Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2024
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 001-38676
BANK FIRST CORPORATION
(Exact name of registrant as specified in its charter)
WISCONSIN
39-1435359
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
402 North 8th Street, Manitowoc, Wisconsin
54220
(Address of principal executive offices)
(Zip Code)
(920) 652-3100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ⌧
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name on each exchange on which registered
Common Stock, par value $0.01 per share
BFC
The Nasdaq Stock Market LLC
The number of shares of the issuer’s common stock, par value $0.01, outstanding as of August 7, 2024 was 10,013,737 shares.
TABLE OF CONTENTS
Page Number
Part I. Financial Information
3
ITEM 1.
Financial Statements
Consolidated Balance Sheets – June 30, 2024 (unaudited) and December 31, 2023
Consolidated Statements of Income – Three and Six Months Ended June 30, 2024 and 2023 (unaudited)
4
Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2024 and 2023 (unaudited)
5
Consolidated Statements of Changes in Stockholders’ Equity – Three and Six Months Ended June 30, 2024 and 2023 (unaudited)
6
Consolidated Statements of Cash Flows – Six Months Ended June 30, 2024 and 2023 (unaudited)
7
Notes to Unaudited Consolidated Financial Statements
9
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
27
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
54
ITEM 4.
Controls and Procedures
56
Part II. Other Information
Legal Proceedings
ITEM 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
57
Defaults Upon Senior Securities
Mine Safety Disclosures
ITEM 5.
Other Information
ITEM 6.
Exhibits
58
Signatures
59
2
PART I – FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets
(In thousands, except share and per share data)
June 30, 2024
December 31, 2023
(Unaudited)
(Audited)
Assets
Cash and due from banks
$
45,549
69,973
Interest-bearing deposits
53,401
177,495
Cash and cash equivalents
98,950
247,468
Securities held to maturity, at amortized cost ($109,805 and $103,626 fair value at June 30, 2024 and December 31, 2023, respectively)
110,648
103,324
Securities available for sale, at fair value ($140,845 and $154,318 amortized cost at June 30, 2024 and December 31, 2023, respectively)
127,977
142,197
Loans held for sale
2,274
3,012
Loans
3,428,635
3,342,974
Allowance for credit losses - loans ("ACL-Loans")
(45,118)
(43,609)
Loans, net
3,383,517
3,299,365
Premises and equipment, net
68,633
69,891
Goodwill
175,106
Other investments
21,256
21,366
Cash value of life insurance
60,904
61,292
Core deposit intangibles, net
24,021
26,996
Mortgage servicing rights ("MSR")
13,694
13,668
Other real estate owned (“OREO”)
712
2,573
Investment in Ansay and Associates, LLC ("Ansay")
34,218
32,926
Other assets
23,910
22,658
TOTAL ASSETS
4,145,820
4,221,842
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
2,424,096
2,382,185
Noninterest-bearing deposits
975,845
1,050,735
Total deposits
3,399,941
3,432,920
Securities sold under repurchase agreements
—
75,747
Notes payable
90,321
35,270
Subordinated notes
12,000
Junior subordinated debenture
4,124
Other liabilities
28,979
41,983
Total liabilities
3,531,241
3,602,044
Stockholders’ equity:
Serial preferred stock - $0.01 par value
Authorized - 5,000,000 shares
Common stock - $0.01 par value
Authorized - 20,000,000 shares
Issued - 11,515,130 shares as of June 30, 2024 and December 31, 2023
Outstanding - 10,031,350 and 10,365,131 shares as of June 30, 2024 and December 31, 2023, respectively
115
Additional paid-in capital
332,763
333,815
Retained earnings
372,420
348,001
Treasury stock, at cost - 1,483,780 and 1,149,999 shares as of June 30, 2024 and December 31, 2023, respectively
(81,348)
(53,387)
Accumulated other comprehensive loss
(9,371)
(8,746)
Total stockholders’ equity
614,579
619,798
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
See accompanying notes to consolidated financial statements.
ITEM 1. Financial Statements Continued:
Consolidated Statements of Income
(In thousands, except per share data) (Unaudited)
Three months ended June 30,
Six months ended June 30,
2024
2023
Interest income:
Loans, including fees
46,349
42,665
91,225
80,756
Securities:
Taxable
2,262
1,946
5,149
4,021
Tax-exempt
241
243
485
546
Other
495
1,075
1,760
1,508
Total interest income
49,347
45,929
98,619
86,831
Interest expense:
Deposits
15,794
10,084
31,187
17,534
570
22
1,131
Borrowed funds
1,003
1,054
1,660
Total interest expense
16,340
11,657
32,263
20,325
Net interest income
33,007
34,272
66,356
66,506
Provision for credit losses
200
4,182
Net interest income after provision for credit losses
66,156
62,324
Noninterest income:
Service charges
2,101
1,766
3,735
3,365
Income from Ansay
1,379
950
2,358
2,021
Income from UFS, LLC (“UFS”)
770
Loan servicing income
735
749
1,461
1,385
Valuation adjustment on MSR
339
(548)
231
Net gain on sales of mortgage loans
277
236
496
376
1,046
631
2,197
1,365
Total noninterest income
5,877
4,554
10,274
10,403
Noninterest expense:
Salaries, commissions, and employee benefits
10,004
9,870
20,897
19,782
Occupancy
1,330
1,317
2,914
2,908
Data processing
2,114
2,094
4,503
3,958
Postage, stationery, and supplies
205
224
443
604
Net (gain) loss on sales and valuations of OREO
(461)
489
(508)
Net loss on sale of securities
34
75
Advertising
79
85
174
166
Charitable contributions
234
228
410
451
Outside service fees
1,889
1,347
3,182
3,549
Amortization of intangibles
1,475
1,672
2,975
3,094
2,188
2,620
4,357
4,534
Total noninterest expense
19,057
19,946
39,381
39,610
Income before provision for income taxes
19,827
18,880
37,049
33,117
Provision for income taxes
3,768
4,748
5,578
8,305
Net Income
16,059
14,132
31,471
24,812
Earnings per share - basic
1.59
1.37
3.10
2.46
Earnings per share - diluted
See accompanying notes to unaudited consolidated financial statements
Consolidated Statements of Comprehensive Income
(In thousands) (Unaudited)
Three Months Ended
Six Months Ended
June 30,
Other comprehensive income (loss):
Unrealized gains (losses) on available for sale securities:
Unrealized holding gains (losses) arising during period
71
(2,441)
(781)
785
Amortization of unrealized holding gains on securities transferred from available for sale to held to maturity
(1)
Reclassification adjustment for losses included in net income
Income tax benefit (expense)
(31)
659
123
(232)
Total other comprehensive income (loss)
40
(1,782)
(625)
628
Comprehensive income
16,099
12,350
30,846
25,440
See accompanying notes to unaudited consolidated financial statements.
Consolidated Statement of Stockholders’ Equity
(In thousands, except share and per share data) (Unaudited)
Accumulated
Serial
Additional
Total
Preferred
Common
Paid-in
Retained
Treasury
Comprehensive
Stockholders'
Stock
Capital
Earnings
Income (loss)
Equity
Balance at January 1, 2023
101
218,263
295,496
(45,191)
(15,566)
453,103
Net income
10,680
Other comprehensive income
2,410
Purchase of treasury stock
(6,727)
Sale of treasury stock
37
Cash dividends ($0.25 per share)
(2,616)
Amortization of stock-based compensation
456
Vesting of restricted stock awards
(1,585)
1,585
Adoption of new accounting pronouncement
(10,050)
Shares issued in the acquisition of Hometown Bancorp, Ltd. (1,450,272 shares)
14
115,065
115,079
Balance at March 31, 2023
332,199
293,510
(50,296)
(13,156)
562,372
Other comprehensive loss
(1,341)
44
Cash dividends ($0.30 per share)
(3,117)
564
(45)
45
Balance at June 30, 2023
332,718
304,525
(51,548)
(14,938)
570,872
Balance at January 1, 2024
15,412
(665)
(22,283)
55
Cash dividends ($0.35 per share)
(3,541)
554
(2,145)
2,145
Balance at March 31, 2024
332,224
359,872
(73,470)
(9,411)
609,330
(7,943)
65
(3,511)
539
Balance at June 30, 2024
Consolidated Statements of Cash Flows
Six Months Ended June 30,
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment
1,122
1,017
Net accretion of securities
(1,849)
(1,017)
1,093
1,020
Accretion of purchase accounting valuations
(2,357)
(4,380)
Net change in deferred loan fees and costs
(106)
(1,159)
Change in fair value of MSR and other investments
84
(358)
Loss from sale and disposal of premises and equipment
Net (gain) loss on sale of OREO and valuation allowance
Proceeds from sales of mortgage loans
43,345
33,531
Originations of mortgage loans held for sale
(42,111)
(34,067)
Gain on sales of mortgage loans
(496)
(376)
Realized loss on sale of securities
Undistributed income of UFS joint venture
(1,660)
Undistributed income of Ansay joint venture
(2,358)
(2,021)
Net earnings on life insurance
(817)
(731)
Increase in other assets
(1,129)
(2,617)
Decrease in other liabilities
(12,504)
(4,671)
Net cash provided by operating activities
16,263
15,163
Cash flows from investing activities, net of effects of business combination:
Activity in securities available for sale and held to maturity:
Sales
10,206
34,197
Maturities, prepayments, and calls
91,444
116,568
Purchases
(93,687)
Net increase in loans
(82,384)
(12,437)
Dividends received from UFS
1,457
Dividends received from Ansay
1,066
990
Proceeds from sale of OREO
1,936
1,485
Net sales of Federal Home Loan Bank (“FHLB”) stock
262
Net purchases of Federal Reserve Bank (“FRB”) stock
(3,970)
Proceeds from life insurance
1,205
Proceeds from sale of premises and equipment
2,380
Purchases of premises and equipment
(1,985)
(6,752)
Net cash received in business combination
89,959
Net cash provided by (used in) investing activities
(69,819)
221,759
Consolidated Statements of Cash Flows (Continued)
Cash flows from financing activities, net of effects of business combination:
Net decrease in deposits
(32,933)
(187,026)
Net decrease in securities sold under repurchase agreements
(75,747)
(73,394)
Proceeds from advances of notes payable
102,000
121,700
Repayment of notes payable
(47,000)
(92,507)
Repayment of junior subordinated debentures
(4,124)
Dividends paid
(7,052)
(5,733)
Proceeds from sales of common stock
120
81
Repurchase of common stock
(30,226)
(8,068)
Net cash used in financing activities
(94,962)
(244,947)
Net decrease in cash and cash equivalents
(148,518)
(8,025)
Cash and cash equivalents at beginning of period
119,351
Cash and cash equivalents at end of period
111,326
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
30,608
17,546
Income taxes
6,286
8,606
Supplemental schedule of noncash activities:
MSR resulting from sale of loans
488
389
Change in unrealized gains and losses on investment securities available for sale, net of tax
Acquisition:
Fair value of assets acquired
615,105
Fair value of liabilities assumed
549,564
Net assets acquired
65,541
Common stock issued in acquisition
8
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, 2023 (“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
The accounting and reporting policies of the Company conform to GAAP in the United States and general practices within the financial institution industry. To prepare financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statement. As disclosed in the Company’s Annual Report, management has identified several accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in understanding our financial statements. These include accounting for business combinations (primarily related to core deposit intangibles and acquired loans), accounting for the ACL-Loans, and the valuation and recording of deferred tax assets and liabilities.
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.
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 disclosure 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.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU is intended to improve the disclosures about a public entity’s reportable segments and addresses requests from investors and other decision makers for additional, more detailed information about a reportable segment’s expenses. The amendment applies to all public entities that are required to report segment information in accordance with Topic 280. This update is effective for annual periods beginning after December 15, 2023, applied retrospectively to all periods presented. The Company does not currently expect adoption of the amendment to have a material impact on its consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU is intended to improve the transparency and decision usefulness of income tax disclosures by requiring specific categories in the rate reconciliation table and disaggregation of taxes paid by jurisdiction. All public entities must also provide additional information for reconciling items that meet a specific quantitative threshold. This update is effective for annual periods beginning after December 15, 2024.
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 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.
10
The fair value of the assets acquired and liabilities assumed on February 10, 2023 was as follows:
As Recorded by
Fair Value
Hometown
Adjustments
the Company
Cash, cash equivalents and securities
174,582
(1,010)
173,572
1,195
406,168
(10,367)
395,801
7,577
(1,109)
6,468
Core deposit intangible
405
16,085
16,490
28,011
(6,432)
21,579
Total assets acquired
617,938
(2,833)
532,165
209
532,374
Other borrowings
5,000
(331)
4,669
Junior subordinated debentures
12,372
(1,464)
10,908
469
1,144
1,613
Total liabilities assumed
550,006
(442)
Excess of assets acquired over liabilities assumed
67,932
(2,391)
Less: purchase price
130,452
64,911
Refinement to fair value estimates (1)
(30)
Goodwill (after refinement)
64,881
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
25,778
Non-credit discount on PCD loans at acquisition
4,498
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 were subject to refinement for up to one year after deal consummation as additional information became 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.
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 six months ended June 30, 2024 or 2023.
11
The following table presents the factors used in the earnings per share computations for the period indicated:
Three Months Ended June 30,
Basic
Net income available to common shareholders
Less: Earnings allocated to participating securities
(84)
(80)
(169)
(144)
Net income allocated to common shareholders
15,975
14,052
31,302
24,668
Weighted average common shares outstanding including participating securities
10,078,611
10,389,790
10,155,979
10,083,026
Less: Participating securities (1)
(52,634)
(58,065)
(54,488)
(58,467)
Average shares
10,025,977
10,331,725
10,101,491
10,024,559
Basic earnings per common shares
Diluted
Weighted average common shares outstanding for basic earnings per common share
Add: Dilutive effects of stock based compensation awards
13,885
14,850
21,073
22,728
Average shares and dilutive potential common shares
10,039,862
10,346,575
10,122,564
10,047,287
Diluted earnings per common share
NOTE 4 – SECURITIES
The following is a summary of available for sale securities:
Gross
Amortized
Unrealized
Estimated
Cost
Gains
Losses
Obligations of U.S. Government sponsored agencies
30,070
(3,215)
26,855
Obligations of states and political subdivisions
63,007
(6,230)
56,786
Mortgage-backed securities
32,103
(1,884)
30,221
Corporate notes
15,665
(1,550)
14,115
Total available for sale securities
140,845
(12,879)
31,453
(3,163)
28,294
63,929
77
(5,760)
58,246
37,789
(1,664)
36,130
20,657
(1,619)
19,038
Certificates of deposit
490
154,318
86
(12,207)
12
The following is a summary of held to maturity securities:
U.S. Treasury securities
107,452
(1,471)
106,609
3,196
Total held to maturity securities
109,805
99,173
1,372
(1,070)
99,475
4,151
103,626
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
Number
Fair
of
Value
Securities
June 30, 2024 - Available for Sale
2,214
(21)
24,641
(3,194)
7,601
(99)
46,195
(6,131)
53,796
73
1,844
(42)
28,147
(1,842)
29,991
102
12,980
Totals
11,659
(162)
111,963
(12,717)
123,622
211
June 30, 2024 - Held to Maturity
22,932
(231)
60,789
(1,240)
83,721
51
December 31, 2023 - Available for Sale
6,519
(173)
19,519
(2,990)
26,038
24
6,806
(71)
40,959
(5,689)
47,765
5,751
(95)
28,693
(1,569)
34,444
104
4,926
(68)
12,487
(1,551)
17,413
Certificate of deposits
24,002
(407)
102,147
(11,800)
126,149
204
December 31, 2023 - Held to Maturity
31,785
35,362
(971)
67,147
49
220
1
35,582
67,367
50
13
As of June 30, 2024, 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 June 30, 2024, 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.
The following is a summary of amortized cost and estimated fair value of securities by contractual maturity as of June 30, 2024. 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
Due in one year or less
2,815
2,808
21,562
21,392
Due after one year through 5 years
16,425
16,042
53,071
52,035
Due after 5 years through 10 years
39,428
35,657
36,015
36,378
Due after 10 years
50,074
43,249
Subtotal
108,742
97,756
As of June 30, 2024 and December 31, 2023, 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 $160.4 million and $204.8 million, respectively.
There were no sales of securities available for sale during the three months ended June 30, 2024 or 2023. Sales of securities available for sale produced $10.2 million in proceeds with immaterial gross losses for the six months ended June 30, 2024. 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 six months ended June 30, 2023.
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 June 30, 2024 and December 31, 2023:
Commercial/industrial
507,895
488,498
Commercial real estate - owner occupied
921,204
893,977
Commercial real estate - non-owner occupied
472,392
473,829
Multi-family
333,660
332,959
Construction and development
230,791
201,823
Residential 1‑4 family
896,957
888,412
Consumer
52,946
50,741
14,795
14,980
Subtotals
3,430,640
3,345,219
ACL - Loans
Loans, net of ACL - Loans
3,385,522
3,301,610
Deferred loan fees, net
(2,005)
(2,245)
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. More information regarding the Company’s methodology related to the ACL-Loans can be found in the Company’s Annual Report.
The Company utilized the high-end range of the Federal Reserve Bank Open Market Committee forecast for national unemployment and the low-end range for national GDP growth at June 30, 2024 and December 31, 2023. As of June 30, 2024, the Company anticipates the national unemployment rate to rise during the forecast period and the national GDP growth rate to decline. Due to recent volatility in forecasts, the Company utilized long-term averages for the remaining loss drivers.
A roll forward of the ACL-Loans is summarized as follows:
Year Ended
June 30, 2023
Beginning Balance
44,378
43,316
43,609
22,680
Adoption of ASU 2016-13
-
10,972
ACL on PCD loans acquired
500
700
4,092
4,292
Charge-offs
(25)
(46)
(77)
(55)
(88)
Recoveries
265
139
886
186
219
Net recoveries
240
93
809
131
Ending Balance
45,118
43,409
A summary of the activity in the ACL - Loans by loan type for the six months ended June 30, 2024 is summarized as follows:
Commercial
Real Estate -
Construction
Commercial /
Owner
Non - Owner
Multi-
and
Residential
Industrial
Occupied
Family
Development
1-4 Family
ACL - Loans - January 1, 2024
5,965
12,285
5,700
4,754
3,597
10,620
615
(17)
(6)
(52)
861
15
Provision
(195)
193
(61)
572
184
92
ACL - Loans - June 30, 2024
5,755
13,338
5,639
4,670
4,169
10,809
610
128
A summary of the activity in the ACL – Loans by loan type for the six months ended June 30, 2023 is summarized as follows:
ACL - Loans - January 1, 2023
4,071
5,204
2,644
2,761
1,592
5,944
314
150
1,859
1,982
1,161
753
2,063
2,567
620
(33)
ACL - Loans on PCD loans acquired
1,082
4,424
28
70
135
1,171
929
151
(417)
2,004
76
43
ACL - Loans - June 30, 2023
7,150
12,851
4,734
3,665
3,238
10,645
1,013
113
In addition to the ACL-Loans, the Company has established an allowance for credit losses on unfunded commitments (“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 $3.3 million and $3.8 million at June 30, 2024 and December 31, 2023, respectively. See Note 10 for further information on commitments.
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.
Provision for credit losses on:
Unfunded Commitments
(500)
90
390
Total provision for credit losses
4,682
The Company’s past due and non-accrual loans as of June 30, 2024 is summarized as follows:
90 Days
Non-Accrual
30-89 Days
or more
with no
Past Due
Non-
specifically
Accruing
and Accruing
Accrual
allocated ACL
4,301
4,318
19
2,477
2,754
5,231
80
528
874
218
1,620
96
125
706
3,385
7,283
11,374
260
The Company’s past due and non-accrual loans as of December 31, 2023 is summarized as follows:
4,303
106
1,344
5,753
365
180
252
3,877
4,309
343
871
507
429
1,807
394
68
108
5,436
893
5,662
11,991
1,113
Interest recognized on non-accrual loans is considered immaterial to the consolidated financial statements for the six months ended June 30, 2024 and 2023.
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 amortized cost of the loan less 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.
16
The following tables present 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 these tables 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 equipment, receivables and inventory of the underlying borrowers.
Collateral Type
As of June 30, 2024
Without an
With an
Allowance
Real Estate
Business Assets
Allocation
4,305
842
9,212
3,729
707
Total Loans
9,919
14,224
13,517
4,571
As of December 31, 2023
5,320
47
5,273
1,089
8,131
794
7,337
3,156
35
8,166
13,486
876
12,610
4,245
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 are assessed for a rating of 5, 6 or 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.
17
The following tables present 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
Revolving
2022
2021
2020
Prior
to Term
Grades 1-4
46,155
56,427
74,025
56,328
45,320
24,366
80,376
382,997
Grade 5
9,817
8,843
52,195
7,612
2,889
2,368
24,402
108,126
Grade 6
837
82
578
122
3,796
5,626
Grade 7
506
378
4,594
1,149
1,320
2,959
11,146
Grade 8
56,478
66,485
126,542
69,112
49,480
28,265
111,533
Current-period gross charge-offs
24,487
61,890
106,742
154,122
101,966
204,971
52,271
706,449
17,641
7,124
24,876
33,421
12,603
32,025
21,578
149,268
815
2,098
3,231
5,060
585
11,885
2,708
7,381
8,126
2,210
30,364
2,813
53,602
42,128
72,537
141,097
198,900
116,875
272,420
77,247
18,879
51,557
68,458
132,059
50,282
105,912
10,249
437,396
1,566
1,158
2,078
9,895
3,612
13,193
31,502
2,872
63
359
622
20,445
52,715
70,536
142,017
54,253
122,177
1,280
25,021
32,624
100,662
73,174
88,854
1,081
322,696
784
880
1,881
4,241
126
7,912
3,052
2,064
25,901
34,505
104,903
92,032
17,960
88,626
65,032
12,308
4,645
5,691
566
194,828
25,481
526
1,261
695
183
1,051
29,328
2,490
2,497
4,987
775
1,648
18,091
117,304
65,558
16,066
5,506
6,649
1,617
43,807
98,818
188,160
188,302
151,373
113,386
87,782
871,628
2,433
3,489
6,574
2,906
215
425
18,609
155
315
178
648
312
321
1,043
1,731
2,491
6,072
46,240
102,774
195,370
192,251
153,319
118,622
88,381
16,137
15,728
10,169
5,007
3,434
1,951
501
52,927
1,970
859
185
635
499
559
9,502
2,473
14,712
83
2,556
52
202,442
453,629
644,412
728,755
456,600
651,637
293,165
Total current-period gross charge-offs
18
2019
59,526
133,469
62,894
54,552
10,380
20,575
78,439
419,835
6,127
5,367
11,641
4,208
1,180
3,039
21,420
52,982
671
61
206
627
1,658
271
5,756
2,351
30
1,687
3,563
14,023
66,689
139,200
80,352
61,317
11,590
25,301
104,049
55,239
105,187
167,124
108,680
47,115
178,586
33,220
695,151
7,586
24,734
24,890
12,955
11,168
26,179
21,519
129,031
1,694
110
867
6,552
699
11,083
3,143
9,988
10,061
2,313
14,775
15,777
2,655
58,712
65,968
141,070
203,769
124,058
73,925
227,094
58,093
54,774
72,336
127,450
53,341
45,898
84,129
447,798
944
4,819
3,516
97
10,081
22,329
64
366
2,722
550
3,702
55,718
77,155
130,386
57,223
48,717
94,760
Commercial real estate - multi-family
25,099
28,144
103,804
74,083
25,640
61,589
2,149
320,508
672
1,092
10,660
12,451
25,771
29,236
114,464
61,616
65,134
67,396
35,017
5,013
1,853
4,281
779
179,473
11,796
1,190
6,060
743
808
20,681
172
790
1,669
77,637
68,586
41,077
5,928
5,155
1,587
102,529
199,295
197,713
160,489
44,411
77,644
80,659
862,740
3,816
6,269
119
612
2,465
18,704
158
319
810
249
1,716
316
29
1,022
400
2,947
5,252
106,819
204,799
204,821
161,630
45,423
83,236
81,684
23,711
12,497
6,570
1,194
1,326
925
50,721
20
1,346
347
663
551
1,076
38
9,697
2,520
14,892
88
2,608
422,660
673,206
781,990
489,813
208,380
508,205
260,965
Loans that were both experiencing financial difficulty and were modified during the six months ended June 30, 2024 and 2023, were insignificant to these consolidated financial statements.
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 assist with determining 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:
Fair value at beginning of period
9,582
Servicing asset additions
879
Loan payments and payoffs
(819)
(1,624)
Changes in valuation inputs and assumptions used in the valuation model
357
1,140
Amount recognized through earnings
26
395
MSR asset acquired
3,691
Fair value at end of period
Unpaid principal balance of loans serviced for others
1,164,785
1,175,709
Mortgage servicing rights as a percent of loans serviced for others
1.18
1.16
The primary economic assumptions utilized by the Company in measuring the value of MSRs were constant prepayment speeds of 7.8 and 7.5 months as of June 30, 2024 and December 31, 2023, respectively, and discount rates of 10.19% as of each of those periods. The constant prepayment speeds are obtained from publicly available sources for each of the loan programs the Company originates under.
NOTE 7 – NOTES PAYABLE
The Company utilizes FHLB advances to fund liquidity. The Company had outstanding balances borrowed from the FHLB of $90.5 million at June 30, 2024 and $35.5 million as of December 31, 2023. The advances, rate, and maturities of FHLB advances were as follows:
December 31,
Maturity
Rate
Fixed rate, fixed term
06/30/2025
5.16%
25,000
03/23/2026
4.02%
10,000
05/26/2026
1.95%
06/29/2026
4.77%
15,000
03/23/2027
3.91%
06/28/2027
4.57%
03/23/2028
3.85%
04/22/2030
0.00%
508
90,508
35,508
Adjustment due to purchase accounting
(187)
(238)
Future maturities of borrowings were as follows:
1 year or less
1 to 2 years
30,000
2 to 3 years
3 to 4 years
4 to 5 years
Over 5 years
As of June 30, 2024, the Company had borrowing availability at the FHLB totaling $737.1 million in addition to the existing borrowings noted in the tables above.
NOTE 8 – SUBORDINATED NOTES AND JUNIOR SUBORDINATED DEBENTURES
During July 2020, the Company entered into subordinated note agreements with two separate commercial banks. The Company had through December 31, 2020, to borrow funds up to a maximum availability of $6.0 million under each agreement, or $12.0 million total. These notes were issued with 10-year maturities, carry interest at a fixed rate of 5.0% through June 30, 2025, and at a variable rate thereafter, payable quarterly. These notes are callable on or after January 1, 2026 and qualify for Tier 2 capital for regulatory purposes. The Company had outstanding balances of $6.0 million under these agreements at June 30, 2024 and December 31, 2023.
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 June 30, 2024 and December 31, 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 totaled $4.1 million and $8.2 million, respectively, carried interest at floating rates resetting on each quarterly payment date, and were due on January 7, 2034 and December 15, 2036, respectively. Applicable discounts originally totaling $1.5 million were recorded to carry the assumed debentures at their then estimated fair value and were being accreted to interest expense over the remaining life of the debentures. Both junior subordinated debentures were redeemable by the Company, subject to prior approval by the Federal Reserve Bank, on any quarterly payment date. The junior subordinated debentures represented the sole asset of Trust I and Trust II. The trusts were not included in the Company’s 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, was liable for the distributions and other payments required on the trusts’ preferred securities. Trust I and Trust II also provided the Company with $12.0 million in Tier 1 capital for regulatory capital purposes. The Company redeemed the junior subordinated debenture related to Trust II during December 2023 and the junior subordinated debenture related to Trust I during January 2024, resulting in the trusts’ dissolution. As a result of the redemption of the junior subordinated debenture related to Trust II and notification of the Company’s intent to redeem the junior subordinated debenture of Trust I prior to December 31, 2023, the Company amortized the remaining original fair value discounts into interest expense during December 2023.
21
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.
Under regulatory guidance for non-advanced approaches institutions, the Bank and Company are 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 June 30, 2024 and December 31, 2023, this buffer was 2.5%. The Bank met all capital adequacy requirements to which they are subject as of June 30, 2024 and December 31, 2023.
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
Total capital (to risk-weighted assets):
Company
482,349
13.66
%
282,548
8.00
370,844
10.50
NA
Bank
434,726
12.32
282,387
370,633
352,984
10.00
Tier 1 capital (to risk-weighted assets):
429,847
12.17
211,911
6.00
300,207
8.50
394,224
11.17
211,790
300,036
Common Equity Tier 1 capital (to risk-weighted assets):
158,933
4.50
247,229
7.00
158,843
247,089
229,440
6.50
Tier 1 capital (to average assets):
10.98
156,549
4.00
10.07
156,540
195,675
5.00
484,398
13.99
276,904
363,437
446,634
12.91
276,726
363,202
345,907
437,979
12.65
207,678
294,211
412,215
11.92
207,544
294,021
433,979
12.54
155,759
242,291
155,658
242,135
224,840
11.05
158,581
10.40
158,585
198,231
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 June 30, 2024 and December 31, 2023 was approximately $13.2 million and $5.9 million, respectively. The fair value of these rate-lock commitments are not material to these financial statements and have not been recorded.
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
Commitments to extend credit:
Fixed
59,958
92,113
Variable
704,141
707,285
Credit card arrangements
22,273
21,213
Letters of credit
11,265
9,785
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.
23
Information regarding the fair value of assets measured at fair value on a recurring basis is as follows:
Instruments
Markets
Significant
Measured
for Identical
Observable
Unobservable
At Fair
Inputs
(Level 1)
(Level 2)
(Level 3)
Securities available for sale
Mortgage servicing rights
There were no assets measured on a recurring basis using significant unobservable inputs (Level 3) during these periods. Furthermore, there were no liabilities measured on a recurring basis during the periods.
Information regarding the fair value of assets measured at fair value on a non-recurring basis is as follows:
Quoted Prices
In Active
OREO
Loans individually evaluated, net of reserve
9,653
10,365
9,242
11,815
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, 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
Range of
Average
Valuation Technique
Discounts
Discount
Third party appraisals, sales contracts or brokered price options
Collateral discounts and estimated costs to sell
Loans individually evaluated
Third party appraisals and discounted cash flows
Collateral discounts and discount rates
0% - 71
3% - 71
0% - 53
31
The carrying value and estimated fair value of financial instruments not measured and reported at fair value on a recurring or non-recurring basis at June 30, 2024 and December 31, 2023 are as follows:
Carrying
amount
Level 1
Level 2
Level 3
Financial assets:
Securities held to maturity
3,172,419
Financial liabilities:
3,129,841
3,168,749
3,153,512
25
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 June 30, 2024, 100,954 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 three months ended June 30, 2024 and 2023, compensation expense of $0.5 million and $0.6 million, respectively, was recognized related to restricted stock awards. For the six months ended June 30, 2024 and 2023, compensation expense of $1.1 million and $1.0 million, respectively, was recognized related to restricted stock awards.
As of June 30, 2024, there was $3.0 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 1.66 years. The aggregate grant date fair value of restricted stock awards that vested during the six months ended June 30, 2024, was approximately $2.1 million.
For the period ended
Weighted-
Average Grant-
Shares
Date Fair Value
Restricted Stock
Outstanding at beginning of period
58,196
72.28
59,272
65.85
Granted
24,581
85.85
25,375
80.17
Vested
(30,143)
71.14
(25,762)
62.05
Forfeited or cancelled
(820)
65.09
Outstanding at end of period
52,634
79.27
58,065
71.41
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2023, included in our Annual Report and with our unaudited condensed accompanying notes set forth in this Quarterly Report on Form 10-Q for the quarterly period June 30, 2024.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report are forward-looking statements within the meaning of and subject to the safe harbor protections of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements relating to the Company’s assets, business, cash flows, condition (financial or otherwise), credit quality, financial performance, liquidity, short and long-term performance goals, prospects, results of operations, strategic initiatives, potential future acquisitions, disposition and other growth opportunities. These statements, which are based upon certain assumptions and estimates and describe the Company’s future plans, results, strategies and expectations, can generally be identified by the use of the words and phrases “may,” “will,” “should,” “could,” “would,” “goal,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target,” “aim,” “predict,” “continue,” “seek,” “projection” and other variations of such words and phrases and similar expressions. These forward-looking statements are not historical facts, and are based upon current expectations, estimates and projections about the Company’s industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond the Company’s control. The inclusion of these forward-looking statements should not be regarded as a representation by the Company or any other person that such expectations, estimates and projections will be achieved. Accordingly, the Company cautions investors that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict and that are beyond the Company’s control. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable as of the date of this report, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. A number of factors could cause actual results to differ materially from those contemplated by the forward-looking statement in this report including, without limitation, the risks and other factors set forth in the Company’s Registration Statements under the captions “Cautionary Note Regarding Forward-Looking Statements” and “Risk factors.” Many of these factors are beyond the Company’s ability to control or predict. If one or more events related to these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to be incorrect, actual results may differ materially from the forward-looking statements. Accordingly, investors should not place undue reliance on any such forward-looking statements. Any forward-looking statements speaks only as of the date of this report, and the Company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law. New risks and uncertainties may emerge from time to time, and it is not possible for the Company to predict their occurrence or how they will affect the Company.
We qualify all of our forward-looking statements by these cautionary statements.
OVERVIEW
Bank First Corporation is a Wisconsin corporation that was organized primarily to serve as the holding company for Bank First, N.A. Bank First, N.A., which was incorporated in 1894, is a nationally-chartered bank headquartered in Manitowoc, Wisconsin. It is a member of the Board of Governors of the Federal Reserve System (“Federal Reserve”), and is regulated by the Office of the Comptroller of the Currency (“OCC”). Including its headquarters in Manitowoc, Wisconsin, the Bank has twenty-six banking locations in Manitowoc, Outagamie, Brown, Winnebago, Sheboygan, Shawano, Waupaca, Ozaukee, Monroe, Fond du Lac, Waushara, Dane, Columbia and Jefferson counties in Wisconsin. The Bank offers loan, deposit and treasury management products at each of its banking locations.
As with most community banks, the Bank derives a significant portion of its income from interest received on loans and investments. The Bank’s primary source of funding is deposits, both interest-bearing and noninterest-bearing. In order to maximize the Bank’s net interest income, or the difference between the income on interest-earning assets and the expense of interest-bearing liabilities, the Bank must not only manage the volume of these balance sheet items, but also the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities. To account for credit risk inherent in all loans, the Bank maintains an ACL - Loans to absorb possible losses on existing loans that may become uncollectible. The Bank establishes and maintains this allowance by charging a provision for loan losses against operating earnings. Beyond its net interest income, the Bank further receives income through the net gain on sale of loans held for sale as well as servicing income which is retained on those sold loans. In order to maintain its operations and bank locations, the Bank incurs various operating expenses which are further described within the “Results of Operations” later in this section.
On February 10, 2023, the Company consummated its merger with Hometown pursuant to the Agreement and Plan of Bank Merger, dated as of July 25, 2022, by and among the Company and Hometown, whereby Hometown was merged with and into the Company, and Hometown Bank, Hometown’s wholly owned banking subsidiary, was merged with and into the Bank. The system integration was completed, and six branches of Hometown Bank opened on February 13, 2023 as branches of the Bank, expanding the Bank’s presence in Fond du Lac, Columbia, Dane and Waushara County.
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 are not included in the accompanying consolidated financial statements. The acquisition method of accounting required assets purchased and liabilities assumed to be recorded at their respective fair values at the date of acquisition. The Company determines the fair value of core deposit intangibles, securities, premises and equipment, loans, other assets and liabilities, deposits and borrowings with the assistance of third-party valuations, appraisals, and third-party advisors. The estimated fair values are subject to refinement for up to one year after the consummation as additional information becomes available relative to the closing date fair values.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables present certain selected historical consolidated financial data as of the dates or for the period indicated:
At or for the Three Months Ended
At or for the Six Months Ended
(In thousands, except per share data)
6/30/2024
3/31/2024
12/31/2023
9/30/2023
6/30/2023
Results of Operations:
Interest income
49,272
48,663
46,989
Interest expense
15,923
15,747
12,931
33,349
32,916
34,058
33,149
32,416
Noninterest income
4,397
42,458
5,254
Noninterest expense
20,324
28,862
19,647
Income before income tax expense
17,222
46,012
19,665
Income tax expense
1,810
11,114
4,861
34,898
14,804
Earnings per common share - basic
1.51
3.39
1.43
Earnings per common share - diluted
Common Shares:
Basic weighted average
10,177,932
10,308,275
10,330,779
Diluted weighted average
10,201,373
10,338,715
10,353,621
Outstanding
10,031,350
10,129,190
10,365,131
10,379,071
10,389,240
Noninterest income / noninterest expense:
1,634
1,847
1,821
979
791
Income from UFS
(179)
726
741
734
Valuation adjustment on mortgage servicing rights
(312)
(65)
229
273
248
Gain on sale of UFS
38,904
Other noninterest income
1,151
827
647
Personnel expense
10,893
10,357
10,216
Occupancy, equipment and office
1,584
1,307
1,455
2,389
1,900
2,153
Postage, stationery and supplies
238
244
Net gain (loss) on sales and valuations of other real estate owned
(47)
1,591
53
Net loss on sales of securities
7,826
95
99
60
176
264
1,293
1,363
1,438
1,500
1,604
1,626
Other noninterest expense
2,169
2,315
2,173
Period-end balances:
83,374
75,776
Investment securities available-for-sale, at fair value
138,420
179,046
191,303
Investment securities held-to-maturity, at cost
111,732
77,154
77,708
3,383,395
3,355,549
3,314,481
Allowance for credit losses - loans
(44,378)
(43,404)
(43,409)
Premises and equipment
69,621
70,994
66,958
Goodwill and other intangibles, net
199,127
200,602
202,102
203,705
205,329
Mortgage Servicing Rights
13,356
13,733
13,504
Other Assets
143,274
143,802
143,827
154,966
154,871
Total assets
4,099,924
4,087,519
4,092,071
3,416,039
3,398,293
3,405,736
17,191
23,802
Borrowings
102,321
47,295
51,394
70,319
70,269
27,260
24,387
3,490,594
3,510,190
3,521,199
Stockholders’ equity
577,329
Book value per common share
61.27
60.16
59.80
55.62
54.95
Tangible book value per common share (1)
41.42
40.35
40.30
36.00
35.18
Average balances:
3,399,906
3,355,142
3,330,511
3,324,729
3,312,353
3,377,526
3,224,384
Interest-earning assets
3,696,099
3,741,498
3,738,589
3,671,620
3,683,143
3,718,801
3,604,344
4,094,542
4,144,896
4,147,859
4,092,565
4,100,549
4,119,719
4,001,680
3,401,828
3,446,145
3,406,028
3,404,708
3,394,667
3,423,985
3,326,997
Interest-bearing liabilities
2,466,726
2,512,304
2,426,870
2,411,062
2,437,034
2,489,514
2,386,276
199,959
201,408
202,933
204,556
206,209
200,684
183,310
610,818
613,190
613,244
576,315
567,531
612,004
544,002
Financial ratios (2):
Return on average assets
1.58
1.50
3.34
1.44
1.38
1.54
1.25
Return on average common equity
10.57
10.11
22.58
10.19
9.99
10.34
9.20
Average equity to average assets
14.92
14.79
14.78
14.08
13.84
14.86
13.59
Stockholders’ equity to assets
14.82
14.68
14.12
13.95
Tangible equity to tangible assets (1)
10.53
10.48
10.39
9.62
9.40
Loan yield
5.51
5.41
5.33
5.23
5.20
5.46
5.08
Earning asset yield
5.40
5.11
5.04
5.37
4.89
Cost of funds
2.66
2.55
2.57
2.13
1.92
2.61
1.72
Net interest margin, taxable equivalent
3.63
3.62
3.53
3.71
3.77
3.76
Net loan charge-offs to average loans
(0.05)
(0.07)
(0.01)
Nonperforming loans to total loans
0.31
0.29
0.20
0.10
0.15
Nonperforming assets to total assets
0.27
0.21
0.13
0.18
Allowance for credit losses - loans to total loans
1.32
1.31
1.30
1.29
GAAP RECONCILIATION AND MANAGEMENT EXPLANATION OF NON-GAAP FINANCIAL MEASURES
We identify certain financial measures discussed in the Report as being “non-GAAP financial measures.” The non-GAAP financial measures presented in this Report are tangible book value per common share and tangible equity to tangible assets.
In accordance with the SEC’s rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows.
The non-GAAP financial measures that we discuss in this Report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in our selected historical consolidated financial data may differ from that of other companies reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures we have presented in our selected historical consolidated financial data when comparing such non-GAAP financial measures. The following discussion and reconciliations provide a more detailed analysis of these non-GAAP financial measures.
Tangible book value per common share and tangible equity to tangible assets are non-GAAP measures that exclude the impact of goodwill and other intangibles used by the Company’s management to evaluate capital adequacy. Because intangible assets such as goodwill and other intangibles vary extensively from company to company, we believe that the presentation of this information allows investors to more easily compare the Company’s capital position to other companies. The most directly comparable financial measures calculated in accordance with GAAP are book value per common share, return on average common equity and stockholders’ equity to total assets.
Tangible Assets
Adjustments:
(175,106)
(175,104)
Core deposit intangible, net of amortization
(24,021)
(25,496)
(26,996)
(28,599)
(30,225)
Tangible assets
3,946,693
3,899,322
4,019,740
3,883,814
3,886,742
Tangible Common Equity
Tangible common equity
415,452
408,728
417,696
373,624
365,543
Tangible book value per common share
Total stockholders’ equity to total assets
Tangible common equity to tangible assets
RESULTS OF OPERATIONS
Results of Operations for the Three Months Ended June 30, 2024 and June 30, 2023
General. Net income increased $1.9 million to $16.1 million for three months ended June 30, 2024, compared to $14.1 million for the same period in 2023. This increase was partially due to positive valuation adjustments on the Bank’s MSRs during the second quarter of 2024 compared to negative adjustments during the second quarter of 2023. Also, gains on the sale and valuations of OREO during the second quarter of 2024 compared favorably to losses on these sales and valuations during the second quarter of 2023.
Net Interest Income. The management of interest income and expense is fundamental to our financial performance. Net interest income, the difference between interest income and interest expense, is the largest component of the Company’s total revenue. Management closely monitors both total net interest income and the net interest margin (net interest income divided by average earning assets). We seek to maximize net interest income without exposing the Company to an excessive level of interest rate risk through our asset and liability policies. Interest rate risk is managed by monitoring the pricing, maturity and repricing options of all classes of interest-bearing assets and liabilities. Our net interest margin can also be adversely impacted by the reversal of interest on nonaccrual loans and the reinvestment of loan payoffs into lower yielding investment securities and other short-term investments.
Net interest and dividend income decreased by $1.3 million to $33.0 million for the three months ended June 30, 2024 compared to $34.3 million for three months ended June 30, 2023. The decrease in net interest income was primarily due to increased cost of funding liabilities. The momentum of these increases has begun to slow while average rates on earned on interest-earning assets continued a steady move higher. Total average interest-earning assets were $3.70 billion for the three months ended June 30, 2024, up from $3.68 billion for the same period in 2023. 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 $3.4 million, or 7.4%, to $49.3 million for the three months ended June 30, 2024 compared to $45.9 million for the same period in 2023. The increase in total interest income was primarily due to an increase in the average interest rate earned on interest-earning assets. The average balance of interest-earning assets increased by $13.0 million during the three months ended June 30, 2024 compared to the same period in 2023 and the average interest rate earned on these assets increased by 0.36% in the year-over-year second quarters.
Interest Expense. Interest expense increased $4.7 million, or 40.2%, to $16.3 million for the three months ended June 30, 2024 compared to $11.7 million for the same period in 2023. The increase in interest expense was primarily due to higher crediting interest rates on interest-bearing liabilities.
Interest expense on interest-bearing deposits increased by $5.7 million to $15.8 million for the three months ended June 30, 2024 compared to $10.1 million for the same period in 2023. The average balance and cost of interest-bearing deposits was $2.42 billion and 2.63% for the three months ended June 30, 2024, compared to $2.32 billion and 1.74% for the same period in 2023.
Provision for Credit Losses. Credit risk is inherent in the business of making loans. We establish an allowance for credit losses through charges to earnings, which are shown in the statements of operations as the provision for credit losses. The provision for credit 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 did not record a provision for credit loss during the three months ended June 30, 2024 or 2023. Economic forecasts, primarily US gross domestic product and unemployment projections, were little changed during the second quarter of 2024 resulting in consistent economic and qualitative factors in the Current Expected Credit Losses (“CECL”) methodology. We recorded net recoveries of $0.2 million during the three months ended June 30, 2024 compared to net recoveries of $0.1 million during the three months ended June 30, 2023. Metrics regarding the credit quality of the Bank’s loan portfolio continue to show very little in terms of stress. Also, due to a reduction in unfunded loan commitments and an increase in outstanding loans, the Bank moved $0.5 million from its ACL-Unfunded Commitments to its ACL – Loans during the second quarter of 2024. While this move had no impact on the Bank’s profitability for the quarter, it did increase the allowance for potential loan credit losses to correspond with the increase in overall loan portfolio balances. The ACL - Loans was $45.1 million, or 1.32% of total loans, at June 30, 2024 compared to $43.4 million, or 1.31% of total loans at June 30, 2023.
Noninterest Income. Noninterest income is an important component of our total revenues. A significant portion of our noninterest income has historically been associated with service charges and income from the Bank’s unconsolidated subsidiaries, Ansay and UFS. Other sources of noninterest income include loan servicing fees and gains on sales of mortgage loans.
Noninterest income increased $1.3 million to $5.9 million for the three months ended June 30, 2024 compared to $4.6 million for the same period in 2023. Due to the sale of 100% of the Bank’s member interest in UFS on October 1, 2023, no income from UFS was recorded in the second quarter of 2024, compared to income of $0.8 million during the second quarter of 2023. Service charges increased by 19.0% from the prior-year second quarter primarily due to a recently negotiated vendor incentive program related to the Bank’s credit and debit card payments processing. Positive valuation adjustments to the Bank’s MSRs totaling $0.3 million during the second quarter of 2024 compared favorably to $0.5 million in negative valuation adjustments during the second quarter of 2023.
The major components of our noninterest income are listed below:
$ Change
% Change
(In thousands)
Noninterest Income
335
(770)
(100)
(14)
(2)
887
NM
41
415
66
1,323
32
Noninterest Expense. Noninterest expense decreased $0.9 million to $19.1 million for the three months ended June 30, 2024 compared to $19.9 million for the same period in 2023. Salaries, commissions, employee benefits, occupancy and data processing expenses continue to be well managed which resulted in only slight increases year-over-year in the second quarter. Outside service fees increased by $0.5 million, or 40.2%, during the second quarter of 2024 compared to the prior-year second quarter. Included in outside service fees during the most recent quarter was $0.2 million paid to an advisory firm which assisted the Bank in negotiations with a vendor, estimated to result in savings for the Bank of $1.1 million over the next five years. Also included in outside service fees during the most recent quarter was $0.3 million in commissions paid related to sales of former branch buildings which were no longer in use by the Bank. These sales resulted in net gains on sale of OREO totaling $0.5 million during the quarter, comparing favorably to net losses totaling $0.5 million in the second quarter of 2023.
The major components of our noninterest expense are listed below:
Noninterest Expense
134
Postage, stationary, and supplies
(19)
(8)
Net loss (gain) on sales and valuations of other real estate owned
(950)
(7)
542
(197)
(12)
(432)
(16)
Total noninterest expenses
(889)
(4)
Income Tax Expense. We recorded a provision for income taxes of $3.8 million for the three months ended June 30, 2024 compared to a provision of $4.7 million for the same period during 2023, reflecting effective tax rates of 19.0% and 25.1%, respectively. On July 5, 2023, Wisconsin passed its 2023 state budget which included a provision exempting income earned from certain commercial loans of $5.0 million or less from state taxability. As a result of this legislation, income from a significant portion of the Company’s loans will no longer be subject to taxation in its home state. The effective tax rates were further 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, 2024 and June 30, 2023
General. Net income increased $6.7 million to $31.5 million for six months ended June 30, 2024, compared to $24.8 million for the same period in 2023. This increase was partially due to the added scale of operations resulting from the Hometown acquisition during the first quarter of 2023. The first six months of 2023 was also negatively impacted by $1.5 million in acquisition expenses and a $3.6 million provision for credit losses related to the acquired loans from Hometown. Offsetting these factors was the absence of income from UFS during the first six months of 2024 compared to $1.7 million in income provided by UFS during the first six months of 2023.
33
Net interest and dividend income decreased by $0.1 million to $66.4 million for the six months ended June 30, 2024 compared to $66.5 million for six months ended June 30, 2023. The decrease in net interest income was primarily due to increases in rates paid on interest-bearing liabilities outpacing increasing rates earned on interest-earning assets over the last twelve months. Comparing the first six months of 2024 to the first six months of 2023, rates earned on interest-earning assets increased by 0.48% while rates paid on interest-bearing liabilities increased by 0.89%. Tax equivalent net interest margin decreased 0.14% to 3.62% for the six months ended June 30, 2024, down from 3.76% for the same period in 2023. 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 $11.8 million, or 13.6%, to $98.6 million for the six months ended June 30, 2024 compared to $86.8 million for the same period in 2023. The increase in total interest income was primarily due to the aforementioned increase in rates earned on interest-earning assets over the last twelve months. The average balance of interest-earning assets increased by $114.5 million during the first six months of 2024 compared to the same period in 2023 and the average interest rate earned on these assets increased from 4.89% for the first half of 2023 to 5.37% during the first half of 2024.
Interest Expense. Interest expense increased $11.9 million, or 58.7%, to $32.3 million for the six months ended June 30, 2024 compared to $20.3 million for the same period in 2023. The increase in interest expense was primarily due to elevated crediting rates on interest-bearing liabilities. The average balance of interest-bearing liabilities increased by $103.2 million during the first six months of 2024 compared to the same period in 2023 and the average interest rate paid on these balances was 1.72% for the first half of 2023 compared to 2.61% for the first half of 2024.
Interest expense on interest-bearing deposits totaled $31.2 million and $17.5 million for the six months ended June 30, 2024 and 2023, respectively. The average cost of interest-bearing deposits was 2.57% for the six months ended June 30, 2024, compared to 1.55% for the same period in 2023.
Provision for Credit Losses. Credit risk is inherent in the business of making loans. We establish an allowance for credit losses through charges to earnings, which are shown in the statements of operations as the provision for credit losses. Specifically identifiable and quantifiable known losses are promptly charged off against the allowance. The provision for credit losses is determined by conducting a quarterly evaluation of the adequacy of our allowance for credit losses 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 credit 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 credit losses of $0.2 million for the six months ended June 30, 2024 compared to $4.2 million for the same period in 2023. The increased provision for the first six months of 2023 was primarily related to loans acquired from Hometown. We recorded net recoveries of $0.8 million for the six months ended June 30, 2024 compared to net recoveries of $0.1 million for the same period in 2023. The ACL was $45.1 million, or 1.32% of total loans, at June 30, 2024 compared to $43.4 million, or 1.31% of total loans at June 30, 2023.
Noninterest income decreased $0.1 million to $10.3 million for the six months ended June 30, 2024 compared to $10.4 million for the same period in 2023. While total noninterest income was little changed in the year-over-year first six months, components of noninterest income did show variability. Service charges and income provided by the Bank’s member interest in Ansay increased $0.4 million and $0.3 million, respectively, for the first six months of 2024 compared to the same period in 2023. Offsetting these increases, the sale of 100% of the Bank’s member interest in UFS on October 1, 2023, lead to no income from UFS being recorded in the half of 2024, compared to income of $1.7 million during the second quarter of 2023.
Service Charges
370
337
Loan Servicing income
(204)
832
(129)
Noninterest Expense. Noninterest expense decreased $0.2 million to $39.4 million for the six months ended June 30, 2024 compared to $39.6 million for the same period in 2023. Data processing expense increased by $0.5 million, or 13.8%, over the first half of 2024 compared to the first half of 2023 due to added scale from the acquisition of Hometown, which occurred during the first half of 2023. Expenses related to this acquisition totaled $1.5 million during the first half of 2023. The lack of a similar acquisition during the first half of 2024 caused decreases in the areas of postage, stationary, supplies and outside service fees expense period-over-period. Finally, gains on sales and valuations of OREO totaling $0.5 million during the first half of 2024 compared favorably to losses of $0.5 million during the first half of 2023.
1,115
0
545
(161)
(27)
(997)
(41)
(9)
(367)
(10)
(119)
(177)
(229)
Income Tax Expense. We recorded a provision for income taxes of $5.6 million for the six months ended June 30, 2024 compared to a provision of $8.3 million for the same period during 2023, reflecting effective tax rates of 15.1% and 25.1%, respectively. On July 5, 2023, Wisconsin passed its 2023 state budget which included a provision exempting income earned from certain commercial loans of $5.0 million or less from state taxability. As a result of this legislation, income from a significant portion of the Company’s loans will no longer be subject to taxation in its home state. Final rules relating to qualifying loans under this legislation were not published until the first quarter of 2024. Based on these final rules, the Company was able to further reduce its estimated tax liability from 2023 by $1.3 million, resulting in the lower provision for income taxes and effective tax rate during the first half of 2024. 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.
NET INTEREST MARGIN
Net interest income represents the difference between interest earned, primarily on loans and investments, and interest paid on funding sources, primarily deposits and borrowings. Interest rate spread is the difference between the average rate earned on total interest-earning assets and the average rate paid on total interest-bearing liabilities. Net interest margin is the amount of net interest income, on a fully taxable-equivalent basis, expressed as a percentage of average interest-earning assets. The average rate earned on earning assets is the amount of annualized taxable-equivalent interest income expressed as a percentage of average earning assets. The average rate paid on interest-bearing liabilities is equal to annualized interest expense as a percentage of average interest-bearing liabilities.
The following tables set forth the distribution of our average assets, liabilities and stockholders’ equity, and average rates earned or paid on a fully taxable equivalent basis for each of the periods indicated:
Income/
Rate Earned/ Paid
Balance
Expenses (1)
(dollars in thousands)
ASSETS
Loans (2)
3,293,213
182,549
5.54
3,209,040
167,425
5.22
106,693
4,895
4.59
103,313
4,690
4.54
Taxable (available for sale)
123,616
4,862
3.93
181,969
5,332
2.93
Tax-exempt (available for sale)
32,888
1,139
3.46
35,496
1,124
3.17
Taxable (held to maturity)
108,037
4,283
3.96
73,271
2,631
3.59
Tax-exempt (held to maturity)
3,217
2.64
4,228
2.60
28,435
1,945
6.84
75,826
4,155
5.48
Total interest-earning assets
199,758
185,467
Non interest-earning assets
442,843
460,748
(44,400)
(43,342)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Checking accounts
400,135
11,825
2.96
294,149
5,275
1.79
Savings accounts
814,980
12,218
856,852
10,137
Money market accounts
595,018
14,193
2.39
667,577
12,444
1.86
605,071
25,273
4.18
497,527
12,463
2.50
Brokered deposits
748
2.27
4,490
129
2.87
Total interest-bearing deposits
2,415,952
63,526
2.63
2,320,595
40,448
1.74
Other borrowed funds
50,774
2,195
4.32
116,439
6,309
5.42
Total interest-bearing liabilities
65,721
46,757
Non-interest bearing liabilities
Demand deposits
985,876
1,074,072
31,122
21,912
3,483,724
3,533,018
Shareholders’ equity
Total liabilities & shareholders’ equity
Net interest income on a fully taxable equivalent basis
134,037
138,710
Less taxable equivalent adjustment
(1,285)
(1,244)
132,752
137,466
Net interest spread (3)
2.74
3.12
Net interest margin (4)
36
Earned/
Paid (1)
3,270,089
179,602
5.49
3,122,738
159,219
5.10
107,437
4,873
101,646
4,597
4.52
142,985
6,143
4.30
210,753
5,879
2.79
33,409
3.41
40,689
1,271
107,193
4,266
3.98
63,789
2,311
3,677
4,704
2.59
54,011
3,484
6.45
60,025
2,961
4.93
199,604
176,360
444,965
437,328
Allowance for loan losses
(44,047)
(39,992)
410,955
11,669
2.84
294,648
4,831
1.64
813,963
12,048
1.48
839,702
8,670
1.03
616,236
14,674
2.38
666,530
11,020
1.65
597,593
24,308
4.07
474,225
10,675
2.25
5,597
163
2.91
2,439,495
62,716
2,280,702
35,359
1.55
50,019
2,165
4.33
105,574
5,629
40,988
984,490
1,046,295
33,711
25,107
3,507,715
3,457,678
Total liabilities & shareholders' equity
134,723
135,372
(1,283)
(1,257)
133,440
134,115
2.76
3.18
Rate/Volume Analysis
The following tables describe the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected our interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volumes (changes in average balance multiplied by prior year average rate) and (ii) changes attributable to changes in rate (change in average interest rate multiplied by prior year average balance), while (iii) changes attributable to the combined impact of volumes and rates have been allocated proportionately to separate volume and rate categories.
Three Months Ended June 30, 2024
Six Months Ended June 30, 2024
Compared with
Three Months Ended June 30, 2023
Six Months Ended June 30, 2023
Increase/(Decrease) Due to Change in
Volume
4,473
10,651
15,124
7,733
12,650
20,383
263
276
Taxable (AFS)
(1,993)
1,523
(470)
(2,271)
2,535
Tax-exempt (AFS)
(86)
(241)
(131)
Taxable (HTM)
1,355
297
1,652
1,708
247
1,955
Tax-exempt (HTM)
(26)
(3,058)
848
(2,210)
(319)
523
819
13,472
14,291
6,846
16,398
23,244
2,341
4,209
6,550
2,396
4,442
6,838
(516)
2,597
2,081
(273)
3,651
3,378
(1,458)
3,207
1,749
(885)
4,539
3,654
3,134
9,676
12,810
3,323
10,310
13,633
Brokered Deposits
(90)
(22)
(112)
(116)
(146)
Total interest bearing deposits
3,411
19,667
23,078
4,445
22,912
27,357
(3,029)
(1,085)
(4,114)
(2,551)
(913)
(3,464)
382
18,582
18,964
1,894
21,999
23,893
Change in net interest income
437
(5,110)
(4,673)
4,952
(5,601)
(649)
CHANGES IN FINANCIAL CONDITION
Total Assets. Total assets decreased $76.0 million, or 1.8%, to $4.15 billion at June 30, 2024, from $4.22 billion at December 31, 2023.
Cash and Cash Equivalents. Cash and cash equivalents decreased by $148.5 million to $99.0 million at June 30, 2024, from $247.5 million at December 31, 2023. This decline was primarily the result of funds being invested in growth in the Bank’s loan portfolio as well as a reduction in deposits and securities sold under repurchase agreements. Securities sold under repurchase agreements reported in prior periods related to one customer who discontinued this arrangement during the first quarter of 2024. These declines were partially offset by increases in notes payable through the first half of 2024.
Investment Securities. The carrying value of total investment securities decreased by $6.9 million to $238.6 million at June 30, 2024, from $245.5 million at December 31, 2023.
Loans. Net loans increased by $84.2 million, totaling $3.38 billion at June 30, 2024 compared to $3.30 billion at December 31, 2023.
Deposits. Deposits decreased $33.0 million, or 1.0%, to $3.40 billion at June 30, 2024 from $3.43 billion at December 31, 2023. The Bank typically sees a seasonal decline in deposits during the first half of the year.
Borrowings. At June 30, 2024, borrowings consisted of advances from the FHLB of Chicago and subordinated debt to other banks and an individual. FHLB borrowings increased $55.1 million, or 156.1%, to $90.3 million at June 30, 2024 from $35.3 million at December 31, 2023. These additional borrowings are intended to provide liquidity to support near-term loan growth. Subordinated debt remained stable at $12.0 million at June 30, 2024 and December 31, 2023. A junior subordinated debenture totaling $4.1 million, which was part of the acquisition of Hometown, was repaid in full during the first quarter of 2024.
Stockholders’ Equity. Total stockholders’ equity decreased $5.2 million, or 0.8%, to $614.6 million at June 30, 2024 from $619.8 million at December 31, 2023. Repurchases of the Company’s common stock totaling $30.2 million and dividends declared totaling $7.1 million offset the positive impact of earnings totaling $31.5 million during the first six months of the year.
LOANS
Our lending activities are principally conducted in the state of Wisconsin. The Bank makes commercial and industrial loans, commercial real estate loans, construction and development loans, residential real estate loans, and a variety of consumer loans and other loans. Much of the loans made by the Bank are secured by real estate collateral. The Bank’s commercial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower, with liquidation of the underlying real estate collateral typically being viewed as the primary source of repayment in the event of borrower default. Although commercial business loans are also often collateralized by equipment, inventory, accounts receivable, or other business assets, the liquidation of collateral in the event of default is often an insufficient source of repayment. Repayment of the Bank’s residential loans are generally dependent on the health of the employment market in the borrowers’ geographic areas and that of the general economy with liquidation of the underlying real estate collateral being typically viewed as the primary source of repayment in the event of borrower default.
Our loan portfolio is our most significant earning asset, comprising 82.7% and 79.2% of our total assets as of June 30, 2024 and December 31, 2023, 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 $85.7 million, or 2.6%, to $3.43 billion as of June 30, 2024 as compared to $3.34 billion as of December 31, 2023. This increase during the first six months of 2024 was primarily driven by solid demand for new credit from our existing customer relationships. This growth was comprised of an increase of $19.5 million or 4.0% in commercial and industrial loans, an increase of $25.9 million or 2.9% in owner occupied commercial real estate loans, stable non-owner occupied commercial real estate and multi-family loans, an increase of $29.1 million or 14.5% in construction and development loans, an increase of $8.4 million or 1.0% in residential 1-4 family loans and an increase of $2.0 million in consumer and other loans.
The following table presents the balance and associated percentage of each major category in our loan portfolio:
% of Total
Commercial & industrial
507,406
487,893
533,657
Commercial real estate
Owner occupied
920,521
894,596
906,944
Non-owner occupied
472,272
472,321
438,664
333,461
332,757
320,065
Construction & development
229,934
200,835
182,770
Residential 1-4 family
897,087
888,639
867,282
53,160
50,950
49,454
Other loans
14,794
14,983
15,645
100
39
Our directors and officers and their associates are customers of, and have other transactions with, the Bank in the normal course of business. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collection or present other unfavorable features. At June 30, 2024 and December 31, 2023, total loans outstanding to such directors and officers and their associates were $75.7 million and $63.9 million, respectively. During the six months ended June 30, 2024, $16.4 million in additions due to director and officer updates, $5.5 million of additions and $10.1 million of repayments were made to these loans. At June 30, 2024 and December 31, 2023, all of the loans to directors and officers were performing according to their original terms.
Loan categories
The principal categories of our loan portfolio are discussed below:
Commercial and Industrial (C&I). Our C&I portfolio totaled $507.4 million and $487.9 million at June 30, 2024 and December 31, 2023, respectively, and represented 15% of our total loans at both of 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. Most clients are privately owned with markets that range from local to national in scope. Many of the loans to this segment are secured by liens on corporate assets and the personal guarantees of the principals. The regional economic strength or weakness impacts the relative risks in this loan category. There is little concentration in any one business sector, and loan risks are generally diversified among many borrowers.
Commercial Real Estate (CRE). Our CRE loan portfolio totaled $1.73 billion and $1.70 billion at June 30, 2024 and December 31, 2023, respectively, and represented 51% of our total loans at both of those dates. The growth in our CRE loan portfolio through the first six months of 2024 consisted primarily of owner occupied commercial real estate while nonowner occupied commercial real estate and multi-family real estate, typically perceived as containing a higher risk of credit losses, remained stable. Management views owner occupied CRE as an extension of C&I lending as typically the primary repayment source on these loans is operating profits from the underlying business.
Our CRE loans are secured by a variety of property types including multifamily dwellings, retail facilities, office buildings, commercial mixed use, lodging and industrial and warehouse properties. We do not have any specific industry or customer concentrations in our CRE portfolio. Our commercial real estate loans are generally for terms up to ten years, with loan-to-values that generally do not exceed 80%. Amortization schedules are long term and thus a balloon payment is generally due at maturity. Under most circumstances, the Bank will offer to rewrite or otherwise extend the loan at prevailing interest rates.
Construction and Development (C&D). Our C&D loan portfolio totaled $229.9 million and $200.8 million at June 30, 2024 and December 31, 2023, respectively, and represented 7% and 6% of our total loans at June 30, 2024 and December 31, 2023, respectively. It is typical for our C&D loans to increase through the middle of each year as this represents the primary construction season in our operating markets.
Our C&D loans are generally for the purpose of creating value out of real estate through construction and development work, and also include loans used to purchase recreational use land. Borrowers typically provide a copy of a construction or development contract which is subject to bank acceptance prior to loan approval. Disbursements are handled by a title company. Borrowers are required to inject their own equity into the project prior to any note proceeds being disbursed. These loans are, by their nature, intended to be short term and are refinanced into other loan types at the end of the construction and development period.
Residential 1 – 4 Family. Residential 1 – 4 family loans held in portfolio amounted to $897.1 million and $888.6 million at June 30, 2024 and December 31, 2023, respectively, and represented 26% and 27% of our total loans at those dates.
We offer fixed and adjustable-rate residential mortgage loans with maturities up to 30 years. One-to-four family residential mortgage loans are generally underwritten according to Fannie Mae guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” We generally originate both fixed and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency, which is generally $726,200 for one-unit properties. In addition, we also offer loans above conforming lending limits typically referred to as “jumbo” loans. These loans are typically underwritten to the same guidelines as conforming loans; however, we may choose to hold a jumbo loan within its portfolio with underwriting criteria that does not exactly match conforming guidelines.
We do not offer reverse mortgages nor do we offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on his loan, resulting in an increased principal balance during the life of the loan. We also do not offer “subprime loans” (loans that are made with low down payments to borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (defined as loans having less than full documentation).
Residential real estate loans are originated both for sale to the secondary market as well as for retention in the Bank’s loan portfolio. The decision to sell a loan to the secondary market or retain within the portfolio is determined based on a variety of factors including but not limited to our asset/liability position, the current interest rate environment, and customer preference. Servicing rights are retained on all loans sold to the secondary market.
We were servicing mortgage loans sold to others without recourse of approximately $1.16 billion at June 30, 2024 and $1.18 billion at December 31, 2023.
Loans sold with the retention of servicing assets result in the capitalization of servicing rights. Loan servicing rights are carried at fair value. The net balance of capitalized servicing rights amounted to $13.7 million at June 30, 2024 and December 31, 2023.
Consumer Loans. Our consumer loan portfolio totaled $53.2 million and $51.0 million at June 30, 2024 and December 31, 2023, 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.
Consumer loans generally have greater risk compared to longer-term loans secured by improved, owner-occupied real estate, particularly consumer loans that are secured by rapidly depreciable assets. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan repayments are dependent on the borrower’s continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.
Other Loans. Our other loans totaled $14.8 million and $15.0 million at June 30, 2024 and December 31, 2023, 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 June 30, 2024. The tables do not include any estimate of prepayments, which can significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.
One Year or
One to Five
Five to Fifteen
Over Fifteen
Less
Years
132,656
253,515
119,427
1,808
Owner Occupied
111,119
422,741
311,426
75,235
Non-owner Occupied
39,198
290,278
134,712
8,084
11,894
134,654
186,562
351
Construction & Development
27,455
51,555
87,381
63,543
14,847
102,714
224,875
554,651
Consumer and other
6,514
38,040
18,269
5,131
67,954
343,683
1,293,497
1,082,652
708,803
Fixed Rate Loans:
34,973
203,230
73,729
1,757
313,689
54,765
339,721
120,292
20,750
535,528
37,300
255,010
38,366
330,676
9,185
128,200
133,896
271,281
15,727
46,616
51,379
36,005
149,727
8,886
81,191
177,834
279,716
547,627
6,319
36,923
17,143
65,516
167,155
1,090,891
612,639
343,359
2,214,044
Floating Rate Loans:
97,683
50,285
45,698
193,717
56,354
83,020
191,134
54,485
384,993
1,898
35,268
96,346
141,596
2,709
6,454
52,666
62,180
11,728
4,939
36,002
27,538
80,207
5,961
21,523
47,041
274,935
349,460
195
1,117
1,126
2,438
176,528
202,606
470,013
365,444
1,214,591
NONPERFORMING ASSETS
In order to operate with a sound risk profile, we focus on originating loans that we believe to be of high quality. We have established loan approval policies and procedures to assist us in maintaining the overall quality of our loan portfolio. When delinquencies in our loans exist, we rigorously monitor the levels of such delinquencies for any negative or adverse trends. From time to time, we may modify loans to extend the term or make other concessions to help a borrower with a deteriorating financial condition stay current on their loan and to avoid foreclosure. We generally do not forgive principal or interest on loans or modify the interest rates on loans to rates that are below market rates. Furthermore, we are committed to collecting on all of our loans and, as a result, at times have lower net charge-offs compared to many of our peer banks. We believe that our commitment to collecting on all of our loans results in higher loan recoveries.
42
Our nonperforming assets consist of nonperforming loans and foreclosed real estate. Nonperforming loans are those on which the accrual of interest has stopped, as well as loans that are contractually 90 days past due on which interest continues to accrue. The composition of our nonperforming assets is as follows:
As of June 30,
As of December 31,
Nonperforming loans
Nonaccrual loans
3,334
467
Total nonaccrual loans
4,600
Loans past due > 90 days, but still accruing
175
422
Total loans past due > 90 days, but still accruing
601
Total nonperforming loans
10,668
6,555
5,201
Commercial real estate owned
Residential real estate owned
Acquired bank property real estate owned
2,239
Total OREO
Total nonperforming assets ("NPAs")
11,380
9,128
7,440
Accruing modified loans to borrowers experiencing financial difficulty
Ratios
Nonaccrual loans to total loans
0.17
0.14
NPAs to total loans plus OREO
0.33
0.22
NPAs to total assets
ACL - Loans to nonaccrual loans
619
ACL - Loans to total loans
Nonaccrual Loans
Loans are typically placed on nonaccrual status when any payment of principal and/or interest is 90 days or more past due, unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. Loans are also placed on nonaccrual status when management believes, after considering economic and business conditions, that the principal or interest will not be collectible in the normal course of business. We monitor closely the performance of our loan portfolio. In addition to the monitoring and review of loan performance internally, we have also contracted with an independent organization to review our commercial and retail loan portfolios. The status of delinquent loans, as well as situations identified as potential problems, is reviewed on a regular basis by senior management. The increase in nonaccrual loans during the first six months of 2024 primarily related to one customer relationship, acquired as part of the Hometown acquisition, that was moved from accrual status during the first quarter.
ALLOWANCE FOR CREDIT LOSSES - LOANS
The Company assesses the adequacy of its ACL - Loans at the end of each calendar quarter. The level of 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. The ACL - Loans is increased by a provision for credit losses, which is charged to expense, when the analysis shows that an increase is warranted. The ACL – Loans is reduced by charge-offs, net of recoveries, when they occur. The ACL is believed adequate to absorb all expected future losses to be recognized over the contractual life of the loans in the portfolio.
For further details on the Company’s ACL – Loans, refer to the footnotes pretend along with the consolidated financial statements elsewhere in this report.
At June 30, 2024, the ACL - Loans was $45.1 million (representing 1.32% of period end loans). The ACL – Loans has remained consistent over recent quarters as economic conditions and the Company’s overall asset quality remain strong. The Company recorded net recoveries totaling $0.8 million during the first half of 2024.
The following table summarizes the changes in our ACL - Loans for the periods indicated:
Six months ended
Year ended
Balance of ACL - Loans at the beginning of period
Adoption of CECL
Net loans charged-off (recovered):
(3)
(860)
(70)
(5)
(102)
Other Loans
67
Total net loans recovered
(809)
Provision charged to operating expense
Transfer from ACL - Unfunded Commitments
Balance of ACL - Loans at end of period
Ratio of net charge-offs (recoveries) to average loans by loan composition
0.00
(0.10)
(0.00)
0.01
0.25
0.36
0.03
Total net charge-offs (recoveries) to average loans
(0.02)
The following table summarizes an allocation of the ACL - Loans and the related percentage of loans outstanding in each category for the periods below.
% of
(in thousands, except %)
Loan Type:
Total allowance
SOURCES OF FUNDS
General. Deposits have traditionally been our primary source of funds for our investment and lending activities. We also borrow from the FHLB of Chicago to supplement cash needs, to lengthen the maturities of liabilities for interest rate risk management purposes and to manage our cost of funds. Our additional sources of funds are scheduled payments and prepayments of principal and interest on loans and investment securities and fee income and proceeds from the sales of loans and securities.
Deposits. Our current deposit products include non-interest bearing and interest-bearing checking accounts, savings accounts, money market accounts, and certificate of deposits. As of June 30, 2024, deposit liabilities accounted for approximately 82.0% of our total liabilities and equity. We accept deposits primarily from customers in the communities in which our branches and offices are located, as well as from small businesses and other customers throughout our lending area. We rely on our competitive pricing and products, quality customer service, and convenient locations and hours to attract and retain deposits. Deposit rates and terms are based primarily on current business strategies, market interest rates, liquidity requirements and our deposit growth goals.
Total deposits were $3.40 billion and $3.43 billion as of June 30, 2024 and December 31, 2023, respectively. Noninterest-bearing deposits at June 30, 2024 and December 31, 2023, were $975.8 million and $1.05 billion, respectively, while interest-bearing deposits were $2.42 billion and $2.38 billion at June 30, 2024 and December 31, 2023, respectively. Like most in the banking industry, the Bank has seen a shift in its deposit portfolio from noninterest-bearing deposits to interest-bearing deposits as prevailing interest rates have increased over the last several quarters.
At June 30, 2024, we had a total of $612.5 million in certificates of deposit, including $0.7 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:
Percent
Noninterest-bearing demand deposits
28.8
1,078,468
31.9
31.7
Interest-bearing checking deposits
12.0
293,568
8.7
8.8
Savings deposits
23.8
833,360
24.6
25.1
18.0
665,988
19.7
20.0
17.5
509,273
15.0
14.2
0.0
3,184
0.1
0.2
3,383,841
The following table provides information on maturities of certificates of deposits which exceed FDIC insurance limits of $250,000 as of June 30, 2024:
Time Deposits over FDIC
Portion of Time Deposits in
Insurance Limits
Excess of FDIC Insurance Limits
3 months or less remaining
64,650
36,400
Over 3 to 6 months remaining
57,987
25,487
Over 6 to 12 months remaining
19,808
7,308
Over 12 months or more remaining
8,645
2,395
151,090
71,590
The Company had securities sold under repurchase agreements which had contractual maturities up to one year from the transaction date with variable and fixed rate terms. The agreements to repurchase required that the Company (seller) repurchase identical securities as those that were sold. The securities underlying the agreements were under the Company’s control. The Company redeemed all securities sold under repurchase agreements during the first quarter of 2024.
The following table summarizes securities sold under repurchase agreements, and the weighted average interest rates paid:
Average daily amount of securities sold under repurchase agreements during the period
36,833
48,318
Weighted average interest rate on average daily securities sold under repurchase agreements
4.92
4.72
Maximum outstanding securities sold under repurchase agreements at any month-end
60,306
Securities sold under repurchase agreements at period end
Weighted average interest rate on securities sold under repurchase agreements at period end
5.31
5.09
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 $90.3 million and $35.3 million of advances outstanding from the FHLB at June 30, 2024 and December 31, 2023, respectively.
46
The total loans pledged as collateral were $1.47 billion and $1.49 billion at June 30, 2024 and December 31, 2023. There were no outstanding letters of credit from the FHLB at June 30, 2024 or December 31, 2023.
The following table summarizes borrowings from the FHLB, and the weighted average interest rates paid:
Average daily amount of borrowings outstanding during the period
37,035
30,697
25,598
Weighted average interest rate on average daily borrowing
4.01
3.92
Maximum outstanding borrowings at any month-end
36,577
Borrowing outstanding at period end
35,825
Weighted average interest rate on borrowing at period end
4.38
3.58
Lines of credit and other borrowings.
During July 2020, the Company entered into subordinated note agreements with two separate commercial banks. As of June 30, 2024 and December 31, 2023, 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. 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. As of June 30, 2024 and December 31, 2023, 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 5.25% 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 totaled $4.1 million and $8.2 million, respectively, carried interest at floating rates resetting on each quarterly payment date, and were due on January 7, 2034 and December 15, 2036, respectively. Applicable discounts originally totaling $1.5 million were recorded to carry the assumed debentures at their then estimated fair value and were being accreted to interest expense over the remaining life of the debentures. Both junior subordinated debentures were redeemable by the Company, subject to prior approval by the Federal Reserve Bank, on any quarterly payment date. The junior subordinated debentures represented the sole asset of Trust I and Trust II. The trusts were not included in the Company’s 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, was liable for the distributions and other payments required on the trusts’ preferred securities. Trust I and Trust II also provided the Company with $12.0 million in Tier 1 capital for regulatory capital purposes. The Company redeemed the junior subordinated debenture related to Trust II during December 2023 and Trust I during January 2024, resulting in these trusts’ dissolution. As a result of the redemption of the junior subordinated debenture related to Trust II and notification of the Company’s intent to redeem the junior subordinated debenture of Trust I prior to December 31, 2023, the Company amortized the remaining original fair value discounts into interest expense during 2023.
INVESTMENT SECURITIES
Our securities portfolio consists of securities available for sale and securities held to maturity. Securities are classified as held to maturity or available for sale at the time of purchase. Obligations of states and political subdivisions and mortgage-backed securities, all of which are issued by U.S. government agencies or U.S. government-sponsored enterprises, make up the largest components of the securities portfolio. We manage our investment portfolio to provide an adequate level of liquidity as well as to maintain neutral interest rate-sensitive positions, while earning an adequate level of investment income without taking undue or excessive risk.
Securities available for sale consist of U.S. government sponsored agencies, 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 $128.0 million and included minimal gross unrealized gains and gross unrealized losses of $12.9 million at June 30, 2024. At December 31, 2023, the fair value of securities available for sale totaled $142.2 million and included gross unrealized gains of $0.1 million and gross unrealized losses of $12.2 million.
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 $110.6 million at June 30, 2024 and $103.3 million at December 31, 2023.
The Company had recognized minimal net losses on sales of securities during the six months ended June 30, 2024. The Company had recognized net losses on sales of securities of $0.1 million during the six months ended June 30, 2023.
The following tables set forth the composition and maturities of investment securities as of June 30, 2024 and December 31, 2023. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
After One, But
After Five, But
Within One Year
Within Five Years
Within Ten Years
After Ten Years
At June 30, 2024
Yield (1)
Available for sale securities
2,474
5.0
15,710
2.2
11,886
2.5
341
4.9
11,425
4.1
14,605
3.5
36,636
2.7
3.1
4.5
11,307
3.4
7,895
4.3
12,901
3.7
9.3
9,113
1,552
7.3
5.7
27,732
4.8
47,323
3.2
62,975
2.9
Held to maturity securities
20,761
3.6
50,676
4.4
3.9
801
2.3
2.6
24,377
80,803
4.0
83,338
251,493
48
At December 31, 2023
980
5.1
1,464
16,202
12,807
9,828
14,542
39,559
2.8
3,579
8,649
3.3
11,788
13,773
4,995
6.5
9,119
1,543
1.3
10,044
24,941
51,651
67,682
16,816
60,714
21,643
4.7
3.8
956
2,324
3.0
17,772
63,038
22,514
4.6
27,816
87,979
74,165
257,642
Weighted Average Yield is shown on a fully taxable equivalent basis using a federal tax rate of 21%.
As of June 30, 2024 and December 31, 2023, no allowance for credit losses on securities AFS was recognized. The Company does not consider its securities AFS with unrealized losses to be attributable to credit-related factors, as the unrealized losses in each category have occurred as a result of changes in noncredit-related factors such as changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration. Furthermore, as of June 30, 2024, the Company did not have the intent to sell any of these securities AFS and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost.
The Company does not believe there are any expected credit losses in its HTM securities portfolio at June 30, 2024 or December 31, 2023. All 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 is immaterial to the financial statements.
As of June 30, 2024, 211 debt securities had gross unrealized losses, with an aggregate depreciation of 5.5% from our amortized cost basis. The largest unrealized loss percentage of any single security was 22.6% (or $0.5 million) of its amortized cost. The largest unrealized dollar loss of any security was $0.9 million (or 15.2%).
As of December 31, 2023, 204 debt securities had gross unrealized losses, with an aggregate depreciation of 4.6% from our amortized cost basis. The largest unrealized loss percentage of any single security was 26.5% (or $0.5 million) of its amortized cost. The largest unrealized dollar loss of any single security was $1.0 million (or 16.1%).
The unrealized losses on these debt securities arose primarily due to changing interest rates and are considered to be temporary.
LIQUIDITY AND CAPITAL RESOURCES
Impact of Inflation and Changing Prices. Our consolidated financial statements and related notes have been prepared in accordance with GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on our performance than they would on industrial companies.
Liquidity. Liquidity is defined as the Company’s ability to generate adequate cash to meet its needs for day-to-day operations and material long and short-term commitments. Liquidity is the risk of potential loss if we were unable to meet our funding requirements at a reasonable cost. We are expected to maintain adequate liquidity at the Bank to meet the cash flow requirements of customers who may be either depositors wishing to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Our asset and liability management policy is intended to cause the Bank to maintain adequate liquidity and, therefore, enhance our ability to raise funds to support asset growth, meet deposit withdrawals and lending needs, maintain reserve requirements and otherwise sustain our operations.
We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all of our short-term and long-term cash requirements. We manage our liquidity based on demand and specific events and uncertainties to meet current and future financial obligations of a short-term nature. We also monitor our liquidity requirements in light of interest rate trends, changes in the economy and the scheduled maturity and interest rate sensitivity of the investment and loan portfolios and deposits. Our objective in managing liquidity is to respond to the needs of depositors and borrowers as well as to increase earnings enhancement opportunities in a changing marketplace.
Our liquidity is maintained through our investment portfolio, deposits, borrowings from the FHLB, and lines available from correspondent banks. Our highest priority is placed on growing noninterest bearing deposits through strong community involvement in the markets that we serve. Borrowings and brokered deposits are considered short-term supplements to our overall liquidity but are not intended to be relied upon for long-term needs. The Company currently has $1.73 billion in availability between borrowings and brokered deposits for future funding if liquidity needs were to develop. We believe that our present position is adequate to meet our current and future liquidity needs, and management knows of no trend or event that will have a material impact on the Company’s ability to maintain liquidity at satisfactory levels.
Capital Adequacy. Total stockholders’ equity was $614.6 million at June 30, 2024 compared to $619.8 million at December 31, 2023.
Our capital management consists of providing adequate equity to support our current and future operations. The Bank is subject to various regulatory capital requirements administered by state and federal banking agencies, including the Federal Reserve and the OCC. Failure to meet minimum capital requirements may prompt certain actions by regulators that, if undertaken, could have a direct material adverse effect on our financial condition and results of operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measure of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and the classifications are also subject to qualitative judgment by the regulator in regard to components, risk weighting and other factors.
The Bank is subject to the following risk-based capital ratios: a common equity Tier 1 (“CET1”) risk-based capital ratio, a Tier 1 risk-based capital ratio, which includes CET1 and additional Tier 1 capital, and a total capital ratio, which includes Tier 1 and Tier 2 capital. CET1 is primarily comprised of the sum of common stock instruments and related surplus net of treasury stock, retained earnings, and certain qualifying minority interests, less certain adjustments and deductions, including with respect to goodwill, intangible assets, mortgage servicing assets and deferred tax assets subject to temporary timing differences. Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred stock, tier 1 minority interests and grandfathered trust preferred securities. Tier 2 capital consists of instruments disqualified from Tier 1 capital, including qualifying subordinated debt, other preferred stock and certain hybrid capital instruments, and a limited amount of loan loss reserves up to a maximum of 1.25% of risk-weighted assets, subject to certain eligibility criteria. The capital rules also define the risk-weights assigned to assets and off-balance sheet items to determine the risk-weighted asset components of the risk-based capital rules, including, for example, certain “high volatility” commercial real estate, past due assets, structured securities and equity holdings.
The leverage capital ratio, which serves as a minimum capital standard, is the ratio of Tier 1 capital to quarterly average assets net of goodwill, certain other intangible assets, and certain required deduction items. The required minimum leverage ratio for all banks is 4%.
Failure to be well-capitalized or to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our operations or financial condition. For example, only a well-capitalized depository institution may accept brokered deposits without prior regulatory approval. Failure to be well-capitalized or to meet minimum capital requirements could also result in restrictions on the Bank’s ability to pay dividends or otherwise distribute capital or to receive regulatory approval of applications or other restrictions on its growth.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, requires the federal bank regulatory agencies to take “prompt corrective action” regarding depository institutions that do not meet minimum capital requirements. FDICIA establishes five regulatory capital tiers: “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized”, and “critically undercapitalized”. A depository institution’s capital tier will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. The FDICIA imposes progressively more restrictive restraints on operations, management and capital distributions, depending on the category in which an institution is classified. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions may not accept brokered deposits absent a waiver from the FDIC, are subject to growth limitations and are required to submit capital restoration plans for regulatory approval. A depository institution’s holding company must guarantee any required capital restoration plan, up to an amount equal to the lesser of 5 percent of the depository institution’s assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. Federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. All of the federal bank regulatory agencies have adopted regulations establishing relevant capital measures and relevant capital levels for federally insured depository institutions. The Bank was well capitalized at June 30, 2024, and brokered deposits are not restricted.
To be well-capitalized, the Bank must maintain at least a 6.5% CET1 to risk-weighted assets ratio, an 8.0% Tier 1 capital to risk-weighted assets ratio, a 10.0% Total capital to risk-weighted assets ratio, and a 5.0% leverage ratio.
The Bank’s regulatory capital ratios were above the applicable well-capitalized standards and met the then-applicable capital conservation buffer. Based on current estimates, we believe that the Bank will continue to exceed all applicable well-capitalized regulatory capital requirements and the capital conservation buffer in 2024.
As a result of the Economic Growth Act, the federal banking agencies were required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s Tier 1 capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under prompt corrective action statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluation whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies set the minimum capital for the new Community Bank Leverage Ratio at 9%. The Bank does not intend to opt into the Community Bank Leverage Ratio Framework.
On December 21, 2018, federal banking agencies issued a joint final rule to revise their regulatory capital rules to (i) address the upcoming implementation of CECL accounting standard under GAAP; (ii) provide an optional three-year phase-in period for the day-one adverse regulatory capital effects that banking organizations are expected to experience upon adopting CECL; and (iii) require the use of CECL in stress tests beginning with the 2020 capital planning and stress testing cycle for certain banking organizations. for more information regarding Accounting Standards Update No. 2016-13, which introduced CECL as the methodology to replace the current “incurred loss” methodology for financial assets measured at amortized cost, and changed the approaches for recognizing and recording credit losses on available-for-sale debt securities and purchased credit impaired financial assets, including the required implementation date for the Company, see the Company’s Annual Report.
Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance-sheet items. The following table reflects capital ratios computed utilizing the implemented Basel III regulatory capital framework discussed above:
Minimum Capital Required
Minimum To Be Well-
for Capital Adequacy Plus
Capitalized Under prompt
Required for Capital
Capital Conservation Buffer
corrective Action
Adequacy
Basel III Phase-In Schedule
Provisions
Bank First Corporation:
Total capital (to risk-weighted assets)
13.7
8.0
10.5
N/A
Tier I capital (to risk-weighted assets)
12.2
6.0
8.5
Common equity tier I capital (to risk-weighted assets)
7.0
Tier I capital (to average assets)
11.0
Bank First, N.A:
12.3
10.0
11.2
10.1
14.0
12.7
12.5
11.1
12.9
11.9
10.4
As previously mentioned, the Company carried $12.0 million of subordinated debt as of June 30, 2024 and December 31, 2023, which qualifies as Tier II capital, and $4.0 million of junior subordinated debt as of December 31, 2023, which qualified as Tier I capital. These amounts are included in total capital for the Company in the tables above.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
We are party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments primarily include commitments to originate and sell loans, standby and direct pay letters of credit, unused lines of credit and unadvanced portions of construction and development loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in these particular classes of financial instruments.
Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby and direct pay letters of credit and unadvanced portions of construction and development loans is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Off-Balance Sheet Arrangements. Our significant off-balance-sheet arrangements consist of the following:
Off-balance sheet arrangement means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the registrant is a party, under which the registrant has (1) any obligation under a guarantee contract, (2) retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement, (3) any obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument, or (4) any obligation, including a contingent obligation, arising out of a variable interest.
Loan commitments are made to accommodate the financial needs of our customers. Standby and direct pay letters of credit commit us to make payments on behalf of customers when certain specified future events occur. Both arrangements have credit risk essentially the same as that involved in extending loans to clients and are subject to our normal credit policies. Collateral (e.g., securities, receivables, inventory, equipment, etc.) is obtained based on management’s credit assessment of the customer.
Loan commitments and standby and direct pay letters of credit do not necessarily represent our future cash requirements because while the borrower has the ability to draw upon these commitments at any time, these commitments often expire without being drawn upon. Our off-balance sheet arrangements at the dates indicated were as follows:
Amounts of Commitments Expiring - By Period as of June 30, 2024
Less Than One
One to Three
Three to Five
Other Commitments
Year
After Five Years
Unused lines of credit
764,099
386,740
118,688
45,027
213,644
Standby and direct pay letters of credit
9,042
1,434
607
182
Total commitments
797,637
395,782
120,122
45,634
236,099
Amounts of Commitments Expiring - By Period as of December 31, 2023
Less Than
One to
Three to
After Five
One Year
Three Years
Five Years
799,398
369,800
129,181
66,070
234,347
7,615
1,407
580
830,396
377,415
130,588
66,650
255,743
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest rate risk inherent in its lending, investment and deposit-taking activities. To that end, management actively monitors and manages its interest rate risk exposure.
Our profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact our earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis. We monitor the impact of changes in interest rates on its net interest income using several tools.
Our primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on our net interest income and capital, while configuring our asset-liability structure to obtain the maximum yield-cost spread on that structure. We rely primarily on our asset-liability structure to control interest rate risk.
Interest Rate Sensitivity. Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay home mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries (basis risk).
An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.
The Company actively manages its interest rate sensitivity position. The objectives of interest rate risk management are to control exposure of net interest income to risks associated with interest rate movements and to achieve sustainable growth in net interest income. The Company’s ALCO, using policies and procedures approved by the Company’s board of directors, is responsible for the management of the Company’s interest rate sensitivity position. The Company manages interest rate sensitivity by changing the mix, pricing and re-pricing characteristics of its assets and liabilities, through the management of its investment portfolio, its offerings of loan and selected deposit terms and through wholesale funding. Wholesale funding consists of, but is not limited to, multiple sources including borrowings with the FHLB of Chicago, the Federal Reserve Bank of Chicago’s discount window and certificates of deposit from institutional brokers.
The Company uses several tools to manage its interest rate risk including interest rate sensitivity analysis, or gap analysis, market value of portfolio equity analysis, interest rate simulations under various rate scenarios and net interest margin reports. The results of these reports are compared to limits established by the Company’s ALCO policies and appropriate adjustments are made if the results are outside the established limits.
There are an infinite number of potential interest rate scenarios, each of which can be accompanied by differing economic/political/regulatory climates; can generate multiple differing behavior patterns by markets, borrowers, depositors, etc.; and, can last for varying degrees of time. Therefore, by definition, interest rate risk sensitivity cannot be predicted with certainty. Accordingly, the Company’s interest rate risk measurement philosophy focuses on maintaining an appropriate balance between theoretical and practical scenarios; especially given the primary objective of the Company’s overall asset/liability management process is to facilitate meaningful strategy development and implementation.
Therefore, we model a set of interest rate scenarios capturing the financial effects of a range of plausible rate scenarios; the collective impact of which will enable the Company to clearly understand the nature and extent of its sensitivity to interest rate changes. Doing so necessitates an assessment of rate changes over varying time horizons and of varying/sufficient degrees such that the impact of embedded options within the balance sheet are sufficiently examined.
The following tables demonstrate the annualized result of an interest rate simulation and the estimated effect that a parallel interest rate shift, or “shock,” in the yield curve and subjective adjustments in deposit pricing might have on the Company’s projected net interest income over the next 12 months.
This simulation assumes that there is no growth in interest-earning assets or interest-bearing liabilities over the next 12 months. The changes to net interest income shown below are in compliance with the Company’s policy guidelines.
As of June 30, 2024:
Change in Interest Rates
Percentage Change in
(in Basis Points)
Net Interest Income
+400
(9.0)%
+300
(6.3)%
+200
(4.2)%
+100
(1.9)%
-100
(1.4)%
As of December 31, 2023:
0.1%
0.2%
(0.1)%
The increased sensitivity to changes in interest rates noted at June 30, 2024 was the result of management’s reconsideration of interest rate betas for its loan and deposit products during the second quarter of 2024.
Economic Value of Equity Analysis. We also analyze the sensitivity of the Company’s financial condition to changes in interest rates through our economic value of equity model. This analysis measures the difference between estimated changes in the present value of the Company’s assets and estimated changes in the present value of the Company’s liabilities assuming various changes in current interest rates. The Company’s economic value of equity analysis as of June 30, 2024 estimated that, in the event of an instantaneous 200 basis point increase in interest rates, the Company would experience a 0.64% increase in the economic value of equity. At the same date, our analysis estimated that, in the event of an instantaneous 100 basis point decrease in interest rates, the Company would experience a 1.90% decrease in the economic value of equity. The estimates of changes in the economic value of our equity require us to make certain assumptions including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain and, as a result, we cannot precisely predict the impact of changes in interest rates on the economic value of our equity. Although our economic value of equity analysis provides an indication of our interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on the economic value of our equity and will differ from actual results.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), undertook an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report, and, based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report, in recording, processing, summarizing and reporting in a timely manner the information that the Company is required to disclose in its reports under the Exchange Act and in accumulating and communicating to the Company’s management, including the Company’s CEO and CFO, such information as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
No changes were made to our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a party to various litigation in the normal course of business. Management, after consulting with our legal counsel, believes that any liability resulting from litigation will not have a material effect on our financial position, results of operations or liquidity.
ITEM 1A. RISK FACTORS
Additional information regarding risk factors appears in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements” of this Form 10-Q and in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023. There have been no material changes during the quarterly period ended June 30, 2024 to the risk factors previously disclosed in the Company’s Annual Report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On February 21, 2024, the Company renewed its share repurchase program, pursuant to which the Company may repurchase up to $30 million of its common stock, par value $0.01 per share, for a period of one (1) year, ending on February 20, 2025. The program was announced in a Current Report on Form 8-K on February 21, 2024. The table below sets forth information regarding repurchases of our common stock during the first quarter of 2024 under that program as well as pursuant to the 2020 Equity Plan and other repurchases.
Total Number
Maximum Number
of Shares Repurchased as
of Shares
Part of
that May Yet Be
Total Number of Shares
Average Price Paid per
Publicly Announced
Purchased Under the
(in thousands, except per share data)
Repurchased
Share(1)
Plans or Programs
Plans or Programs(2)
April 2024
35,791
79.64
259,191
May 2024
40,424
81.70
218,767
June 2024
22,408
80.42
196,359
98,623
80.59
The average price paid per share is calculated on a trade date basis for all open market transactions and excludes commissions and other transaction expenses.
Based on the closing per share price as of June 30, 2024 ($82.59).
The Inflation Reduction Act of 2022 (“IRA”) created a new nondeductible 1% excise tax on repurchases of corporate stock by certain publicly traded corporations or their specified affiliates after December 31, 2022. The tax is imposed on the fair value of the stock of a covered corporation that is repurchased in a given year, less the fair market value of any stock issued in that year. The Company falls under the definition of a “covered corporation”. The excise tax applies to all of the stock of a covered corporation regardless of whether the corporation has profits or losses. The impact of the IRA on our consolidated financial statements will be dependent on the extent of stock repurchases made in current and future periods.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
Rule 10b5-1 Trading Arrangements
For the quarter ended June 30, 2024, there were no trading arrangements for the sale or purchases of Company securities adopted, terminated or for which the amount, pricing or timing provisions were modified by our directors and officers that was either (1) a contract, instruction or written plan intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) (a “Rule 10b5-1 trading arrangement”) or (2) a “non-Rule 10b5-1 trading arrangement” (as defined in Item 408(c) of Regulation S-K).
ITEM 6. EXHIBITS
Exhibit Index
Exhibit Number
Description
31.1
Rule 13a-14(a) Certification of Chief Executive Officer*
31.2
Rules 13a-14(a) Certification of Chief Financial Officer*
32.1
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer**
101 INS
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL document)
*Filed herewith.
**Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DATE:
August 7, 2024
BY:
/s/Kevin M. LeMahieu
Kevin M. LeMahieu
Chief Financial Officer
(Principal Financial and Accounting Officer)