Item 1. Financial Statements
ITEM 1. Financial Statements Continued:
BANK FIRST CORPORATION
Consolidated Statements of Cash Flows (Continued)
(In thousands) (Unaudited)
Nine Months Ended September 30,
2023
2022
Cash flows from financing activities, net of effects of business combination:
Net increase (decrease) in deposits
$
( 194,088 )
$
5,020
Net decrease in securities sold under repurchase agreements
( 80,005 )
( 19,159 )
Proceeds from advances of notes payable
121,700
3,122,700
Repayment of notes payable
( 92,507 )
( 3,128,950 )
Proceeds from issuance of subordinated notes
—
6,000
Dividends paid
( 8,850 )
( 5,567 )
Proceeds from sales of common stock
144
85
Repurchase of common stock
( 9,105 )
( 14,313 )
Net cash used in financing activities
( 262,711 )
( 34,184 )
Net decrease in cash and cash equivalents
( 43,575 )
( 153,419 )
Cash and cash equivalents at beginning of period
119,351
296,860
Cash and cash equivalents at end of period
$
75,776
$
143,441
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
$
29,487
$
6,985
Income taxes
12,606
9,835
Supplemental schedule of noncash activities:
MSR resulting from sale of loans
597
658
Amortization of unrealized holding gains on securities transferred from available for sale to held to maturity recognized in other comprehensive income, net of tax
—
( 1 )
Change in unrealized gains and losses on investment securities available for sale, net of tax
( 4,246 )
( 22,347 )
Acquisition:
Fair value of assets acquired
$
615,105
$
685,840
Fair value of liabilities assumed
549,564
612,700
Net assets acquired
$
65,541
$
73,140
Common stock issued in acquisition
$
115,079
$
124,771
See accompanying notes to consolidated financial statements.
8
Table of Contents
BANK FIRST CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
NOTE 1 – BASIS OF PRESENTATION
Bank First Corporation (the “Company”) provides a variety of financial services to individual and corporate customers through its wholly-owned subsidiary, Bank First, N.A. (the “Bank”). The Bank operates as a full-service financial institution with a primary market area including, but not limited to, the counties in which the Bank’s branches are located. The Bank has twenty-six locations located in Manitowoc, Outagamie, Brown, Winnebago, Sheboygan, Shawano, Waupaca, Ozaukee, Monroe, Fond du Lac, Waushara, Dane, Columbia and Jefferson counties in Wisconsin. The Company and Bank are subject to the regulations of certain federal agencies and undergo periodic examinations by those regulatory authorities.
These interim unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures required by GAAP have been omitted or abbreviated. These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (“Annual Report”).
The unaudited consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The results for interim periods are not necessarily indicative of results for a full year.
Critical Accounting Policies and Estimates
Preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, the allowance for credit losses on securities and loans, valuation of loans in acquisition transactions, valuation of mortgage servicing rights, useful lives for depreciation and amortization, fair value of financial instruments, valuation of deferred tax assets, uncertain income tax positions and contingencies. Estimates that are particularly susceptible to significant change for the Company include the determination of the allowance for credit losses, the determination of the valuation of mortgage servicing rights, the determination and assessment of deferred tax assets and liabilities, and the valuation of loans acquired in acquisition transactions; therefore, these are critical accounting policies. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: external market factors such as market interest rates and employment rates, changes to operating policies and procedures, changes in applicable banking or tax regulations, and changes to deferred tax estimates. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period presented.
There have been no material changes or developments with respect to the assumptions or methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as previously disclosed in the Company’s Annual Report, other than what is disclosed in “Updates to Significant Accounting Policies” noted below.
Updates to Significant Accounting Policies
On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), utilizing the modified retrospective method for financial assets measured at amortized cost. Results for the periods beginning after January 1, 2023 are presented under ASU 2016-13 while prior period amounts are reported in accordance with the previously applicable accounting standards. The Company recorded a reduction to retained earnings of approximately $ 10.1 million upon adoption of ASU 2016-13. The transition adjustment included an increase to the ACL-Loans of $ 11.0 million and an increase in the Allowance for Credit Losses – Unfunded Commitments (“ACL – Unfunded Commitments”) of $ 3.3 million, offset by applicable deferred taxes.
9
Table of Contents
The Company adopted ASU 2016-13 using the prospective transition approach for financial assets considered purchased credit deteriorated (“PCD”) that were previously classified as purchase credit impaired (“PCI”). The amortized cost of the PCD assets were adjusted to reflect the addition of $ 0.3 million to the allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost) will be accreted into interest income at the effective interest rate over the remaining life of the assets.
The following table presents the changes in the allowance for credit losses required as a result of this adoption:
January 1, 2023 As
December 31, 2022
Reported After ASU
Pre-ASU 2016-13
Impact of
Allowance for Credit Losses
2016-13 Adoption
Adoption
2016-13 Adoption
Assets
Loans held for investments
Commercial/industrial
$
5,930
$
4,071
$
1,859
Commercial real estate - owner occupied
7,186
5,204
1,982
Commercial real estate - non-owner occupied
7,319
5,405
1,914
Construction and development
3,655
1,592
2,063
Residential 1-4 family
8,511
5,944
2,567
Consumer
934
314
620
Other
117
150
( 33 )
Loans held for investments, total
33,652
22,680
10,972
Liabilities
Unfunded commitments
3,264
-
3,264
Total
$
36,916
$
22,680
$
14,236
As a result of adopting ASU 2016-13, certain of the Company’s accounting policies were updated as follows:
Securities: Securities are classified as held to maturity or available for sale at the time of purchase. Investment securities classified as held to maturity, which management has the intent and ability to hold to maturity, are reported at amortized cost. Investment securities classified as available for sale, which management has the intent and ability to hold for an indefinite period of time, but not necessarily to maturity, are carried at fair value, with unrealized gains and losses, net of related deferred income taxes, included in stockholders’ equity as a separate component of other comprehensive income.
The net carrying value of debt securities classified as held to maturity or available for sale is adjusted for amortization of premiums and accretion of discounts utilizing the effective interest method over the expected estimated maturity. Such amortization and accretion is included as an adjustment to interest income from securities. Interest and dividends are included in interest income from securities.
Transfers of debt securities into the held to maturity classification from the available for sale classification are made at fair value as of the date of transfer. The unrealized holding gain or loss as of the date of transfer is retained in other comprehensive income and in the carrying value of the held to maturity securities, establishing the amortized cost of the security. These unrealized holding gains and losses as of the date of transfer are amortized or accreted over the remaining life of the security.
Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings.
Prior to January 1, 2023, unrealized gains or losses considered temporary and the noncredit portion of unrealized losses deemed other-than-temporary were reported as an increase or decrease in accumulated other comprehensive income. The credit related portion of unrealized losses deemed other-than-temporary were recorded in current period earnings.
Subsequent to January 1, 2023, the Bank evaluates securities for potential credit losses at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. As part of such monitoring, the credit quality of individual securities and their issuers are assessed. If, based on information available such as the decline in the credit worthiness of the issuer, external market ratings or the anticipated or realized elimination of associated dividends, potential credit losses are identified on securities an allowance for credit losses would be established.
10
Table of Contents
Loans and Related Interest Income – Originated : Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are carried at their amortized cost basis, which is the unpaid principal balance outstanding, net of deferred loan fees and costs and any direct principal charge-offs. The Company made an accounting policy election to exclude accrued interest from the amortized cost basis of loans and report such accrued interest as part of other assets on the consolidated balance sheets.
Interest income is accrued on the unpaid principal balance using the simple interest method. The accrual of interest income on loans is discontinued when, in the opinion of management, there is reasonable doubt as to the borrower’s ability to meet payment of interest or principal when due. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal, though may be placed in such status earlier. Loans past due 90 days or more may continue on accrual only when they are well secured and/or in process of collection or renewal. When interest accrual is discontinued, all previously accrued but uncollected interest is reversed against current period interest income. Except in very limited circumstances, cash collections on nonaccrual loans are credited to the loan receivable balance and no interest income is recognized on those loans until the principal balance is paid in full. Accrual of interest may be resumed when the customer is current on all principal and interest payments and has been paying on a timely basis for a sustained period of time. See Note 5 for additional information and disclosures on loans.
Loans and Related Interest Income – Acquired: Loans purchased in acquisition transactions are acquired loans, and are recorded at their estimated fair value at the acquisition date.
Prior to January 1, 2023, as described in further detail in the Company’s Annual Report, the Company initially classified acquired loans as either PCI loans (i.e., loans that reflect credit deterioration since origination and it is probable at acquisition that the Company will be unable to collect all contractually required payments) or purchased non-impaired loans (i.e., “performing acquired loans”). The Company estimated the fair value of PCI loans based on the amount and timing of expected principal, interest and other cash flows for each loan. The excess of the loan’s contractual principal and interest payments over all cash flows expected to be collected at acquisition was considered an amount that should not be accreted. These credit discounts (“nonaccretable marks”) were included in the determination of the initial fair value for acquired loans; therefore, no allowance for credit losses was recorded at the acquisition date. Differences between the estimated fair values and expected cash flows of acquired loans at the acquisition date that were not credit-based (“accretable marks”) were subsequently accreted to interest income over the estimated life of the loans. Subsequent to the acquisition date for PCI loans, increases in cash flows over those expected at the acquisition date resulted in a move of the discount from nonaccretable to accretable, while decreases in expected cash flows after the acquisition date were recognized through the provision for credit losses.
Subsequent to January 1, 2023, acquired loans that have evidence of more-than-insignificant deterioration in credit quality since origination are considered PCD loans. At acquisition, an estimate of expected credit losses is made for PCD loans. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair value to establish the initial amortized cost basis of the PCD loans. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors, resulting in a discount or premium that is amortized to interest income. For acquired loans not deemed PCD loans at acquisition, the difference between the initial fair value mark and the unpaid principal balance are recognized in interest income over the estimated life of the loans. In addition, an initial allowance for expected credit losses is estimated and recorded as provision expense at the acquisition date. The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated loans. See Note 5 for additional information and disclosures on loans.
Allowance for Credit Losses - Loans: The ACL-Loans represents management’s estimate of expected credit losses in the Company’s loan portfolio at the balance sheet date. The Company estimates the ACL-Loans based on the amortized costs basis of the underlying loan and has made an accounting policy election to exclude accrued interest from the loan’s amortized cost basis and the related measurement of the ACL-Loans. Estimating the amount of the ACL-Loans is a function of a number of factors, including but not limited to changes in the loan portfolio, net charge-offs, trends in past due and nonaccrual loans, and the level of potential problem loans, all of which may be susceptible to significant change.
Prior to January 1, 2023, as described in further detail in the Company’s Annual Report, the Company used an incurred loss impairment model. This methodology assessed the overall appropriateness of the allowance for credit losses and included allocations for specifically identified impaired loans and loss factors for all remaining loans, with a component primarily based on historical loss rates and another component primarily based on other qualitative factors. Impaired loans were individually assessed and measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market
11
Table of Contents
price or the fair value of the collateral if the loan was collateral dependent. Loans that were determined not to be impaired were collectively evaluated for impairment, stratified by type and allocated loss ranges based on the Company’s actual historical loss ratios for each strata, and adjustments were also provided for certain environmental and other qualitative factors.
Subsequent to January 1, 2023, the Company uses a current expected loss model (“CECL”). This methodology also considers historical loss rates and other qualitative adjustments, as well as a new forward-looking component that considers reasonable and supportable forecasts over the expected life of each loan. To develop the ACL-Loans estimate under the current expected loss model, the Company segments the loan portfolio into loan pools based on loan type and similar credit risk elements; performs an individual evaluation of PCD loans; calculates the historical loss rates for the segmented loan pools; applies the loss rates over the calculated life of the pooled loans; adjusts for forecasted macro-level economic conditions; and determines qualitative adjustments based on factors and conditions unique to the Bank's portfolio. The Company further individually evaluates certain impaired loans based on the amount and timing of estimated future cash flows and collateral values and establishes specific reserves when these estimated future cash flows or collateral values do not justify the carrying value of the loan.
Allowance for Credit Losses - Unfunded Commitments : In addition to the ACL-Loans, the Company has established an allowance for unfunded commitments, included in other liabilities on the consolidated balance sheets, representing expected credit losses over the contractual period for which the Company is exposed to credit risk resulting from a contractual obligation to extend credit. The ACL-Unfunded Commitments is maintained at a level that management believes is sufficient to absorb losses arising from unfunded loan commitments, and is determined quarterly based on methodology similar to the methodology for determining the ACL-Loans.
Other Recently Implemented Accounting Standards
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures . This ASU eliminated the accounting guidance for TDRs by creditors and enhanced the disclosure requirements for loan modifications to borrowers experiencing financial difficulty. The ASU also requires public business entities to expand the vintage disclosures to include gross charge-offs by year of origination. The updated guidance was effective for fiscal years beginning after December 15, 2022. Adoption of this ASU did not have a material impact on the Company’s consolidated financial statements; however, it resulted in new disclosures. See Note 5 for the new disclosures.
Recently Issued Not Yet Effective Accounting Standards
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying GAAP to contracts hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In December 2022, the FASB issued ASU 2022-06, Reference rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which defers the sunset date of the original guidance from December 31, 2022 to December 31, 2024. The Company has been diligent in responding to reference rate reform and does not anticipate a significant impact to its financial statements as a result.
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements. This ASU modifies the dis closure or presentation requirements of a variety of Topics in the Codification. Certain of the amendments represent clarifications to or technical corrections of the current requirements. The effective date for each amendment will be the date on which the Security and Exchange Commission’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. If, by June 30, 2027, the Securities and Exchange Commission has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the related amendment will be removed from the Codification and will not become effective for any entity. The Company does not anticipate a significant impact to its financial statement disclosures as a result of this ASU.
NOTE 2 – ACQUISITIONS
On February 10, 2023, the Company completed a merger with Hometown Bancorp, Ltd. (“Hometown”), a bank holding company headquartered in Fond du Lac, Wisconsin, pursuant to the Agreement and Plan of Bank Merger (“Merger Agreement”), dated as of July 25, 2022 by and among the Company and Hometown, whereby Hometown merged with and into the Company, and Hometown Bank, Hometown’s wholly-owned banking subsidiary, merged with and into the Bank. Hometown’s principal activity was the
12
Table of Contents
ownership and operation of Hometown Bank, a state-chartered banking institution that operated ten ( 10 ) branches in Wisconsin at the time of closing. The merger consideration totaled approximately $ 130.5 million.
Pursuant to the terms of the Merger Agreement, Hometown shareholders could elect to receive either 0.3962 shares of the Company’s common stock or $ 29.16 in cash for each outstanding share of Hometown common stock, subject to a maximum of 30 % cash consideration in total, with cash paid in lieu of any remaining fractional share. Company stock issued totaled 1,450,272 shares valued at approximately $ 115.1 million, with cash of $ 15.4 million comprising the remainder of merger consideration.
The fair value of the assets acquired and liabilities assumed on February 10, 2023 was as follows:
As Recorded by
Fair Value
As Recorded by
Hometown
Adjustments
the Company
Cash, cash equivalents and securities
$
174,582
$
( 1,010 )
$
173,572
Other investments
1,195
—
1,195
Loans, net
406,168
( 10,367 )
395,801
Premises and equipment, net
7,577
( 1,109 )
6,468
Core deposit intangible
405
16,085
16,490
Other assets
28,011
( 6,432 )
21,579
Total assets acquired
$
617,938
$
( 2,833 )
$
615,105
Deposits
$
532,165
$
209
$
532,374
Other borrowings
5,000
( 331 )
4,669
Junior subordinated debentures
12,372
( 1,464 )
10,908
Other liabilities
469
1,144
1,613
Total liabilities assumed
$
550,006
$
( 442 )
$
549,564
Excess of assets acquired over liabilities assumed
$
67,932
$
( 2,391 )
$
65,541
Less: purchase price
130,452
Goodwill
64,911
Refinement to fair value estimates (1)
( 30 )
Goodwill (after refinement)
$
64,881
(1) Refinement consists of adjustments to the initial fair value estimates of other assets and liabilities.
The Company purchased loans through the acquisition of Hometown for which there was, at the date of acquisition, more than insignificant deterioration of credit quality since origination (PCD Loans). The carrying amount of these loans at acquisition was as follows:
February 10, 2023
Purchase price of PCD loans at acquisition
$
30,276
Allowance for credit losses on PCD loans at acquisition
5,534
Par value of PCD acquired loans at acquisition
$
35,810
The Company accounted for this transaction under the acquisition method of accounting, and thus, the financial position and results of operations of Hometown prior to the consummation date was not included in the accompanying consolidated financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective fair values at the date of acquisition. The Company determined the fair value of core deposit intangibles, securities, premises and equipment, loans, other assets and liabilities and deposits with the assistance of third-party valuations, appraisals and third-party advisors. The estimated fair values will be subject to refinement for up to one year after deal consummation as additional information becomes available relative to the closing date fair values.
For more information concerning the Company’s acquisitions, see “Note 2 – Acquisition” in the Company’s audited consolidated financial statements included in the Company’s Annual Report.
13
Table of Contents
NOTE 3 – EARNINGS PER SHARE
The two-class method is used in the calculation of basic and diluted earnings per share. Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings. There were no anti-dilutive stock options for the nine months ended September 30, 2023 or 2022.
The following table presents the factors used in the earnings per share computations for the period indicated:
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands, except per share data)
2023
2022
2023
2022
Basic
Net income available to common shareholders
$
14,804
$
10,533
$
39,616
$
32,370
Less: Earnings allocated to participating securities
( 83 )
( 76 )
( 228 )
( 247 )
Net income allocated to common shareholders
$
14,721
$
10,457
$
39,388
$
32,123
Weighted average common shares outstanding including participating securities
10,388,909
8,265,186
10,186,107
7,796,259
Less: Participating securities (1)
( 58,130 )
( 59,272 )
( 58,399 )
( 59,170 )
Average shares
10,330,779
8,205,914
10,127,708
7,737,089
Basic earnings per common shares
$
1.43
$
1.26
$
3.89
$
4.15
Diluted
Net income available to common shareholders
$
14,804
$
10,533
$
39,616
$
32,370
Weighted average common shares outstanding for basic earnings per common share
10,330,779
8,205,914
10,127,708
7,737,089
Add: Dilutive effects of stock based compensation awards
22,842
22,283
23,282
20,637
Average shares and dilutive potential common shares
10,353,621
8,228,197
10,150,990
7,757,726
Diluted earnings per common share
$
1.43
$
1.26
$
3.89
$
4.15
(1) Participating securities are restricted stock awards whereby the stock certificates have been issued, are included in outstanding shares, receive dividends and can be voted, but have not vested.
14
Table of Contents
NOTE 4 – SECURITIES
The following is a summary of available for sale securities:
Gross
Gross
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
September 30, 2023
U.S. Treasury securities
$
49,659
$
—
$
( 7,824 )
$
41,835
Obligations of U.S. Government sponsored agencies
31,888
—
( 4,108 )
27,780
Obligations of states and political subdivisions
63,941
—
( 9,820 )
54,121
Mortgage-backed securities
38,692
—
( 2,852 )
35,840
Corporate notes
20,682
—
( 1,944 )
18,738
Certificates of deposit
740
—
( 8 )
732
Total available for sale securities
$
205,602
$
—
$
( 26,556 )
$
179,046
December 31, 2022
U.S. Treasury securities
$
149,614
$
—
$
( 7,517 )
$
142,097
Obligations of U.S. Government sponsored agencies
24,935
—
( 3,186 )
21,749
Obligations of states and political subdivisions
90,701
88
( 7,603 )
83,186
Mortgage-backed securities
38,701
—
( 2,064 )
36,637
Corporate notes
21,005
381
( 1,392 )
19,994
Certificates of deposit
1,004
—
( 30 )
974
Total available for sale securities
$
325,960
$
469
$
( 21,792 )
$
304,637
The following is a summary of held to maturity securities:
Gross
Gross
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
September 30, 2023
U.S. Treasury securities
$
73,002
$
—
$
( 2,264 )
$
70,738
Obligations of states and political subdivisions
4,152
—
( 2 )
4,150
Total held to maturity securities
$
77,154
$
—
$
( 2,266 )
$
74,888
December 31, 2022
U.S. Treasury securities
$
39,902
$
115
$
( 1,440 )
$
38,577
Obligations of states and political subdivisions
5,195
—
( 2 )
5,193
Total held to maturity securities
$
45,097
$
115
$
( 1,442 )
$
43,770
15
Table of Contents
The following table shows the fair value and gross unrealized losses of securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
Less Than 12 Months
Greater Than 12 Months
Total
Number
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
of
Value
Losses
Value
Losses
Value
Losses
Securities
September 30, 2023 - Available for Sale
U.S. Treasury securities
$
—
$
—
$
41,835
$
( 7,824 )
$
41,835
$
( 7,824 )
9
Obligations of U.S. Government sponsored agencies
8,622
( 355 )
19,158
( 3,753 )
27,780
( 4,108 )
27
Obligations of states and political subdivisions
16,359
( 894 )
37,762
( 8,926 )
54,121
( 9,820 )
83
Mortgage-backed securities
7,149
( 310 )
28,691
( 2,542 )
35,840
( 2,852 )
114
Corporate notes
4,850
( 142 )
12,268
( 1,802 )
17,118
( 1,944 )
9
Certificate of Deposits
—
—
732
( 8 )
732
( 8 )
3
Totals
$
36,980
$
( 1,701 )
$
140,446
$
( 24,855 )
$
177,426
$
( 26,556 )
245
September 30, 2023 - Held to Maturity
U.S. Treasury securities
$
36,117
$
( 694 )
$
34,621
$
( 1,570 )
$
70,738
$
( 2,264 )
51
Obligations of states and political subdivisions
—
—
218
( 2 )
218
( 2 )
1
Totals
$
36,117
$
( 694 )
$
34,839
$
( 1,572 )
$
70,956
$
( 2,266 )
52
December 31, 2022 - Available for Sale
U.S. Treasury securities
$
99,433
$
( 559 )
$
42,664
$
( 6,958 )
$
142,097
$
( 7,517 )
12
Obligations of U.S. Government sponsored agencies
6,735
( 652 )
15,014
( 2,534 )
21,749
( 3,186 )
16
Obligations of states and political subdivisions
50,839
( 2,650 )
15,933
( 4,953 )
66,772
( 7,603 )
103
Mortgage-backed securities
35,731
( 1,993 )
879
( 71 )
36,610
( 2,064 )
107
Corporate notes
9,701
( 920 )
3,080
( 472 )
12,781
( 1,392 )
8
Certificate of Deposits
974
( 30 )
—
—
974
( 30 )
4
Totals
$
203,413
$
( 6,804 )
$
77,570
$
( 14,988 )
$
280,983
$
( 21,792 )
250
December 31, 2022 - Held to Maturity
U.S. Treasury securities
$
29,464
$
( 1,306 )
$
4,868
$
( 134 )
$
34,332
$
( 1,440 )
15
Obligations of states and political subdivisions
417
( 2 )
—
—
417
( 2 )
2
Totals
$
29,881
$
( 1,308 )
$
4,868
$
( 134 )
$
34,749
$
( 1,442 )
17
As of September 30, 2023, no allowance for credit losses has been recognized on available for sale securities in an unrealized loss position as the Company does not believe any of the debt securities are credit impaired. This is based on the Company’s analysis of the risk characteristics, including credit ratings, and other qualitative factors related to these securities. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. As of September 30, 2023, the Company did not intend to sell these securities and it was more likely than not that the Company would not be required to sell the debt securities before recovery of their amortized cost, which may be at maturity. The unrealized losses have occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration.
Furthermore, based on its analysis the Company has determined that held to maturity securities have zero expected credit losses. U.S. Treasury securities have the full faith and credit backing of the United States Government and the amount of Obligations of states and political subdivisions in an unrealized loss position at September 30, 2023 are not material to the financial statements.
16
Table of Contents
The following is a summary of amortized cost and estimated fair value of securities by contractual maturity as of September 30, 2023. Contractual maturities will differ from expected maturities for mortgage-backed securities because borrowers may have the right to call or prepay obligations without penalties.
Available for Sale
Held to Maturity
Amortized
Estimated
Amortized
Estimated
Cost
Fair Value
Cost
Fair Value
Due in one year or less
$
6,704
$
6,548
$
15,819
$
15,594
Due after one year through 5 years
31,059
28,060
56,263
54,356
Due after 5 years through ten years
74,846
64,319
5,072
4,938
Due after 10 years
54,301
44,279
—
—
Subtotal
166,910
143,206
77,154
74,888
Mortgage-backed securities
38,692
35,840
—
—
Total
$
205,602
$
179,046
$
77,154
$
74,888
As of September 30, 2023 and December 31, 2022, the carrying values of securities pledged to secure public deposits, securities sold under repurchase agreements, and for other purposes required or permitted by law were approximately $ 148.4 million and $ 226.9 million, respectively.
Sales of securities available for sale produced $ 34.2 million in proceeds, $ 0.1 million in gross gains and $ 0.2 million in gross losses for the nine months ended September 30, 2023. There were no sales of securities during the nine months ended September 30, 2022.
NOTE 5 – LOANS, ALLOWANCE FOR CREDIT LOSSES, AND CREDIT QUALITY
The following table presents total loans by portfolio segment and class of loan as of September 30, 2023 and December 31, 2022:
2023
2022
Commercial/industrial
$
531,906
$
492,563
Commercial real estate - owner occupied
898,141
717,401
Commercial real estate - non-owner occupied
785,400
681,783
Construction and development
197,927
200,022
Residential 1‑4 family
878,860
739,339
Consumer
50,527
44,796
Other
14,821
18,905
Subtotals
3,357,582
2,894,809
ACL - Loans
( 43,404 )
( 22,680 )
Loans, net of ACL - Loans
3,314,178
2,872,129
Deferred loan fees, net
( 2,033 )
( 831 )
Loans, net
$
3,312,145
$
2,871,298
17
Table of Contents
The ACL - Loans is based on the Company’s evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay a loan, the estimated value of any underlying collateral, composition of the loan portfolio and other relevant factors. Loans with similar risk characteristics are evaluated in pools and, depending on the nature of each identified pool, the Company utilizes a discounted cash flow (“DCF”), probability of default / loss given default (“PD/LGD”) or remaining life method. The historical loss experience estimate by pool is then adjusted by forecast factors that are quantitatively related to the Company’s historical credit loss experience, such as national unemployment rates, gross domestic product and indexes which are indicative of the value of underlying collateral. Losses are forecasted over the expected life of the loan, first by predicting over a period of time determined to be reasonable and supportable (currently four calendar quarters), and at the end of the reasonable and supportable period reverting to long term historical averages. The reasonable and supportable period and reversion period are re-evaluated each quarter by the Company and are dependent on the current economic environment among other factors. The expected credit losses for each loan pool are then adjusted for changes in qualitative factors not inherently considered in the quantitative analyses. The qualitative adjustments either increase or decrease the quantitative model estimation. The Company considers factors that are relevant within the qualitative framework which include the following: lending policy, changes in nature and volume of loans, staff experience, changes in volume and trends of problem loans, concentration risk, trends in underlying collateral values, external factors, quality of loan review system and other economic conditions. Expected credit losses for loans that no longer share similar risk characteristics with the collectively evaluated pools are excluded from the collective evaluation and estimated on an individual basis. Individual evaluations are performed for nonaccrual loans, loans rated substandard, and modified loans (previously classified as TDRs). Specific allocations of the ACL for credit losses on individually evaluated loans are estimated on one of several methods, including the estimated fair value of the underlying collateral, observable market value of similar debt or the present value of expected cash flows.
A summary of the activity in the ACL - Loans by loan type for the nine-months ended September 30, 2023 is summarized as follows:
Commercial
Commercial
Real Estate -
Real Estate -
Construction
Commercial /
Owner
Non - Owner
and
Residential
Industrial
Occupied
Occupied
Development
1-4 Family
Consumer
Other
Total
ACL - Loans - January 1, 2023
$
4,071
$
5,204
$
5,405
$
1,592
$
5,944
$
314
$
150
$
22,680
Adoption of CECL
1,859
1,982
1,914
2,063
2,567
620
( 33 )
10,972
ACL - Loans on PCD loans acquired
1,082
4,424
—
—
28
—
—
5,534
Charge-offs
—
—
—
—
—
( 1 )
( 69 )
( 70 )
Recoveries
5
70
—
—
104
4
13
196
Provision
538
( 220 )
1,245
( 87 )
2,509
70
37
4,092
ACL - Loans - September 30, 2023
$
7,555
$
11,460
$
8,564
$
3,568
$
11,152
$
1,007
$
98
$
43,404
A summary of the activity in the allowance for loan losses (“ALL”) by loan type for the nine-months ended September 30, 2022 is as follows:
Commercial
Commercial
Real Estate -
Real Estate -
Construction
Commercial /
Owner
Non - Owner
and
Residential
Industrial
Occupied
Occupied
Development
1-4 Family
Consumer
Other
Total
ALL - January 1, 2022
$
3,699
$
5,633
$
5,151
$
984
$
4,445
$
224
$
179
$
20,315
Charge-offs
—
—
—
—
( 39 )
( 17 )
( 27 )
( 83 )
Recoveries
455
74
360
152
6
2
64
1,113
Provision
134
( 643 )
365
507
1,312
90
( 65 )
1,700
ALL September 30, 2022
4,288
5,064
5,876
1,643
5,724
299
151
23,045
ALL ending balance individually evaluated for impairment
150
—
775
—
—
—
—
925
ALL ending balance collectively evaluated for impairment
$
4,138
$
5,064
$
5,101
$
1,643
$
5,724
$
299
$
151
$
22,120
Loans outstanding - September 30, 2022
$
486,839
$
723,964
$
668,505
$
209,619
$
706,794
$
43,953
$
19,178
$
2,858,852
Loans ending balance individually evaluated for impairment
487
2,541
1,396
—
211
—
—
4,635
Loans ending balance collectively evaluated for impairment
$
486,352
$
721,423
$
667,109
$
209,619
$
706,583
$
43,953
$
19,178
$
2,854,217
In addition to the ACL-Loans, the Company has established an ACL-Unfunded Commitments, classified in other liabilities on the consolidated balance sheets. This allowance is maintained to absorb losses arising from unfunded loan commitments, and is determined quarterly based on methodology similar to the methodology for determining the ACL-Loans. The ACL - Unfunded Commitments was $ 3.5 million at September 30, 2023. See Note 10 for further information on commitments.
18
Table of Contents
The provision for credit losses is determined by the Company as the amount to be added to the ACL loss accounts for various types of financial instruments including loans, investment securities, and off-balance sheet credit exposures after net charge-offs have been deducted to bring the ACL to a level that, in management’s judgment, is necessary to absorb expected credit losses over the lives of the respective financial instruments. The following table presents the components of the provision for credit losses.
Nine Months Ended
Year Ended
September 30, 2023
September 30, 2022
December 31, 2022
Provision for credit losses on:
Loans
$
4,092
$
1,700
$
2,200
Unfunded Commitments
90
—
—
Total provision for credit losses
$
4,182
$
1,700
$
2,200
The Company’s past due and non-accrual loans as of September 30, 2023 is summarized as follows:
90 Days
Non-Accrual
30-89 Days
or more
with no
Past Due
Past Due
Non-
specifically
Accruing
and Accruing
Accrual
Total
allocated ACL
Commercial/industrial
$
78
$
18
$
531
$
627
$
47
Commercial real estate - owner occupied
180
250
1,958
2,388
1,958
Commercial real estate - non-owner occupied
—
—
—
—
—
Construction and development
—
—
—
—
—
Residential 1‑4 family
843
151
444
1,438
445
Consumer
76
27
13
116
13
Other
—
—
—
—
—
$
1,177
$
446
$
2,946
$
4,569
$
2,463
The Company’s past due and non-accrual loans as of December 31, 2022 is summarized as follows:
90 Days
30-89 Days
or more
Past Due
Past Due
Accruing
and Accruing
Non-Accrual
Total
Commercial/industrial
$
192
$
—
$
418
$
610
Commercial real estate - owner occupied
1,301
—
2,688
3,989
Commercial real estate - non-owner occupied
—
—
—
—
Construction and development
237
—
17
254
Residential 1‑4 family
774
268
505
1,547
Consumer
19
5
—
24
Other
—
—
—
—
$
2,523
$
273
$
3,628
$
6,424
Interest recognized on non-accrual loans is considered immaterial to the consolidated financial statements for the nine months ended September 30, 2023 and 2022.
A loan is considered to be collateral dependent when, based upon management’s assessment, the borrower is experiencing financial
difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. For collateral dependent loans, expected credit losses are based on the estimated fair value of the collateral at the balance sheet date, with consideration for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The following table presents collateral dependent loans by portfolio segment and collateral type, including those loans with and without a related allowance allocation. A significant portion of the loan balances in this table and essentially all of the allowance allocations relate to PCD loans which were acquired from Hometown. Real estate collateral primarily consists of operating facilities of the underlying borrowers. Other business assets collateral primarily consists of receivables and inventory of the underlying borrowers.
19
Table of Contents
Collateral Type
As of September 30, 2023
Other
Without an
With an
Allowance
Real Estate
Business Assets
Total
Allowance
Allowance
Allocation
Commercial/industrial
$
—
$
5,719
$
5,719
$
47
$
5,672
$
1,919
Commercial real estate - owner occupied
9,699
—
9,699
1,590
8,109
2,854
Commercial real estate - non-owner occupied
—
—
—
—
—
—
Construction and development
—
—
—
—
—
—
Residential 1‑4 family
35
—
35
35
—
—
Consumer
—
—
—
—
—
—
Other
—
—
—
—
—
—
Total Loans
$
9,734
$
5,719
$
15,453
$
1,672
$
13,781
$
4,773
Prior to the adoption of ASU 2016-13, the allowance included specific reserves for certain individually evaluated impaired loans. Specific reserves reflected estimated losses on impaired loans from management’s analysis developed through specific credit allocations. The following table shows a summary of impaired loans individually evaluated as of December 31, 2022:
Commercial
Commercial
Real Estate -
Real Estate -
Construction
Commercial/
Owner
Non - Owner
and
Residential
Industrial
Occupied
Occupied
Development
1 ‑ 4 Family
Consumer
Other
Total
With an allowance recorded:
Recorded investment
$
—
$
—
$
18
$
—
$
—
$
—
$
—
$
18
Unpaid principal balance
—
—
18
—
—
—
—
18
Related allowance
—
—
8
—
—
—
—
8
With no related allowance recorded:
Recorded investment
$
284
$
2,487
$
497
$
—
$
200
$
—
$
—
$
3,468
Unpaid principal balance
284
2,487
497
—
200
—
—
3,468
Related allowance
—
—
—
—
—
—
—
—
Total:
Recorded investment
$
284
$
2,487
$
515
$
—
$
200
$
—
$
—
$
3,486
Unpaid principal balance
284
2,487
515
—
200
—
—
3,486
Related allowance
—
—
8
—
—
—
—
8
Average recorded investment
$
361
$
3,726
$
1,017
$
—
$
237
$
—
$
—
$
5,341
The Company utilizes a numerical risk rating system for commercial relationships. All other types of relationships (ex: residential, consumer, other) are assigned a “Pass” rating, unless they have fallen 90 days past due or more, at which time they receive a rating of 7. The Company uses split ratings for government guaranties on loans. The portion of a loan that is supported by a government guaranty is included with other Pass credits.
The determination of a commercial loan risk rating begins with completion of a matrix, which assigns scores based on the strength of the borrower’s debt service coverage, collateral coverage, balance sheet leverage, industry outlook, and customer concentration. A weighted average is taken of these individual scores to arrive at the overall rating. This rating is subject to adjustment by the loan officer based on facts and circumstances pertaining to the borrower. Risk ratings are subject to independent review.
Commercial borrowers with ratings between 1 and 5 are considered Pass credits, with 1 being most acceptable and 5 being just above the minimum level of acceptance. Commercial borrowers rated 6 have potential weaknesses which may jeopardize repayment ability. Borrowers rated 7 have a well-defined weakness or weaknesses such as the inability to demonstrate significant cash flow for debt service based on analysis of the company’s financial information. These loans remain on accrual status provided full collection of principal and interest is reasonably expected. Otherwise they are deemed impaired and placed on nonaccrual status. Borrowers rated 8 are the same as 7 rated credits with one exception: collection or liquidation in full is not probable.
20
Table of Contents
The following table presents total loans by risk ratings and year of origination. Loans acquired from other previously acquired institutions have been included in the table based upon the actual origination date.
Amortized Cost Basis by Origination Year
As of September 30, 2023
Revolving
2023
2022
2021
2020
2019
Prior
Revolving
to Term
Total
Commercial/industrial
Grades 1-4
$
61,115
$
139,591
$
67,111
$
60,218
$
11,767
$
23,074
$
101,456
$
-
$
464,332
Grade 5
5,069
4,649
13,299
4,484
2,652
3,441
21,456
-
55,050
Grade 6
-
203
725
-
-
-
921
-
1,849
Grade 7
39
163
5,887
804
51
1,133
2,598
-
10,675
Grade 8
-
-
-
-
-
-
-
-
-
Total
$
66,223
$
144,606
$
87,022
$
65,506
$
14,470
$
27,648
$
126,431
$
-
$
531,906
Current-period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Commercial real estate - owner occupied
Grades 1-4
$
45,784
$
105,640
$
177,796
$
125,287
$
55,462
$
204,060
$
52,566
$
-
$
766,595
Grade 5
4,881
18,569
13,968
8,694
7,043
23,604
7,619
-
84,378
Grade 6
-
137
1,098
117
965
427
489
-
3,233
Grade 7
1,589
8,142
3,906
4,127
10,524
13,370
2,277
-
43,935
Grade 8
-
-
-
-
-
-
-
-
-
Total
$
52,254
$
132,488
$
196,768
$
138,225
$
73,994
$
241,461
$
62,951
$
-
$
898,141
Current-period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Commercial real estate - non-owner occupied
Grades 1-4
$
48,018
$
102,690
$
233,310
$
127,811
$
73,184
$
153,717
$
11,382
$
-
$
750,112
Grade 5
1,042
3,878
13,610
3,720
107
6,125
-
-
28,482
Grade 6
-
-
-
-
-
-
-
-
-
Grade 7
-
-
65
369
5,818
554
-
-
6,806
Grade 8
-
-
-
-
-
-
-
-
-
Total
$
49,060
$
106,568
$
246,985
$
131,900
$
79,109
$
160,396
$
11,382
$
-
$
785,400
Current-period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Construction and development
Grades 1-4
$
37,716
$
71,328
$
43,618
$
5,250
$
1,872
$
4,203
$
1,207
$
-
$
165,194
Grade 5
10,313
16,548
3,434
772
26
194
464
-
31,751
Grade 6
-
-
-
-
-
-
-
-
-
Grade 7
10
-
-
175
-
797
-
-
982
Grade 8
-
-
-
-
-
-
-
-
-
Total
$
48,039
$
87,876
$
47,052
$
6,197
$
1,898
$
5,194
$
1,671
$
-
$
197,927
Current-period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Residential 1 ‑ 4 family
Grades 1-4
$
88,804
$
205,155
$
204,165
$
163,959
$
44,299
$
82,398
$
77,274
$
-
$
866,054
Grade 5
1,535
2,918
767
78
378
2,060
332
-
8,068
Grade 6
160
-
83
-
-
181
63
-
487
Grade 7
32
394
35
1,035
102
2,481
172
-
4,251
Grade 8
-
-
-
-
-
-
-
-
-
Total
$
90,531
$
208,467
$
205,050
$
165,072
$
44,779
$
87,120
$
77,841
$
-
$
878,860
Current-period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Consumer
Grades 1-4
$
20,383
$
13,897
$
7,264
$
5,157
$
1,434
$
1,360
$
1,017
$
-
$
50,512
Grade 5
-
-
-
-
-
-
-
-
-
Grade 6
-
-
-
-
-
-
-
-
-
Grade 7
-
-
-
-
-
15
-
-
15
Grade 8
-
-
-
-
-
-
-
-
-
Total
$
20,383
$
13,897
$
7,264
$
5,157
$
1,434
$
1,375
$
1,017
$
-
$
50,527
Current-period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
1
$
-
$
1
Other
Grades 1-4
$
347
$
800
$
581
$
1,199
$
40
$
9,873
$
1,891
$
-
$
14,731
Grade 5
-
-
-
-
-
-
90
-
90
Grade 6
-
-
-
-
-
-
-
-
-
Grade 7
-
-
-
-
-
-
-
-
-
Grade 8
-
-
-
-
-
-
-
-
-
Total
$
347
$
800
$
581
$
1,199
$
40
$
9,873
$
1,981
$
-
$
14,821
Current-period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
69
$
-
$
69
Total Loans
$
326,837
$
694,702
$
790,722
$
513,256
$
215,724
$
533,067
$
283,274
$
-
$
3,357,582
21
Table of Contents
The breakdown of loans by risk rating as of December 31, 2022 is as follows:
Pass (1-5)
6
7
8
Total
Commercial/industrial
$
474,586
$
3,708
$
14,156
$
—
$
492,450
Commercial real estate - owner occupied
665,986
8,031
42,946
—
716,963
Commercial real estate - non-owner occupied
677,303
—
4,317
—
681,620
Construction and development
198,581
—
1,127
—
199,708
Residential 1‑4 family
736,146
151
3,217
—
739,514
Consumer
44,961
—
2
—
44,963
Other
18,760
—
—
—
18,760
$
2,816,323
$
11,890
$
65,765
$
—
$
2,893,978
On January 1, 2023, the Company adopted ASU 2022-02, which eliminated the accounting guidance for TDRs by creditors and enhanced the disclosure requirements for certain loan modifications to borrowers experiencing financial difficulty. Loans that were both experiencing financial difficulty and were modified during the nine months ended September 30, 2023, were insignificant to these consolidated financial statements. The Company also had no new TDRs during the nine months ended September 30, 2022.
The following tables present loans acquired with deteriorated credit quality and the change in the accretable and non-accretable components of the related discounts prior to the adoption of ASU 2016-13.
December 31, 2022
Unpaid
Recorded
Principal
Investment
Balance
Commercial & Industrial
$
712
$
1,091
Commercial real estate - owner occupied
2,539
2,843
Commercial real estate - non-owner occupied
—
—
Construction and development
—
—
Residential 1‑4 family
824
1,045
Consumer
—
—
Other
—
—
$
4,075
$
4,979
September 30, 2022
December 31, 2022
Accretable
Non-accretable
Accretable
Non-accretable
discount
discount
discount
discount
Balance at beginning of period
$
813
$
149
$
813
$
149
Acquired balance, net
292
211
292
211
Reclassifications between accretable and non-accretable
61
( 61 )
135
( 135 )
Accretion to loan interest income
( 476 )
—
( 561 )
—
Balance at end of period
$
690
$
299
$
679
$
225
22
Table of Contents
NOTE 6 – MORTGAGE SERVICING RIGHTS
Loans serviced for others are not included in the accompanying consolidated balance sheets. MSRs are recognized as separate assets when loans sold in the secondary market are sold with servicing retained. The Company utilizes a third-party consulting firm to determine an accurate assessment of the MSRs fair value. The third-party firm collects relevant data points from numerous sources. Some of these data points relate directly to the pricing level or relative value of the mortgage servicing while other data points relate to the assumptions used to derive fair value. In addition, the valuation evaluates specific collateral types, and current and historical performance of the collateral in question. The valuation process focuses on the non-distressed secondary servicing market, common industry practices and current regulatory standards. The primary determinants of the fair value of MSRs are servicing fee percentage, ancillary income, expected loan life or prepayment speeds, discount rates, costs to service, delinquency rates, foreclosure losses and recourse obligations. The valuation data also contains interest rate shock analyses for monitoring fair value changes in differing interest rate environments.
Following is an analysis of activity in the MSR asset:
Nine Months Ended
Year Ended
September 30, 2023
December 31, 2022
Fair value at beginning of period
$
9,582
$
5,016
Servicing asset additions
654
771
Loan payments and payoffs
( 1,225 )
( 918 )
Changes in valuation inputs and assumptions used in the valuation model
1,031
3,012
Amount recognized through earnings
460
2,865
MSR asset acquired
3,691
1,701
Fair value at end of period
$
13,733
$
9,582
Unpaid principal balance of loans serviced for others
$
1,183,257
$
866,941
Mortgage servicing rights as a percent of loans serviced for others
1.16
1.11
The primary economic assumptions utilized by the Company in measuring the value of MSRs were constant prepayment speeds of 7.7 and 7.9 months as of September 30, 2023 and December 31, 2022 and discount rates of 10.19 % and 10.21 % as of each of those periods, respectively.
NOTE 7 – NOTES PAYABLE
From time to time the Company utilizes FHLB advances to fund liquidity. At September 30, 2023 and December 31, 2022, the Company had outstanding balances borrowed from the FHLB of $ 36.1 million and $ 1.9 million, respectively. The advances, rate, and maturities of FHLB advances were as follows:
September 30,
December 31,
Maturity
Rate
2023
2022
Fixed rate, fixed term
06/01/2023
1.79 %
$
—
$
807
Fixed rate, fixed term
11/21/2023
3.06 %
600
600
Fixed rate, fixed term
03/23/2026
4.02 %
10,000
—
Fixed rate, fixed term
05/26/2026
1.95 %
5,000
—
Fixed rate, fixed term
03/23/2027
3.91 %
10,000
—
Fixed rate, fixed term
03/23/2028
3.85 %
10,000
—
Fixed rate, fixed term
04/22/2030
0.00 %
508
508
36,108
1,915
Adjustment due to purchase accounting
( 261 )
14
$
35,847
$
1,929
23
Table of Contents
Future maturities of borrowings were as follows:
September 30,
December 31,
2023
2022
1 year or less
$
600
$
1,407
1 to 2 years
—
—
2 to 3 years
15,000
—
3 to 4 years
10,000
—
4 to 5 years
10,000
—
Over 5 years
508
508
$
36,108
$
1,915
As of September 30, 2023, the Company had borrowing availability at the FHLB totaling $ 773.6 million in addition to the existing borrowings noted in the tables above.
The Company maintains a $ 7.5 million line of credit with a commercial bank, which was entered into on May 15, 2022. There were no outstanding balances on this note at September 30, 2023 or December 31, 2022. Any future borrowings will require monthly payments of interest at a variable rate, and will be due in full on May 15, 2024.
NOTE 8 – SUBORDINATED NOTES AND JUNIOR SUBORDINATED DEBENTURES
During September 2017, the Company entered into subordinated note agreements with three separate commercial banks. The Company had outstanding balances of $ 11.5 million under these agreements as of September 30, 2023 and December 31, 2022. These notes were all issued with 10 -year maturities, carry interest at a variable rate payable quarterly, are callable on or after the sixth anniversary of the issuance dates, and qualify for Tier 2 capital for regulatory purposes. See Note 14 for information regarding activity related to these notes subsequent to September 30, 2023.
During July 2020, the Company entered into subordinated note agreements with two separate commercial banks. The Company had outstanding balances of $ 6.0 million under these agreements as of September 30, 2023 and December 31, 2022. These notes were issued with 10 -year maturities, carry interest at a fixed rate of 5.0 % through June 30, 2025, and at a variable rate thereafter, payable quarterly. These notes are callable on or after January 1, 2026 and qualify for Tier 2 capital for regulatory purposes.
During August 2022, the Company entered into subordinated note agreements with an individual. The Company had outstanding balances of $ 6.0 million under these agreements as of September 30, 2023. These notes were issued with 10 -year maturities, carry interest at a fixed rate of 5.25 % through August 6, 2027, and at a variable rate thereafter, payable quarterly. These notes are callable on or after August 6, 2027 and qualify for Tier 2 capital for regulatory purposes.
As a result of the acquisition of Hometown during February 2023, the Company acquired all of the common securities of Hometown’s wholly-owned subsidiaries, Hometown Bancorp, Ltd. Capital Trust I (“Trust I”) and Hometown Bancorp, Ltd. Capital Trust II (“Trust II”). The Company also assumed adjustable rate junior subordinated debentures issued to these trusts. The junior subordinated debentures issued to Trust I and Trust II total $ 4.1 and $ 8.2 million, respectively, carry interest at floating rates resetting on each quarterly payment date, and are due on January 7, 2034 and December 15, 2036, respectively. Both junior subordinated debentures are redeemable by the Company, subject to prior approval by the Federal Reserve Bank, on any quarterly payment date. The junior subordinated debentures represent the sole asset of Trust I and Trust II. The trusts are not included in the consolidated financial statements. The net effect of all agreements assumed with respect to Trust I and Trust II is that the Company, through payments on its debentures, is liable for the distributions and other payments required on the trusts’ preferred securities. Trust I and Trust II also provide the Company with $ 12.0 million in Tier 1 capital for regulatory capital purposes. Interest on all debentures is current. Applicable discounts (initially recorded to carry the acquired debentures at their then estimated fair value) are being accreted to interest expense over the remaining life of the debentures, and total $ 1.4 million at September 30, 2023.
NOTE 9 – REGULATORY MATTERS
Banks and certain bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.
24
Table of Contents
The Economic Growth, Regulatory Relief, and Consumer Protection Act, signed into law in May 2018 raised the threshold for those bank holding companies subject to the Federal Reserve’s Small Bank Holding Company Policy Statement to $ 3 billion. As a result, as of the effective date of that change in 2018, the Company was no longer required to comply with the risk-based capital rules applicable to the Bank. The Federal Reserve may, however, require smaller bank holding companies to maintain certain minimum capital levels, depending upon general economic conditions and a bank holding company’s particular condition, risk profile and growth plans. Due to the acquisition of Denmark Bancshares, Inc. (“Denmark”) the Company is subject to compliance with risk-based capital rules beginning with the third quarter of 2022, and will remain so as long as it remains above the $ 3 billion threshold.
Under regulatory guidance for non-advanced approaches institutions, the Bank is required to maintain minimum amounts and ratios of common equity Tier I capital to risk-weighted assets, including an additional conservation buffer determined by banking regulators. As of September 30, 2023 and December 31, 2022, this buffer was 2.5 %. The Bank met all capital adequacy requirements to which they are subject as of September 30, 2023 and December 31, 2022.
Actual and required capital amounts and ratios are presented below at period-end:
To Be Well
Minimum Capital
Capitalized Under
For Capital
Adequacy with
Prompt Corrective
Actual
Adequacy Purposes
Capital Buffer
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
September 30, 2023
Total capital (to risk-weighted assets):
Company
$
469,931
12.97
%
$
289,759
8.00
%
$
380,309
10.50
%
$
362,199
10.00
%
Bank
$
432,259
11.94
%
$
289,528
8.00
%
$
380,005
10.50
%
$
361,909
10.00
%
Tier 1 capital (to risk-weighted assets):
Company
$
412,915
11.40
%
$
217,319
6.00
%
$
307,869
8.50
%
$
289,759
8.00
%
Bank
$
398,743
11.02
%
$
217,146
6.00
%
$
307,623
8.50
%
$
289,528
8.00
%
Common Equity Tier 1 capital (to risk-weighted assets):
Company
$
400,915
11.07
%
$
162,989
4.50
%
$
253,539
7.00
%
$
235,429
6.50
%
Bank
$
398,743
11.02
%
$
162,859
4.50
%
$
253,337
7.00
%
$
235,241
6.50
%
Tier 1 capital (to average assets):
Company
$
412,915
10.56
%
$
156,440
4.00
%
$
156,440
4.00
%
$
195,550
5.00
%
Bank
$
398,743
10.20
%
$
156,313
4.00
%
$
156,313
4.00
%
$
195,391
5.00
%
December 31, 2022
Total capital (to risk-weighted assets):
Company
$
387,814
12.23
%
$
253,689
8.00
%
$
332,967
10.50
%
$
317,112
10.00
%
Bank
$
372,312
11.75
%
$
253,504
8.00
%
$
332,724
10.50
%
$
316,880
10.00
%
Tier 1 capital (to risk-weighted assets):
Company
$
341,634
10.77
%
$
190,267
6.00
%
$
269,545
8.50
%
$
253,689
8.00
%
Bank
$
349,632
11.03
%
$
190,128
6.00
%
$
269,348
8.50
%
$
253,504
8.00
%
Common Equity Tier 1 capital (to risk-weighted assets):
Company
$
341,634
10.77
%
$
142,700
4.50
%
$
221,978
7.00
%
$
206,123
6.50
%
Bank
$
349,632
11.03
%
$
142,596
4.50
%
$
221,816
7.00
%
$
205,972
6.50
%
Tier 1 capital (to average assets):
Company
$
341,634
9.69
%
$
140,992
4.00
%
$
140,992
4.00
%
$
176,240
5.00
%
Bank
$
349,632
9.93
%
$
140,887
4.00
%
$
140,887
4.00
%
$
176,108
5.00
%
25
Table of Contents
NOTE 10 – COMMITMENTS AND CONTINGENCIES
The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate-lock commitments). Rate-lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans. Fair value is based on fees currently charged to enter into similar agreements and for fixed rate commitments also considers the difference between current levels of interest rates and committed rates. The notional amount of rate-lock commitments at September 30, 2023 and December 31, 2022 was approximately $ 10.4 million and $ 3.7 million, respectively.
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.
The Company’s exposure to credit loss is represented by the contractual or notional amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments. Since some of the commitments are expected to expire without being drawn upon and some of the commitments may not be drawn upon to the total extent of the commitment, the notional amount of these commitments does not necessarily represent future cash requirements.
The following commitments were outstanding:
Notional Amount
September 30, 2023
December 31, 2022
Commitments to extend credit:
Fixed
$
104,580
$
120,906
Variable
689,877
539,658
Credit card arrangements
20,213
17,364
Letters of credit
10,537
10,343
NOTE 11 – FAIR VALUE MEASUREMENTS
Accounting guidance establishes a fair value hierarchy to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.
Level 1: Quoted prices (unadjusted) or identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
26
Table of Contents
Information regarding the fair value of assets measured at fair value on a recurring basis is as follows:
Instruments
Markets
Other
Significant
Measured
for Identical
Observable
Unobservable
At Fair
Assets
Inputs
Inputs
Value
(Level 1)
(Level 2)
(Level 3)
September 30, 2023
Assets
Securities available for sale
U.S. Treasury securities
$
41,835
$
—
$
41,835
$
—
Obligations of U.S. Government sponsored agencies
27,780
—
27,780
—
Obligations of states and political subdivisions
54,121
—
54,121
—
Mortgage-backed securities
35,840
—
35,840
—
Corporate notes
18,738
—
18,738
—
Certificates of deposit
732
—
732
—
Mortgage servicing rights
13,733
—
13,733
—
December 31, 2022
Assets
Securities available for sale
U.S. Treasury securities
$
142,097
$
—
$
142,097
$
—
Obligations of U.S. Government sponsored agencies
21,749
—
21,749
—
Obligations of states and political subdivisions
83,186
—
83,186
—
Mortgage-backed securities
36,637
—
36,637
—
Corporate notes
19,994
—
19,994
—
Certificates of deposit
974
—
974
—
Mortgage servicing rights
9,582
—
9,582
—
There were no assets measured on a recurring basis using significant unobservable inputs (Level 3) during these periods.
Information regarding the fair value of assets measured at fair value on a non-recurring basis is as follows:
Quoted Prices
In Active
Significant
Assets
Markets
Other
Significant
Measured
for Identical
Observable
Unobservable
At Fair
Assets
Inputs
Inputs
Value
(Level 1)
(Level 2)
(Level 3)
September 30, 2023
OREO
$
1,844
$
—
$
—
$
1,844
Loans individually evaluated, net of reserve
10,680
—
—
10,680
$
12,524
$
—
$
—
$
12,524
December 31, 2022
OREO
$
2,520
$
—
$
—
$
2,520
Impaired Loans, net of impairment reserve
3,478
—
—
3,478
$
5,998
$
—
$
—
$
5,998
27
Table of Contents
The following is a description of the valuation methodologies used by the Company for the items noted in the table above, including the general classification of such instruments in the fair value hierarchy. For loans individually evaluated (referred to as impaired loans prior to January 1, 2023), the amount of reserve is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, the estimated fair value of the underlying collateral for collateral-dependent loans, or the estimated liquidity of the note. For OREO, the fair value is based upon the estimated fair value of the underlying collateral adjusted for the expected costs to sell. The following table shows significant unobservable inputs used in the fair value measurement of Level 3 assets:
Weighted
Unobservable
Range of
Average
Valuation Technique
Inputs
Discounts
Discount
As of September 30, 2023
Other real estate owned
Third party appraisals, sales contracts or brokered price options
Collateral discounts and estimated costs to sell
0
%
0
%
Loans individually evaluated
Third party appraisals and discounted cash flows
Collateral discounts and discount rates
0 % - 53
%
30.9
%
As of December 31, 2022
Other real estate owned
Third party appraisals, sales contracts or brokered price options
Collateral discounts and estimated costs to sell
0
%
0
%
Impaired loans
Third party appraisals and discounted cash flows
Collateral discounts and discount rates
0 % - 71
%
25.5
%
The carrying value and estimated fair value of financial instruments at September 30, 2023 and December 31, 2022 follows:
Carrying
September 30, 2023
amount
Level 1
Level 2
Level 3
Total
Financial assets:
Cash and cash equivalents
$
75,776
$
75,776
$
—
$
—
$
75,776
Securities held to maturity
77,154
—
74,888
—
74,888
Securities available for sale
179,046
—
179,046
—
179,046
Loans held for sale
1,155
—
—
1,155
1,155
Loans, net
3,312,145
—
—
3,184,002
3,184,002
Other investments, at cost
21,542
—
—
21,542
21,542
Mortgage servicing rights
13,733
—
13,733
—
13,733
Financial liabilities:
Deposits
$
3,398,293
$
—
$
—
$
3,072,252
$
3,072,252
Securities sold under repurchase agreements
17,191
—
17,191
—
17,191
Notes payable
35,847
—
35,847
—
35,847
Subordinated notes
23,500
—
23,500
—
23,500
Junior subordinated debentures
10,972
—
10,972
—
10,972
28
Table of Contents
Carrying
December 31, 2022
amount
Level 1
Level 2
Level 3
Total
Financial assets:
Cash and cash equivalents
$
119,351
$
119,351
$
—
$
—
$
119,351
Securities held to maturity
45,097
—
43,770
—
43,770
Securities available for sale
304,637
—
304,637
—
304,637
Loans held for sale
648
—
—
648
648
Loans, net
2,871,298
—
—
2,832,454
2,832,454
Other investments, at cost
16,495
—
—
16,495
16,495
Mortgage servicing rights
9,582
—
9,582
—
9,582
Financial liabilities:
Deposits
$
3,060,229
—
—
2,732,007
2,732,007
Securities sold under repurchase agreements
97,196
—
97,196
—
97,196
Notes payable
1,929
—
1,929
—
1,929
Subordinated notes
23,500
—
23,500
—
23,500
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters that could affect the estimates. Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.
Deposits with no stated maturities are defined as having a fair value equivalent to the amount payable on demand. This prohibits adjusting fair value derived from retaining those deposits for an expected future period of time. This component, commonly referred to as a deposit base intangible, is neither considered in the above amounts nor is it recorded as an intangible asset on the consolidated balance sheet. Significant assets and liabilities that are not considered financial assets and liabilities include premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
NOTE 12 – STOCK BASED COMPENSATION
The Company has made restricted share grants pursuant to the Bank First Corporation 2011 Equity Plan and the Bank First Corporation 2020 Equity Plan, which replaced the 2011 Plan. The purpose of the Plan is to provide financial incentives for selected employees and for the non-employee Directors of the Company, thereby promoting the long-term growth and financial success of the Company. The number of shares of Company stock that may be issued pursuant to awards under the 2020 Plan shall not exceed, in the aggregate, 700,000 . As of September 30, 2023, 76,373 shares of Company stock have been awarded under the 2020 Plan. Compensation expense for restricted stock is based on the fair value of the awards of Bank First Corporation common stock at the time of grant. The value of restricted stock grants that are expected to vest is amortized into expense over the vesting periods. For the nine months ended September 30, 2023 and 2022, compensation expense of $ 1.6 million and $ 1.2 million, respectively, was recognized related to restricted stock awards.
29
Table of Contents
As of September 30, 2023, there was $ 2.6 million of unrecognized compensation cost related to non-vested restricted stock awards granted under the plan. That cost is expected to be recognized over a weighted average period of 1.58 years. The aggregate grant date fair value of restricted stock awards that vested during the nine months ended September 30, 2023, was approximately $ 1.6 million.
For the period ended
For the period ended
September 30, 2023
September 30, 2022
Weighted-
Weighted-
Average Grant-
Average Grant-
Shares
Date Fair Value
Shares
Date Fair Value
Restricted Stock
Outstanding at beginning of year
59,272
$
65.85
58,611
$
61.44
Granted
25,506
80.15
25,451
69.73
Vested
( 25,762 )
62.05
( 20,785 )
60.52
Forfeited or cancelled
( 820 )
65.09
( 4,005 )
60.50
Outstanding at end of year
58,196
$
71.42
59,272
$
65.85
NOTE 13 – LEASES
Accounting standards require lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements, establishing a right-of-use (“ROU”) model that requires a lessee to recognize a ROU lease asset and liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
Lessee Leases
The Company’s lessee leases are operating leases, and consist of leased real estate for branches. Options to extend and renew leases are generally exercised under normal circumstances. Advance notification is required prior to termination, and any noticing period is often limited to the months prior to renewal. Rent escalations are generally specified by a payment schedule, or are subject to a defined formula. The Company also elected the practical expedient to not separate lease and non-lease components for all leases, the majority of which consist of real estate common area maintenance expenses. Generally, leases do not include guaranteed residual values, but instead typically specify that the leased premises are to be returned in satisfactory condition with the Company liable for damages.
For operating leases, the lease liability and ROU asset (before adjustments) are recorded at the present value of future lease payments. Accounting standards require the use of the lease interest rate; however, this rate is typically not known. As an alternative, the use of an entity’s fully secured incremental borrowing rate is permitted. The Company is electing to utilize the Wall Street Journal Prime Rate on the date of lease commencement.
Nine Months Ended
(dollars in thousands)
September 30, 2023
September 30, 2022
Amortization of ROU Assets - Operating Leases
$
( 1 )
$
( 1 )
Interest on Lease Liabilities - Operating Leases
65
74
Operating Lease Cost (Cost resulting from lease payments)
64
73
Weighted Average Lease Term (Years) - Operating Leases
30.25
24.68
Weighted Average Discount Rate - Operating Leases
5.50
%
5.50
%
30
Table of Contents
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liabilities as of September 30, 2023 is as follows:
September 30, 2023
Operating lease payments due:
Within one year
$
85
After one but within two years
86
After two but within three years
92
After three but within four years
94
After four years but within five years
94
After five years
3,067
Total undiscounted cash flows
3,518
Discount on cash flows
( 1,935 )
Total operating lease liabilities
$
1,583
NOTE 14 – SUBSEQUENT EVENTS
The Bank sold 100 % of its member interest in UFS, LLC in a transaction which closed on October 1, 2023. The transaction resulted in proceeds of $ 52.2 million and a pre-tax gain of $ 39.3 million which will be realized during the fourth quarter of 2023.
The Bank repaid $ 11.5 million in subordinated notes on October 2, 2023. These notes were originated during September 2017 and qualified for Tier 2 capital for regulatory purposes.
31
Table of Contents
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.