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 periodSeptember 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. OnSeptember 18, 2020 , the Company announced its intention to sell its branch inChetek, Wisconsin , in a transaction expected to close during the fourth quarter of 2020. This event will reduce the Bank's branch count by one and will removeBarron County from the list of counties in which the Bank has a presence. 31 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 , but continued uncertainty remains as future actions may be warranted based on the progression of the pandemic. 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 also participated extensively in the Payroll Protection Program ("PPP"), under which we secured funding of approximately 1,875 loans totaling approximately$279.6 million . 32 Table of Contents
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 Nine Months Ended
(In thousands, except per share
data) 9/30/2020 6/30/2020 3/31/2020 12/31/2019 9/30/2019 9/30/2020 9/30/2019
Results of Operations:
Interest income $ 25,928 $ 24,382 $ 23,296 $ 23,795 $ 25,489 $ 73,606 $ 65,370
Interest expense 3,003 3,586 4,653 5,015 5,176 11,242 14,483
Net interest income 22,925 20,796 18,643 18,780 20,313 62,364 50,887
Provision for loan losses 1,350 3,150 975 1,125 3,000 5,475 4,125
Net interest income after
provision for loan losses 21,575 17,646 17,668 17,655 17,313 56,889 46,762
Noninterest income 5,115 7,764 3,897 3,211 3,145 16,776 9,421
Noninterest expense 12,202 14,438 12,741 11,182 12,087 39,381 31,578
Income before income tax expense 14,488 10,972 8,824 9,684 8,371 34,284 24,605
Income tax expense 3,534 2,676 1,558 2,225 1,712 7,768 5,370
Net income $ 10,954 $ 8,296 $ 7,266 $ 7,459 $ 6,659 $ 26,516 $ 19,235
Earnings per common share - basic $ 1.42 $ 1.11 $ 1.03 $ 1.05 $ 0.95 $ 3.57 $ 2.88
Earnings per common share -
diluted 1.42 1.11 1.02 1.04 0.93 3.56 2.83
Common Shares:
Basic weighted average 7,673,572 7,395,199 7,028,690 7,084,728 6,985,767 7,367,793 6,679,481
Diluted weighted average 7,691,326 7,405,995 7,128,246 7,182,854 7,134,674 7,412,673 6,808,177
Outstanding 7,729,762 7,733,457 7,155,955 7,084,728 7,084,728 7,729,762 7,084,728
Noninterest income / noninterest
expense:
Service charges $ 1,343 $ 1,158 $ 916 $ 1,110 $ 918 $ 3,417 $ 2,396
Income from Ansay 970 710 891 55 319 2,571 1,737
Income from UFS 720 850 897 842 768 2,467 2,093
Loan servicing income 538 226 462 (291) 374 1,226 841
Net gain on sales of mortgage
loans 1,304 1,332 460 627 533 3,096 774
Net gain on sales of securities - 3,233 - 611 - 3,233 257
Noninterest income from strategic
alliances 16 16 17 21 26 49 74
Other noninterest income 224 239 254 236 207 717 1,249
Total noninterest income $ 5,115 $ 7,764 $ 3,897 $ 3,211 $ 3,145 $ 16,776 $ 9,421
Personnel expense $ 6,609 $ 6,608 $
6,452
1,171 921 1,275 1,103 1,076 3,367 2,757
Data processing 1,463 1,334 1,199 1,478 1,158 3,996 3,031Postage, stationery and supplies 219 277 172 141 135 668 450 Net (gain) loss on sales and valuations of other real estate owned (32) 467 976 36 (10) 1,411 (109) Advertising 41 69 55 88 53 165 180 Charitable contributions 110 127 123 69 225 360 497 Outside service fees 888 1,394 801 204 1,171 3,083 2,837
Amortization of intangibles 418 362 334 373 374 1,114 696 Penalty for early extinguishment of debt - 1,323 - - - 1,323 - Other noninterest expense 1,315 1,556 1,354 1,772 1,633 4,225
4,254
Total noninterest expense$ 12,202 $ 14,438 $ 12,741 $ 11,182 $ 12,087 $ 39,381 $ 31,578 Period-end balances: Loans$ 2,193,228 $ 2,115,023 $
1,765,242
16,318 16,071 12,967 11,396 10,131 16,318 10,131
Investment securities available-for-sale, at fair value 173,334 174,067 172,070 181,506 136,935 173,334 136,935 Investment securities held-to-maturity, at cost 6,670 9,579 43,732 43,734 42,605 6,670 42,605Goodwill and other intangibles, net 65,110 65,559 52,789 53,122 54,153 65,110 54,153 Total assets 2,639,247 2,657,911 2,200,320 2,210,168 2,163,501 2,639,247 2,163,501 Deposits 2,271,040 2,263,145 1,847,209 1,843,311 1,838,080 2,271,040 1,838,080 Stockholders' equity 286,104 276,100 237,682 230,211 225,332 286,104 225,332 Book value per common share 37.01 35.70 33.21 32.49 31.81 37.01 31.81 Tangible book value per common share (1) 29.12 27.76 26.44 25.60 24.86 29.12 24.86 Average balances: Loans$ 2,140,008 $ 2,034,738 $ 1,744,576 $ 1,718,705 $ 1,682,932 $ 1,973,716 $ 1,513,552 Interest-earning assets 2,423,168 2,329,097 2,011,382 1,976,420 1,923,451 2,255,165 1,752,714 Total assets 2,626,136 2,520,882 2,196,662 2,160,080 2,095,357 2,448,544 1,891,257 Deposits 2,260,065 2,130,100 1,843,039 1,835,430 1,786,373 2,078,580 1,633,726 Interest-bearing liabilities 1,636,606 1,589,127 1,476,814 1,373,320 1,310,757 1,567,768
1,198,799
Goodwill and other intangibles, net 61,276 53,836 48,606 49,071 42,373 54,633 25,612 Stockholders' equity 281,656 256,529 233,470 228,404 227,205 257,308 194,778 Financial ratios (2): Return on average assets 1.67 % 1.32 % 1.32 % 1.37 % 1.27 % 1.44 % 1.36 % Return on average common equity 15.56 % 12.94 % 12.45 % 12.96 % 11.72 % 13.74 % 13.17 % Average equity to average assets 10.73 % 10.18 % 10.63 % 10.57 % 10.84 % 10.51 % 10.30 % Stockholders' equity to assets 10.84 % 10.39 % 10.80 % 10.42 % 10.42 % 10.84 % 10.42 % Tangible equity to tangible assets (1) 8.73 % 8.27 % 8.79 % 8.39 % 8.33 % 8.73 % 8.33 % Loan yield 4.65 % 4.66 % 5.07 % 5.22 % 5.73 % 4.78 % 5.44 % Earning asset yield 4.33 % 4.29 % 4.74 % 4.86 % 5.37 % 4.44 % 5.08 % Cost of funds 0.73 % 0.91 % 1.27 % 1.45 % 1.57 % 0.96 % 1.62 % Net interest margin, taxable equivalent 3.84 % 3.67 % 3.81 % 3.85 % 4.30 % 3.77 % 3.98 % 33 Table of Contents Net loan charge-offs to average loans 0.20 % 1.00 % (0.14) % (0.01) % 1.20 % 0.03 % 0.48 % Nonperforming loans to total loans 0.84 % 1.09 % 0.42 % 0.31 % 0.30 % 0.84 % 0.30 % Nonperforming assets to total assets 0.79 % 0.94 % 0.51 % 0.52 % 0.52 % 0.79 % 0.52 % Allowance for loan losses to loans 0.74 % 0.76 % 0.73 % 0.66 %
0.59 % 0.74 % 0.59 %
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 Nine Months Ended (In thousands, except per share data) 9/30/2020 6/30/2020 3/31/2020 12/31/2019 9/30/2019 9/30/2020 9/30/2019 Tangible Assets Total assets$ 2,639,247 $ 2,657,911 $ 2,200,320 $ 2,210,168 $ 2,163,501 $ 2,639,247 $ 2,163,501 Adjustments: Goodwill (55,022) (55,052) (43,456) (43,456) (43,456) (55,022) (43,456) Core deposit intangible, net of amortization (5,962) (6,381) (5,046) (5,379) (5,752) (5,962) (5,752) Tangible assets$ 2,578,263 $ 2,596,478 $ 2,151,818 $ 2,161,333 $ 2,114,293 $ 2,578,263 $ 2,114,293 Tangible Common Equity Total stockholders' equity$ 286,104 $ 276,100 $ 237,682
(55,022) (55,052) (43,456) (43,456) (43,456) (55,022) (43,456)
Core deposit intangible, net
of amortization (5,962) (6,381) (5,046) (5,379) (5,752) (5,962) (5,752)
Tangible common equity $ 225,120 $ 214,667 $ 189,180
Book value per common share
29.12 27.76 26.44 25.60 24.86 29.12 24.86
Total stockholders' equity to
total assets 10.84 % 10.39 % 10.80 % 10.42 % 10.42 % 10.84 % 10.42 %
Tangible common equity to
tangible assets 8.73 % 8.27 % 8.79 % 8.39 % 8.33 % 8.73 % 8.33 %
34
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RESULTS OF OPERATIONS
Results of Operations for the Three Months Ended
General. Net income increased$4.3 million to$11.0 million for three months endedSeptember 30, 2020 , compared to$6.7 million for the same period in 2019. This increase was primarily due to the added scale of the office acquired in the Timberwood acquisition during the second quarter of 2020, strong residential mortgage production during the third quarter of 2020, interest income produced by approximately$279.6 million in PPP loans originated during the first half of 2020, and a lower provision for loan losses during the third quarter of 2020 compared to the third quarter of 2019. 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$2.6 million to$22.9 million for the three months endedSeptember 30, 2020 compared to$20.3 million for three months endedSeptember 30, 2019 . The increase in net interest income was primarily due to the added scale of one office acquired in the Timberwood acquisition as well as the impact of approximately$279.6 million PPP loans originated during the first half of 2020. Total average interest-earning assets was$2.42 billion for the three months endedSeptember 30, 2020 , up from$1.92 billion for the same period in 2019. Tax equivalent net interest margin decreased 0.46% to 3.84% for the three-months endedSeptember 30, 2020 , down from 4.30% for the same period in 2019. Net interest margin decreased by 0.44% due to a decrease in purchase accounting accretion quarter-over-quarter which added to a decrease of 0.02% 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$0.4 million , or 1.72%, to$25.9 million for the three months endedSeptember 30, 2020 compared to$25.5 million for the same period in 2019. The increase in total interest income was primarily due the added scale of one office acquired in the Timberwood acquisition during the second quarter of 2020 along with the interest income produced by approximately$279.6 million in PPP loans originated during the first half of 2020. The average balance of loans increased by$457.1 million during the three months endedSeptember 30, 2020 compared to the same period in 2019, offsetting a reduction in yield on interest-earning assets of 1.04% between these two periods. Of this reduction in yield on interest earning assets, 0.48% was the result of lower purchase accounting accretion during the 2020 third quarter, with the remaining 0.56% due to the lower interest rate environment during the third quarter of 2020 in comparison to the third quarter of 2019. Interest Expense. Interest expense decreased$2.2 million , or 42.0%, to$3.0 million for the three months endedSeptember 30, 2020 compared to$5.2 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 one office acquired in the Timberwood acquisition. Interest expense on interest-bearing deposits decreased by$2.0 million to$2.7 million for the three months endedSeptember 30, 2020 , from$4.7 million for the same period in 2019. The average cost of interest-bearing deposits was 0.69% for the three months endedSeptember 30, 2020 , compared to 1.50% 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. 35
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We recorded a provision for loan losses of$1.4 million for the three months endedSeptember 30, 2020 compared to$3.0 million for the same period in 2019. We recorded net charge-offs of$1.3 million for the three months endedSeptember 30, 2020 compared to net charge-offs of$5.0 million for the same period in 2019. The ALL was$16.3 million , or 0.74% of total loans, atSeptember 30, 2020 compared to$10.1 million , or 0.59% of total loans atSeptember 30, 2019 . Noninterest Income. Noninterest income is an important component of our total revenues. A significant portion of our noninterest income is associated with service charges and income from the Bank's subsidiaries, Ansay and UFS. Other sources of noninterest income include loan servicing fees, gains on sales of mortgage loans, and other income from strategic alliances. Noninterest income increased$2.0 million to$5.1 million for the three months endedSeptember 30, 2020 compared to$3.1 million for the same period in 2019. Income from service charges increased by 46.3% due to an expanded base of customer relationships, many of which were the result of the Timberwood acquisition, as well as a lower earned income crediting rate on analyzed depository accounts, which serve to offset fees on those accounts. Income from our investment in Ansay increased by 204.1% as a result of a strong operating quarter by that entity as well as the Company's increased ownership of that entity from 30.0% during the third quarter of 2019 to 40.0% during the third quarter of 2020. Loan servicing income increased by 43.9% resulting from significant additions to the Company's serviced portfolios both organically and through 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.
The major components of our noninterest income are listed below:
Three Months Ended September 30,
2020 2019 $ Change % Change
(In thousands)
Noninterest Income
Service Charges $ 1,343 $ 918 $ 425 46 %
Income from Ansay 970 319 651 204 %
Income from UFS 720 768 (48) (6) %Loan Servicing income 538 374 164 44 % Net gain on sales of mortgage loans 1,304 533 771 145 % Noninterest income from strategic alliances 16 26
(10) (38) %
Other 224 207 17 8 %
Total noninterest income $ 5,115 $ 3,145 $ 1,970 63 %
Noninterest Expense. Noninterest expense increased $0.1 million to $12.2 million
for the three months ended September 30, 2020 compared to $12.1 million for the
same period in 2019. Personnel expense increased 5.4%, or $0.3 million , as a
result of the added cost of staffing one acquired office locations in addition
to customary annual pay increases. Occupancy expenses and postage, stationary
and supplies expense increased 8.8% and 62.2%, respectively, the result of
continued 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 fees increased by 26.3% as a result of trailing one-time expenses
incurred in relation to the Timberwood acquisition as well as increases in
"per-item" costs which are charged based on number of customer accounts, due to
the increased scale of the Company through its acquisitions and PPP loan
originations. Outside service fee expense decreased by 24.2% due to significant
investment banker fees paid during the third quarter of 2019 in relation to the
Partnership acquisition, which did not occur during the third quarter of 2020.
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The major components of our noninterest expense are listed below:
Three Months Ended September 30,
2020 2019 $ Change % Change
(In thousands)
Noninterest ExpenseSalaries, commissions, and employee benefits$ 6,609 $ 6,272
$ 337 5 % Occupancy 1,171 1,076 95 9 % Data Processing 1,463 1,158 305 26 %
Postage, stationary, and supplies 219 135 84 62 % Net gain on sales and valuation of ORE (32) (10)
(22) NM
Advertising 41 53 (12) (23) %
Charitable contributions 110 225 (115) (51) %
Outside service fees 888 1,171 (283) (24) %
Amortization of intangibles 418 374 44 12 %
Other 1,315 1,633 (318) (19) %
Total noninterest expenses $ 12,202 $ 12,087 $ 115 1 %
Income Tax Expense. We recorded a provision for income taxes of $3.5 million for
the three months ended September 30, 2020 compared to a provision of $1.7
million for the same period during 2019, reflecting effective tax rates of 24.4%
and 20.5%, respectively. The effective tax rates were reduced from the statutory
federal and state income tax rates during both periods as a result of tax-exempt
interest income produced by certain qualifying loans and investments in the
Bank's portfolios.
Results of Operations for the Nine Months Ended
General. Net income increased$7.3 million to$26.5 million for the nine months endedSeptember 30, 2020 , compared to$19.2 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 and the one office acquired in the Timberwood acquisition during the second quarter of 2020, strong residential mortgage production during the first nine months of 2020, and interest income produced by approximately$279.6 million in PPP loans originated during the first half of 2020. Net Interest Income. Net interest and dividend income increased by$11.5 million to$62.4 million for the nine months endedSeptember 30, 2020 , compared to$50.9 million for nine months endedSeptember 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$9.0 million , or 14.65%, during the same period. Total average interest-earning assets increased to$2.26 billion for the nine months endedSeptember 30, 2020 , compared to$1.75 billion for the same period in 2019. Tax equivalent net interest margin decreased 0.21% to 3.77% for the nine months endedSeptember 30, 2020 , down from 3.98% for the same period in 2019. Net interest margin decreased by 0.20% due to a decrease in purchase accounting accretion period-over-period which added to a decrease 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$8.2 million , or 12.6%, to$73.6 million for the nine months endedSeptember 30, 2020 compared to$65.4 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 along with interest income produced by approximately$279.6 million in PPP loans originated during the first half of 2020. The average balance of loans increased by$460.2 million during the nine months endedSeptember 30, 2020 compared to the same period in 2019, offsetting a reduction in yield on interest-earning assets of 0.65% between these two periods. Of this reduction in yield on interest earning assets, 0.22% was the result of lower purchase accounting accretion during the 2020 third quarter, with the remaining 0.43% due to the lower interest rate environment during the third quarter of 2020 in comparison to the third quarter of 2019. Interest Expense. Interest expense decreased$3.3 million , or 22.4%, to$11.2 million for the nine months endedSeptember 30, 2020 compared to$14.5 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. 37
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Interest expense on interest-bearing deposits decreased by$3.4 million to$10.0 million for the nine months endedSeptember 30, 2020 , from$13.4 million for the same period in 2019. The average cost of interest-bearing deposits was 0.91% for the nine months endedSeptember 30, 2020 , compared to 1.55% for the same period in 2019. Provision for Loan Losses. We recorded a provision for loan losses of$5.5 million for the nine months endedSeptember 30, 2020 , compared to$4.1 million for the same period in 2019. We recorded net charge-offs of$0.6 million for the nine months endedSeptember 30, 2020 compared to net charge-offs of 6.2 million for the same period in 2019. The ALL was$16.3 million , or 0.74% of total loans, atSeptember 30, 2020 compared to$10.1 million , or 0.59% of total loans atSeptember 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 atSeptember 30, 2020 , in response to the heightened economic risks resulting from the COVID-19 pandemic. Noninterest Income. Noninterest income increased$7.4 million to$16.8 million for the nine months endedSeptember 30, 2020 compared to$9.4 million for the same period in 2019. Income from service charges increased by 43.6% due to an expanded base of customer relationships, many of which were the result of the Partnership and Timberwood acquisitions, as well as a lower earned income crediting rate on analyzed depository accounts, which serve to offset fees on those accounts. Income from our investment in Ansay increased by 48.0% as a result of the Company's increased ownership of that entity from 30.0% during the first nine months of 2019 to 40.0% during the first nine months of 2020. Income from our investment in UFS increased by 17.9% as they continue to see significant growth in customers in their managed information technology business. Loan servicing income increased by 45.8% resulting from the addition of significant serviced portfolios acquired as a part of the acquisitions of Partnership and Timberwood augmented by strong organic growth in this area. 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 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 first nine months of 2019, causing a positive comparison between those periods. Finally, during the first nine months 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:
Nine Months Ended September 30,
2020 2019 $Change % Change
(In thousands)
Noninterest Income
Service Charges $ 3,417 $ 2,396 $ 1,021 43 %
Income from Ansay 2,571 1,737 834 48 %
Income from UFS 2,467 2,093 374 18 %
Loan Servicing income 1,226 841 385 46 %Net gain on sales of mortgage loans 3,096 774 2,322 300 % Net gain on sales of securities 3,233 257 2,976 NM Noninterest income from strategic alliances 49 74
(25) (34) %
Other 717 1,249 (532) (43) %
Total noninterest income $ 16,776 $ 9,421 $ 7,355 78 %
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Noninterest Expense. Noninterest expense increased $7.8 million to $39.4 million
for the nine months ended September 30, 2020 compared to $31.6 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 15.8%, or $2.7 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 22.1%
and 48.4%, 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 fees increased by 31.8%as a result
of increases in "per-item" costs which are charged based on number of customer
accounts, due to the increased scale of the Company through its acquisitions and
PPP loan originations. Amortization of intangibles increased by 60.1% 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 second quarter of 2020, an event which did not occur
during the first nine months 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 nine months of 2020 compared to the first nine months
of 2019.
The major components of our noninterest expense are listed below:
Nine Months Ended September 30,
2020 2019 $ Change % Change
(In thousands)
Noninterest ExpenseSalaries, commissions, and employee benefits$ 19,669 $ 16,985
$ 2,684 16 % Occupancy 3,367 2,757 610 22 % Data Processing 3,996 3,031 965 32 %
Postage, stationary, and supplies 668 450 218 48 % Net loss (gain) on sales and valuation of ORE 1,411 (109)
1,520 NM
Advertising 165 180 (15) (8) %
Charitable Contributions 360 497 (137) (28) %
Outside service fees 3,083 2,837 246 9 %
Amortization of intangibles 1,114 696 418 60 %Penalty for early extinguishment of debt 1,323 -
1,323 NM
Other 4,225 4,254 (29) (1) %
Total noninterest expenses $ 39,381 $ 31,578 $ 7,803 25 %
Income Tax Expense. We recorded a provision for income taxes of $7.8 million for
the nine months ended September 30, 2020 compared to a provision of $5.4 million
for the same period during 2019, reflecting effective tax rates of 22.66% and
21.82%, 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.
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
September 30, 2020 September 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 $ 2,026,973 $ 93,783 4.63 % $ 1,582,587 $ 88,515 5.59 %
Tax-exempt 113,035 5,770 5.10 % 100,345 7,966 7.94 %
SecuritiesTaxable (available for sale) 107,171 2,735
2.55 % 88,363 2,625 2.97 %
Tax-exempt (available for
sale) 74,472 2,313 3.11 % 52,746 1,836 3.48 %
Taxable (held to maturity) - - - 31,079 761 2.45 %Tax-exempt (held to maturity) 7,081 170 2.40 % 10,558 295 2.79 % Cash and due from banks 94,436 111 0.12 % 57,773 1,245 2.15 % Total interest-earning assets 2,423,168 104,882
4.33 % 1,923,451 103,243 5.37 %
Non interest-earning assets 219,144 184,077
Allowance for loan losses (16,176) (12,171)
Total assets $ 2,626,136 $ 2,095,357
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits
Checking accounts $ 195,870 $ 267 0.14 % $ 91,598 $ 1,939 2.12 %
Savings accounts 379,599 1,491 0.39 % 281,531 2,755 0.98 %
Money market accounts 593,470 2,542 0.43 % 469,211 5,268 1.12 %
Certificates of deposit 376,618 5,961 1.58 % 392,194 8,353 2.13 %
Brokered Deposits 20,135 567 2.82 % 15,507 470 3.03 %
Total interest bearing
deposits 1,565,692 10,828 0.69 % 1,250,041 18,785 1.50 %
Other borrowed funds 70,914 1,121 1.58 % 60,716 1,751 2.88 %
Total interest-bearing
liabilities 1,636,606 11,949 0.73 % 1,310,757 20,536 1.57 %
Non-interest bearing
liabilities
Demand Deposits 694,373 536,332
Other liabilities 13,501 21,063
Total Liabilities 2,344,480 1,868,152
Shareholders' equity 281,656 227,205
Total liabilities &
sharesholders' equity $ 2,626,136 $ 2,095,357
Net interest income on a fully
taxable equivalent basis 92,933 82,707
Less taxable equivalent
adjustment (1,732) (2,120)
Net interest income $ 91,201 $ 80,587
Net interest spread (3) 3.60 % 3.80 %
Net interest margin (4) 3.84 % 4.30 %
(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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Nine Months Ended
September 30, 2020 September 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 $ 1,857,288 $ 88,326 4.76 % $ 1,417,376 $ 76,317 5.38 %
Tax-exempt 116,428 5,960 5.12 % 96,176 6,005 6.24 %
SecuritiesTaxable (available for sale) 116,792 2,907
2.49 % 78,007 2,298 2.95 %
Tax-exempt (available for
sale) 66,160 2,134 3.23 % 52,221 1,875 3.59 %
Taxable (held to maturity) 12,113 289 2.39 % 29,685 728 2.45 %Tax-exempt (held to maturity) 9,010 239 2.65 % 11,105 310 2.79 % Cash and due from banks 77,374 216 0.28 % 68,144 1,586 2.33 % Total interest-earning assets 2,255,165 100,071
4.44 % 1,752,714 89,119 5.08 %
Non interest-earning assets 207,466 150,747
Allowance for loan losses (14,087) (12,204)
Total assets $ 2,448,544 $ 1,891,257
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits
Checking accounts $ 194,592 $ 796 0.41 % $ 81,051 $ 1,880 2.32 %
Savings accounts 343,196 1,915 0.56 % 250,783 2,564 1.02 %
Money market accounts 542,993 3,388 0.62 % 425,662 4,847 1.14 %
Certificates of deposit 371,170 6,793 1.83 % 379,836 8,139 2.14 %
Brokered Deposits 18,090 523 2.89 % 16,661 488 2.93 %
Total interest bearing
deposits 1,470,041 13,415 0.91 % 1,153,993 17,918 1.55 %
Other borrowed funds 97,727 1,602 1.64 % 44,806 1,446 3.23 %
Total interest-bearing
liabilities 1,567,768 15,017 0.96 % 1,198,799 19,364 1.62 %
Non-interest bearing
liabilities
Demand Deposits 608,359 479,733
Other liabilities 15,109 17,947
Total Liabilities 2,191,236 1,696,479
Shareholders' equity 257,308 194,778
Total liabilities &
sharesholders' equity $ 2,448,544 $ 1,891,257
Net interest income on a fully
taxable equivalent basis 85,054 69,755
Less taxable equivalent
adjustment (1,750) (1,720)
Net interest income $ 83,304 $ 68,035
Net interest spread (3) 3.48 % 3.47 %
Net interest margin (4) 3.77 % 3.98 %
(1) Annualized on a fully taxable equivalent basis calculated using a federal tax
rate of 21% for the nine 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 September 30, 2020 Nine Months Ended September 30, 2020
Compared with Compared with
Three Months Ended September 30, 2019 Nine Months Ended September 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$ 22,196 $ (16,928) $ 5,268 $ 21,677 $ (9,668) $ 12,009 Tax-exempt 913 (3,109) (2,196) 1,142 (1,187) (45) Securities Taxable (AFS) 511 (401) 110 1,008 (399) 609 Tax-exempt (AFS) 692 (215) 477 464 (205) 259 Taxable (HTM) (381) (380) (761) (420) (19) (439) Tax-exempt (HTM) (88) (37) (125) (56) (15) (71) Cash and due from banks 490 (1,624) (1,134) 190 (1,560) (1,370) Total interest income 24,333 (22,694) 1,639 24,005 (13,053) 10,952 Interest expense Deposits Checking accounts$ 1,074 $ (2,746) $ (1,672) $ 1,268 $ (2,352) $ (1,084) Savings accounts 748 (2,012) (1,264) 753 (1,402) (649) Money market accounts 1,136 (3,862) (2,726) 1,107 (2,566) (1,459) Certificates of deposit (320) (2,072) (2,392) (182) (1,164) (1,346) Brokered Deposits 132 (35) 97 41 (6) 35
Total interest bearing deposits 2,770 (10,727)
(7,957) 2,987 (7,490) (4,503) Other borrowed funds 258 (888) (630) 1,115 (959) 156 Total interest expense 3,028 (11,615) (8,587) 4,102 (8,449) (4,347)
Change in net interest income$ 21,305 $ (11,079)
$ 10,226 $ 19,903 $ (4,604) $ 15,299
CHANGES IN FINANCIAL CONDITION
Total Assets. Total assets increased
Cash and Cash Equivalents. Cash and cash equivalents decreased by
Investment Securities . The carrying value of total investment securities decreased by$45.2 million to$180.0 million atSeptember 30, 2020 , from$225.2 million atDecember 31, 2019 . This decrease was largely the result of the aforementioned sale of$36.6 million ofU.S. Treasury notes during the second quarter of 2020. Loans. Net loans increased by$452.0 million , totaling$2.18 billion atSeptember 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.
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Bank-Owned Life Insurance. At September 30, 2020 , our investment in bank-owned
life insurance was $31.2 million , an increase of $6.3 million from $24.9 million
at December 31, 2019 . This increase was primarily the result of bank-owned life
insurance acquired in the Timberwood acquisition.
Deposits. Deposits increased $427.7 million , or 23.2%, to $2.27 billion at
September 30, 2020 from $1.84 billion at December 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. At September 30, 2020 , borrowings consisted of advances from the
FHLB of Chicago , as well as notes payable and subordinated debt to other banks.
Total FHLB borrowings decreased to $25.0 million at September 30, 2020 from
$39.8 million of FHLB borrowings at December 31, 2019 . Notes payable to other
banks totaled $0 at September 30, 2020 and $10.0 million at December 31, 2019 .
Subordinated debt owed to other banks totaled $20.5 million at September 30,
2020 and $18.6 million December 31, 2019 .
Stockholders' Equity. Total stockholders' equity increased $55.9 million , or
24.3%, to $286.1 million at September 30, 2020 , from $230.2 million at December
31, 2019 .
LOANS
Our lending activities are conducted principally in Wisconsin . The Bank makes
commercial and industrial loans, commercial real estate loans, construction and
development loans, residential real estate loans, and a variety of consumer
loans and other loans. Much of the loans made by the Bank are secured by real
estate collateral. The Bank's commercial business loans are primarily made based
on the cash flow of the borrower and secondarily on the underlying collateral
provided by the borrower, with liquidation of the underlying real estate
collateral typically being viewed as the primary source of repayment in the
event of borrower default. Although commercial business loans are also often
collateralized by equipment, inventory, accounts receivable, or other business
assets, the liquidation of collateral in the event of default is often an
insufficient source of repayment. Repayment of the Bank's residential loans are
generally dependent on the health of the employment market in the borrowers'
geographic areas and that of the general economy with liquidation of the
underlying real estate collateral being typically viewed as the primary source
of repayment in the event of borrower default.
Our loan portfolio is our most significant earning asset, comprising 83.1% and
78.6% of our total assets as of September 30, 2020 and December 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 $456.9 million , or 26.3%, to $2.19 billion as of September 30,
2020 as compared to $1.74 billion as of December 31, 2019 . This increase during
the first nine months of 2020 has been comprised of an increase of $240.1
million or 79.4% in commercial and industrial loans, an increase of $143.5
million or 17.7% in commercial real estate loans, an increase of $18.0 million
or 13.6% in construction and development loans, an increase of $40.3 million or
9.0% in residential 1-4 family loans and an increase of $14.9 million or 37.3%
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 originations of $279.6 million in PPP loans during the first nine
months of 2020, consisting of 1,876 individual loans with an average balance of
$149,000 .
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The following table presents the balance and associated percentage of each major category in our loan portfolio atSeptember 30, 2020 ,December 31, 2019 , andSeptember 30, 2019 : September 30, December 31, September 30, 2020 % of Total 2019 % of Total 2019 % of Total (dollars in thousands) Commercial & industrial Commercial & industrial$ 547,750 25 %$ 302,538 17 %$ 310,536 18 % Deferred costs net of unearned fees (5,247) 0 % (158) 0 % (178) 0 % Total commercial & industrial 542,503 25 % 302,380 17 % 310,358 18 % Commercial real estate Owner Occupied 530,476 24 % 459,782 26 % 467,030 27 % Non-owner occupied 426,463 20 % 353,723 20 % 337,558 20 % Deferred costs net of unearned fees (250) 0 % (362) 0 % (385) 0 % Total commercial real estate 956,689 44 % 813,143 46 % 804,203 47 % Construction & Development Construction & Development 150,139 7 % 132,296
8 % 118,055 7 %
Deferred costs net of
unearned fees 27 0 % (133) 0 % (123) 0 %
Total construction &
development 150,166 7 % 132,163 8 % 117,932 7 %
Residential 1-4 family
Residential 1-4 family 488,925 22 % 448,605 26 % 443,906 26 %
Deferred costs net of
unearned fees 7 0 % 25 0 % 42 0 %
Total residential 1-4
family 488,932 22 % 448,630 26 % 443,948 26 %
Consumer
Consumer 29,684 1 % 29,462 2 % 31,665 2 %
Deferred costs net of
unearned fees 133 0 % 124 0 % 123 0 %
Total consumer 29,817 1 % 29,586 2 % 31,788 2 %
Other Loans
Other 25,552 1 % 10,440 1 % 5,985 0 %
Deferred costs net of
unearned fees (431) 0 % 1 0 % (1) 0 %
Total other loans 25,121 1 % 10,441 1 % 5,984 0 %
Total loans $ 2,193,228 100 % $ 1,736,343 100 % $ 1,714,213 100 %
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. AtSeptember 30, 2020 andDecember 31, 2019 , total loans outstanding to such directors and officers and their associates were$60.3 million and$68.6 million , respectively. During the nine months endedSeptember 30, 2020 ,$44.9 million of additions and$53.2 million of repayments were made to these loans. AtSeptember 30, 2020 andDecember 31, 2019 , all of the loans to directors and officers were performing according to their original terms, other than standard and customary payment deferrals allowed under the CARES act, which were provided under the same terms as all other customers of the Bank.
Loan categories
The principal categories of our loan portfolio are discussed below:
Commercial and Industrial (C&I). Our C&I portfolio totaled$542.5 million and$302.4 million atSeptember 30, 2020 andDecember 31, 2019 , respectively, and represented 25% and 17% of our total loans at those dates. The increase in this loan category was the result of$279.6 million in PPP loans made primarily in the second quarter of 2020. 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 44
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impacts the relative risks in this loan category. There is little concentration in any one business sector, and loan risks are generally diversified among many borrowers.Commercial Real Estate (CRE). Our CRE loan portfolio totaled$956.7 million and$813.1 million atSeptember 30, 2020 andDecember 31, 2019 , respectively, and represented 44% and 46% of our total loans at those dates. Our CRE loans are secured by a variety of property types including multifamily dwellings, retail facilities, office buildings, commercial mixed use, lodging and industrial and warehouse properties. 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 atSeptember 30, 2020 andDecember 31, 2019 , respectively.
Consumer Loans. Our consumer loan portfolio totaled
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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 $25.1 million and $10.4 million at
September 30, 2020 and December 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 at September 30, 2020 and December 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 September 30, 2020 Less Years Years Total
(dollars in thousands)
Commercial & industrial $ 65,011 $ 393,304 $ 84,188 $ 542,503
Commercial real estate 116,066 424,853 415,770 956,689
Construction & Development 33,706 17,325 99,135 150,166
Residential 1-4 family 18,770 61,579 408,583 488,932
Consumer and other 5,315 40,193 9,430 54,938
Total $ 238,868 $ 937,254 $ 1,017,106 $ 2,193,228
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 at September 30, 2020 and December 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 September 30, 2020 Less Years Years Total
(dollars in thousands)
Predetermined interest rates $ 137,433 $ 844,534 $ 557,906 $ 1,539,873 Floating or adjustable interest rates 101,435 92,720
459,200 653,355 Total$ 238,868 $ 937,254 $ 1,017,106 $ 2,193,228 46 Table of Contents 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:
September 30, December 31, September 30,
2020 2019 2019
(dollars in thousands)
Nonaccruals $ 17,808 $ 5,093 $ 4,692
Loans past due > 90 days, but still
accruing 75 354 527
Total nonperforming loans $ 17,883 $ 5,447 $ 5,219 Accruing troubled debt resructured loans $ 1,223 $ 1,844 $
175
Nonperforming loans as a percent of gross
loans 0.84 % 0.31 % 0.30 %
Nonperforming loans as a percent of total
assets 0.68 % 0.25 % 0.24 %
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 nonaccrual loans during the first nine months of 2020 were primarily due to negative impacts of the current economic conditions on five large commercial customers. Two of these customers, whose balances comprise 57% of the total value of nonaccrual loans atSeptember 30, 2020 , remain current with their loan repayments. The remaining three relationships are either adequately collateralized or only modestly under collateralized, in which case specific reserves have been established within the allowance for loan losses, and are performing under terms of reorganization plans.
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
47
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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.
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 ofSeptember 30, 2020 andDecember 31, 2019 the Company had specific reserves of$0 and$80,000 for TDRs, respectively, and none of them have subsequently defaulted. 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 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. The Company granted payment deferrals to over 625 customers on loans totaling over$271.5 million . These deferrals were primarily for lengths in the range of 60 to 180 days, and were a combination of deferrals of principal payments only (89.7% by dollar value) or both principal and interest payments (10.3% by dollar value). As ofSeptember 30, 2020 , these totals had decreased to 383 loans totaling$187.3 million .
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$52.3 million were classified substandard under the Bank's policy atSeptember 30, 2020 and loans totaling$60.3 million were classified substandard under the Bank's policy as ofDecember 31, 2019 . The following table sets forth information related to the credit quality of our loan portfolio atSeptember 30, 2020 andDecember 31, 2019 . Loan type (in thousands) Pass Watch Substandard Total As ofSeptember 30, 2020 (unaudited) Commercial & industrial$ 505,025 $ 32,736 $ 4,742 $ 542,503 Commercial real estate 799,803 111,943 44,943 956,689 Construction & Development 144,925 5,101 140 150,166 Residential 1-4 family 478,640 7,829 2,463 488,932 Consumer 29,805 12 - 29,817 Other loans 24,868 253 - 25,121 Total loans$ 1,983,066 $ 157,874 $ 52,288 $ 2,193,228 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 48 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. 49
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The following table summarizes the changes in our ALL for the periods indicated:
Nine months ended Year ended Nine months ended
September 30, December 31, September 30,
2020 2019 2019
(dollars in thousands)
Period-end loans outstanding (net of unearned
discount and deferred loan fees) $ 2,193,228 $ 1,736,343 $ 1,714,213
Average loans outstanding (net of unearned
discount and deferred loan fees) $ 1,973,716 $ 1,565,261 $ 1,513,552
Balance of allowance for loan losses at the
beginning of period $ 11,396 $ 12,248 $ 12,248
Loans charged-off:
Commercial & industrial 631 1,229 1,229Commercial real estate - owner occupied 773 4,994 4,974 Commercial real estate - non-owner occupied -
62 55
Construction & Development - - -
Residential 1-4 family 63 276 83
Consumer 33 76 75
Other Loans 19 41 29
Total loans charged-off 1,519 6,678 6,445
Recoveries of loans previously charged off:
Commercial & industrial 2 11 3
Commercial real estate - owner occupied 873 356 4
Commercial real estate - non-owner occupied 40
60 60
Construction & Development - - -
Residential 1-4 family 40 130 126
Consumer - 11 4
Other Loans 11 8 6
Total recoveries of loans previously charged
off: 966 576 203
Net Loan charge-offs 553 6,102 6,242
Provision charged to operating expense 5,475 5,250 4,125
Balance at end of period $ 16,318 $ 11,396 $ 10,131
Ratio of net charge offs during the year to
average loans outstanding 0.03 % 0.39 % 0.48 %
Ratio of allowance for loan losses to loans
outstanding 0.74 % 0.66 % 0.59 %
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.
The following table summarizes an allocation of the ALL and the
related percentage of loans outstanding in each category for the periods below.
September 30, December 31, September 30,
2020 2019 2019
(in thousands, except %) Amount % of Loans Amount % of Loans Amount % of Loans
Loan Type:
Commercial & industrial $ 1,829 25 % $ 2,320 17 % $ 2,302 18 %
Commercial real estate -
owner occupied 5,682 24 % 4,587 26 % 3,140 27 %
Commercial real estate -
non-owner occupied 3,894 20 % 1,578 20 % 1,919 20 %
Construction & Development 1,022 7 % 548 8 % 504 7 % Residential 1-4 family 3,405 22 % 2,169 26 % 2,092 26 % Consumer 194 1 % 141 2 % 147 2 % Other Loans 292 1 % 53 1 % 27 0 % Total allowance$ 16,318 100 %$ 11,396 100 %$ 10,131 100 % 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. 50
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Deposits. Our current deposit products include non-interest bearing and interest-bearing checking accounts, savings accounts, money market accounts, and certificate of deposits. As ofSeptember 30, 2020 , deposit liabilities accounted for approximately 86.0% of our total liabilities and equity. We accept deposits primarily from customers in the communities in which our branches and offices are located, as well as from small businesses and other customers throughout our lending area. We rely on our competitive pricing and products, quality customer service, and convenient locations and hours to attract and retain deposits. Deposit rates and terms are based primarily on current business strategies, market interest rates, liquidity requirements and our deposit growth goals. Total deposits were$2.27 billion and$1.84 billion as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. Noninterest-bearing deposits atSeptember 30, 2020 andDecember 31, 2019 , were$688.2 million and$476.5 million , respectively, while interest-bearing deposits were$1.58 billion and$1.37 billion atSeptember 30, 2020 andDecember 31, 2019 , respectively.
At
The following tables set forth the average balances of our deposits for the
periods indicated:
Nine months ended Year ended Nine months ended
September 30, 2020 December 31, 2019 September 30, 2019
Weighted Weighted Weighted
Amount Percent average rate Amount Percent average rate Amount Percent average rate
(dollars in thousands)
Noninterest-bearing
demand deposits $ 608,539 29.3 % N/A $ 495,039 29.4 % N/A $ 479,733 29.4 % N/A
Interest-bearing
checking deposits 194,592 9.4 % 0.41 % 90,273 5.4 % 1.98 % 81,051 5.0 % 2.32 %
Savings deposits 343,196 16.5 % 0.56 % 261,977 15.6 % 0.98 % 250,783 15.4 % 1.02 %
Money market
accounts 542,993 26.1 % 0.62 % 440,773 26.2 % 1.11 % 425,662 26.1 % 1.14 %
Certificates of
deposit 371,170 17.9 % 1.83 % 380,117 22.6 % 2.14 % 379,836 23.2 % 2.14 %
Brokered deposits 18,090 0.8 % 2.89 % 16,387 1.0 % 2.95 % 16,661 1.0 % 2.93 %
Total $ 2,078,580 100 % $ 1,684,566 100 % $ 1,633,726 100 %
Certificates of deposit of$100,000 or greater by maturity are as follows:
September 30, December 31, September 30,
2020 2019 2019
(dollars in thousands)
Less than 3 months remaining $ 28,922 $ 34,306 $ 26,034
3 to 6 months remaining 33,558 23,201 32,640
6 to 12 months remaining 65,671 38,937 40,002
12 months or more remaining 45,127 80,151 85,277
Total $ 173,278 $ 176,595 $ 183,953
Retail certificates of deposit of $100,000 or greater totaled $173.3 million and
$176.6 million at September 30, 2020 and December 31, 2019 , respectively.
Interest expense on retail certificates of deposit of $100,000 or greater was
$2.5 million for the nine months ended September 30, 2020 , and $3.5 million for
the year ended December 31, 2019 .
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The following table sets forth certificates of deposit classified by interest rate as of the dates indicated:
September 30, December 31, September 30,
2020 2019 2019
(dollars in thousands)
Interest Rate:
Less than 1.00% $ 86,110 $ 168 $ 2,654
1.00% to 1.99% 142,162 165,763 134,933
2.00% to 2.99% 127,921 190,164 234,276
3.00% to 3.99% 30,419 32,911 32,761
Total $ 386,612 $ 389,006 $ 404,624
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:
Nine months Year ended Nine months
ended December 31, ended(dollars in thousands) September 30, 2020 2019 September
30, 2019 Average daily amount of securities sold under repurchase agreements during the period $
39,179 $ 21,522 $ 22,134
Weighted average interest rate on average daily securities sold under repurchase agreements
0.37 % 2.14 % 2.31 % 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 $ 23,894$ 45,865 $
12,201
Weighted average interest rate on securities sold under repurchase agreements at period end 0.01 % 1.47 % 1.83 % 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 atSeptember 30, 2020 , and$39.8 million as ofDecember 31, 2019 . The total loans pledged as collateral were$885.0 million atSeptember 30, 2020 and$815.2 million atDecember 31, 2019 . Outstanding letters of credit from the FHLB totaled$4.9 million atSeptember 30, 2020 andDecember 31, 2019 . 52
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The following table summarizes borrowings, which consist of borrowings from the FHLB, and the weighted average interest rates paid:
Nine months Year ended Nine months
ended December 31, ended
(dollars in thousands) September 30, 2020 2019 September 30, 2019
Average daily amount of borrowings outstanding during the period $ 39,384 $ 16,665 $ 8,873
Weighted average interest rate on average daily borrowing 1.48 % 1.90 % 1.75 %
Maximum outstanding borrowings at any month-end $ 58,800 $ 39,800 $ 39,800
Borrowing outstanding at period end $ 24,988 $ 39,800 $ 39,800
Weighted average interest rate on borrowing at period end
1.29 % 1.80 % 1.80 %
Lines of credit and other borrowings.
We maintained a$5.0 million line of credit with a commercial bank. 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 . This agreement was terminated onJuly 22, 2020 . 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 atSeptember 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 ofSeptember 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 ($12,000 and$61,000 atJune 30, 2020 andDecember 31, 2019 , respectively). The total amount outstanding was$7.0 million and$7.1 million atSeptember 30, 2020 andDecember 31, 2019 , respectively. The note was set to mature onOctober 1, 2025 , required quarterly interest-only payments at a rate of 7.1% prior to maturity, and could be prepaid without penalty afterOctober 1, 2020 . This note qualified for Tier 2 capital for regulatory purposes. This note was prepaid in full onOctober 1, 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. The Company had outstanding balances of$2.0 million under these agreements atSeptember 30, 2020 . INVESTMENT SECURITIES Our securities portfolio consists of securities available for sale and securities held to maturity. Securities are classified as held to maturity or available for sale at the time of purchase. Obligations of states and political subdivisions and mortgage-backed securities, all of which are issued 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. 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 53
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sale totaled$173.3 million and included gross unrealized gains of$8.2 million and gross unrealized losses of$0.1 atSeptember 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 of 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$6.7 million and$43.7 million atSeptember 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 nine-months endedSeptember 30, 2020 , The Company recognized a net gain of$3.1 million on sale of held to maturity securities during the nine-months endedSeptember 30, 2020 . The Company recognized a net gain of$0.2 million on the sale of an investment previously classified as an "other investment" and a$22,000 gain on sale of available for sale securities during the nine-months endedSeptember 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:
September 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 $ 18,819 11 % $ 12,060 7 %
Obligations of states and political subdivisions 73,517 43 % 54,771 30 % Mortgage-backed securities 50,804 29 % 51,720 28 % Corporate notes 27,832 16 % 62,955 35 % Certificates of deposit 2,362 1 % - 0 %
Total securities available for sale 173,334 100 % 181,506 100 % Held to maturity securities, at amortized cost U.S. Treasury securities - 0 % 33,527 77 % Obligations of states and political subdivisions 6,670 100 % 10,207 23 % Total securities held to maturity 6,670
100 % 43,734 100 % Total$ 180,004 $ 225,240 54 Table of Contents
The following tables set forth the composition and maturities of investment securities as ofSeptember 30, 2020 andDecember 31, 2019 . Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. After One, But After Five, But Within 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 September 30, 2020 Available for sale securities Obligations of U.S. Government sponsored agencies$ 304 0.4 %$ 311 0.1 %$ 2,185 2.1 %$ 15,483 1.8 %$ 18,283 1.8 % Obligations of states and political subdivisions - 0.0 % 5,407 3.7 % 8,829 3.2 % 55,178 3.4 % 69,414 3.4 % Mortgage-backed securities 1,687 2.2 % 15,546 2.4 % 18,806 2.8 % 11,825 2.6 % 47,864 2.6 % Corporate notes 11,936 2.9 % 4,958 3.3 % - - 10,431 0.8 % 27,325 2.1 % Certificates of deposit 496 2.0 % 1,824 1.0 % - - - - 2,320 1.2 % Total available for sale securities$ 14,423 2.7 %$ 28,046 2.7 %$ 29,820 2.9 %$ 92,917 2.7 %$ 165,206 2.7 % Held to maturity securities Obligations of states and political subdivisions$ 751 1.8 %$ 3,524 2.6 %$ 2,395 2.9 % $ - -$ 6,670 2.6 % Total$ 15,174 2.6 %$ 31,570 2.7 %$ 32,215 2.9 %$ 92,917 2.7 %$ 171,876 2.7 % 55 Table of Contents 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 % - - 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 %
Weighted Average Yield is shown on a fully taxable equivalent basis using a
(1) federal tax rate of 21% at
respectively.
The Company evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. 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. As ofSeptember 30, 2020 , 5 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 1.14% (or$58,000 ) of its amortized cost. This was also the largest unrealized dollar loss of any security. 56 Table of Contents 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. 57
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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.
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 Minimum To Be
Plus Capital Well-Capitalized
Minimum Capital Conservation Buffer Under Ptompt
Required for Basel III Fully Corective Action
Actual Capital Adequacy Phased In Provisions
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)
At September 30, 2020
Bank First Corporation :
Total capital (to risk-weighted
assets) $ 255,984 11.9 % N/A N/A N/A N/A N/A N/A
Tier I capital (to risk-weighted
assets) 219,154 10.2 % N/A N/A N/A N/A N/A N/A
Common equity tier I capital (to
risk-weighted assets) 219,154 10.2 % N/A N/A N/A N/A N/A N/A
Tier I capital (to average assets) 219,154 8.5 % N/A N/A
N/A N/A N/A N/A
Bank First , N.A:
Total capital (to risk-weighted
assets) $ 252,284 11.7 % 172,179 8.0 % 225,985 10.5 % 215,224 10.0 % Tier I capital (to risk-weighted assets)
235,966 11.0 % 129,135 6.0 % 182,941 8.5 % 172,179 8.0 % Common equity tier I capital (to risk-weighted assets)
235,966 11.0 % 96,851 4.5 % 150,657 7.0 % 139,896 6.5 %
Tier I capital (to average assets) 235,966 9.3 % 102,019 4.0 % 102,019 4.0 % 127,524 5.0 %
At December 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 %
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As previously mentioned, the Company carried$20.5 million of subordinated debt as ofSeptember 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
? 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 $ 449,950 $ 234,499 $ 87,981 $ 27,653 $ 99,817
Standby and direct pay letters
of credit 6,897 5,117 1,400 380 -
Credit card arrangements 9,973 - - - 9,973
Total commitments $ 466,820 $ 239,616 $
89,381 $ 28,033 $ 109,790
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 $ 33,641 $ 125,329
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