What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-05-10 · 246 added, 112 removed, 701 unchanged (34% 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, 2021, 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 March 31, 2022.

FORWARD-LOOKING STATEMENTS

32 unchanged sentences

On January 18, 2022, the Company entered into an Agreement and Plan of Merger with Denmark, a Wisconsin Corporation, pursuant to which Denmark will merge with and into the Company and Denmark's banking subsidiary, Denmark State Bank, will merge with and into the Bank.

The transaction is expected to close during the third quarter of 2022 and is subject to, among other items, approval by the shareholders of both institutions and regulatory agencies.

The transaction is expected to close during the third quarter of 2022.

All required approvals by the shareholders of both institutions and regulatory agencies have been secured.

Merger consideration will consist of up to 20% cash and no less than 80% of the common stock of the Company, and will total approximately $119 million, subject to the fair market value of the Company's common stock on the date of closing.

Based on results as of March 31, 2022, the combined company would have total assets of approximately $3.61 billion, loans of approximately $2.79 billion, and deposits of approximately $3.17 billion.

Based on results as of June 30, 2022, the combined company would have total assets of approximately $3.64 billion, loans of approximately $2.85 billion, and deposits of approximately $3.21 billion.

On July 25, 2022, the Company entered into an Agreement and Plan of Merger with Hometown, a Wisconsin Corporation, pursuant to which Hometown will merge with and into the Company and Hometown's banking subsidiary, Hometown Bank, will merge with and into the Bank.

The transaction is expected to close during the first quarter of 2023 and is subject to, among other items, approval by the shareholders of Hometown and regulatory agencies.

Merger consideration will consist of up to 30% cash and no less than 70% of the common stock of the Company, and will total approximately $124 million, subject to the fair market value of the Company's common stock on the date of closing.

Based on results as of June 30, 2022, and inclusive of projected balances to be acquired from the proposed acquisition of Denmark, the combined company would have total assets of approximately $4.27 billion, loans of approximately $3.27 billion, and deposits of approximately $3.75 billion.

The Company accounts for these transactions under the acquisition method of accounting, and thus, the financial position and results of operations of acquired institutions prior to the consummation date are not included in the accompanying consolidated financial statements.

4 unchanged sentences

history, due to the COVID-19 pandemic.

During March 2020, in an effort to lessen the impact of COVID-19 on consumers and businesses, the Federal Reserve reduced the federal funds rate 1.5 percentage points to 0.00 to 0.25 percent and the U.S.

During March 2020, in an effort to lessen the impact of COVID-19 on consumers and businesses, the Federal Reserve

reduced the federal funds rate 1.5 percentage points to 0.00 to 0.25 percent and the U.S.

government enacted the CARES Act, the largest economic stimulus package in the nation's history.

4 unchanged sentences

economy compared to 2020, uncertainty and market disruptions such as additional coronavirus variants, pandemic-related supply chain issues and labor shortages persist.

The economic expansion has been met with inflationary pressures that are expected to result in the Federal Open Market Committee policy tightening in 2022, which began in March 2022 and will likely include more interest rate hikes in the future.

The economic expansion has been met with inflationary pressures that are expected to result in the continued Federal Open Market Committee policy tightening in 2022, which began in March 2022 and will likely include more interest rate hikes in the future.

With a strong asset-sensitive balance sheet and our strong position in our markets, we expect increases in loan demand and interest rates should improve returns going forward.

2 unchanged sentences

At or for the Three Months Ended

At or for the Six Months Ended

(In thousands, except per share data)

73 unchanged sentences

At or for the Three Months Ended

At or for the Six Months Ended

(In thousands, except per share data)

11 unchanged sentences

RESULTS OF OPERATIONS

Results of Operations for the Three Months Ended March 31, 2022 and March 31, 2021

Net income decreased $1.3 million to $10.2 million for three months ended March 31, 2022, compared to $11.5 million for the same period in 2021.

This decrease was primarily due to a slowdown in residential mortgage production during the first quarter of 2022 compared to the year earlier first quarter, and a reduction in interest income produced by PPP loans originated during 2020 and 2021, which totaled $0.7 million for the first quarter of 2022 compared to $2.4 million for the first quarter of 2021.

Results of Operations for the Three Months Ended June 30, 2022 and June 30, 2021

Net income increased $0.1 million to $11.7 million for three months ended June 30, 2022, compared to $11.5 million for the same period in 2021.

This increase was primarily due to higher net interest income offset by a slowdown in residential mortgage production during the second quarter of 2022 compared to the year earlier second quarter.

Net Interest Income .

2 unchanged sentences

Management closely monitors both total net interest income and the net interest margin (net interest income divided by average earning assets).

We seek to maximize net interest income without exposing the Company to an excessive level of interest rate risk

through our asset and liability policies.

Interest rate risk is managed by monitoring the pricing, maturity and repricing options of all classes of interest-bearing assets and liabilities.

We seek to maximize net interest income without exposing the Company to an excessive level of interest rate risk through our asset and liability policies.

Interest rate risk is managed by monitoring the pricing, maturity and repricing options of all

classes of interest-bearing assets and liabilities.

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

Net interest and dividend income increased by $0.2 million to $22.3 million for the three months ended March 31, 2022 compared to $22.1 million for three months ended March 31, 2021.

The increase in net interest income was primarily due to growth in interest earnings assets over the last twelve months as well as a reduction in the cost of interest earning liabilities during that same time period.

Total average interest-earning assets was $3.0 billion for the three months ended March 31, 2022, up from $2.55 billion for the same period in 2021.

Tax equivalent net interest margin decreased 0.51% to 3.06% for the three-months ended March 31, 2022, down from 3.57% for the same period in 2021.

Net interest margin decreased by 0.05% due to a decrease in purchase accounting accretion quarter-over-quarter and a short-term net interest income enhancement strategy further decreased net interest margin by 0.29%, both of which added to a decrease of 0.17% in core net interest margin.

Net interest and dividend income increased by $1.7 million to $23.5 million for the three months ended June 30, 2022 compared to $21.8 million for three months ended June 30, 2021.

The increase in net interest income was primarily due to growth in interest earning assets over the last twelve months.

Total average interest-earning assets was $2.98 billion for the three months ended June 30, 2022, up from $2.63 billion for the same period in 2021.

Tax equivalent net interest margin decreased 0.16% to 3.21% for the three-months ended June 30, 2022, down from 3.37% for the same period in 2021.

Net interest margin decreased by 0.05% due to a decrease in purchase accounting accretion quarter-over-quarter and a short-term net interest income enhancement strategy further decreased net interest margin by 0.27%, both of which offset an increase of 0.16% in core net interest margin.

This short-term net interest income enhancement strategy increased average interest-earning assets and average interest-bearing liabilities by approximately $253.8 million.

2 unchanged sentences

Interest Income.

Total interest income decreased $0.2 million, or 0.9%, to $24.2 million for the three months ended March 31, 2022 compared to $24.4 million for the same period in 2021.

The decrease in total interest income was primarily due the aforementioned reduction in interest income produced by PPP loans.

The average balance of interest-earning assets increased by $453.4 million during the three months ended March 31, 2022 compared to the same period in 2021, offsetting a reduction in yield on interest-earning assets of 0.63% between these two periods.

Total interest income increased $1.8 million, or 7.6%, to $25.8 million for the three months ended June 30, 2022 compared to $24.0 million for the same period in 2021.

The increase in total interest income was primarily due to the aforementioned growth in interest earnings assets over the last twelve months.

The average balance of interest-earning assets increased by $341.5 million during the three months ended June 30, 2022 compared to the same period in 2021.

Interest Expense.

Interest expense decreased $0.4 million, or 17.5%, to $1.9 million for the three months ended March 31, 2022 compared to $2.3 million for the same period in 2021.

The decrease in interest expense was primarily due to the lower overall interest rate environment due to the COVID-19 pandemic, which was counteracted to a certain extent by an increase of $385.5 million in interest bearing liabilities quarter-over-quarter.

Interest expense on interest-bearing deposits decreased by $0.5 million to $1.6 million for the three months ended March 31, 2022 from $2.1 million for the same period in 2021.

The average cost of interest-bearing deposits was 0.36% for the three months ended March 31, 2022, compared to 0.54% for the same period in 2021.

Interest expense increased $0.2 million, or 6.9%, to $2.3 million for the three months ended June 30, 2022 compared to $2.2 million for the same period in 2021.

The increase in interest expense was primarily due to elevated interest bearing liabilities resulting from the aforementioned short-term net interest income enhancement strategy.

Interest expense on interest-bearing deposits decreased by $0.3 million to $1.7 million for the three months ended June 30, 2022 from $2.0 million for the same period in 2021.

The average cost of interest-bearing deposits was 0.40% for the three months ended June 30, 2022, compared to 0.48% for the same period in 2021.

Provision for Loan Losses.

6 unchanged sentences

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

We recorded a provision for loan losses of $1.2 million for the three months ended March 31, 2022 compared to $0.9 million for the same period in 2021.

We recorded net recoveries of $0.2 million for the three months ended March 31, 2022 compared to net charge offs of $27,000 for the same period in 2021.

The ALL was $21.7 million, or 0.94% of total loans, at March 31, 2022 compared to $18.5 million, or 0.83% of total loans at March 31, 2021.

We recorded a provision for loan losses of $0.5 million for the three months ended June 30, 2022 compared to $1.0 million for the same period in 2021.

We recorded net recoveries of $0.7 million for the three months ended June 30, 2022 compared to net recoveries of $0.1 million for the same period in 2021.

The ALL was $22.7 million, or 0.95% of total loans, at June 30, 2022 compared to $19.5 million, or 0.88% of total loans at June 30, 2021.

The increased ALL coverage was the result of fewer government guaranteed loans (primarily PPP loans) as well as a reduction in total purchased loans which carry a fair value mark in lieu of a portion of the ALL until they are paid off or renewed.

3 unchanged sentences

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

Noninterest income decreased $1.1 million to $5.2 million for the three months ended March 31, 2022 compared to $6.3 million for the same period in 2021.

Income from our investment in Ansay increased by 13.9%.

Income from our investment in UFS increased by 92.6% The added profitability of these two unconsolidated subsidiaries was offset by a significant reduction in net gains on sales of mortgage loans quarter-over-quarter as the Company, and the banking industry as a whole, saw an extreme slowdown in residential

mortgage lending due in part to a higher interest rate environment during the first quarter of 2022 compared to the first quarter of 2021.

Noninterest income decreased $1.1 million to $5.6 million for the three months ended June 30, 2022 compared to $6.6 million for the same period in 2021.

This decrease was primarily the result of a significant reduction in net gains on sales of mortgage loans quarter-over-quarter as the Company, and the banking industry as a whole, saw an extreme slowdown in residential mortgage lending due in part to a higher interest rate environment during the first half of 2022 compared to the first half of 2021.

This decrease was partially offset by higher loan servicing income, which includes the impact of valuation updates to the Company’s MSRs.

These valuation updates added $2.0 million to servicing income during the second quarter of 2022, compared to $0.6 million during the prior year second quarter.

The major components of our noninterest income are listed below:

Three Months Ended March 31,

Three Months Ended June 30,

(In thousands)

8 unchanged sentences

Noninterest Expense.

Noninterest expense increased $0.3 million to $12.7 million for the three months ended March 31, 2022 compared to $12.4 million for the same period in 2021.

Occupancy expenses decreased 7.9%, the result of significant investments made to branch locations during the first quarter of 2021 to enhance safety and experience for our staff and customers that were not repeated in the first quarter of 2022.

Noninterest expense increased $0.9 million to $13.2 million for the three months ended June 30, 2022 compared to $12.3 million for the same period in 2021.

Occupancy expenses decreased 25.4%, the result of significant investments made to branch locations during the second quarter of 2022 as well as inflationary.

Outside service fees increased $0.6 million, or 72.4%, quarter-over-quarter, primarily as a result of $0.6 million in costs associated with the pending acquisition of Denmark.

The major components of our noninterest expense are listed below:

Three Months Ended March 31,

Three Months Ended June 30,

(In thousands)

Noninterest Expense

Salaries, commissions, and employee benefits

Data processing

Postage, stationary, and supplies

Charitable contributions

Outside service fees

Amortization of intangibles

Total noninterest expenses

Income Tax Expense.

We recorded a provision for income taxes of $3.7 million for the three months ended June 30, 2022 compared to a provision of $3.7 million for the same period during 2021, reflecting effective tax rates of 23.9% and 24.1%, respectively.

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.

Results of Operations for the Six Months Ended June 30, 2022 and June 30, 2021

Net income decreased $1.2 million to $21.8 million for six months ended June 30, 2022, compared to $23.1 million for the same period in 2021.

This decrease was primarily due to a slowdown in residential mortgage production during the first quarter of 2022 compared to the year earlier first quarter, and a reduction in interest income produced by PPP loans originated during 2020 and 2021, which totaled $1.1 million for the first half of 2022 compared to $4.3 million for the first half of 2021, partially offset by higher core net interest income for the current year-to-date.

Net Interest Income .

The management of interest income and expense is fundamental to our financial performance.

Net interest income, the difference between interest income and interest expense, is the largest component of the Company’s total revenue.

Management closely monitors both total net interest income and the net interest margin (net interest income divided by average earning assets).

We seek to maximize net interest income without exposing the Company to an excessive level of interest rate risk

through our asset and liability policies.

Interest rate risk is managed by monitoring the pricing, maturity and repricing options of all classes of interest-bearing assets and liabilities.

Net interest and dividend income increased by $1.9 million to $45.8 million for the six months ended June 30, 2022 compared to $43.9 million for six months ended June 30, 2021.

The increase in net interest income was primarily due to growth in interest earning assets over the last twelve months as well as a reduction in the cost of interest earning liabilities during that same time period.

Total average interest-earning assets was $2.99 billion for the six months ended June 30, 2022, up from $2.59 billion for the same period in 2021.

Tax equivalent net interest margin decreased 0.34% to 3.13% for the six-months ended June 30, 2022, down from 3.47% for the same period in 2021.

Net interest margin decreased by 0.05% due to a decrease in purchase accounting accretion and a short-term net interest income enhancement strategy further decreased net interest margin by 0.28%.

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

Internal factors include balance sheet changes on both volume and mix and pricing decisions, and external factors include changes in market interest rates, competition and the shape of the interest rate yield curve.

Interest Income.

Total interest income increased $1.6 million, or 3.3%, to $50.0 million for the six months ended June 30, 2022 compared to $48.4 million for the same period in 2021.

The increase in total interest income was primarily due to growth in interest earnings assets over the last twelve months.

The average balance of interest-earning assets increased by $397.2 million during the first six months of 2022 compared to the same period in 2021.

Interest Expense.

Interest expense decreased $0.3 million, or 5.7%, to $4.3 million for the six months ended June 30, 2022 compared to $4.5 million for the same period in 2021.

The decrease in interest expense was primarily due to the lower crediting interest rate on interest bearing liabilities, which fell 0.11% from 0.53% during the first half of 2021 to 0.42% during the first half of 2022.

Interest expense on interest-bearing deposits decreased by $0.8 million to $3.3 million for the six months ended June 30, 2022 from $4.1 million for the same period in 2021.

The average cost of interest-bearing deposits was 0.38% for the six months ended June 30, 2022, compared to 0.51% for the same period in 2021.

Provision for Loan Losses.

Credit risk is inherent in the business of making loans.

We establish an ALL through charges to earnings, which are shown in the statements of operations as the provision for loan losses.

Specifically identifiable and quantifiable known losses are promptly charged off against the allowance.

The provision for loan losses is determined by conducting a quarterly evaluation of the adequacy of our ALL and charging the shortfall or excess, if any, to the current quarter’s expense.

This has the effect of creating variability in the amount and frequency of charges to earnings.

The provision for loan losses and level of allowance for each period are dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in our market area.

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

We recorded a provision for loan losses of $1.7 million for the six months ended June 30, 2022 compared to $1.9 million for the same period in 2021.

We recorded net recoveries of $0.7 million for the six months ended June 30, 2022 compared to net charge offs of $0.1 million for the same period in 2021.

The ALL was $22.7 million, or 0.95% of total loans, at June 30, 2022 compared to $19.5 million, or 0.88% of total loans at June 30, 2021.

Noninterest Income.

Noninterest income is an important component of our total revenues.

A significant portion of our noninterest income is associated with service charges and income from the Bank’s subsidiaries, Ansay and UFS.

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

Noninterest income decreased $2.2 million to $10.8 million for the six months ended June 30, 2022 compared to $13.0 million for the same period in 2021.

Income from our investment in Ansay increased by 13.6%.

Income from our investment in UFS increased by 23.2% The added profitability of these two unconsolidated subsidiaries was offset by a significant reduction in net gains on sales of mortgage loans as the Company, and the banking industry as a whole, saw an extreme slowdown in residential mortgage lending due in part to a higher interest rate environment during the first half of 2022 compared to the first half of 2021.

This decrease was partially offset by higher loan servicing income, which includes the impact of valuation updates to the Company’s MSRs.

These valuation updates added $2.0 million to servicing income during the first half of 2022, compared to $0.6 million during the first half of 2021.

The major components of our noninterest income are listed below:

Six Months Ended June 30,

(In thousands)

Noninterest Income

Service charges

Income from Ansay

Income from UFS

Loan servicing income

Net gain on sales of mortgage loans

Net gain on sales and valuations of other real estate owned

Total noninterest income

Noninterest Expense.

Noninterest expense increased $1.3 million to $26.0 million for the six months ended June 30, 2022 compared to $24.7 million for the same period in 2021.

Occupancy expenses increased 6.9%, primarily the result of inflationary pressures.

Outside service fees increased $1.0 million, or 64.1%, primarily as a result of $1.1 million in costs associated with the pending acquisition of Denmark.

The major components of our noninterest expense are listed below:

Six Months Ended June 30,

(In thousands)

Noninterest Expense

Salaries, commissions, and employee benefits

6 unchanged sentences

Income Tax Expense.

We recorded a provision for income taxes of $3.4 million for the three months ended March 31, 2022 compared to a provision of $3.7 million for the same period during 2021, reflecting effective tax rates of 25.1% and 24.2%, respectively.

We recorded a provision for income taxes of $7.1 million for the six months ended June 30, 2022 compared to a provision of $7.3 million for the same period during 2021, reflecting effective tax rates of 24.5% and 24.2%, respectively.

7 unchanged sentences

Three Months Ended

March 31, 2022

March 31, 2021

June 30, 2022

June 30, 2021

Rate Earned/ Paid

4 unchanged sentences

Tax-exempt (available for sale)

Taxable (held to maturity)

Tax-exempt (held to maturity)

24 unchanged sentences

Net interest margin (4)

Annualized on a fully taxable equivalent basis calculated using a federal tax rate of 21% for the three months ended March 31, 2022 and 2021.

Annualized on a fully taxable equivalent basis calculated using a federal tax rate of 21% for the three months ended June 30, 2022 and 2021.

Nonaccrual loans are included in average amounts outstanding.

1 unchanged sentence

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

Six Months Ended

June 30, 2022

June 30, 2021

(dollars in thousands)

Interest-earning assets

Taxable (available for sale)

Tax-exempt (available for sale)

Taxable (held to maturity)

Tax-exempt (held to maturity)

Cash and due from banks

Total interest-earning assets

Non interest-earning assets

Allowance for loan losses

LIABILITIES AND SHAREHOLDERS’ EQUITY

Interest-bearing deposits

Checking accounts

Savings accounts

Money market accounts

Certificates of deposit

Brokered deposits

Total interest-bearing deposits

Other borrowed funds

Total interest-bearing liabilities

Non-interest bearing liabilities

Demand deposits

Other liabilities

Total liabilities

Shareholders’ equity

Total liabilities & shareholders' equity

Net interest income on a fully taxable equivalent basis

Less taxable equivalent adjustment

Net interest income

Net interest spread (3)

Net interest margin (4)

Annualized on a fully taxable equivalent basis calculated using a federal tax rate of 21% for the six months ended June 30, 2022 and 2021.

Nonaccrual loans are included in average amounts outstanding.

Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

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

Rate/Volume Analysis

2 unchanged sentences

(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 March 31, 2022

Three Months Ended June 30, 2022

Six Months Ended June 30, 2022

Compared with

Three Months Ended March 31, 2021

Compared with

Three Months Ended June 30, 2021

Six Months Ended June 30, 2021

Increase/(Decrease) Due to Change in

(dollars in thousands)

Interest income

1 unchanged sentence

Tax-exempt (AFS)

Taxable (HTM)

Tax-exempt (HTM)

13 unchanged sentences

Total Assets.

Total assets decreased $12.6 million, or 0.4%, to $2.92 billion at March 31, 2022, from $2.94 billion at December 31, 2021.

Total assets increased $23.5 million, or 0.8%, to $2.96 billion at June 30, 2022, from $2.94 billion at December 31, 2021.

Cash and Cash Equivalents.

Cash and cash equivalents decreased by $189.5 million to $107.4 million at March 31, 2022 from $296.9 million at December 31, 2021, the result of significant loan growth as well as investing approximately $100.0 million in one-year treasury notes during the first quarter of 2022.

Cash and cash equivalents decreased by $252.9 million to $44.0 million at June 30, 2022 from $296.9 million at December 31, 2021, the result of significant loan growth as well as investing approximately $100.0 million in one-year treasury notes during the first quarter of 2022.

Investment Securities.

The carrying value of total investment securities increased by $84.3 million to $302.9 million at March 31, 2022, from $218.6 million at December 31, 2021.

Net loans increased by $79.7 million, totaling $2.29 billion at March 31, 2022 compared to $2.21 billion at December 31, 2021.

The carrying value of total investment securities increased by $107.7 million to $326.3 million at June 30, 2022, from $218.6 million at December 31, 2021.

Net loans increased by $149.7 million, totaling $2.36 billion at June 30, 2022 compared to $2.22 billion at December 31, 2021.

Bank-Owned Life Insurance.

At March 31, 2022, our investment in bank-owned life insurance was $32.1 million, an increase of $0.2 million from $31.9 million at December 31, 2021.

Deposits increased $28.7 million, or 1.1%, to $2.56 billion at March 31, 2022 from $2.53 billion at December 31, 2021.

At March 31, 2022, borrowings consisted of advances from the FHLB of Chicago, as well as subordinated debt to other banks.

FHLB borrowings decreased to $7.7 million at March 31, 2022, from $8.0 million at December 31, 2021.

Subordinated debt owed to other banks totaled $17.5 million at March 31, 2022 and December 31, 2021.

At June 30, 2022, our investment in bank-owned life insurance was $32.3 million, an increase of $0.4 million from $31.9 million at December 31, 2021.

Deposits increased $73.0 million, or 2.9%, to $2.60 billion at June 30, 2022 from $2.53 billion at December 31, 2021.

At June 30, 2022, borrowings consisted of advances from the FHLB of Chicago, as well as subordinated debt to other banks.

FHLB borrowings decreased to $1.7 million at June 30, 2022, from $8.0 million at December 31, 2021.

Subordinated debt owed to other banks totaled $17.5 million at June 30, 2022 and December 31, 2021.

Stockholders’ Equity.

Total stockholders’ equity decreased $4.4 million, or 1.4%, to $318.3 million at March 31, 2022, from $322.7 million at December 31, 2021.

Strong earnings during the quarter were offset by valuation adjustments to the Bank’s available for sale investment portfolio, which is accounted for through the comprehensive income component of equity, due to significant movements in the interest rate environment.

Total stockholders’ equity decreased $8.5 million, or 2.6%, to $314.2 million at June 30, 2022, from $322.7 million at December 31, 2021.

Strong earnings during the first half of 2022 were offset by valuation adjustments to the Bank’s available for sale investment portfolio, which is accounted for through the comprehensive income component of equity, due to significant movements in the interest rate environment.

Further offsetting the strong earnings was $12.1 million in repurchases of its common stock by the Company.

Our lending activities are conducted principally in Wisconsin.

4 unchanged sentences

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 79.2% and 76.1% of our total assets as of March 31, 2022 and December 31, 2021, respectively.

Our loan portfolio is our most significant earning asset, comprising 80.7% and 76.1% of our total assets as of June 30, 2022 and December 31, 2021, 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 $81.2 million, or 3.6%, to $2.32 billion as of March 31, 2022 as compared to $2.24 billion as of December 31, 2021.

This increase during the first three months of 2022 has been comprised of a decrease of $0.9 million or 0.2% in commercial and industrial loans, an increase of $32.0 million or 5.6% in owner occupied commercial real estate loans, an increase of $13.4 million or 2.5% in non-owner occupied commercial real estate, an increase of $19.3 million or 14.6% in construction and development loans, an increase of $16.3 million or 2.9% in residential 1-4 family loans and an increase of $1.0 million or 3.2% in consumer and other loans.

The following table presents the balance and associated percentage of each major category in our loan portfolio at March 31, 2022, December 31, 2021, and March 31, 2021:

Loans increased $152.1 million, or 6.8%, to $2.39 billion as of June 30, 2022 as compared to $2.24 billion as of December 31, 2021.

This increase during the first six months of 2022 has been comprised of an increase of $28.6 million or 7.8% in commercial and industrial loans, an increase of $14.0 million or 2.4% in owner occupied commercial real estate loans, an increase of $38.0 million or 7.1% in non-owner occupied commercial real estate, an increase of $26.0 million or 19.7% in construction and development loans, an increase of $44.9 million or 7.9% in residential 1-4 family loans and an increase of $0.5 million or 0.9% 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, 2022, December 31, 2021, and June 30, 2021:

(dollars in thousands)

7 unchanged sentences

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 March 31, 2022 and December 31, 2021, total loans outstanding to such directors and officers and their associates were $75.3 million and $73.5 million, respectively.

During the three months ended March 31, 2022, $12.5 million of additions and $10.7 million of repayments were made to these loans.

At March 31, 2022 and December 31, 2021, 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 June 30, 2022 and December 31, 2021, total loans outstanding to such directors and officers and their associates were $78.3 million and $73.5 million, respectively.

During the six months ended June 30, 2022, $25.0 million of additions and $20.2 million of repayments were made to these loans.

At June 30, 2022 and December 31, 2021, 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 $365.2 million and $366.2 million at March 31, 2022 and December 31, 2021, respectively, and represented 16% of our total loans at those dates.

Our C&I portfolio totaled $394.7 million and $366.2 million at June 30, 2022 and December 31, 2021, respectively, and represented 16% of our total loans at those dates.

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.

4 unchanged sentences

Commercial Real Estate (CRE).

Our CRE loan portfolio totaled $1.17 billion and $1.11 billion at March 31, 2022 and December 31, 2021, respectively, and represented 50% of our total loans at those dates.

Our CRE loan portfolio totaled $1.16 billion and $1.11 billion at June 30, 2022 and December 31, 2021, respectively, and represented 49% and 50% 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 $151.8 million and $132.5 million at March 31, 2022 and December 31, 2021, respectively, and represented 7% and 6% of our total loans at those dates.

Our C&D loan portfolio totaled $158.5 million and $132.5 million at June 30, 2022 and December 31, 2021, respectively, and represented 7% and 6% 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 $588.2 million and $571.8 million at March 31, 2022 and December 31, 2021, respectively, and represented 25% and 26% of our total loans at those dates.

Residential 1 – 4 family loans held in portfolio amounted to $616.7 million and $571.8 million at June 30, 2022 and December 31, 2021, respectively, and represented 26% of our total loans at those dates.

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

4 unchanged sentences

We do not offer reverse mortgages nor do we offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on his loan, resulting in an increased principal balance during the life of the loan.

We also do not offer “subprime loans” (loans that are made with low down payments to borrowers with weakened

credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (defined as loans having less than full documentation).

We also do not offer “subprime loans” (loans that are made with low down payments to borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with

questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (defined as loans having less than full documentation).

Residential real estate loans are originated both for sale to the secondary market as well as for retention in the Bank’s loan portfolio.

1 unchanged sentence

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

We were servicing mortgage loans sold to others without recourse of approximately $715.6 million at March 31, 2022 and $705.5 million at December 31, 2021.

We were servicing mortgage loans sold to others without recourse of approximately $716.7 million at June 30, 2022 and $705.5 million at December 31, 2021.

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 $5.5 million and 5.0 million at March 31, 2022 and December 31, 2021, respectively.

The net balance of capitalized servicing rights amounted to $7.0 million and 5.0 million at June 30, 2022 and December 31, 2021, respectively.

Consumer Loans.

Our consumer loan portfolio totaled $33.1 million and $32.1 million at March 31, 2022 and December 31, 2021, respectively, and represented 1% of our total loans at those dates.

Our consumer loan portfolio totaled $35.5 million and $32.1 million at June 30, 2022 and December 31, 2021, respectively, and represented 1% of our total loans at those dates.

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

2 unchanged sentences

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 $21.5 million at March 31, 2022 and December 31, 2021, respectively, and are immaterial to the overall loan portfolio.

Our other loans totaled $18.6 million at June 30, 2022 and December 31, 2021, 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, fixed or variable rate of interest, and contractual terms to maturity at March 31, 2022.

The following tables summarize the dollar amount of loans maturing in our portfolio based on their loan type, fixed or variable rate of interest, and contractual terms to maturity at June 30, 2022.

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.

36 unchanged sentences

The composition of our nonperforming assets is as follows:

As of March 31,

As of June 30,

As of December 31,

As of March 31,

As of June 30,

(dollars in thousands)

29 unchanged sentences

ALL to total loans

At March 31, 2022 and December 31, 2021, impaired loans had specific reserves of $0.9 million and $0.8 million, respectively.

At June 30, 2022 and December 31, 2021, impaired loans had specific reserves of $0.9 million and $0.8 million, respectively.

Nonaccrual Loans

11 unchanged sentences

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 March 31, 2022 and December 31, 2021 the Company had specific reserves of $7,000 for TDRs, and none of them have subsequently defaulted.

As of June 30, 2022 and December 31, 2021 the Company had specific reserves of $7,000 for TDRs, and none of them have subsequently defaulted.

ALLOWANCE FOR LOAN LOSSES

18 unchanged sentences

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

Three months ended

Six months ended

(dollars in thousands)

33 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 March 31, 2022, deposit liabilities accounted for approximately 87.4% of our total liabilities and equity.

As of June 30, 2022, deposit liabilities accounted for approximately 87.9% 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 $2.56 billion and $2.53 billion as of March 31, 2022 and December 31, 2021, respectively.

Noninterest-bearing deposits at March 31, 2022 and December 31, 2021, were $798.3 million and $799.9 million, respectively, while interest-bearing deposits were $1.76 billion and $1.73 billion at March 31, 2022 and December 31, 2021, respectively.

At March 31, 2022, we had a total of $230.6 million in certificates of deposit, including $10.7 million of brokered deposits.

Total deposits were $2.60 billion and $2.53 billion as of June 30, 2022 and December 31, 2021, respectively.

Noninterest-bearing deposits at June 30, 2022 and December 31, 2021, were $819.9 million and $799.9 million, respectively, while interest-bearing deposits were $1.78 billion and $1.73 billion at June 30, 2022 and December 31, 2021, respectively.

At June 30, 2022, we had a total of $246.1 million in certificates of deposit, including $6.7 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:

Three months ended

March 31, 2022

Six months ended

June 30, 2022

December 31, 2021

March 31, 2021

June 30, 2021

(dollars in thousands)

5 unchanged sentences

Brokered deposits

The following table provides information on maturities of certificates of deposits which exceed FDIC insurance limits of $250,000 as of March 31,2022:

The following table provides information on maturities of certificates of deposits which exceed FDIC insurance limits of $250,000 as of June 30,2022:

Time Deposits over FDIC

12 unchanged sentences

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

Three months ended

Six months ended

(dollars in thousands)

March 31, 2022

June 30, 2022

December 31, 2021

March 31, 2021

June 30, 2021

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 $7.7 million of advances outstanding from the FHLB at March 31, 2022, and $8.0 million as of December 31, 2021.

The total loans pledged as collateral were $960.9 million at March 31, 2022 and $915.5 million at December 31, 2021.

There were no outstanding letters of credit from the FHLB at March 31, 2022 and December 31, 2021.

There were $1.7 million of advances outstanding from the FHLB at June 30, 2022, and $8.0 million as of December 31, 2021.

The total loans pledged as collateral were $581.1 million at June 30, 2022 and $915.5 million at December 31, 2021.

There were no outstanding letters of credit from the FHLB at June 30, 2022 and December 31, 2021.

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

Three months ended

Six months ended

(dollars in thousands)

March 31, 2022

June 30, 2022

December 31, 2021

March 31, 2021

June 30, 2021

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, 2022.

There were no outstanding balances on this note at March 31, 2022.

There were no outstanding balances on this note at June 30, 2022.

Any future borrowings will required monthly payments of interest at a variable rate, and will be due in full on May 15, 2024.

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

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

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

As of June 30, 2022 and December 31, 2021, 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.

7 unchanged sentences

We manage our investment portfolio to provide an adequate level of liquidity as well as to maintain neutral interest rate-sensitive positions, while earning an adequate level of investment income without taking undue or excessive risk.

Securities available for sale consist of obligations of states and political subdivision, mortgage-backed securities, and corporate notes.

Securities available for sale consist of U.S.

treasury securities, obligations of states and political subdivision, mortgage-backed securities, and corporate notes.

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

The fair value of securities available for sale totaled $297.1 million and included gross unrealized gains of $1.6 million and gross unrealized losses of $7.9 at March 31, 2022.

The fair value of securities available for sale totaled $292.4 million and included gross unrealized gains of $0.6 million and gross unrealized losses of $17.1 at June 30, 2022.

At December 31, 2021, the fair value of securities available for sale totaled $212.7 million and included gross unrealized gains of $5.6 million and gross unrealized losses of $0.7 million.

Securities classified as held to maturity consist of obligations of states and political subdivisions.

Securities classified as held to maturity consist of U.S.

treasury securities and obligations of states and political subdivisions.

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

Securities held to maturity totaled $5.9 million at March 31, 2022 and December 31, 2021, respectively.

The Company had no sales of securities during the three months ended March 31, 2022 or March 31, 2021.

The following tables set forth the composition and maturities of investment securities as of March 31, 2022 and December 31, 2021.

Securities held to maturity totaled $33.3 million at June 30, 2022 and $5.9 million at December 31, 2021.

The Company had no recognized gains or losses on sales of securities during the six months ended June 30, 2022 or June 30, 2021.

The following tables set forth the composition and maturities of investment securities as of June 30, 2022 and December 31, 2021.

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.

5 unchanged sentences

After Ten Years

At March 31, 2022

At June 30, 2022

(dollars in thousands)

9 unchanged sentences

Held to maturity securities

Treasury securities

Obligations of states and political subdivisions

Total held to maturity securities

After One, But

17 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 March 31, 2022 and December 31, 2021, respectively.

Weighted Average Yield is shown on a fully taxable equivalent basis using a federal tax rate of 21% at June 30, 2022 and December 31, 2021, 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 March 31, 2022, 117 debt securities had gross unrealized losses, with an aggregate depreciation of 3.2% from our amortized cost basis.

As of June 30, 2022, 170 debt securities had gross unrealized losses, with an aggregate depreciation of 6.1% from our amortized cost basis.

The largest unrealized loss percentage of any single security was 22.5% (or $0.2 million) of its amortized cost.

24 unchanged sentences

Capital Adequacy.

Total stockholders’ equity was $318.3 million at March 31, 2022 compared to $322.7 million at December 31, 2021.

Total stockholders’ equity was $314.2 million at June 30, 2022 compared to $322.7 million at December 31, 2021.

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 December 31, 2018, and brokered deposits are not restricted.

The Bank was well capitalized at June 30, 2022, 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 March 31, 2022

At June 30, 2022

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 March 31, 2022 and December 31, 2021, 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 June 30, 2022 and December 31, 2021, 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 March 31, 2022

Amounts of Commitments Expiring - By Period as of June 30, 2022

Less Than One

15 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