BANK FIRST CORPORATION 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 endedDecember 31, 2019 , 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 periodJune 30, 2020 .
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 aWisconsin corporation that was organized primarily to serve as the holding company forBank First, N.A. Bank First, N.A. , which was incorporated in 1894, is a nationally-chartered bank headquartered inManitowoc, Wisconsin . It is a member of theBoard of Governors of theFederal Reserve System ("Federal Reserve"), and is regulated by theOffice of the Comptroller of the Currency ("OCC"). Including its headquarters inManitowoc, Wisconsin , the Bank has 24 banking locations inManitowoc ,Outagamie ,Brown ,Winnebago ,Sheboygan ,Waupaca ,Ozaukee ,Monroe ,Jefferson andBarron counties inWisconsin . The Bank offers loan, deposit and treasury management products at each of its banking locations. 30 Table of Contents
As with most community banks, the Bank derives a significant portion of its income from interest received on loans and investments. The Bank's primary source of funding is deposits, both interest-bearing and noninterest-bearing. In order to maximize the Bank's net interest income, or the difference between the income on interest-earning assets and the expense of interest-bearing liabilities, the Bank must not only manage the volume of these balance sheet items, but also the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities. To account for credit risk inherent in all loans, the Bank maintains an ALL to absorb possible losses on existing loans that may become uncollectible. The Bank establishes and maintains this allowance by charging a provision for loan losses against operating earnings. Beyond its net interest income, the Bank further receives income through the net gain on sale of loans held for sale as well as servicing income which is retained on those sold loans. In order to maintain its operations and bank locations, the Bank incurs various operating expenses which are further described within the "Results of Operations" later in this section. The Bank is a 49.8% member of a data processing subsidiary, UFS, which provides core data processing, endpoint management cloud services, cyber security and digital banking solutions for over 50 Midwest banks. The Bank, through its 100% owned subsidiaryTVG Holdings, Inc. , also holds a 40% ownership interest in Ansay, an insurance agency providing clients throughoutWisconsin with insurance and risk management solutions (onOctober 1, 2019 ,TVG Holdings, Inc. purchased an additional 10% ownership interest in Ansay, increasing its ownership interest from 30% prior to that date). These unconsolidated subsidiary interests contribute noninterest income to the Bank through their underlying annual earnings. OnOctober 27, 2017 , the Company consummated its merger withWaupaca pursuant to the Agreement and Plan ofBank Merger , dated as ofMay 11, 2017 and as amended onJuly 20, 2017 , by and among the Company,BFNC Merger Sub, LLC , a wholly-owned subsidiary of the Company, andWaupaca , wherebyWaupaca was merged with and into the Company, andFirst National Bank ,Waupaca's wholly owned banking subsidiary, was merged with and into the Bank. The system integration was completed, and six branches ofFirst National Bank opened onOctober 30, 2017 as branches of the Bank, expanding the Bank's presence intoBarron andWaupaca counties. OnJuly 12, 2019 , the Company consummated its merger with Partnership pursuant to the Agreement and Plan ofBank Merger , dated as ofJanuary 22, 2019 and as amended onApril 30, 2019 , by and among the Company and Partnership, whereby Partnership was merged with and into the Company, andPartnership Bank , Partnership's wholly owned banking subsidiary, was merged with and into the Bank. The system integration was completed, and four branches ofPartnership Bank opened onJuly 15, 2019 as branches of the bank, expanding the Bank's presence intoOzaukee ,Monroe andJefferson counties. OnMay 15, 2020 , the Company consummated its merger with Timberwood pursuant to the Agreement and Plan ofBank Merger , dated as ofNovember 20, 2019 , by and among the Company and Timberwood, whereby Timberwood was merged with and into the Company, andTimberwood Bank , Timberwood's wholly owned banking subsidiary, was merged with and into the Bank. The system integration was completed, and the sole branch ofTimberwood Bank opened onMay 18, 2020 as a branch of the bank, expanding the Bank's presence inMonroe County . During the first quarter of 2020, COVID-19 was declared a global pandemic by theWorld Health Organization and a National Public Health Emergency was declared inthe United States . Shortly before the end ofMarch 2020 , in response to the COVID-19 pandemic, the government ofWisconsin and of most other states took preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. These preventative and protective actions withinWisconsin were lifted duringMay 2020 . The impact of the COVID-19 pandemic on the economy continues to evolve. The COVID-19 pandemic and its associated impacts on trade, travel, unemployment, consumer spending, and other economic activities has resulted in less economic activity and could have an adverse effect on our business, financial condition and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and our customers. Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans and other products and services we offer, which are highly dependent on the business environment in our primary markets. We have actively reached out to our customers to provide guidance, direction and assistance in these uncertain times. We have also extended credit to our customers related to the Payroll Protection Program ("PPP"). As ofAugust 5, 2020 , we have secured funding of approximately 1,859 loans totaling approximately$279.5 million . 31
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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) 6/30/2020 3/31/2020 12/31/2019 9/30/2019 6/30/2019 6/30/2020 6/30/2019
Results of Operations:
Interest income $ 24,382 $ 23,296 $ 23,795 $ 25,489 $ 20,158 $ 47,678 $ 39,881
Interest expense 3,586 4,653 5,015 5,176 4,784 8,239 9,307
Net interest income 20,796 18,643 18,780 20,313 15,374 39,439 30,574
Provision for loan losses 3,150 975 1,125 3,000 500 4,125 1,125
Net interest income after
provision for loan losses 17,646 17,668 17,655 17,313 14,874 35,314 29,449
Noninterest income 7,764 3,897 3,211 3,145 2,736 11,661 6,276
Noninterest expense 14,438 12,741 11,182 12,087 9,955 27,179 19,491
Income before income tax expense 10,972 8,824 9,684 8,371 7,655 19,796 16,234
Income tax expense 2,676 1,558 2,225 1,712 1,666 4,234 3,658
Net income $ 8,296 $ 7,266 $ 7,459 $ 6,659 $ 5,989 $ 15,562 $ 12,576
Earnings per common share - basic $ 1.11 $ 1.03 $ 1.05 $ 0.95 $ 0.91 $ 2.14 $ 1.91
Earnings per common share -
diluted 1.11 1.02 1.04 0.93 0.90 2.14 1.89
Common Shares:
Basic weighted average 7,395,199 7,083,520 7,084,728 7,036,807 6,577,016 7,212,634 6,575,696
Diluted weighted average 7,405,995 7,128,246 7,182,854 7,134,674 6,675,794 7,271,192 6,642,222
Outstanding 7,733,457 7,155,955 7,084,728 7,084,728 6,576,171 7,733,457 6,576,171
Noninterest income / noninterest
expense:
Service charges $ 1,158 $ 916 $ 1,110 $ 918 $ 799 $ 2,074 $ 1,478
Income from Ansay 710 891 55 319 543 1,601 1,418
Income from UFS 850 897 842 768 731 1,747 1,325
Loan servicing income 226 462 (291) 374 244 688 467
Net gain on sales of mortgage
loans 1,332 460 627 533 154 1,792 241
Net gain on sales of securities 3,233 - 611 - 23 3,233 257
Noninterest income from strategic
alliances 16 17 21 26 29 33 48
Other noninterest income 239 254 236 207 213 493 1,042
Total noninterest income $ 7,764 $ 3,897 $ 3,211 $ 3,145 $ 2,736 $ 11,661 $ 6,276
Personnel expense $ 6,608 $ 6,452 $
5,918
921 1,275 1,103 1,076 832 2,196 1,681
Data processing 1,334 1,199 1,478 1,158 960 2,533 1,873Postage, stationery and supplies 277 172 141 135 192 449 315 Net (gain) loss on sales and valuations of other real estate owned 467 976 36 (10) (135) 1,443 (99) Advertising 69 55 88 53 53 124 127 Charitable contributions 127 123 69 225 141 250 272 Outside service fees 1,394 801 204 1,171 982 2,195 1,666 Amortization of intangibles 362 334 373 374 161 696 322 Penalty for early extinguishment of debt 1,323 - - - - 1,323 - Other noninterest expense 1,556 1,354 1,772 1,633 1,366 2,910
2,621
Total noninterest expense$ 14,438 $ 12,741 $ 11,182 $ 12,087 $ 9,955 $ 27,179 $ 19,491 Period-end balances: Loans$ 2,115,023 $ 1,765,242 $
1,736,343
16,071 12,967 11,396 10,131 12,170 16,071 12,170
Investment securities available-for-sale, at fair value 174,067 172,070 181,506 136,935 120,083 174,067 120,083 Investment securities held-to-maturity, at cost 9,579 43,732 43,734 42,605 39,537 9,579 39,537Goodwill and other intangibles, net 65,559 52,789 53,122 54,153 19,998 65,559 19,998 Total assets 2,657,911 2,200,320 2,210,168 2,163,501 1,806,467 2,657,911 1,806,467 Deposits 2,263,145 1,847,209 1,843,311 1,838,080 1,574,998 2,263,145 1,574,998 Stockholders' equity 276,100 237,682 230,211 225,332 185,448 276,100 185,448 Book value per common share 35.70 33.21 32.49 31.81 28.20 35.70 28.20 Tangible book value per common share (1) 27.76 26.44 25.60 24.86 25.63 27.76 25.63 Average balances: Loans$ 2,034,738 $ 1,744,576 $ 1,718,705 $ 1,682,932 $ 1,420,710 $ 1,889,657 $ 1,427,458 Interest-earning assets 2,329,097 2,011,382 1,976,420 1,923,451 1,679,604 2,170,238 1,665,930 Total assets 2,520,882 2,196,662 2,160,080 2,095,357 1,801,530 2,358,772 1,787,515 Deposits 2,130,100 1,843,039 1,835,430 1,786,373 1,563,322 1,986,569 1,556,139 Interest-bearing liabilities 1,589,127 1,476,814 1,373,320 1,310,757 1,142,604 1,532,970
1,141,894
Goodwill and other intangibles, net 53,836 48,606 49,071 42,373 20,096 51,275 20,177 Stockholders' equity 256,529 233,470 228,404 227,205 181,498 244,999 178,295 Financial ratios (2): Return on average assets 1.32 % 1.32 % 1.37 % 1.27 % 1.33 % 1.32 % 1.41 % Return on average common equity 12.94 % 12.45 % 12.96 % 11.72 % 13.20 % 12.70 % 14.11 % Average equity to average assets 10.18 % 10.63 % 10.57 % 10.84 % 10.07 % 10.39 % 9.97 % Stockholders' equity to assets 10.39 % 10.80 % 10.42 % 10.42 % 10.27 % 10.39 % 10.27 % Tangible equity to tangible assets (1) 8.27 % 8.79 % 8.39 % 8.33 % 9.42 % 8.27 % 9.42 % Loan yield 4.60 % 5.00 % 5.15 % 5.63 % 5.22 % 4.78 % 5.19 % Earning asset yield 4.29 % 4.74 % 4.86 % 5.37 % 4.90 % 4.50 % 4.92 % Cost of funds 0.91 % 1.27 % 1.45 % 1.57 % 1.68 % 1.08 % 1.64 % Net interest margin, taxable equivalent 3.67 % 3.81 % 3.85 % 4.30 % 3.76 % 3.74 % 3.79 % Net loan charge-offs to average loans 0.01 % (0.14) % (0.01) % 1.20 % 0.16 % (0.03) % 0.17 % Nonperforming loans to total loans 1.09 % 0.42 % 0.31 % 0.30 % 1.20 % 1.09 % 1.20 % Nonperforming assets to total assets 0.94 % 0.51 % 0.52 % 0.52 % 1.10 % 0.94 % 1.10 % Allowance for loan losses to loans 0.76 % 0.73 %
0.66 % 0.59 % 0.86 % 0.76 % 0.86 %
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These measures are not measures prepared in accordance with GAAP, and are (1) therefore considered to be non-GAAP financial measures. See "GAAP
reconciliation and management explanation of non-GAAP finanical measures" for
a reconciliation of these measures to their most comparable GAAP measures.
(2) Income statement-related ratios for partial year periods are annualized.
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 theSEC'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 inthe 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. At or for the Three Months Ended At or for the Six Months Ended (In thousands, except per share data) 6/30/2020 3/31/2020 12/31/2019 9/30/2019 6/30/2019 6/30/2020 6/30/2019 Tangible Assets Total assets$ 2,657,911 $ 2,200,320 $ 2,210,268 $ 2,163,501 $ 1,806,467 $ 2,657,911 $ 1,806,467 Adjustments: Goodwill (55,052) (43,456) (43,456) (43,456) (15,024) (55,052) (15,024) Core deposit intangible, net of amortization (6,381) (5,046) (5,379) (5,752) (1,890) (6,381)
(1,890)
Tangible assets$ 2,596,478 $ 2,151,818 $
2,161,433
Tangible Common Equity Total stockholders' equity$ 276,100 $ 237,682 $ 230,211 $ 225,332 $ 185,448 $ 276,100 $ 185,448 Adjustments: Goodwill (55,052) (43,456) (43,456) (43,456) (15,024) (55,052) (15,024) Core deposit intangible, net of amortization (6,381) (5,046) (5,379) (5,752) (1,890) (6,381) (1,890) Tangible common equity$ 214,667 $ 189,180 $ 181,376 $ 176,124 $ 168,534 $ 214,667 $ 168,534 Book value per common share$ 35.70 $ 33.21 $ 32.49 $ 31.81 $ 28.20 $ 35.70 $ 28.20 Tangible book value per common share 27.76 26.44 25.60 24.86 25.63 27.76
25.63
Total stockholders' equity to total assets 10.39 % 10.80 % 10.42 % 10.42 % 10.27 % 10.39 % 10.27 % Tangible common equity to tangible assets 8.27 % 8.79 % 8.39 % 8.33 % 9.42 % 8.27 % 9.42 % RESULTS OF OPERATIONS
Results of Operations for the Three Months Ended
General. Net income increased$2.3 million to$8.3 million for three months endedJune 30, 2020 , compared to$6.0 million for the same period in 2019. This increase was primarily due to the added scale of the four offices acquired in the Partnership acquisition during the third quarter of 2019 as well as the one office acquired in the Timberwood acquisition during the second quarter of
2020.
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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 increased by $5.4 million to $20.8 million for
the three months ended June 30, 2020 compared to $15.4 million for three months
ended June 30, 2019 . The increase in net interest income was primarily due to
the added scale of five offices acquired in the aforementioned acquisitions.
Interest income on loans increased by $4.9 million , or 27.2%, during the same
period. Total average interest-earning assets was $2.33 billion for the three
months ended June 30, 2020 , up from $1.68 billion for the same period in 2019.
Tax equivalent net interest margin decreased 0.09% to 3.67% for the three-months
ended June 30, 2020 , down from 3.76% for the same period in 2019. Net interest
margin decreased by 0.05% due to a decrease in purchase accounting accretion
quarter-over-quarter which added to a decrease of 0.04% in core net interest
margin. 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 $4.2 million , or 21.0%, to
$24.4 million for the three months ended June 30, 2020 compared to $20.2 million
for the same period in 2019. The increase in total interest income was primarily
due the added scale of four offices acquired in the Partnership acquisition as
well as the one office acquired in the Timberwood acquisition during the second
quarter of 2020. The average balance of loans increased by $614.0 million during
the three months ended June 30, 2020 compared to the same period in 2019.
Interest Expense. Interest expense decreased $1.2 million , or 25.0%, to $3.6
million for the three months ended June 30, 2020 compared to $4.8 million for
the same period in 2019. The decrease in interest expense was primarily due to
the lower overall interest rate environment due to the COVID-19 pandemic, which
was counteracted to a certain extent by the added scale of five offices acquired
in the aforementioned acquisitions.
Interest expense on interest-bearing deposits decreased by $1.2 million to $3.2
million for the three months ended June 30, 2020 , from $4.4 million for the same
period in 2019. The average cost of interest-bearing deposits was 0.88% for the
three months ended June 30, 2020 , compared to 1.62% for the same period in 2019.
Provision for Loan Losses. Credit risk is inherent in the business of making
loans. We establish an ALL through charges to earnings, which are shown in the
statements of operations as the provision for loan losses. Specifically
identifiable and quantifiable known losses are promptly charged off against the
allowance. The provision for loan losses is determined by conducting a quarterly
evaluation of the adequacy of our ALL and charging the shortfall or excess, if
any, to the current quarter's expense. This has the effect of creating
variability in the amount and frequency of charges to earnings. The provision
for loan losses and level of allowance for each period are dependent upon many
factors, including loan growth, net charge-offs, changes in the composition of
the loan portfolio, delinquencies, management's assessment of the quality of the
loan portfolio, the valuation of problem loans and the general economic
conditions in our market area. The determination of the amount is complex and
involves a high degree of judgment and subjectivity.
We recorded a provision for loan losses of $3.2 million for the three months
ended June 30, 2020 compared to $0.5 million for the same period in 2019. We
recorded net charge-offs of $0.1 million for the three months ended June 30,
2020 compared to net charge-offs of $0.5 million for the same period in 2019.
The ALL was $16.1 million , or 0.76% of total loans, at June 30, 2020 compared to
$12.2 million , or 0.86% of total loans at June 30, 2019 . The elevated provision
during the second quarter of 2020 compared to the provision during the second
quarter of 2019 was primarily the result of increased qualitative factors in the
calculation of the ALL at June 30, 2020 , in response to the heightened economic
risks resulting from the COVID-19 pandemic. The reduced percentage of ALL to
loans at June 30, 2020 , compared to June 30, 2019 , is the result of significant
reductions during the third quarter of 2019 of problem loans acquired in the
Waupaca transaction, as well as acquiring approximately $275.3 million and
$118.4 million in loans carried at fair value with no related ALL in the
Partnership and Timberwood transactions during the third quarter of 2019 and
second quarter of 2020, respectively.
Noninterest Income. Noninterest income is an important component of our total
revenues. A significant portion of our noninterest income is associated with
service charges and income from the Bank's subsidiaries, Ansay and UFS. Other
sources of noninterest income include loan servicing fees, gains on sales of
mortgage loans, and other income from strategic alliances.
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Noninterest income increased$5.0 million to$7.7 million for the three months endedJune 30, 2020 compared to$2.7 million for the same period in 2019. Income from service charges increased by 44.9% due to an expanded base of customer relationships, many of which were the result of the Partnership and Timberwood acquisitions. Income from our investment in Ansay increased by 30.8% as a result of the Company's increased ownership of that entity from 30.0% during the first half of 2019 to 40.0% during the first half of 2020. Income from our investment in UFS increased by 16.3% as they continue to see significant growth in customers in their managed information technology business. Loan servicing income decreased by 7.4% resulting from a negative valuation adjustment of$0.5 million of the Company's mortgage servicing asset which counteracted the addition of significant serviced portfolios acquired as a part of the acquisitions of Partnership and Timberwood. Net gains on sales of mortgage loans saw a very significant increase quarter-over-quarter as the Company continues to experience very robust activity in secondary market loan originations. During the second quarter of 2020 the Company sold$36.6 million ofU.S. Treasury notes. This sale resulted in a gain of$3.1 million , and was an event that did not occur during the second quarter of 2019, causing a positive comparison between those periods.
The major components of our noninterest income are listed below:
Three Months Ended June 30,
2020 2019 $Change % Change
(In thousands)
Noninterest Income
Service Charges $ 1,158 $ 799 $ 359 45 %
Income from Ansay 710 543 167 31 %
Income from UFS 850 731 119 16 %
Loan Servicing income 226 244 (18) (7) %
Net gain on sales of mortgage loans 1,332 154 1,178 765 %
Net gain on sales of securities 3,233 23 3,210 NM
Noninterest income from strategic alliances 16 29 (13) (45) %
Other 239 213 26 12 %
Total noninterest income $ 7,764 $ 2,736 $ 5,028 184 %
Noninterest Expense. Noninterest expense increased $4.5 million to $14.4 million
for the three months ended June 30, 2020 compared to $9.9 million for the same
period in 2019. The increase in noninterest expense was primarily the result of
the Partnership and Timberwood acquisitions. Personnel expense increased 22.3%,
or $1.2 million , as a result of the added cost of staffing five acquired office
locations in addition to customary annual pay increases. Occupancy expenses and
postage, stationary and supplies expense increased 10.7% and 44.3%,
respectively, the result of significant investments made in equipment to allow
staff to work remotely and supplies to maintain safe work environments due to
the COVID-19 pandemic. Data processing and outside service fees increased by
39.0% and 42.0%, respectively, as a result of one-time expenses incurred in
relation to the Timberwood acquisition. Amortization of intangibles increased by
124.8% as a result of amortization related to the core deposit intangibles that
were established as part of the Partnership and Timberwood acquisitions.
Finally, the Company incurred a $1.3 million penalty for early extinguishment of
borrowings from the FHLB during the second quarter of 2020, an event which did
not occur during the second quarter of 2019.
Net gains and losses from sales and valuations of ORE are specific to the properties which are sold or held and will vary greatly period to period, as they did in the second quarter of 2020 compared to the second quarter of 2019.
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The major components of our noninterest expense are listed below:
Three Months Ended June 30,
2020 2019 $Change % Change
(In thousands)
Noninterest ExpenseSalaries, commissions, and employee benefits$ 6,608 $ 5,403
$ 1,205 22 % Occupancy 921 832 89 11 % Data Processing 1,334 960 374 39 %
Postage, stationary, and supplies 277 192 85 44 % Net loss (gain) on sales and valuation of ORE 467 (135)
602 NM
Advertising 69 53 16 30 %
Charitable contributions 127 141 (14) (10) %
Outside service fees 1,394 982 412 42 %
Amortization of intangibles 362 161 201 125 %Penalty for early extinguishment of debt 1,323 -
1,323 NM Other 1,556 1,366 190 14 % Total noninterest expenses$ 14,438 $ 9,955 $ 4,483 45 % Income Tax Expense. We recorded a provision for income taxes of$2.7 million for the three months endedJune 30, 2020 compared to a provision of$1.7 million for the same period during 2019, reflecting effective tax rates of 24.4% and 21.8%, respectively. The effective tax rates were reduced from the statutory federal and state income tax rates during both periods as a result of tax-exempt interest income produced by certain qualifying loans and investments in the Bank's portfolios. The effective tax rate for the second quarter of 2020 was increased due to significant costs as part of the Timberwood acquisition which are not deductible for tax purposes.
Results of Operations for the Six Months Ended
General. Net income increased$3.0 million to$15.6 million for the six months endedJune 30, 2020 , compared to$12.6 million for the same period in 2019. This increase was primarily due to the added scale of the four offices acquired in the Partnership acquisition during the third quarter of 2019 as well as the one office acquired in the Timberwood acquisition during the second quarter of 2020. Net Interest Income. Net interest and dividend income increased by$8.8 million to$39.4 million for the six months endedJune 30, 2020 , compared to$30.6 million for six months endedJune 30, 2019 . The increase in net interest income was primarily due to the added scale of five offices acquired in the aforementioned acquisitions. Interest income on loans increased by$8.2 million , or 22.0%, during the same period. Total average interest-earning assets increased to$2.17 billion for the six months endedJune 30, 2020 , compared to$1.67 billion for the same period in 2019. Tax equivalent net interest margin decreased 0.05% to 3.74% for the six months endedJune 30, 2020 , down from 3.79% for the same period in 2019. Net interest margin decreased by 0.04% due to a decrease in purchase accounting accretion period-over-period which added to an increase of 0.01% in core net interest margin. 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$7.8 million , or 19.6%, to$47.7 million for the six months endedJune 30, 2020 compared to$39.9 million for the same period in 2019. The increase in total interest income was primarily due the added scale of four offices acquired in the Partnership acquisition as well as the one office acquired in the Timberwood acquisition during the second quarter of 2020. The average balance of loans increased by$462.2 million during the six months endedJune 30, 2020 compared to the same period in 2019. Interest Expense. Interest expense decreased$1.1 million , or 11.5%, to$8.2 million for the six months endedJune 30, 2020 compared to$9.3 million for the same period in 2019. The decrease in interest expense was primarily due to the lower overall interest rate environment due to the COVID-19 pandemic, which was counteracted to a certain extent by the added scale of five offices acquired in the aforementioned acquisitions. 36
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Interest expense on interest-bearing deposits decreased by$1.4 million to$7.3 million for the six months endedJune 30, 2020 , from$8.7 million for the same period in 2019. The average cost of interest-bearing deposits was 1.04% for the six months endedJune 30, 2020 , compared to 1.58% for the same period in 2019. Provision for Loan Losses. We recorded a provision for loan losses of$4.1 million for the six months endedJune 30, 2020 , compared to$1.1 million for the same period in 2019. We recorded net recoveries of$0.6 million for the six months endedJune 30, 2020 compared to net charge-offs of 1.2 million for the same period in 2019. The ALL was$16.1 million , or 0.76% of total loans, atJune 30, 2020 compared to$12.2 million , or 0.86% of total loans atJune 30, 2019 . The elevated provision during the first half of 2020 compared to the provision during the first half of 2019 was primarily the result of increased qualitative factors in the calculation of the ALL atJune 30, 2020 , in response to the heightened economic risks resulting from the COVID-19 pandemic. The reduced percentage of ALL to loans atJune 30, 2020 , compared toJune 30, 2019 , is the result of significant reductions during the third quarter of 2019 of problem loans acquired in theWaupaca transaction, as well as acquiring approximately$275.3 million and$118.4 million in loans carried at fair value with no related ALL in the Partnership and Timberwood transactions during the third quarter of 2019 and second quarter of 2020, respectively. Noninterest Income. Noninterest income increased$5.4 million to$11.7 million for the six months endedJune 30, 2020 compared to$6.3 million for the same period in 2019. Income from service charges increased by 40.3% due to an expanded base of customer relationships, many of which were the result of the Partnership and Timberwood acquisitions. Income from our investment in Ansay increased by 12.9% as a result of the Company's increased ownership of that entity from 30.0% during the first half of 2019 to 40.0% during the first half of 2020. Income from our investment in UFS increased by 31.8% as they continue to see significant growth in customers in their managed information technology business. Loan servicing income increased by 47.3% resulting from a negative valuation adjustment of$0.5 million of the Company's mortgage servicing asset which was more than counteracted by the addition of significant serviced portfolios acquired as a part of the acquisitions of Partnership and Timberwood. Net gains on sales of mortgage loans saw a very significant increase period-over-period as the Company continues to experience very robust activity in secondary market loan originations. During the first half of 2020 the Company sold$36.6 million ofU.S. Treasury notes. This sale resulted in a gain of$3.1 million , and was an event that did not occur during the first half of 2019, causing a positive comparison between those periods. Finally, during the first half of 2019 the Company revalued an investment in common stock of another financial institution, which had historically been held at cost, to fair value based on recent observable prices in orderly stock transactions, resulting in other noninterest income of$0.6 million . While this common stock continued to be held and valued in a similar fashion during the first half of 2020, the appreciation in value was less than$0.1 million , creating a negative variance between those periods in other noninterest income.
The major components of our noninterest income are listed below:
Six Months Ended June 30,
2020 2019 $ Change % Change
(In thousands)
Noninterest Income
Service Charges $ 2,074 $ 1,478 $ 596 40 %
Income from Ansay 1,601 1,418 183 13 %
Income from UFS 1,747 1,325 422 32 %
Loan Servicing income 688 467 221 47 %Net gain on sales of mortgage loans 1,792 241 1,551 644 % Net gain on sales of securities 3,233 257 2,976 NM Noninterest income from strategic alliances 33 48
(15) (31) % Other 493 1,042 (549) (53) % Total noninterest income$ 11,661 $ 6,276 $ 5,385 86 % 37 Table of Contents Noninterest Expense. Noninterest expense increased$7.7 million to$27.2 million for the six months endedJune 30, 2020 compared to$19.5 million for the same period in 2019. The increase in noninterest expense was primarily the result of the Partnership and Timberwood acquisitions. Personnel expense increased 21.9%, or$2.3 million , as a result of the added cost of staffing five acquired office locations in addition to customary annual pay increases. Occupancy expenses and postage, stationary and supplies expense increased 30.6% and 42.5%, respectively, the result of significant investments made in equipment to allow staff to work remotely and supplies to maintain safe work environments due to the COVID-19 pandemic. Data processing and outside service fees increased by 35.2% and 31.8%, respectively, as a result of one-time expenses incurred in relation to the Timberwood acquisition. Amortization of intangibles increased by 116.1% as a result of amortization related to the core deposit intangibles that were established as part of the Partnership and Timberwood acquisitions. Finally, the Company incurred a$1.3 million penalty for early extinguishment of borrowings from the FHLB during the first half of 2020, an event which did not occur during the first half of 2019. Net gains and losses from sales of ORE and securities are specific to the properties and securities which are sold and will vary greatly period to period, as they did in the first six months of 2020 compared to the first six months of 2019.
The major components of our noninterest expense are listed below:
Six Months Ended June 30,
2020 2019 $ Change % Change
(In thousands)
Noninterest ExpenseSalaries, commissions, and employee benefits$ 13,060 $ 10,713 $
2,347 22 % Occupancy 2,196 1,681 515 31 % Data Processing 2,533 1,873 660 35 %
Postage, stationary, and supplies 449 315 134 43 % Net loss (gain) on sales and valuation of ORE 1,443 (99)
1,542 NM Advertising 124 127 (3) (2) % Charitable Contributions 250 272 (22) (8) % Outside service fees 2,195 1,666 529 32 % Amortization of intangibles 696 322 374 116 %
Penalty for early extinguishment of debt 1,323 -
1,323 NM Other 2,910 2,621 289 11 % Total noninterest expenses$ 27,179 $ 19,491 $ 7,688 39 % Income Tax Expense. We recorded a provision for income taxes of$4.2 million for the six months endedJune 30, 2020 compared to a provision of$3.7 million for the same period during 2019, reflecting effective tax rates of 21.4% and 22.5%, respectively. The effective tax rates were reduced from the statutory federal and state income tax rates largely as a result of tax-exempt interest income produced by certain qualifying loans and investments in the Bank's portfolios. The effective tax rate for the first half of 2020 was negatively impacted by non-deductible expenses in relation to the Timberwood acquisition, but positively impacted by favorable tax treatment of the payout of balances from a terminated deferred compensation plan in shares of the Company's common stock. These two items served to offset one another.
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.
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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:
Three Months Ended
June 30, 2020 June 30, 2019
Interest Interest
Average Income/ Rate Earned/ Paid Average Income/ Rate Earned/ Paid
Balance Expenses (1) (1) Balance Expenses (1) (1)
(dollars in thousands)
ASSETS
Interest-earning assets
Loans (2)
Taxable $ 1,917,156 $ 88,760 4.63 % $ 1,326,394 $ 70,224 5.29 %
Tax-exempt 117,582 6,048 5.14 % 94,316 5,067 5.37 %
SecuritiesTaxable (available for sale) 109,530 2,426
2.21 % 74,055 2,014 2.72 %
Tax-exempt (available for
sale) 68,401 2,205 3.22 % 51,954 1,870 3.60 %
Taxable (held to maturity) 2,948 62 2.10 % 28,977 713 2.46 %Tax-exempt (held to maturity) 9,764 268 2.74 % 10,979 302 2.75 % Cash and due from banks 103,716 85 0.08 % 92,929 2,186 2.35 % Total interest-earning assets 2,329,097 99,854
4.29 % 1,679,604 82,376 4.90 %
Non interest-earning assets 205,962 134,201
Allowance for loan losses (14,177) (12,275)
Total assets $ 2,520,882 $ 1,801,530
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits
Checking accounts $ 197,067 $ 493 0.25 % $ 72,458 $ 2,001 2.76 %
Savings accounts 346,279 1,815 0.52 % 248,539 2,671 1.07 %
Money market accounts 536,139 3,092 0.58 % 400,664 4,682 1.17 %
Certificates of deposit 372,003 6,988 1.88 % 363,799 7,975 2.19 %
Brokered Deposits 18,532 531 2.87 % 16,789 489 2.91 %
Total interest bearing
deposits 1,470,020 12,919 0.88 % 1,102,249 17,818 1.62 %
Other borrowed funds 119,107 1,504 1.26 % 40,355 1,374 3.40 %
Total interest-bearing
liabilities 1,589,127 14,423 0.91 % 1,142,604 19,192 1.68 %
Non-interest bearing
liabilities
Demand Deposits 660,080 461,073
Other liabilities 15,146 16,355
Total Liabilities 2,264,353 1,620,032
Shareholders' equity 256,529 181,498
Total liabilities &
sharesholders' equity $ 2,520,882 $ 1,801,530
Net interest income on a fully
taxable equivalent basis 85,431 63,184
Less taxable equivalent
adjustment (1,789) (1,520)
Net interest income $ 83,642 $ 61,664
Net interest spread (3) 3.38 % 3.22 %
Net interest margin (4) 3.67 % 3.76 %
(1) Annualized on a fully taxable equivalent basis calculated using a federal tax
rate of 21% for the three months ended
(2) Nonaccrual loans are included in average amounts outstanding.
Interest rate spread represents the difference between the weighted average (3) yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(4) Net interest margin represents net interest income on a fully tax equivalent
basis as a percentage of average interest-earning assets.
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Six Months Ended
June 30, 2020 June 30, 2019
Interest Interest
Average Income/ Rate Earned/ Paid Average Income/ Rate Earned/ Paid
Balance Expenses (1) (1) Balance Expenses (1) (1)
(dollars in thousands)
ASSETS
Interest-earning assets
Loans (2)
Taxable $ 1,771,514 $ 85,566 4.83 % $ 1,333,402 $ 70,116 5.26 %
Tax-exempt 118,143 6,057 5.13 % 94,056 5,009 5.33 %
Securities
Taxable (available for sale) 121,653 2,994 2.46 % 72,743 2,132 2.93 % Tax-exempt (available for sale) 61,958 2,044 3.30 % 51,954 1,895 3.65 % Taxable (held to maturity) 18,236 435 2.39 % 28,976 711 2.45 % Tax-exempt (held to maturity) 9,986 274 2.74 % 11,384 318 2.79 % Cash and due from banks 68,748 269 0.39 % 73,415 1,759 2.40 % Total interest-earning assets 2,170,238 97,639 4.50 % 1,665,930 81,940 4.92 % Non interest-earning assets 201,565 133,806 Allowance for loan losses (13,031) (12,221) Total assets$ 2,358,772 $ 1,787,515 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits Checking accounts$ 193,946 $ 1,063 0.55 %$ 75,690 $ 1,850 2.44 % Savings accounts 324,795 2,130 0.66 % 235,155 2,466 1.05 % Money market accounts 517,476 3,817 0.74 % 403,527 4,633 1.15 %
Certificates of deposit 368,417 7,214 1.96 % 373,556 8,030 2.15 % Brokered Deposits 17,056 500 2.93 % 17,247 498 2.89 % Total interest bearing deposits 1,421,690 14,724 1.04 % 1,105,175 17,477 1.58 % Other borrowed funds 111,280 1,844 1.66 % 36,719 1,291 3.52 % Total interest-bearing liabilities 1,532,970 16,568 1.08 % 1,141,894 18,768 1.64 % Non-interest bearing liabilities Demand Deposits 564,879 450,964 Other liabilities 15,924 16,362 Total Liabilities 2,113,773 1,609,220
Shareholders' equity 244,999 178,295 Total liabilities & sharesholders' equity$ 2,358,772 $ 1,787,515 Net interest income on a fully taxable equivalent basis 81,071 63,172 Less taxable equivalent adjustment (1,759)
(1,517)
Net interest income $ 79,312 $ 61,655
Net interest spread (3) 3.42 % 3.27 %
Net interest margin (4) 3.74 % 3.79 %
(1) Annualized on a fully taxable equivalent basis calculated using a federal tax
rate of 21% for the six months ended
(2) Nonaccrual loans are included in average amounts outstanding.
Interest rate spread represents the difference between the weighted average (3) yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(4) Net interest margin represents net interest income on a fully tax equivalent
basis as a percentage of average interest-earning assets.
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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, 2020 Six Months Ended June 30, 2020
Compared with Compared with
Three Months Ended June 30, 2019 Six Months Ended June 30, 2019
Increase/(Decrease) Due to Change in Increase/(Decrease) Due to Change in
Volume Rate Total Volume Rate Total
(dollars in thousands) (dollars in thousands)Interest income Loans Taxable$ 25,810 $ (7,274) $ 18,536 $ 20,543 $ (5,093) $ 15,450 Tax-exempt 1,186 (205) 981 1,227 (179) 1,048 Securities Taxable (AFS) 673 (261) 412 1,132 (270) 862 Tax-exempt (AFS) 500 (165) 335 296 (147) 149 Taxable (HTM) (560) (91) (651) (257) (19) (276) Tax-exempt (HTM) (33) (1) (34) (38) (6) (44) Cash and due from banks 287 (2,388) (2,101) (105) (1,385) (1,490) Total interest income 27,863 (10,385) 17,478 22,798 (7,099) 15,699 Interest expense Deposits Checking accounts$ (3,200) $ 1,692 $ (1,508) $ (1,563) $ 776$ (787) Savings accounts 2,828 (3,684) (856) (19,533) 19,197 (336) Money market accounts 3,194 (4,784) (1,590) 3,066 (3,882) (816) Certificates of deposit 185 (1,172) (987) (109) (707) (816) Brokered Deposits 50 (8) 42 (5) 7 2 Total interest bearing deposits 3,057 (7,956) (4,899) (18,144) 15,391 (2,753) Other borrowed funds 192 (62) 130 748 (195) 553 Total interest expense 3,249 (8,018) (4,769) (17,396) 15,196 (2,200)
Change in net interest income
CHANGES IN FINANCIAL CONDITION
Total Assets. Total assets increased
Cash and Cash Equivalents. Cash and cash equivalents increased by
Loans. Net loans increased by$374.0 million , totaling$2.10 billion atJune 30, 2020 compared to$1.72 billion atDecember 31, 2019 . This increase was primarily the result of loans originated during the second quarter of 2020 under the PPP, offset by pay-downs of commercial lines with proceeds from these loans. This increase is also the result of loans acquired in the Timberwood acquisition. 41 Table of Contents Bank-Owned Life Insurance. AtJune 30, 2020 , our investment in bank-owned life insurance was$31.0 million , an increase of$6.1 million from$24.9 million atDecember 31, 2019 . This increase was primarily the result of bank-owned life insurance acquired in the Timberwood acquisition. Deposits. Deposits increased$419.8 million , or 22.8%, to$2.26 billion atJune 30, 2020 from$1.84 billion atDecember 31, 2019 . This increase was primarily the result of proceeds of much of the loans originated under the PPP remaining in the depository accounts of the Company's customers, as well as a result of the deposits acquired in the Timberwood acquisition. Borrowings. AtJune 30, 2020 , borrowings consisted of advances from the FHLB ofChicago , as well as notes payable and subordinated debt to other banks. Total FHLB borrowings decreased to$25.0 million atJune 30, 2020 from$39.8 million of FHLB borrowings atDecember 31, 2019 . Notes payable to other banks totaled$0 atJune 30, 2020 and$10.0 million atDecember 31, 2019 . Subordinated debt owed to other banks totaled$18.5 million atJune 30, 2020 and$18.6 million December 31, 2019 . Stockholders' Equity. Total stockholders' equity increased$45.9 million , or 19.9%, to$276.1 million atJune 30, 2020 , from$230.2 million at December
31, 2019. LOANS Our lending activities are conducted principally inWisconsin . 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 79.6% and 78.6% of our total assets as ofJune 30, 2020 andDecember 31, 2019 , 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$378.7 million , or 21.8%, to$2.12 billion as ofJune 30, 2020 as compared to$1.74 billion as ofDecember 31, 2019 . This increase during the first six months of 2020 has been comprised of an increase of$264.4 million or 87.4% in commercial and industrial loans, an increase of$123.4 million or 15.2% in commercial real estate loans, a decrease of$5.6 million or 4.2% in construction and development loans, an increase of$2.5 million or 0.6% in residential 1-4 family loans and a decrease of$6.0 million or 15.0% in consumer and other loans. The increase in loans was primarily due to the acquisition of Timberwood, which included$118.4 million in loan balances, as well as the origination of$278.1 million in PPP loans during the first six months of 2020, consisting of 1,826 individual loans with an average original balance of$152,327 . 42 Table of Contents
The following table presents the balance and associated percentage of each major category in our loan portfolio atJune 30, 2020 ,December 31, 2019 , andJune 30, 2019 : June 30, December 31, June 30, 2020 % of Total 2019 % of Total 2019 % of Total (dollars in thousands) Commercial & industrial Commercial & industrial$ 574,052 27 %$ 302,538 17 %$ 271,838 19 % Deferred costs net of unearned fees (7,258) 0 % (158) 0 % (207) 0 % Total commercial & industrial 566,794 27 % 302,380 17 % 271,631 19 % Commercial real estate Owner Occupied 525,908 25 % 459,782 26 % 415,451 29 % Non-owner occupied 410,931 19 % 353,723 20 % 255,072 18 % Deferred costs net of unearned fees (329) 0 % (362) 0 % (428) 0 % Total commercial real estate 936,510 44 % 813,143 46 % 670,095 47 % Construction & Development Construction & Development 126,653 6 % 132,296 8 % 73,522 5 % Deferred costs net of unearned fees (81) 0 % (133) 0 % (106) 0 % Total construction & development 126,572 6 % 132,163 8 % 73,416 5 % Residential 1-4 family Residential 1-4 family 451,070 22 % 448,605 26 % 370,261 26 % Deferred costs net of unearned fees 49 0 % 25 0 % 43 0 % Total residential 1-4 family 451,119 22 % 448,630 26 % 370,304 26 % Consumer Consumer 28,532 1 % 29,462 2 % 28,138 2 % Deferred costs net of unearned fees 128 0 % 124 0 % 114 0 % Total consumer 28,660 1 % 29,586 2 % 28,252 2 % Other Loans Other 5,365 0 % 10,440 1 % 5,493 0 % Deferred costs net of unearned fees 3 0 % 1 0 % 1 0 % Total other loans 5,368 0 % 10,441 1 % 5,494 0 % Total loans$ 2,115,023 100 %$ 1,736,343 100 %$ 1,419,192 100 %
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. AtJune 30, 2020 andDecember 31, 2019 , total loans outstanding to such directors and officers and their associates were$63.2 million and$68.6 million , respectively. During the six months endedJune 30, 2020 ,$11.0 million of additions and$16.3 million of repayments were made to these loans. AtJune 30, 2020 andDecember 31, 2019 , 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
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.
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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
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
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 theFederal Housing Finance Agency , which is generally$424,100 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
Loans sold with the retention of servicing assets result in the capitalization of servicing rights. Loan servicing rights are included in other assets and are carried at fair value. The net balance of capitalized servicing rights amounted to$4.1 million and$4.3 million atJune 30, 2020 andDecember 31, 2019 , respectively. Consumer Loans. Our consumer loan portfolio totaled$28.7 million and$29.6 million atJune 30, 2020 andDecember 31, 2019 , respectively, and represented 1% and 2% of our total loans at those dates. Consumer loans include secured and unsecured loans, lines of credit and personal installment loans. 44
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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$5.4 million and$10.4 million atJune 30, 2020 andDecember 31, 2019 , respectively, and are immaterial to the overall loan portfolio. The other loans category consists primarily of over-drafted depository accounts, loans utilized to purchase or carry securities and loans to nonprofit organizations. Loan Portfolio Maturities. The following tables summarize the dollar amount of loans maturing in our portfolio based on their loan type and contractual terms to maturity atJune 30, 2020 andDecember 31, 2019 , respectively. The tables do not include any estimate of prepayments, which can significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. One Year or One to Five Over Five As of June 30, 2020 Less Years Years Total (dollars in thousands) Commercial & industrial$ 79,257 $ 399,202 $ 88,335 $ 566,794 Commercial real estate 131,615 446,157 358,738 936,510 Construction & Development 26,983 19,053 80,536 126,572 Residential 1-4 family 22,435 67,938 360,746 451,119 Consumer and other 6,733 17,797 9,498 34,028 Total$ 267,023 $ 950,147 $ 897,853 $ 2,115,023 One Year or One to Five Over Five As of December 31, 2019 Less Years Years Total (dollars in thousands) Commercial & industrial$ 93,244 $ 120,816 $ 88,320 $ 302,380 Commercial real estate 120,010 421,789 271,344 813,143 Construction & Development 27,079 43,132 61,952 132,163 Residential 1-4 family 27,120 65,537 355,973 448,630 Consumer and other 10,825 20,438 8,764 40,027 Total$ 278,278 $ 671,712 $ 786,353 $ 1,736,343 The following tables summarize the dollar amount of loans maturing in our portfolio based on whether the loan has a fixed or variable rate of interest and their contractual terms to maturity atJune 30, 2020 andDecember 31, 2019 , respectively. The tables do not include any estimate of prepayments, which can significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. One Year or One to Five Over Five As of June 30, 2020 Less Years Years Total (dollars in thousands) Predetermined interest rates$ 158,124 $ 844,768 $ 441,825 $ 1,444,717
Floating or adjustable interest rates 108,899 105,379
456,028 670,306
Total $ 267,023 $ 950,147 $ 897,853 $ 2,115,023
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One Year or One to Five Over Five
As of December 31, 2019 Less Years Years Total
(dollars in thousands)
Predetermined interest rates $ 141,578 $ 574,071 $ 389,942 $ 1,105,591 Floating or adjustable interest rates 136,700 97,641
396,411 630,752
Total $ 278,278 $ 671,712 $ 786,353 $ 1,736,343 NONPERFORMING LOANS AND TROUBLED DEBT RESTRUCTURINGS
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.
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:
June 30, December 31, June 30,
2020 2019 2019
(dollars in thousands)
Nonaccruals $ 23,037 $ 5,093 $ 13,611 Loans past due > 90 days, but still accruing 81 354 3,433 Total nonperforming loans$ 23,118 $ 5,447 $ 17,044 Accruing troubled debt resructured loans$ 1,206 $ 1,844 $ 176 Nonperforming loans as a percent of gross loans 1.09 % 0.31 % 1.20 % Nonperforming loans as a percent of total assets 0.87 %
0.25 % 0.94 %
At
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 nonaccural loans during the first six months of 2020 was primarily due to negative impacts of the current economic environment on six large commercial customers.
Troubled Debt Restructurings
A troubled debt restructuring includes a loan modification where a borrower is
experiencing financial difficulty and we grant a concession to that borrower
that we would not otherwise consider except for the borrower's financial
difficulties. These concessions may include modifications of the terms of the
debt such as deferral of payments, extension of maturity, reduction of principal
balance, reduction of the stated interest rate other than normal market rate
adjustments, or a combination of these concessions. Debt may be bifurcated with
separate terms for each tranche of the restructured debt. Restructuring a loan
in lieu of aggressively enforcing the collection of the loan may benefit the
Company by increasing the ultimate probability of collection.
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A TDR may be either on accrual or nonaccrual status based upon the performance of the borrower and management's assessment of collectability. If a TDR is placed on nonaccrual status, which would occur based on the same criteria as non-TDR loans, it remains there until a sufficient period of performance under the restructured terms has occurred at which it returned to accrual status, generally 6 months.
As of
During the first half of 2020 the Bank has experienced an increase in customer requests for loan modifications and payment deferrals as a result of impacts of the COVID-19 pandemic. The Coronavirus Aid, Relief, and Economic Security (CARES) act, signed into law onMarch 27, 2020 , allowed financial institutions the option to exempt loan modifications related to the COVID-19 pandemic that would otherwise be categorized as a TDR from consideration for TDR treatment. Modifications in the scope of the exemption include forbearance agreements, interest-rate modifications, repayment plan changes and any other similar arrangements that would delay payments of principal or interest. This relief is allowable on modifications on loans which were not more than 30 days past due as ofDecember 31, 2019 , and that occur afterMarch 1, 2020 , and before the earlier of 60 days after the date on which the national emergency related to the COVID-19 outbreak is terminated
Classified loans
Accounting standards require the Company to identify loans, where full repayment of principal and interest is doubtful, as impaired loans. These standards require that impaired loans be valued at the present value of expected future cash flows, discounted at the loan's effective interest rate, or using one of the following methods: the observable market price of the loan or the fair value of the underlying collateral if the loan is collateral dependent. We have implemented these standards in our quarterly review of the adequacy of the ALL, and identify and value impaired loans in accordance with guidance on these standards. As part of the review process, we also identify loans classified as watch, which have a potential weakness that deserves management's close attention. Loans totaling$65.2 million were classified substandard under the Bank's policy atJune 30, 2020 and loans totaling$60.3 million were classified substandard under the Bank's policy as ofDecember 31, 2019 . The following table sets forth information related to the credit quality of our loan portfolio atJune 30 ,
2020 andDecember 31, 2019 . Loan type (in thousands) Pass Watch Substandard Total As ofJune 30, 2020 (unaudited) Commercial & industrial$ 523,327 $ 35,038 $ 8,429 $ 566,794 Commercial real estate 773,971 108,551 53,988 936,510 Construction & Development 126,432 - 140 126,572 Residential 1-4 family 440,967 8,138 2,014 451,119 Consumer 28,614 14 32 28,660 Other loans 1,600 3,207 561 5,368 Total loans$ 1,894,911 $ 154,948 $ 65,164 $ 2,115,023 Loan type (in thousands) Pass Watch Substandard Total As ofDecember 31, 2019 Commercial & industrial$ 270,948 $ 19,074 $ 12,358 $ 302,380 Commercial real estate 693,642 72,610 46,891 813,143 Construction & Development 128,820 3,313 30 132,163 Residential 1-4 family 441,144 6,511 975 448,630 Consumer 29,517 37 32 29,586 Other loans 6,504 3,937 - 10,441 Total loans$ 1,570,575 $ 105,482 $ 60,286 $ 1,736,343 47 Table of Contents ALLOWANCE FOR LOAN LOSSES
ALL represents management's estimate of probable and inherent credit losses in the loan portfolio. Estimating the amount of the ALL require the exercise of significant judgment and the use of estimates related to the amount and timing of expected future cash flows or impaired loans, estimated losses on pools of homogenous loans based on historical loss experience, and consideration of other qualitative factors such as current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset on the consolidated balance sheets. Loan losses are charged off against the ALL, while recoveries of amounts previously charged off are credited to the ALL. A provision for loan losses is charged to operations based on management's periodic evaluation of the factors previously mentioned, as well as other pertinent factors. The ALL consists of specific reserves for certain individually evaluated impaired loans and general reserves for collectively evaluated non-impaired loans. Specific reserves reflect estimated losses on impaired loans from management's analyses developed through specific credit allocations. The specific reserves are based on regular analyses of impaired, non-homogenous loans greater than$250,000 . These analyses involve a high degree of judgment in estimating the amount of loss associated with specific loans, including estimating the amount and timing of future cash flows and collateral values. The general reserve is based in part on the Bank's historical loss experience which is updated quarterly. The general reserve portion of the ALL also includes consideration of certain qualitative factors such as (1) changes in lending policies and/or underwriting practices, (2) national and local economic conditions, (3) changes in portfolio volume and nature, (4) experience, ability and depth of lending management and other relevant staff, (5) levels of and trends in past-due and nonaccrual loans and quality, (6) changes in loan review and oversight, (7) impact and effects of concentrations and (8) other issues deemed relevant. There are many factors affecting ALL; some are quantitative while others require qualitative judgment. The process for determining the ALL (which management believes adequately considers potential factors which might possibly result in credit losses) includes subjective elements and, therefore, may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provision for loan losses could be required that could adversely affect our earnings or financial position in future periods. Allocations of the ALL may be made for specific loans but the entire ALL is available for any loan that, in management's judgment, should be charged off or for which an actual loss is realized. As an integral part of their examination process, various regulatory agencies review the ALL as well. Such agencies may require that changes in the ALL be recognized when such regulators' credit evaluations differ from those of management based on information available to the regulators at the time of their examinations. 48
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The following table summarizes the changes in our ALL for the periods indicated:
Six months ended Year ended Six months ended
June 30, December 31, June 30,
2020 2019 2019
(dollars inthousands)
Period-end loans outstanding (net of unearned discount and deferred loan fees) $ 2,115,023$ 1,736,343 $ 1,419,192 Average loans outstanding (net of unearned discount and deferred loan fees) $ 1,889,657$ 1,565,261 $ 1,427,458 Balance of allowance for loan losses at the beginning of period $ 11,396$ 12,248 $ 12,248 Loans charged-off: Commercial & industrial 8 1,229 594 Commercial real estate - owner occupied 101 4,994 659 Commercial real estate - non-owner occupied - 62 54 Construction & Development - - - Residential 1-4 family 59 276 11 Consumer - 76 11 Other Loans 9 41 8 Total loans charged-off 177 6,678 1,337 Recoveries of loans previously charged off: Commercial & industrial 1 11 1 Commercial real estate - owner occupied 640 356 2 Commercial real estate - non-owner occupied 40 60 1 Construction & Development - - - Residential 1-4 family 37 130 122 Consumer - 11 4 Other Loans 9 8 4 Total recoveries of loans previously charged off: 727 576 134 Net Loan charge-offs (recoveries) (550) 6,102 1,203 Provision charged to operating expense 4,125 5,250 1,125 Balance at end of period $ 16,071$ 11,396 $ 12,170 Ratio of net charge offs (recoveries) during the year to average loans outstanding (0.03) % 0.39 % 0.17 % Ratio of allowance for loan losses to loans outstanding 0.76 % 0.66 % 0.86 % The level of charge-offs depends on many factors, including the national and regional economy. Cyclical lagging factors may result in charge-offs being higher than historical levels. Although the allowance is allocated between categories, the entire allowance is available to absorb losses attributable to all loan categories. Management believes that the current ALL is adequate. 49
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The following table summarizes an allocation of the ALL and the
related percentage of loans outstanding in each category for the periods below.
June 30, December 31, June 30,
2020 2019 2019
(in thousands, except %) Amount % of Loans Amount % of Loans Amount % of Loans
Loan Type:
Commercial & industrial $ 2,548 27 % $ 2,320 17 % $ 2,143 19 %
Commercial real estate -
owner occupied 6,031 25 % 4,587 26 % 5,473 29 %
Commercial real estate -
non-owner occupied 3,798 19 % 1,578 20 % 1,948 18 %
Construction & Development 772 6 % 548 8 % 411 5 % Residential 1-4 family 2,705 22 % 2,169 26 % 2,027 26 % Consumer 160 1 % 141 2 % 139 2 % Other Loans 57 0 % 53 1 % 29 0 % Total allowance$ 16,071 100 %$ 11,396 100 %$ 12,170 100 % SOURCES OF FUNDS General. Deposits traditionally have been our primary source of funds for our investment and lending activities. We also borrow from the FHLB ofChicago 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 ofJune 30, 2020 , deposit liabilities accounted for approximately 85.1% 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$2.26 billion and$1.84 billion as ofJune 30, 2020 andDecember 31, 2019 , respectively. Noninterest-bearing deposits atJune 30, 2020 andDecember 31, 2019 , were$708.3 million and$476.5 million , respectively, while interest-bearing deposits were$1.55 billion and$1.37 billion atJune 30, 2020 andDecember 31, 2019 , respectively. AtJune 30, 2020 , we had a total of$405.1 million in certificates of deposit, including$20.6 million of brokered deposits. Based on historical experience and our current pricing strategy, we believe we will retain a majority of these accounts upon maturity, although our long-term strategy is to minimize reliance on certificates of deposits by increasing relationship deposits in lower earning savings and demand deposit accounts. The following tables set forth the average balances of our deposits for the periods indicated: Six months ended Year ended Six months ended June 30, 2020 December 31, 2019 June 30, 2019 Weighted Weighted Weighted Amount Percent average rate Amount Percent average rate Amount Percent average rate (dollars in thousands) Noninterest-bearing demand deposits$ 564,879 28.4 % N/A$ 495,039 29.4 % N/A$ 450,964 29.0 % N/A Interest-bearing checking deposits 193,946 9.8 % 0.55 % 90,273 5.4 % 1.98 % 75,690 4.9 % 2.44 % Savings deposits 324,795 16.3 % 0.66 % 261,977 15.6 % 0.98 % 235,155 15.1 % 1.05 % Money market accounts 517,476 26.0 % 0.74 % 440,773 26.2 % 1.11 % 403,527 25.9 % 1.15 % Certificates of deposit 368,417 18.5 % 1.96 % 380,117 22.6 % 2.14 % 373,556 24.0 % 2.15 % Brokered deposits 17,056 0.9 % 2.93 % 16,387 1.0 % 2.95 % 17,247 1.1 % 2.89 % Total$ 1,986,569 100 %$ 1,684,566 100 %$ 1,556,139 100 % 50 Table of Contents
Certificates of deposit of
June 30, December 31, June 30,
2020 2019 2019
(dollars in thousands)
Less than 3 months remaining $ 28,327 $ 34,306 $ 19,944
3 to 6 months remaining 27,435 23,201 20,503
6 to 12 months remaining 71,600 38,937 46,014
12 months or more remaining 53,877 80,151 91,221
Total $ 181,239 $ 176,595 $ 177,682
Retail certificates of deposit of $100,000 or greater totaled $181.2 million and
$176.6 million at June 30, 2020 and December 31, 2019 , respectively. Interest
expense on retail certificates of deposit of $100,000 or greater was $1.7
million for the six months ended March 31, 2020 , and $3.5 million for the year
ended December 31, 2019 .
The following table sets forth certificates of deposit classified by interest rate as of the dates indicated:
June 30, December 31, June 30,
2020 2019 2019
(dollars in thousands)
Interest Rate:
Less than 1.00% $ 53,821 $ 168 $ 852
1.00% to 1.99% 172,736 165,763 122,398
2.00% to 2.99% 147,204 190,164 212,328
3.00% to 3.99% 31,381 32,911 32,734
Total $ 405,142 $ 389,006 $ 368,312
Borrowings
Securities sold under repurchase agreements
The Company has securities sold under repurchase agreements which have contractual maturities up to one year from the transaction date with variable and fixed rate terms. The agreements to repurchase require that the Company (seller) repurchase identical securities as those that are sold. The securities underlying the agreements are under the Company's control.
The following table summarizes securities sold under repurchase agreements, and the weighted average interest rates paid:
Six months Year ended Six months
ended December 31, ended
(dollars in thousands) June 30, 2020 2019 June 30, 2019
Average daily amount of securities sold under
repurchase agreements during the period $ 45,633 $ 21,522 $ 25,178
Weighted average interest rate on average
daily securities sold under repurchase
agreements 0.47 % 2.14 % 2.38 %
Maximum outstanding securities sold under
repurchase agreements at any month-end $ 79,718 $ 45,865 $ 42,338
Securities sold under repurchase agreements at
period end $ 57,442 $ 45,865 $ 20,034
Weighted average interest rate on securities
sold under repurchase agreements at period end 0.03 % 1.47 % 2.30 % Borrowings The Company's borrowings have historically consisted primarily of FHLB ofChicago 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$25.0 million of advances outstanding from the FHLB atJune 30, 2020 , and$39.8 million as ofDecember 31, 2019 . 51
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The total loans pledged as collateral were$807.0 million atJune 30, 2020 and$815.2 million atDecember 31, 2019 . Outstanding letters of credit from the FHLB totaled$6.6 million atMarch 31, 2020 andDecember 31, 2019 .
The following table summarizes borrowings, which consist of borrowings from the FHLB, and the weighted average interest rates paid:
Six months Year ended Six months
ended December 31, ended
(dollars in thousands) June 30, 2020 2019 June 30, 2019
Average daily amount of borrowings outstanding
during the period $ 46,573 $ 16,665 $ -
Weighted average interest rate on average daily
borrowing 1.64 % 1.90 % NA
Maximum outstanding borrowings at any month-end $ 58,800 $ 39,800 $ -
Borrowing outstanding at period end $ 24,988 $ 39,800 $ -
Weighted average interest rate on borrowing at
period end 1.29 % 1.80 % NA
Lines of credit and other borrowings.
We maintained a$5.0 million line of credit with a commercial bank. There were no outstanding balances on this note as ofJune 30, 2020 . AtDecember 31, 2019 , the Company had an outstanding balance of$5.0 million on this line. Borrowings under this note carried interest at a variable rate with a floor of 3.50%, and was due in full onMay 25, 2021 . Subsequent toJune 30, 2020 , onJuly 22, 2020 , this agreement was terminated. We also maintained a$5.0 million line of credit with another commercial bank. AtDecember 31, 2019 , the Company had an outstanding balance of$5.0 million on this line. This note was not renewed when it matured onMay 19, 2020 . We maintain a$7.5 million line of credit with another commercial bank, which was entered into onMay 15, 2020 . There were no outstanding balances on this note atJune 30, 2020 . Any future borrowings will required monthly payments of interest at a variable rate, and will be due in full onMay 15, 2021 . DuringSeptember 2017 , the Company entered into subordinated note agreements with three separate commercial banks, where the Company had up to twelve months from entering these agreements to borrow funds up to a maximum availability of$22.5 million . As ofJune 30, 2020 andDecember 31, 2019 , outstanding balances under these agreements totaled$11.5 million . These notes were all issued with 10-year maturities, carry interest at a variable rate payable quarterly, are callable on or after the sixth anniversary of their issuance dates, and qualify for Tier 2 capital for regulatory purposes. As part of the Partnership acquisition, the Company assumed a subordinated note agreement with an outstanding balance of$7.0 million , and a fair market value adjustment of$0.2 million ($49,000 and$61,000 atJune 30, 2020 andDecember 31, 2019 , respectively). The total amount outstanding was$7.0 million and$7.1 million atJune 30, 2020 andDecember 31, 2019 , respectively. The note matures onOctober 1, 2025 , requires quarterly interest-only payments at a rate of 7.1% prior to maturity, and can be prepaid without penalty afterOctober 1, 2020 . This note qualifies for Tier 2 capital for regulatory purposes. Subsequent toJune 30, 2020 , onJuly 22, 2020 , the Company entered into subordinated note agreements with two separate commercial banks. The Company has throughDecember 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, will carry interest at a fixed rate of 5.0% throughJune 30, 2025 , and at a variable rate thereafter, payable quarterly. These notes are callable on or afterJanuary 1, 2026 and qualify for Tier 2 capital for regulatory purposes.
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.U.S. Treasury securities, obligations of states and political subdivisions and mortgage-backed securities, all of which are issued byU.S. government agencies orU.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. 52
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Securities available for sale consist of 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$174.1 million and included gross unrealized gains of$7.5 million and gross unrealized losses of$0 atJune 30, 2020 . At December, 31 2019, the fair value of securities available for sale totaled$181.5 million and included gross unrealized gains of$3.4 million and gross unrealized losses of$0.2 million . Securities classified as held to maturity consist ofU.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$9.6 million and$43.7 million atJune 30, 2020 andDecember 31, 2019 , respectively. The Company recognized a net gain on sale of available for sale securities of$0.1 million during the six-months endedJune 30, 2020 , The Company recognized a net gain of$3.1 million on sale of held to maturity securities during the six-months endedJune 30, 2020 . The Company recognized a net gain of$0.2 million on the sale of an investment previously classified as an "other investment" during the six-months endedJune 30, 2019 .
The following table sets forth the fair value of available for sale investment securities, the amortized costs of held to maturity and the percentage distribution at the dates indicated:
June 30, December 31,
2020 2019
Amount Percent Amount Percent
(dollars in thousands)
Available for sale securities, at estimated
fair value
Obligations of U.S. Government sponsored
agencies $ 14,599 8 % $ 12,060 7 %
Obligations of states and political
subdivisions 75,226 43 % 54,771 30 %
Mortgage-backed securities 54,111 31 % 51,720 28 %
Corporate notes 27,512 16 % 62,955 35 %
Certificates of deposit 2,619 2 % - 0 %Total securities available for sale 174,067 100 % 181,506 100 % Held to maturity securities, at amortized cost U.S. Treasury securities - 0 % 33,527 77 % Obligations of states and political subdivisions 9,579 100 % 10,207 23 % Total securities held to maturity 9,579 100 %
43,734 100 % Total$ 183,646 $ 225,240 53 Table of Contents
The following tables set forth the composition and maturities of investment
securities as of
After One, But After Five, But
Within Five Within Ten
Within One Year Years Years After Ten Years Total
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield(1) Cost Yield(1) Cost Yield(1) Cost Yield(1) Cost Yield(1)
(dollars in thousands)
At June 30, 2020
Available for sale
securities
Obligations of U.S.
Government sponsored
agencies $ 305 (0.4) % $ 312 0.1 % $ 2,291 2.1 % $ 11,137 2.3 % $ 14,045 2.1 %
Obligations of states
and political
subdivisions 831 3.3 % 5,427 3.7 % 8,858 3.2 % 56,330 3.3 % 71,446 3.3 %
Mortgage-backed
securities 1,706 2.2 % 15,803 2.5 % 19,531 2.8 % 14,131 2.6 % 51,171 2.6 %
Corporate notes 11,913 2.9 % 4,955 3.3 % - 0.0 % 10,423 1.3 % 27,291 2.3 %
Certificates of
deposit 745 2.0 % 1,835 1.0 % - - - - 2,580 1.3 %
Total available for
sale securities $ 15,500 2.7 % $ 28,332 2.7 % $ 30,680 2.9 % $ 92,021 2.8 % $ 166,533 2.8 %
Held to maturity
securities
Obligations of states
and political
subdivisions $ 751 1.8 % $ 3,524 2.6 % $ 2,395 2.9 % $ 2,909 3.8 % $ 9,579 2.9 %
Total $ 16,251 2.7 % $ 31,856 2.7 % $ 33,075 2.9 % $ 94,930 2.9 % $ 176,112 2.8 %
After One, But After Five, But
Within One Year Within Five Years Within Ten Years After Ten Years Total
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield(1) Cost Yield(1) Cost Yield(1) Cost Yield(1) Cost Yield(1)
(dollars in thousands)
At December 31, 2019
Available for sale
securities
Obligations of U.S.
Government sponsored
agencies $ - - $ - - $ - - $ 12,218 2.3 % $ 12,218 2.3 %
Obligations of states
and political
subdivisions 1,685 3.1 % 6,524 3.5 % 13,153 3.7 % 31,231 3.7 % 52,593 3.6 %
Mortgage-backed
securities 1,469 2.1 % 18,395 2.5 % 19,514 2.9 % 11,392 2.8 % 50,770 2.7 %
Corporate notes 45,752 1.8 % 16,815 3.0 % - 0.0 % 228 8.3 % 62,795 2.1 %
Total available for
sale securities $ 48,906 1.9 % $ 41,734 2.8 % $ 32,667 3.2 % $ 55,069 3.2 % $ 178,376 2.8 %
Held to maturity
securities
U.S. Treasury
securities $ 3,508 2.3 % $ 12,501 2.6 % $ 17,517 2.4 % $ - - $ 33,526 2.4 %
Obligations of states
and political
subdivisions 628 1.6 % 4,276 2.4 % 2,395 2.9 % 2,909 3.8 % 10,208 2.9 %
Total held to maturity
securities 4,136 2.1 % 16,777 2.5 % 19,912 2.5 % 2,909 3.8 % 43,734 2.5 %
Total $ 53,042 1.9 % $ 58,511 2.8 % $ 52,579 2.9 % $ 57,978 3.2 % $ 222,110 2.7 %
(1) Weighted Average Yield is shown on a fully taxable equivalent basis using a
federal tax rate of 21% at
The Company evaluates securities for other-than-temporary impairment on at least
a quarterly basis, and more frequently when economic or market conditions
warrant such evaluation. Consideration is given to (1) credit quality of
individual securities and their issuers are assessed; (2) the length of time and
the extent to which the fair value has been less than cost; (3) the financial
condition and near-term prospects of the issuer; and (4) that the Company does
not have the intent to sell the security and it is more likely than not that it
will not have to sell the security before recovery of its cost basis.
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As ofJune 30, 2020 , 7 debt securities had gross unrealized losses, with negligible aggregate depreciation from our amortized cost basis. The largest unrealized loss percentage of any single security was 0.49% (or$14,000 ) of its amortized cost. This was also the largest unrealized dollar loss of any security. As ofDecember 31, 2019 , 20 debt securities had gross unrealized losses, with an aggregate depreciation of 0.11% from our amortized cost basis. The largest unrealized loss percentage of any single security was 1.87% (or$6,000 ) of its amortized cost. The largest unrealized dollar loss of any single security was$67,000 (or 1.46%) of its amortized cost.
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 customerswho 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 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. 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
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 theFederal 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 regards to components, risk weighting and other factors. 55
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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%.
In addition, the capital rules require a capital conservation buffer of up to
2.5% above each of the minimum capital ratio requirements (CET1, Tier 1, and
total risk-based capital), which is designed to absorb losses during periods of
economic stress. These buffer requirements must be met for a bank to be able to
pay dividends, engage in share buybacks or make discretionary bonus payments to
executive management without restriction. This capital conservation buffer is
being phased in, and was 1.875% as of January 1, 2018 and is 2.5% effective
January 1, 2019 .
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 December 31, 2018 , and brokered deposits are not
restricted.
To be well-capitalized, the Bank must maintain at least the following capital ratios:
? 6.5% CET1 to risk-weighted assets;
? 8.0% Tier 1 capital to risk-weighted assets;
? 10.0% Total capital to risk-weighted assets; and
? 5.0% leverage ratio.
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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 2019.
The Economic Growth, Regulatory Relief, and Consumer Protection Act (the "Economic Growth Act") signed into law inMay 2018 scaled back certain requirements of the Dodd-Frank Act and provided other regulatory relief. Among the provisions of the Economic Growth Act was a requirement that theFederal Reserve raise the asset threshold for those bank holding companies subject to theFederal Reserve's Small Bank Holding Company Policy Statement ("Policy Statement") to$3 billion . As a result, as of the effective date of that change in 2018, the Company was no longer required to comply with the risk-based capital rules applicable to the Bank as described above. TheFederal Reserve may however, require smaller bank holding companies subject to the Policy Statement to maintain certain minimum capital levels, depending upon general economic conditions and a bank holding company's particular condition, risk profile and growth plans. As a result of the Economic Growth Act, the federal banking agencies were also 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 institutions 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. OnDecember 21, 2018 , federal banking agencies issued a joint final rule to revise their regulatory capital rules to (i) address the upcoming implementation of the "current expected credit losses" ("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.
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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 for
Capital
Adequacy Plus Minimum To Be
Capital Well-
Minimum Conservation Capitalized
Capital Buffer Under
Required for Basel III Fully Ptompt
Capital Phased Corective Action
Actual Adequacy In Provisions
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)
At June 30, 2020
Bank First Corporation :
Total capital (to
risk-weighted assets) $ 243,784 11.6 % N/A N/A N/A N/A N/A N/A
Tier I capital (to
risk-weighted assets) 209,164 9.9 % N/A N/A N/A N/A N/A N/A
Common equity tier I
capital (to
risk-weighted assets) 209,164 9.9 % N/A N/A N/A N/A N/A N/A Tier I capital (to average assets) 209,164 8.5 % N/A N/A N/A N/A N/A N/A Bank First, N.A: Total capital (to risk-weighted assets)$ 240,638 11.4 % 168,605 8.0 % 221,294 10.5 % 210,757 10.0 % Tier I capital (to risk-weighted assets) 224,567 10.7 % 126,454 6.0 % 179,143 8.5 % 168,605 8.0 % Common equity tier I capital (to risk-weighted assets) 224,567 10.7 % 94,840 4.5 % 147,530 7.0 % 136,992 6.5 % Tier I capital (to average assets) 224,567 9.2 % 97,879 4.0 % 97,879 4.0 % 122,349 5.0 % AtDecember 31, 2019 Bank First Corporation : Total capital (to risk-weighted assets)$ 208,900 10.4 % N/A N/A N/A N/A N/A N/A Tier I capital (to risk-weighted assets) 178,882 8.9 % N/A N/A N/A N/A N/A N/A Common equity tier I capital (to risk-weighted assets) 178,882 8.9 % N/A N/A
N/A N/A N/A N/A Tier I capital (to average assets) 178,882 8.5 % N/A N/A N/A N/A N/A N/A Bank First, N.A: Total capital (to risk-weighted assets)$ 215,347 10.7 % 161,163 8.0 % 211,527 10.5 % 201,454 10.0 % Tier I capital (to risk-weighted assets) 203,951 10.1 % 120,872 6.0 % 171,236 8.5 % 161,163 8.0 % Common equity tier I capital (to risk-weighted assets) 203,951 10.1 % 90,654 4.5 % 141,018 7.0 % 130,945 6.5 % Tier I capital (to average assets) 203,951 9.7 % 84,390 4.0 % 84,390 4.0 % 105,487 5.0 %
As previously mentioned, the Company carried$18.5 million of subordinated debt as ofJune 30, 2020 andDecember 31, 2019 , respectively, which is 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:
? Unused lines of credit
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? Standby and direct pay letters of credit
? Credit card arrangements
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
Less Than One to Three Three to Five After Five
Other Commitments Total One Year Years Years Years
(dollars in thousands)
Unused lines of credit $ 445,074 $ 240,479 $ 60,359 $ 30,266 $ 113,970
Standby and direct pay letters
of credit 7,501 5,088 1,643 770 -
Credit card arrangements 9,719 - - - 9,719
Total commitments $ 462,294 $ 245,567 $ 62,002 $ 31,036 $ 123,689
Amounts of Commitments
Expiring - By Period as of
Less Than One to Three Three to Five After Five
Other Commitments Total One Year Years Years Years
(dollars in thousands)
Unused lines of credit $ 383,209 $ 194,890 $ 47,214 $ 28,215 $ 112,890
Standby and direct pay letters
of credit 17,121 5,354 5,050 5,426 1,291
Credit card arrangements 11,148 - - - 11,148
Total commitments $ 411,478 $ 200,244 $
52,264
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