a net gain of $3.1 million on sale of held to maturity securities during the six-months ended June 30, 2020.

Securities held to maturity totaled $5.9 million and $6.7 million at September 30, 2021 and December 31, 2020, respectively.

The Company recognized a net loss on sale of available for sale securities of $3,000 during the nine-months ended September 30, 2021.

The Company recognized a net gain on sale of available for sale securities of $0.1 million during the nine-months ended September 30, 2020.

The Company recognized a net gain of $3.1 million on sale of held to maturity securities during the nine-months ended September 30, 2020.

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

September 30,

(dollars in thousands)

10 unchanged sentences

Obligations of states and political subdivisions

The following tables set forth the composition and maturities of investment securities as of June 30, 2021 and December 31, 2020.

The following tables set forth the composition and maturities of investment securities as of September 30, 2021 and December 31, 2020.

Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

6 unchanged sentences

(dollars in thousands)

At June 30, 2021

At September 30, 2021

Available for sale securities

27 unchanged sentences

Obligations of states and political subdivisions

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

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

The Company evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such evaluation.

3 unchanged sentences

and (4) that the Company does not have the intent to sell the security and it is more likely than not that it will not have to sell the security before recovery of its cost basis.

As of June 30, 2021, 2 debt securities had gross unrealized losses, with an aggregate depreciation of 0.1% from our amortized cost basis.

As of September 30, 2021, 5 debt securities had gross unrealized losses, with an aggregate depreciation of 0.2% from our amortized cost basis.

The largest unrealized loss percentage of any single security was 4.93% (or $237,000 of its amortized cost.

24 unchanged sentences

Capital Adequacy.

Total stockholders’ equity was $311.4 million at June 30, 2021 compared to $294.9 million at December 31, 2020.

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

Our capital management consists of providing adequate equity to support our current and future operations.

26 unchanged sentences

All of the federal bank regulatory agencies have adopted regulations establishing relevant capital measures and relevant capital levels for federally insured depository institutions.

The Bank was well capitalized at June 30, 2021, and brokered deposits are not restricted.

The Bank was well capitalized at September 30, 2021, and brokered deposits are not restricted.

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

31 unchanged sentences

(dollars in thousands)

At June 30, 2021

At September 30, 2021

Bank First Corporation:

19 unchanged sentences

Tier I capital (to average assets)

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

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

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

17 unchanged sentences

Our off-balance sheet arrangements at the dates indicated were as follows:

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

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

Less Than One

Three to Five

Other Commitments

After Five Years

(dollars in thousands)

11 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis