# Bank First Corp (BFC) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from Bank First Corp's 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/1746109/000155837023003499/bfc-20221231x10k.htm Accession: 0001558370-23-003499 Filing date: 2023-03-10 Report date: 2022-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/BFC/ All MD&A years: /company/BFC/mda/ Previous year: /company/BFC/mda/fy2021/ (FY 2021) Next year: /company/BFC/mda/fy2023/ (FY 2023) ITEM 7.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes. Historical results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not indicate trends in operations or results of operations for any future periods. We are a bank holding company and we conduct all of our material business operations through the Bank. As a result, the discussion and analysis above relates to activities primarily conducted at the Bank level. We have made, and will continue to make, various forward-looking statements with respect to financial and business matters. Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see the  “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this Annual Report. OVERVIEW Bank First Corporation is a Wisconsin corporation that was organized primarily to serve as the holding company for Bank First, N.A. Bank First, N.A., which was incorporated in 1894, is a nationally-chartered bank headquartered in Manitowoc, Wisconsin. It is a member of the Federal Reserve, and is regulated by the OCC. Including its headquarters in Manitowoc, Wisconsin, the Bank has 28 banking locations in Brown, Columbia, Dane, Fond du Lac, Jefferson, Manitowoc, Monroe, Outagamie, Ozaukee, Shawano, Sheboygan, Waupaca, Waushara, and Winnebago counties in Wisconsin. The Bank offers loan, deposit and treasury management products at each of its banking locations. As with most community banks, the Bank derives a significant portion of its income from interest received on loans and investments. The Bank’s primary source of funding is deposits, both interest-bearing and noninterest-bearing. In order to maximize the Bank’s net interest income, or the difference between the income on interest-earning assets and the expense of interest-bearing liabilities, the Bank must not only manage the volume of these balance sheet items, but also the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities. To account for credit risk inherent in all loans, the Bank maintains an ALLL 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, LLC, which provides core data processing, endpoint management cloud services, cyber security and digital banking solutions for over 60 Midwest banks. The Bank, through its 100% owned subsidiary TVG Holdings, Inc., also holds a 40% ownership interest in Ansay & Associates, LLC, an insurance agency providing clients primarily located in Wisconsin with insurance and risk management solutions. These unconsolidated subsidiary interests contribute noninterest income to the Bank through their underlying annual earnings. As of December 31, 2022, the Company had total consolidated assets of $3.66 billion, total loans of $2.89 billion, total deposits of $3.06 billion and total stockholders’ equity of $453.1 million. The Company employs approximately 382 full-time equivalent employees and has an assets-to-FTE ratio of approximately $11.2 million. For more information, see the Company’s website at www.bankfirst.com. Recent acquisitions Tomah Bancshares, Inc. On May 15, 2020, the Company completed a merger with Timberwood, a bank holding company headquartered in Tomah, WI, pursuant to the Agreement and Plan of Bank Merger dated as of November 20, 2019, by and between the Company and Timberwood, whereby Timberwood was merged with and into the Company, and Timberwood Bank, Timberwood's wholly owned banking subsidiary, was merged with and into the Bank. Timberwood's principal activity was the ownership and operation of Timberwood Bank, a state-chartered banking institution that operated one (1) branch in Wisconsin at the time of closing. The merger consideration totaled approximately $29.8 million. 41 Table of Contents Pursuant to the terms of the merger agreement, Timberwood shareholders received 5.1445 shares of the Company's common stock for each outstanding share of Timberwood common stock, and cash in lieu of any remaining fractional share. Company stock issued totaled 575,641 shares valued at approximately $29.4 million, with cash of $0.4 million comprising the remainder of merger consideration. Denmark Bancshares, Inc. On August 12, 2022, the Company completed a merger with Denmark, a bank holding company headquartered in Denmark, Wisconsin, pursuant to the merger agreement, dated as of January 18, 2022 by and between the Company and Denmark, whereby Denmark merged with and into the Company, and Denmark State Bank, Denmark’s wholly-owned banking subsidiary, merged with and into the Bank. Denmark’s principal activity was the ownership and operation of Denmark State Bank, a state-chartered banking institution that operated seven (7) branches in Wisconsin at the time of closing. The merger consideration totaled approximately $128.8 million. Pursuant to the terms of the merger agreement, Denmark shareholders could elect to receive either 0.5276 of a share of the Company’s common stock or $38.10 in cash for each outstanding share of Denmark common stock, subject to a maximum of 20% cash consideration in total, with cash paid in lieu of any remaining fractional share. Company stock issued totaled 1,579,530 shares valued at approximately $124.8 million, with cash of $4.0 million comprising the remainder of merger consideration. Hometown Bancorp, Ltd. On February 10, 2023, the Company completed a merger with Hometown Bancorp, Ltd. ("Hometown"), a bank holding company headquartered in Fond Du Lac, Wisconsin, pursuant to the Agreement and Plan of Bank Merger, dated as of July 25, 2022, by and between the Company and Hometown, whereby Hometown merged with and into the Company, and Hometown Bank, Hometown's wholly-owned banking subsidiary, merged with and into the Bank. Hometown's principal activity was the ownership and operation of Hometown Bank, a state-chartered banking institution that operated ten (10) branches in Wisconsin at the time of closing. The merger consideration totaled approximately $130.5 million. Pursuant to the terms of the merger agreement, Hometown shareholders could elect to receive either 0.3962 of a share of the Company’s common stock or $29.16 in cash for each outstanding share of Hometown common stock, subject to a maximum of 30% cash consideration in total, and cash in lieu of any remaining fractional share. Company stock issued totaled 1,450,272 shares valued at approximately $115.1 million, with cash of $15.4 million comprising the remainder of merger consideration. At close, the combined company had total assets of approximately $4.2 billion, loans of approximately $3.3 billion and deposits of approximately $3.5 billion. These values are based on initial fair value estimates and are subject to change. The Company accounts for these transactions under the acquisition method of accounting, and thus, the financial position and results of operations of acquired institutions prior to the consummation date are not included in the accompanying consolidated financial statements. The acquisition method of accounting required assets purchased and liabilities assumed to be recorded at their respective fair values at the date of acquisition. The Company determines the fair value of core deposit intangibles, securities, premises and equipment, loans, other assets and liabilities, deposits and borrowings with the assistance of third party valuations, appraisals, and third party advisors. The estimated fair values are subject to refinement for up to one year after the consummation as additional information becomes available relative to the closing date fair values. CRITICAL ACCOUNTING POLICIES The accounting and reporting policies of the Company conform to GAAP in the United States and general practices within the financial institution industry. Significant accounting and reporting policies are summarized below. 42 Table of Contents Business Combinations We account for business combinations under the acquisition method of accounting in accordance with Accounting Standards Codification (ASC) 805, Business Combinations (ASC 805). We recognize the full fair value of the assets acquired and liabilities assumed and immediately expense transaction costs. There is no separate recognition of the acquired ALLL on the acquirer’s balance sheet as credit related factors are incorporated directly into the fair value of the net tangible and intangible assets acquired. If the amount of consideration exceeds the fair value of assets purchased less the fair value of liabilities assumed, goodwill is recorded. Alternatively, if the amount by which the fair value of assets purchased exceeds the fair value of liabilities assumed and consideration paid, a gain (bargain purchase gain) is recorded. Fair values are subject to refinement for up to one year after the closing date of an acquisition as information relative to closing date fair values becomes available. Results of operations of the acquired business are included in the statement of income from the effective date of the acquisition. Allowance for Loan and Lease Losses — Originated The ALLL is established through a provision for loan losses charged to expense as losses are estimated to have occurred. Loan losses are charged against the allowance when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. Management regularly evaluates the ALLL using general economic conditions, our past loan loss experience, composition of the portfolio, credit worthiness of the borrowers, the estimated value of the underlying collateral, the assumptions about cash flow, determination of loss factors for estimating credit losses and other relevant factors. This evaluation is inherently subjective since it requires material estimates that may be susceptible to significant change. The ALLL consists of specific reserves for certain impaired loans and general reserves for non-impaired loans. Specific reserves reflect estimated losses on impaired loans from management’s analyses developed through specific credit allocations. The specific credit reserves are based on regular analyses of impaired non-homogenous loans. 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 on our historical loss experience which is updated quarterly. The general reserve portion of the ALLL 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. Management believes that the current ALLL is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the ALLL. Such agencies may require us to recognize additions to the allowance based on their judgments of information available to them at the time of their examination. Allowance for Loan and Lease Losses — Acquired The ALLL for acquired loans is calculated using a methodology similar to that described for originated loans. Performing acquired loans are subsequently evaluated for any required allowance at each reporting date. Such required allowance for each loan pool is compared to the remaining fair value discount for that pool. If greater, the excess is recognized as an addition to the allowance through a provision for loan losses. If less than the discount, no additional allowance is recorded. Charge-offs and losses first reduce any remaining fair value discount for the loan pool and once the discount is depleted, losses are applied against the allowance established for that pool. For purchase credit impaired loans after an acquisition, cash flows expected to be collected are recast for each loan periodically as determined appropriate by management. If the present value of expected cash flows for a loan is less than its carrying value, impairment is reflected by an increase in the ALLL and a charge to the provision for loan losses. If the present value of the expected cash flows for a loan is greater than its carrying value, any previously established ALLL is reversed and any remaining difference increases the accretable yield which will be taken into income over the remaining life of the loan. Loans which were considered TDRs by the acquired institution prior to the acquisition are not required to be 43 Table of Contents classified as TDRs in our consolidated financial statements unless or until such loans would subsequently meet our criteria to be classified as such, since acquired loans were recorded at their estimated fair values at the time of the acquisition. Impaired Investment Securities Unrealized gains or losses considered temporary and the noncredit portion of unrealized losses deemed other-than-temporary are reported as an increase or decrease in accumulated other comprehensive income.  The credit-related portion of unrealized losses deemed other-than-temporary is recorded in current period earnings. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. We evaluate securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. As part of such monitoring, the credit quality of individual securities and their issuers are assessed. In addition, management considers the length of time and extent that fair value has been less than cost, the financial condition and near-term prospects of the issuer, and 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. Adjustments to market value that are considered temporary are recorded as a separate component of equity, net of tax.  If an impairment of security is identified as other-than-temporary based on information available such as the decline in the credit worthiness of the issuer, external market ratings or the anticipated or realized elimination of associated dividends, such impairments are further analyzed to determine if a credit loss exists. If there is a credit loss, it will be recorded in the consolidated statement of income in the period of identification. Intangible Assets and Goodwill Intangible assets consist of the value of core deposits and mortgage servicing assets and the excess of purchase price over fair value of net assets (“goodwill”). The value of core deposits is stated at cost less accumulated amortization and is amortized on a sum of the years digits basis over a period of one to ten years. Mortgage servicing rights are recognized as separate assets when rights are acquired through purchase or through sale of mortgage loans with servicing retained. Servicing rights acquired through sale of financial assets are recorded based on the fair value of the servicing right. The determination of fair value is based on a valuation model and includes stratifying the mortgage servicing rights by predominant characteristics, such as interest rates and terms, and estimating the fair value of each stratum based on the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as costs to service, a discount rate, and prepayment speeds. Changes in fair value are recorded as an adjustment to earnings. We perform a “qualitative” assessment of goodwill to determine whether further impairment testing of indefinite-lived intangible assets is necessary on at least an annual basis. If it is determined, as a result of performing a qualitative assessment over goodwill, that it is more likely than not that goodwill is impaired, management will perform an impairment test to determine if the carrying value of goodwill is realizable. Deferred Tax Assets Deferred tax assets (“DTA”) and liabilities are determined using the liability method. DTAs and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities and the current enacted tax rates which will be in effect when these differences are expected to reverse. Provision (benefit) for deferred taxes is the result of changes in the DTAs and liabilities. Deferred taxes are reviewed quarterly and would be reduced by a valuation allowance if, based upon the information available, it is more likely than not that some or all of the DTAs will not be realized. 44 Table of Contents Recent Accounting Developments In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Certain aspects of this ASU were updated in November 2018 by the issuance of ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses. The main objective of the ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in the ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. During 2019 FASB issued ASU 2019-10 which delated the effective date of ASU 2016-13 for smaller, publicly traded companies, until interim and annual periods beginning after December 15, 2022. This delay applies to the Company as it was classified as a “Smaller reporting company” as defined in Rule 12b-2 of the Exchange Act as of the date ASU 2019-10 was enacted. During the first half of 2019 the Company engaged a third-party partner to assist in its implementation of this standard. Over the last three years significant progress has been made working through the assumptions, drivers, documentation and other mechanics for the calculation of the Company’s ALL under ASU 2016-13. Throughout 2022, management ran a calculation of its allowance under ASU 2016-13 parallel to its current modeling to assess the functioning of the ASU 2016-13 model while also documenting the controls that will be in place around the process when the Company implements this standard. Results of these parallel runs indicate that the Bank’s ALL to total loans coverage ratio will increase from 0.78% as of December 31, 2022, to 1.10% - 1.20% upon implementation of ASU 2016-13 on January 1, 2023. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The updated guidance was originally effective for all entities from March 12, 2020 through December 31, 2022. In December 2022, the FASB issued ASU 2022-06 which deferred the sunset date of Topic 848 from December 31, 2022 to December 31, 2024. The Corporation has been diligent in responding to reference rate reform and does not anticipate a significant impact to its financial statements as a result. ​ In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU provides guidance on eliminating the requirement for classification of and disclosures around troubled debt restructurings. The purpose of this guidance is to eliminate unnecessary and overly-complex disclosures of loans that are already incorporated into the allowance for credit losses and related disclosures. This ASU further requires the disclosure of current-period gross charge-offs by year of origination. The updated guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, for all entities which have implemented ASU 2016-13. The Company has historically had very few credit relationships classified as troubled debt restructurings, and as such does not anticipate that the elimination of accounting for and disclosure of these types of credit relationships will have a significant impact to its financial statements upon implementation of ASU 2016-13 beginning with the first quarter of 2023. ​ RESULTS OF OPERATIONS Results of Operations for the Years Ended December 31, 2022 and 2021 General.  Net income decreased $0.2 million, or 0.1%, to $45.2 million for the year ended December 31, 2022, from $45.4 million for the year ended December 31, 2021. During 2022, the Company experienced increased net interest income, a reduced provision for loan losses, a slowdown in retail mortgage lending which led to a large decrease in gains on sales of mortgage loans to the secondary market, and a significant increase in many noninterest expense areas as a result of the acquisition of Denmark which occurred during August 2022. 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 45 Table of Contents 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 income after provision for loan losses increased by $14.9 million to $101.9 million for the year ended December 31, 2022, from $87.0 million for the year ended December 31, 2021. Interest income on loans increased by $13.5 million, or 14.5%, from 2021 to 2022. Total average interest-earning assets increased to $3.09 billion for the year ended December 31, 2022 from $2.63 billion for the year ended December 31, 2021. The Bank’s net interest margin decreased six basis points to 3.41% for the year ended December 31, 2022, down from 3.47% for the year ended December 31, 2021. Interest Income.  Total interest income increased $18.1 million, or 18.4%, to $116.5 million for the year ended December 31, 2022, up from $98.4 million for the year ended December 31, 2021. This increase was primarily due to the $455.2 million increase in average earning assets during 2022 when compared to 2021. Most of this growth was the result of the acquisition of Denmark in August 2022. Interest Expense.  Interest expense increased $4.1 million, or 49.9%, to $12.4 million for the year ended December 31, 2022, up from $8.3 million for the year ended December 31, 2021. The increase was driven by a combination of increases in the average cost of interest-bearing liabilities, rising 12 basis points from 0.48% to 0.60%, and a $362.4 million increase in average interest-bearing liabilities. Interest expense on interest-bearing deposits increased by $2.7 million to $10.3 million for the year ended December 31, 2022, from $7.5 million for the year ended December 31, 2021. This increase was due to the aforementioned higher interest rate environment and growth in average interest-bearing deposits totaling $240.6 million year-over-year. The average cost of interest-bearing deposits was 0.54% for the year ended December 31, 2022, compared to 0.45% for the year ended December 31, 2021. Provision for Loan Losses.  Credit risk is inherent in the business of making loans. We establish an ALLL 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 ALLL and charging the shortfall or excess, if any, to the current quarter’s expense. This has the effect of creating variability in the amount and frequency of charges to earnings. The provision for loan losses and level of allowance for each period are dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in our market area. The determination of the amount is complex and involves a high degree of judgment and subjectivity. We recorded a provision for loan losses of $2.2 million for the year ended December 31, 2022, compared to $3.1 million for the year ended December 31, 2021. Our asset quality metrics during the course of 2022 continued the trend of remaining strong from 2021 and allowed for a further reduction in provision expense during 2022. The ALLL was $22.7 million, or 0.78% of total loans, at December 31, 2022 compared to $20.3 million, or 0.91% of total loans at December 31, 2021. The decrease in ALLL coverage to total loans from December 31, 2021, to December 31, 2022, was primarily due to a significant increase in the percentage of the Company’s loan portfolio accounted for under purchase accounting year-over-year as a result of the Denmark acquisition. Under the Company’s current allowance methodology, loans which are accounted for under purchase accounting do not require an ALLL reserve allocation. 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 unconsolidated subsidiaries, Ansay and UFS. Other sources of noninterest income include loan servicing fees and gains on sales of mortgage loans. 46 Table of Contents Noninterest income decreased by $3.7 million, or 15.7% to $19.8 million for 2022, down from $23.5 million during 2021. The primary driver of the decrease in noninterest income was the slowdown in the retail mortgage lending market, which drove a $5.8 million decline in gains on sales of mortgage loans to the secondary market. This same slowdown positively impacted the valuation of the Company’s mortgage servicing rights (“MSR”) as certain assumptions in the calculation of fair value of these rights adjusted to the new market conditions, leading to $1.6 more in positive valuation adjustments to MSRs in 2022 compared to 2021. Finally, income from the Company’s investment in UFS saw a significant increase year-over-year as they continue to increase market share. The major components of our noninterest income are listed in the table below: [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","For the Years Ended"],["\u200b","\u200b","\u200b","December 31,"],["\u200b","","","2022","","2021"],["(in thousands)","\u200b","\u200b","\u200b"],["Noninterest Income","","\u200b","\u200b","","","\u200b"],["Service charges","\u200b","\u200b","$","5,810","\u200b","$","6,128"],["Income from Ansay","\u200b","\u200b","\u200b","2,558","\u200b","\u200b","2,587"],["Income from UFS","\u200b","\u200b","","3,055","\u200b","","2,556"],["Loan servicing income","\u200b","\u200b","","1,922","\u200b","","1,622"],["Valuation adjustment on MSR","\u200b","\u200b","\u200b","2,865","\u200b","\u200b","1,290"],["Net gain on sales of mortgage loans","\u200b","\u200b","","1,560","\u200b","","7,371"],["Net gain on sales and valuation of ORE","\u200b","\u200b","","146","\u200b","","20"],["Other","\u200b","\u200b","","1,931","\u200b","","1,967"],["Total noninterest income","\u200b","\u200b","$","19,847","\u200b","$","23,541"]] [[/GREPCENT_TABLE]] ​ Noninterest Expense.  Noninterest expense increased $11.5 million to $62.1 million for the year ended December 31, 2022, up from $50.6 million for the year ended December 31, 2021. Personnel expense increased $4.6 million, or 16.3%, primarily as a result of the severance payments and the added scale from the Denmark acquisition that occurred during 2022. Occupancy expense increased $1.3 million, or 30.2%, data processing increased $1.0 million, or 18.3%, and outside service fees increased $3.7 million, or 118.7%, primarily as a result of the Company completing the Denmark acquisition during 2022 with no corresponding acquisition during 2021. These areas of noninterest expense are typically elevated during years where acquisitions occur. Amortization of intangibles increased by $0.9 million, or 65.0%, as the acquisition of Denmark led to a core deposit intangible of $15.1 million which began amortizing during August 2022. The major components of our noninterest expense are listed in the table below: ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","For the Years Ended"],["\u200b","\u200b","\u200b","December 31,"],["\u200b","\u200b","\u200b","2022","\u200b","2021"],["(In thousands)","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Noninterest Expense","","\u200b","\u200b","","","\u200b"],["Salaries, commissions, and employee benefits","\u200b","\u200b","$","33,155","\u200b","$","28,515"],["Occupancy","\u200b","\u200b","","5,467","\u200b","","4,198"],["Data Processing","\u200b","\u200b","","6,324","\u200b","","5,344"],["Postage, stationary, and supplies","\u200b","\u200b","","771","\u200b","","713"],["Net loss on sales of securities","\u200b","\u200b","","\u2014","\u200b","","3"],["Advertising","\u200b","\u200b","","271","\u200b","","227"],["Charitable contributions","\u200b","\u200b","","718","\u200b","","534"],["Outside service fees","\u200b","\u200b","","6,727","\u200b","","3,076"],["Amortization of intangibles","\u200b","\u200b","","2,318","\u200b","","1,405"],["Other","\u200b","\u200b","","6,348","\u200b","","6,541"],["Total noninterest expenses","\u200b","\u200b","$","62,099","\u200b","$","50,556"]] [[/GREPCENT_TABLE]] ​ Income Tax Expense.  We recorded a provision for income taxes of $14.4 million for the year ended December 31, 2022, compared to $14.5 million for the year ended December 31, 2021, reflecting effective tax rates of 24.2% for both 2022 and 2021, respectively. 47 Table of Contents Results of Operations for the Years Ended December 31, 2021 and 2020 General.  Net income increased $7.4 million, or 19.4%, to $45.4 million for the year ended December 31, 2021, from $38.0 million for the year ended December 31, 2020. The primary reasons for the increase in profitability were increased net interest, a reduced provision for loan losses during 2021, robust retail mortgage lending which led to a large increase in gains on sales of mortgage loans to the secondary market, reduced losses on sales and valuations of OREO and a significant penalty for the early extinguishment of debt during 2020 that did not recur during 2021. This was offset by a small loss on sales of securities during 2021 that compared unfavorably to a gain of $3.2 million on these sales during 2020 as well as a $1.7 million gain on the sale of a branch location during 2020 with no similar gain during 2021. Net Interest Income.  Net interest income after provision for loan losses increased by $7.3 million to $87.0 million for the year ended December 31, 2021, from $79.7 million for the year ended December 31, 2020. Interest income on loans decreased by $1.9 million, or 1.9%, from 2020 to 2021. Total average interest-earning assets increased to $2.63 billion for the year ended December 31, 2021 from $2.31 billion for the year ended December 31, 2020. The Bank’s net interest margin decreased 37 basis points to 3.47% for the year ended December 31, 2021, down from 3.84% for the year ended December 31, 2020. Interest Income.  Total interest income decreased $2.3 million, or 2.30%, to $98.4 million for the year ended December 31, 2021, down from $100.7 million for the year ended December 31, 2020. This decrease was primarily due to yield on loans decreasing by 50 basis points from 4.75% during 2020 to 4.25% during 2021, which more than offset the $185.1 million increase in average balances of loans during 2021. Interest Expense.  Interest expense decreased $5.6 million, or 40.1%, to $8.3 million for the year ended December 31, 2021, down from $13.9 million for the year ended December 31, 2020. The decrease was driven by declines in the average cost of interest-bearing liabilities, falling 39 basis points from 0.87% to 0.48%. This decline was primarily the result of a significantly lower interest rate environment that developed through the first half of 2020 and continued throughout 2021. Interest expense on interest-bearing deposits decreased by $4.9 million to $7.5 million for the year ended December 31, 2021, from $12.5 million for the year ended December 31, 2020. This decrease was primarily due to the aforementioned lower interest rate environment, allowing the Company to significantly reduce crediting interest rates on non-time, interest-bearing deposit accounts. The average cost of interest-bearing deposits was 0.45% for the year ended December 31, 2021, compared to 0.83% for the year ended December 31, 2020. Provision for Loan Losses. We recorded a provision for loan losses of $3.1 million for the year ended December 31, 2021, compared to $7.1 million for the year ended December 31, 2020.  Provision expense was elevated during 2020 in response to uncertainty created by COVID-19 and society’s response to it. Actual asset quality metrics during the course of 2021 remained strong, however, and allowed for a reduction in provision expense during that year. The ALLL was $20.3 million, or 0.91% of total loans, at December 31, 2021 compared to $17.7 million, or 0.81% of total loans, at December 31, 2020. The increase in ALLL coverage to total loans from December 31, 2020, to December 31, 2021, was primarily due to a smaller percentage of the Company’s loan portfolio accounted for under purchase accounting year-over-year. Under the Company’s current allowance methodology, loans which are accounted for under purchase accounting do not require an ALLL reserve allocation. Noninterest Income.  Noninterest income was $23.5 million for 2021, compared to $18.9 million during 2020. Service charges increased by $1.1 million, or 22.5%, from 2020 to 2021, as a result of new markets and added scale from three acquisitions during the previous four years. Net gain on sales of mortgage loans increased by $2.1 million from 2020 to 2021 as a result of a robust residential mortgage lending environment during 2021 spurred by historically low mortgage interest rates. The Company had sales of two large foreclosed properties scheduled to close late in the first quarter of 2020 which would have resulted in modest losses. Due to the economic turmoil that resulted during the last several weeks of the first quarter of 2020, terms of these sales were negatively impacted. Rather than hold these properties heading into this time of uncertainty, the Company chose to accept the reduced terms, causing significant losses on these sales that were the primary components of $1.4 million in total losses on sales and valuations of other real estate owned during 2020. During 2021 the Company experienced a small overall gain on these types of transactions, creating a very favorable year-over-year comparison. Finally, the Company recorded a $1.7 million gain on the sale of a branch location during December 48 Table of Contents 2020. There was no similar sale during 2021, causing other noninterest income to decrease year-over-year. The major components of our noninterest income are listed in the table below: ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","For the Years"],["\u200b","","Ended December 31,"],["(in thousands)","","2021","","2020"],["Noninterest Income","","\u200b","\u200b","\u200b","\u200b","\u200b"],["Service Charges","\u200b","$","6,128","\u200b","$","5,003"],["Income from Ansay","\u200b","","2,587","\u200b","","2,740"],["Income from UFS","\u200b","","2,556","\u200b","","3,066"],["Loan Servicing income","\u200b","","1,622","\u200b","","1,488"],["Valuation adjustment on mortgage servicing rights","\u200b","\u200b","1,290","\u200b","\u200b","(945)"],["Net gain on sales of mortgage loans","\u200b","","7,371","\u200b","","5,310"],["Net gain (loss) on other real estate owned","\u200b","\u200b","20","\u200b","\u200b","(1,395)"],["Other","\u200b","","1,967","\u200b","","3,625"],["Total noninterest income","\u200b","$","23,541","\u200b","$","18,892"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"]] [[/GREPCENT_TABLE]] ​ Noninterest Expense.  Noninterest expense increased $1.8 million to $50.6 million for the year ended December 31, 2021, up from $48.7 million for the year ended December 31, 2020. Personnel expense increased $1.2 million, or 4.6%, primarily as a result of customary annual salary increases. Occupancy expense decreased $0.5 million, or 11.0%, data processing decreased $0.2 million, or 3.1%, and outside service fees decreased $1.0 million, or 25.2%, primarily as a result of the Company completing an acquisition of another institution during 2020 with no corresponding acquisition during 2021. These areas of noninterest expense are typically elevated during years where acquisitions occur. Due to uncertainty about liquidity needs in financial markets during the early days of the COVID-19 pandemic, the Company sold approximately $34.0 million in U.S. Treasury Securities during the second quarter of 2020, resulting in a gain on sale of securities of $3.2 million. This compared favorably to small losses on sales of securities during 2021. Finally, during the second quarter of 2020 the Company paid off $30.0 million in borrowings from the Federal Home Loan Bank of Chicago which had contractual maturities ranging from August 2022 through August 2024, resulting in prepayment penalties of $1.3 million, but saving the Company $1.7 million in interest over the next four years. There was no similar action during 2021. The major components of our noninterest expense are listed in the table below. [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","For the Years"],["\u200b","\u200b","Ended December 31,"],["\u200b","","2021","","2020"],["(In thousands)","\u200b","\u200b","\u200b","\u200b","\u200b"],["Noninterest Expense","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Salaries, commissions, and employee benefits","\u200b","$","28,515","\u200b","$","27,273"],["Occupancy","\u200b","","4,198","\u200b","","4,719"],["Data Processing","\u200b","","5,344","\u200b","","5,515"],["Postage, stationary, and supplies","\u200b","","713","\u200b","","872"],["Advertising","\u200b","","227","\u200b","","226"],["Charitable Contributions","\u200b","","534","\u200b","","574"],["Outside service fees","\u200b","","3,076","\u200b","","4,112"],["Net loss on sales of securities","\u200b","","3","\u200b","","(3,233)"],["Amortization of intangibles","\u200b","","1,405","\u200b","","1,636"],["Penalty for early extinguishment of debt","\u200b","\u200b","\u2014","\u200b","\u200b","1,323"],["Other","\u200b","","6,541","\u200b","","5,708"],["Total noninterest expenses","\u200b","$","50,556","\u200b","$","48,725"]] [[/GREPCENT_TABLE]] ​ Income Tax Expense.   We recorded a provision for income taxes of $14.5 million for the year ended December 31, 2021, compared to $11.8 million for the year ended December 31, 2020, reflecting effective tax rates of 24.2% and 23.7%, respectively. 49 Table of Contents NET INTEREST MARGIN Net interest income represents the difference between interest earned, primarily on loans and investments, and interest paid on funding sources, primarily deposits and borrowings. Interest rate spread is the difference between the average rate earned on total interest-earning assets and the average rate paid on total interest-bearing liabilities. Net interest margin is the amount of net interest income, on a fully taxable-equivalent basis, expressed as a percentage of average interest-earning assets. The average rate earned on earning assets is the amount of annualized taxable equivalent interest income expressed as a percentage of average earning assets. The average rate paid on interest-bearing liabilities is equal to annualized interest expense as a percentage of average interest-bearing liabilities. The following tables set forth the distribution of our average assets, liabilities and shareholders’ equity, and average rates earned or paid on a fully taxable equivalent basis for each of the periods indicated: ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","","For the Year Ended December 31,"],["\u200b","\u200b","\u200b","2022","\u200b","2021","\u200b","2020"],["\u200b","\u200b","\u200b","\u200b","Interest","\u200b","Rate","\u200b","\u200b","\u200b","\u200b","Interest","\u200b","Rate","\u200b","\u200b","\u200b","\u200b","Interest","\u200b","Rate"],["\u200b","\u200b","Average","\u200b","Income/","\u200b","Earned/","\u200b","Average","\u200b","Income/","\u200b","Earned/","\u200b","Average","\u200b","Income/","\u200b","Earned/"],["\u200b","","Balance","","Expenses (1)","","Paid (1)","","Balance","","Expenses (1)","","Paid (1)","","Balance","","Expenses (1)","","Paid (1)"],["\u200b","\u200b","\u200b","(dollars in thousands)","\u200b"],["ASSETS","\u200b","","","","\u200b","","","","","\u200b","","","\u200b","","","","","\u200b","","","\u200b","","","","\u200b"],["Interest-earning assets","\u200b","","","","\u200b","","","","","\u200b","","","\u200b","","","","","\u200b","","","\u200b","","","","\u200b"],["Loans (2)","\u200b","","","","\u200b","","","","","\u200b","","","\u200b","","","","","\u200b","","","\u200b","","","","\u200b"],["Taxable","\u200b","$","2,434,554","\u200b","$","103,612","","4.26","%","$","2,128,327","\u200b","$","90,172","","4.24","%","$","1,918,490","\u200b","$","90,698","","4.73","%"],["Tax-exempt","\u200b","","96,183","\u200b","","4,227","","4.39","%","","88,978","\u200b","","4,113","","4.62","%","","113,667","\u200b","","5,791","","5.09","%"],["Securities","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Taxable (available for sale)","\u200b","","227,101","\u200b","","5,230","","2.30","%","","103,277","\u200b","","2,788","","2.70","%","","114,392","\u200b","","3,142","","2.75","%"],["Tax-exempt (available for sale)","\u200b","","81,181","\u200b","","2,140","","2.64","%","","70,864","\u200b","","2,207","","3.11","%","","67,903","\u200b","","2,170","","3.20","%"],["Taxable (held to maturity)","\u200b","","24,416","\u200b","","670","","2.74","%","","\u2014","\u200b","","\u2014","","\u2014","%","","9,068","\u200b","","216","","2.38","%"],["Tax-exempt (held to maturity)","\u200b","","5,396","\u200b","","139","","2.58","%","","6,098","\u200b","","155","","2.54","%","","8,422","\u200b","","220","","2.61","%"],["Cash and due from banks","\u200b","","220,929","\u200b","","1,883","","0.85","%","","237,021","\u200b","","310","","0.13","%","","76,153","\u200b","","181","","0.24","%"],["Total interest-earning assets","\u200b","","3,089,760","\u200b","","117,901","","3.82","%","","2,634,565","\u200b","","99,745","","3.79","%","","2,308,095","\u200b","","102,418","","4.44","%"],["Non interest-earning assets","\u200b","","280,249","\u200b","","","","","\u200b","","222,548","\u200b","","","","","\u200b","","211,387","\u200b","","","","","\u200b"],["Allowance for loan losses","\u200b","","(22,152)","\u200b","","","","","\u200b","","(19,320)","\u200b","","","","","\u200b","","(14,800)","\u200b","","","","","\u200b"],["Total assets","\u200b","$","3,347,857","\u200b","","","","","\u200b","$","2,837,793","\u200b","","","","","\u200b","$","2,504,682","\u200b","","","","","\u200b"],["LIABILITIES AND SHAREHOLDERS\u2019 EQUITY","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","","","\u200b","\u200b","\u200b","\u200b","","\u200b","","","\u200b","","\u200b","\u200b","","\u200b","","","\u200b"],["Interest-bearing deposits","\u200b","","\u200b","\u200b","\u200b","\u200b","","","\u200b","","\u200b","\u200b","","\u200b","","","\u200b","","\u200b","\u200b","","\u200b","","","\u200b"],["Checking accounts","\u200b","$","253,443","\u200b","$","1,075","","0.42","%","$","209,970","\u200b","$","252","","0.12","%","$","194,718","\u200b","$","669","","0.34","%"],["Savings accounts","\u200b","","691,599","\u200b","","3,099","","0.45","%","","497,958","\u200b","","1,773","","0.36","%","","356,091","\u200b","","1,792","","0.50","%"],["Money market accounts","\u200b","","666,717","\u200b","","3,025","","0.45","%","","664,591","\u200b","","2,115","","0.32","%","","563,847","\u200b","","3,076","","0.55","%"],["Certificates of deposit","\u200b","","286,054","\u200b","","2,818","","0.99","%","","278,602","\u200b","","2,967","","1.06","%","","367,054","\u200b","","6,405","","1.74","%"],["Brokered Deposits","\u200b","","8,587","\u200b","","251","","2.92","%","","14,718","\u200b","","420","","2.85","%","","18,428","\u200b","","531","","2.88","%"],["Total interest bearing deposits","\u200b","","1,906,400","\u200b","","10,268","","0.54","%","","1,665,839","\u200b","","7,527","","0.45","%","","1,500,138","\u200b","","12,473","","0.83","%"],["Other borrowed funds","\u200b","","185,329","\u200b","","2,181","","1.18","%","","63,474","\u200b","","777","","1.22","%","","88,512","\u200b","","1,392","","1.57","%"],["Total interest-bearing liabilities","\u200b","","2,091,729","\u200b","","12,449","","0.60","%","","1,729,313","\u200b","","8,304","","0.48","%","","1,588,650","\u200b","","13,865","","0.88","%"],["Non-interest bearing liabilities","\u200b","","","\u200b","","","","","\u200b","","\u200b","\u200b","","","","","\u200b","","","\u200b","","","","","\u200b"],["Demand Deposits","\u200b","","878,727","\u200b","","","","","\u200b","","785,364","\u200b","","","","","\u200b","","634,969","\u200b","","","","","\u200b"],["Other liabilities","\u200b","","4,971","\u200b","","","","","\u200b","","12,746","\u200b","","","","","\u200b","","15,559","\u200b","","","","","\u200b"],["Total Liabilities","\u200b","","2,975,427","\u200b","","","","","\u200b","","2,527,423","\u200b","","","","","\u200b","","2,239,178","\u200b","","","","","\u200b"],["Shareholders\u2019 equity","\u200b","","372,430","\u200b","","","","","\u200b","","310,370","\u200b","","","","","\u200b","","265,504","\u200b","","","","","\u200b"],["Total liabilities & shareholders' equity","\u200b","$","3,347,857","\u200b","","","","","\u200b","$","2,837,793","\u200b","","","","","\u200b","$","2,504,682","\u200b","","","","","\u200b"],["Net interest income on a fully taxable equivalent basis","\u200b","","\u200b","\u200b","","105,452","","","\u200b","","","\u200b","\u200b","91,441","","","\u200b","","","\u200b","\u200b","88,553","","","\u200b"],["Less taxable equivalent adjustment","\u200b","\u200b","\u200b","\u200b","","(1,366)","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","","(1,359)","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","","(1,718)","\u200b","\u200b","\u200b"],["Net interest income","\u200b","","","\u200b","$","104,086","","","\u200b","","","\u200b","$","90,082","","","\u200b","","","\u200b","$","86,835","","","\u200b"],["Net interest spread (3)","\u200b","","","\u200b","\u200b","\u200b","","3.22","%","","","\u200b","\u200b","\u200b","","3.31","%","","","\u200b","\u200b","\u200b","","3.56","%"],["Net interest margin (4)","\u200b","","","\u200b","","","","3.41","%","","","\u200b","","","","3.47","%","","","\u200b","","","","3.84","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","Annualized on a fully taxable equivalent basis calculated using a federal tax rate of 21%."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(2)","Nonaccrual loans are included in average amounts outstanding."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(3)","Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities."]] [[/GREPCENT_TABLE]] 50 Table of Contents [[GREPCENT_TABLE]] [["(4)","Net interest margin represents net interest income on a fully tax equivalent basis as a percentage of average interest-earning assets."]] [[/GREPCENT_TABLE]] 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. ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","Twelve Months Ended December 31, 2022","","Twelve Months Ended December 31, 2021"],["\u200b","\u200b","Compared with","\u200b","Compared with"],["\u200b","\u200b","Twelve Months Ended December 31, 2021","\u200b","Twelve Months Ended December 31, 2020"],["\u200b","\u200b","Increase/(Decrease)","\u200b","Increase/(Decrease)"],["\u200b","\u200b","Due to Change in","\u200b","Due to Change in"],["\u200b","\u200b","Volume","\u200b","Rate","\u200b","Total","\u200b","Volume","\u200b","Rate","\u200b","Total"],["\u200b","\u200b","(dollars in thousands)"],["Interest income","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Loans","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Taxable","","$","13,031","","$","409","","$","13,440","","$","9,392","","$","(9,918)","","$","(526)"],["Tax-exempt","\u200b","\u200b","323","\u200b","\u200b","(209)","\u200b","\u200b","114","\u200b","\u200b","(1,176)","\u200b","\u200b","(502)","\u200b","\u200b","(1,678)"],["Securities","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Taxable (AFS)","\u200b","\u200b","2,905","\u200b","\u200b","(463)","\u200b","\u200b","2,442","\u200b","\u200b","(301)","\u200b","\u200b","(53)","\u200b","\u200b","(354)"],["Tax-exempt (AFS)","\u200b","\u200b","297","\u200b","\u200b","(364)","\u200b","\u200b","(67)","\u200b","\u200b","93","\u200b","\u200b","(56)","\u200b","\u200b","37"],["Taxable (HTM)","\u200b","\u200b","670","\u200b","\u200b","\u2014","\u200b","\u200b","670","\u200b","\u200b","(108)","\u200b","\u200b","(108)","\u200b","\u200b","(216)"],["Tax-exempt (HTM)","\u200b","\u200b","(18)","\u200b","\u200b","2","\u200b","\u200b","(16)","\u200b","\u200b","(59)","\u200b","\u200b","(6)","\u200b","\u200b","(65)"],["Cash and due from banks","\u200b","\u200b","(22)","\u200b","\u200b","1,595","\u200b","\u200b","1,573","\u200b","\u200b","241","\u200b","\u200b","(112)","\u200b","\u200b","129"],["Total interest income","\u200b","\u200b","17,186","\u200b","\u200b","970","\u200b","\u200b","18,156","\u200b","$","8,082","\u200b","$","(10,755)","\u200b","$","(2,673)"],["Interest expense","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Deposits","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Checking accounts","\u200b","$","62","\u200b","$","761","\u200b","$","823","\u200b","$","49","\u200b","$","(466)","\u200b","$","(417)"],["Savings accounts","","\u200b","797","","\u200b","529","","\u200b","1,326","","\u200b","594","","\u200b","(613)","","\u200b","(19)"],["Money market accounts","","\u200b","7","","\u200b","903","","\u200b","910","","\u200b","481","","\u200b","(1,442)","","\u200b","(961)"],["Certificates of deposit","","\u200b","78","","\u200b","(227)","","\u200b","(149)","","\u200b","(1,314)","","\u200b","(2,124)","","\u200b","(3,438)"],["Brokered Deposits","","\u200b","(179)","","\u200b","10","","\u200b","(169)","","\u200b","(106)","","\u200b","(5)","","\u200b","(111)"],["Total interest bearing deposits","","\u200b","765","","\u200b","1,976","","\u200b","2,741","","\u200b","(296)","","\u200b","(4,650)","","\u200b","(4,946)"],["Other borrowed funds","","\u200b","1,435","","\u200b","(31)","","\u200b","1,404","","\u200b","(345)","","\u200b","(270)","","\u200b","(615)"],["Total interest expense","","\u200b","2,200","","\u200b","1,945","","\u200b","4,145","","\u200b","(641)","","\u200b","(4,920)","","\u200b","(5,561)"],["Change in net interest income","\u200b","$","14,986","\u200b","$","(975)","\u200b","$","14,011","\u200b","$","8,724","\u200b","$","(5,836)","\u200b","$","2,888"]] [[/GREPCENT_TABLE]] ​ CHANGES IN FINANCIAL CONDITION Total Assets.  Total assets increased $722.9 million, or 24.6%, to $3.66 billion at December 31, 2022 from $2.94 billion at December 31, 2021. The primary driver of this increase, as with most of the categories below, was our acquisition of Denmark, consisting of $685.8 million in assets, during 2022. Cash and Cash Equivalents.  Cash and cash equivalents decreased by $177.5 million, or 59.8%, to $119.4 million at December 31, 2022 from $296.9 million at December 31, 2021. Investment Securities.  The carrying value of total investment securities increased by $131.1 million to $349.7 million at December 31, 2022 from $218.6 million at December 31, 2021. Loans.  Net loans increased by $656.1 million, or 29.6%, to $2.87 billion at December 31, 2022 from $2.22 billion at December 31, 2021. 51 Table of Contents Bank-Owned Life Insurance.  At December 31, 2022, our investment in bank-owned life insurance was $46.1 million, an increase of $14.2 million from $31.9 million at December 31, 2021. Deposits.  Deposits increased $531.8 million, or 21.0%, to $3.06 billion at December 31, 2022 from $2.53 billion at December 31, 2021. Borrowings.  At December 31, 2022 and 2021, borrowings consisted of advances from the FHLB of Chicago and subordinated debt to other banks. FHLB borrowings totaled $1.9 million and $8.0 million at December 31, 2022 and 2021, respectively. Subordinated debt increased $6.0 million, or 34.3% to $23.5 million at December 31, 2022 from $17.5 million at December 31, 2021. Stockholders’ Equity.  Total stockholders’ equity increased $130.4 million, or 40.4%, to $453.1 million at December 31, 2022 from $322.7 million at December 31, 2021. 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 79.1%, 76.1% and 80.6% of our total assets as of December 31, 2022, 2021 and 2020, 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. Total loans increased $658.5 million, or 29.4%, to $2.89 billion as of December 31, 2022 as compared to $2.24 billion as of December 31, 2021. Our loan growth during the year ended December 31, 2022 has been comprised of an increase of $126.3 million, or 34.5%, in commercial and industrial loans, an increase of $287.1 million, or 25.8%, in commercial real estate loans, an increase of $67.3 million, or 50.8%, in construction and development loans, an increase of $167.7 million, or 29.3%, in residential 1-4 family loans and an increase of $10.1 million, or 18.9%, in consumer and other loans. Total loans increased $44.1 million, or 2.0%, to $2.24 billion as of December 31, 2021 as compared to $2.19 billion as of December 31, 2020. Our loan growth during the year ended December 31, 2021 has been comprised of a decrease of $78.8 million, or 17.7%, in commercial and industrial loans, an increase of $119.2 million, or 12.0%, in commercial real 52 Table of Contents estate loans, a decrease of $7.6 million, or 5.4%, in construction and development loans, an increase of $26.0 million, or 4.8%, in residential 1-4family loans and a decrease of $14.7 million, or 21.6%, in consumer and other loans. The following table presents the balance and associated percentage of each major category in our loan portfolio at December 31, 2022, 2021, and 2020: [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","December 31,","\u200b"],["\u200b","\u200b","\u200b","\u200b","% of","\u200b","\u200b","\u200b","% of","\u200b","\u200b","\u200b","% of","\u200b"],["(In thousands)","\u200b","2022","\u200b","Total","\u200b","2021","\u200b","Total","\u200b","2020","\u200b","Total","\u200b"],["\u200b","","\u200b","\u200b","","\u200b","","\u200b","\u200b","\u200b","\u200b","","\u200b","\u200b","","\u200b"],["Commercial & industrial","\u200b","$","492,450","\u200b","17","%","$","366,166","\u200b","16","%","$","444,992","\u200b","20","%"],["Commercial real estate","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Owner Occupied","\u200b","\u200b","716,963","\u200b","25","%","\u200b","574,565","\u200b","26","%","\u200b","549,253","\u200b","25","%"],["Non-owner occupied","\u200b","\u200b","681,620","\u200b","23","%","\u200b","536,892","\u200b","24","%","\u200b","442,996","\u200b","20","%"],["Construction & Development","\u200b","\u200b","199,708","\u200b","7","%","\u200b","132,454","\u200b","6","%","\u200b","140,074","\u200b","6","%"],["Residential 1-4 family","\u200b","\u200b","739,514","\u200b","25","%","\u200b","571,845","\u200b","26","%","\u200b","545,806","\u200b","25","%"],["Consumer","\u200b","\u200b","44,963","\u200b","2","%","\u200b","32,131","\u200b","1","%","\u200b","30,488","\u200b","1","%"],["Other Loans","\u200b","\u200b","18,760","\u200b","1","%","\u200b","21,461","\u200b","1","%","\u200b","37,851","\u200b","2","%"],["Total Loans","\u200b","$","2,893,978","\u200b","100","%","$","2,235,514","\u200b","100","%","$","2,191,460","\u200b","100","%"]] [[/GREPCENT_TABLE]] ​ Our directors and officers and their affiliates are customers of, and have other transactions with, the Bank in the normal course of business. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collection or present other unfavorable features. At December 31, 2022 and December 31, 2021, total loans outstanding to such directors and officers and their affiliates were $70.2 million and $73.5 million, respectively. During the year ended December 31, 2022, $46.5 million of additions and $49.8 million of repayments were made to these loans, compared to $24.7 million of additions and $18.4 million of repayments during the year ended December 31, 2021. At December 31, 2022 and December 31, 2021, all of the loans to directors and officers were performing according to their original terms. Loan categories The principal categories of our loan portfolio are discussed below: Commercial and Industrial (C&I).  Our C&I portfolio totaled $492.5 million, $366.2 million and $445.0 million at December 31, 2022, 2021 and 2020, respectively, and represented 17%, 16% and 20% of our total loans, respectively. C&I loans increased 34.5% during 2022, primarily as a result of loans acquired from Denmark during 2022, slightly offset by significant levels of PPP loans being forgiven during the year. C&I loans decreased 17.7% during 2021, primarily as a result of significant levels of PPP loans being forgiven during the year. C&I loans increased 47.2% in 2020, primarily as a result of loans made through PPP and secondarily as a result of the Timberwood acquisition. Our C&I loan customers represent various small and middle-market established businesses involved in professional services, accommodation and food services, health care, financial services, wholesale trade, manufacturing, distribution, retailing and non-profits. Most clients are privately owned with markets that range from local to national in scope. Many of the loans to this segment are secured by liens on corporate assets and the personal guarantees of the principals. The regional economic strength or weakness impacts the relative risks in this loan category. There is little concentration in any one business sector, and loan risks are generally diversified among many borrowers. Commercial Real Estate (CRE).  Our CRE loan portfolio totaled $1.40 billion, $1.11 billion and $992.2 million at December 31, 2022, 2021 and 2020, respectively, and represented 48%, 50% and 45% of our total loans, respectively. Our CRE loans increased 25.8% during 2022, primarily as a result of loans acquired from Denmark during 2022. Our CRE loans increased 12.0% during 2021, primarily as a result of a backlog from 2020 when developers were cautious to start projects during the early stages of COVID-19. Our CRE loans increased 22.0% during 2020 due primarily to the Timberwood acquisition. 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 twenty years, with loan- 53 Table of Contents to-values that generally do not exceed 85%. 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 $199.7 million, $132.5 million and $140.1 million at December 31, 2022, 2021 and 2020, respectively, and represented 7%, 6% and 6% of our total loans, respectively. C&D loans increased 50.8% during 2022, primarily as a result of loans acquired from Denmark during 2022. C&D loans decreased 5.4% during 2021 and increased 6.0% during 2020. 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. Our residential 1-4 family loan portfolio totaled $739.5 million, $571.8 million and $545.8 million at December 31, 2022, 2021 and 2020, respectively, and represented 25%, 26% and 25% of our total loans, respectively. Residential 1-4 family loans increased 29.3% during 2022, primarily as a result of loans acquired from Denmark during 2022. Residential 1-4 family loans increased 4.8% during 2021. Residential 1-4 family loans increased 21.7% during 2020 primarily as a result of the Timberwood transaction. We offer fixed and adjustable rate residential mortgage loans with maturities up to 30 years. One-to-four family residential mortgage loans are generally underwritten according to Fannie Mae guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” We generally originate both fixed and adjustable rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency. 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 $866.9 million, $705.5 million and $612.7 million at December 31, 2022, 2021 and 2020, respectively. Loans sold with the retention of servicing assets result in the capitalization of servicing rights. Loan servicing rights are subsequently amortized as an offset to other income over the estimated period of servicing. The net balance of capitalized servicing rights amounted to $9.6 million, $5.0 million and $3.7 million at December 31, 2022, 2021 and 2020, respectively. Consumer Loans.  Our consumer loan portfolio totaled $45.0 million, $32.1 million and $30.5 million at December 31, 2022, 2021 and 2020, respectively, and represented 2%, 1%, and 1% of our total loans, respectively. Consumer loans include secured and unsecured loans, lines of credit and personal installment loans. Our consumer loans increased by 39.9%, 5.4% and 3.0% during 2022, 2021 and 2020, respectively. 54 Table of Contents 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 $18.8 million, $21.5 million and $37.9 million at December 31, 2022, 2021 and 2020, respectively, and are immaterial to the overall loan portfolio. The other loans category consists primarily of overdrawn depository accounts, loans utilized to purchase or carry securities and loans to nonprofit organizations. Loan Portfolio Maturities.   The following tables summarize the dollar amount of loans maturing in our portfolio based on their loan type, fixed or variable rate of interest, and contractual terms to maturity at December 31, 2022. The tables do not include any estimate of prepayments, which can significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","One Year or","\u200b","One to Five","\u200b","Five to Fifteen","\u200b","Over Fifteen","\u200b","\u200b","\u200b"],["\u200b","\u200b","Less","\u200b","Years","\u200b","Years","\u200b","Years","\u200b","Total"],["\u200b","\u200b","(dollars in thousands)"],["Commercial & industrial","","$","140,581","","$","217,935","","$","130,154","\u200b","$","3,780","","$","492,450"],["Commercial real estate","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Owner Occupied","\u200b","\u200b","80,391","\u200b","\u200b","303,895","\u200b","\u200b","290,779","\u200b","\u200b","41,898","\u200b","\u200b","716,963"],["Non-owner Occupied","\u200b","\u200b","40,572","\u200b","\u200b","280,671","\u200b","\u200b","348,827","\u200b","\u200b","11,550","\u200b","\u200b","681,620"],["Construction & Development","\u200b","\u200b","23,212","\u200b","\u200b","66,883","\u200b","\u200b","64,281","\u200b","\u200b","45,332","\u200b","\u200b","199,708"],["Residential 1-4 family","\u200b","\u200b","10,518","\u200b","\u200b","83,273","\u200b","\u200b","223,792","\u200b","\u200b","421,931","\u200b","\u200b","739,514"],["Consumer and other","\u200b","\u200b","7,252","\u200b","\u200b","37,666","\u200b","\u200b","16,015","\u200b","\u200b","2,790","\u200b","\u200b","63,723"],["Total","\u200b","$","302,526","\u200b","$","990,323","\u200b","$","1,073,848","\u200b","$","527,281","\u200b","$","2,893,978"],["Fixed Rate Loans:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial & industrial","\u200b","$","23,861","\u200b","$","190,139","\u200b","$","91,055","\u200b","$","3,318","\u200b","$","308,373"],["Commercial real estate","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Owner Occupied","\u200b","\u200b","46,525","\u200b","\u200b","288,149","\u200b","\u200b","126,847","\u200b","\u200b","10,399","\u200b","\u200b","471,920"],["Non-owner Occupied","\u200b","\u200b","36,085","\u200b","\u200b","269,762","\u200b","\u200b","221,148","\u200b","\u200b","\u2014","\u200b","\u200b","526,995"],["Construction & Development","\u200b","\u200b","14,224","\u200b","\u200b","53,969","\u200b","\u200b","49,548","\u200b","\u200b","37,475","\u200b","\u200b","155,216"],["Residential 1-4 family","\u200b","\u200b","4,720","\u200b","\u200b","74,212","\u200b","\u200b","190,208","\u200b","\u200b","247,596","\u200b","\u200b","516,736"],["Consumer and other","\u200b","\u200b","5,037","\u200b","\u200b","36,877","\u200b","\u200b","15,624","\u200b","\u200b","2,790","\u200b","\u200b","60,328"],["Total","\u200b","$","130,452","\u200b","$","913,108","\u200b","$","694,430","\u200b","$","301,578","\u200b","$","2,039,568"],["Floating Rate Loans:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial & industrial","\u200b","$","116,720","\u200b","$","27,796","\u200b","$","39,099","\u200b","$","462","\u200b","$","184,077"],["Commercial real estate","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Owner Occupied","\u200b","\u200b","33,866","\u200b","\u200b","15,746","\u200b","\u200b","163,932","\u200b","\u200b","31,499","\u200b","\u200b","245,043"],["Non-owner Occupied","\u200b","\u200b","4,487","\u200b","\u200b","10,909","\u200b","\u200b","127,679","\u200b","\u200b","11,550","\u200b","\u200b","154,625"],["Construction & Development","\u200b","\u200b","8,988","\u200b","\u200b","12,914","\u200b","\u200b","14,733","\u200b","\u200b","7,857","\u200b","\u200b","44,492"],["Residential 1-4 family","\u200b","\u200b","5,798","\u200b","\u200b","9,061","\u200b","\u200b","33,584","\u200b","\u200b","174,335","\u200b","\u200b","222,778"],["Consumer and other","\u200b","\u200b","2,215","\u200b","\u200b","789","\u200b","\u200b","391","\u200b","\u200b","\u2014","\u200b","\u200b","3,395"],["Total","\u200b","$","172,074","\u200b","$","77,215","\u200b","$","379,418","\u200b","$","225,703","\u200b","$","854,410"]] [[/GREPCENT_TABLE]] ​ 55 Table of Contents NONPERFORMING ASSETS In order to operate with a sound risk profile, we focus on originating loans that we believe to be of high quality. We have established loan approval policies and procedures to assist us in maintaining the overall quality of our loan portfolio. When delinquencies in our loans exist, we rigorously monitor the levels of such delinquencies for any negative or adverse trends. From time to time, we may modify loans to extend the term or make other concessions to help a borrower with a deteriorating financial condition stay current on their loan and to avoid foreclosure. We generally do not forgive principal or interest on loans or modify the interest rates on loans to rates that are below market rates. Furthermore, we are committed to collecting on all of our loans and, as a result, at times have lower net charge-offs compared to many of our peer banks. We believe that our commitment to collecting on all of our loans results in higher loan recoveries. Our nonperforming assets consist of nonperforming loans and foreclosed real estate. Nonperforming loans are those on which the accrual of interest has stopped, as well as loans that are contractually 90 days past due on which interest continues to accrue. The composition of our nonperforming assets is as follows: ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","As of December 31,","","As of December 31,","","As of December 31,"],["\u200b","\u200b","2022","\u200b","2021","\u200b","2020"],["\u200b","","(dollars in thousands)","\u200b"],["Nonperforming loans","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Nonaccrual loans","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial & industrial","\u200b","$","418","\u200b","$","247","\u200b","$","433","\u200b"],["Commercial real estate","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Owner Occupied","\u200b","\u200b","2,688","\u200b","\u200b","5,884","\u200b","\u200b","1,078","\u200b"],["Non-owner Occupied","\u200b","\u200b","\u2014","\u200b","\u200b","650","\u200b","\u200b","8,087","\u200b"],["Construction & Development","\u200b","\u200b","17","\u200b","\u200b","19","\u200b","\u200b","281","\u200b"],["Residential 1-4 family","\u200b","\u200b","505","\u200b","\u200b","439","\u200b","\u200b","912","\u200b"],["Consumer and other","\u200b","\u200b","\u2014","\u200b","\u200b","2","\u200b","\u200b","5","\u200b"],["Total nonaccrual loans","\u200b","\u200b","3,628","\u200b","\u200b","7,241","\u200b","\u200b","10,796","\u200b"],["Loans past due 90 days, but still accruing","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial & industrial","\u200b","\u200b","\u2014","\u200b","\u200b","738","\u200b","\u200b","\u2014","\u200b"],["Commercial real estate","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Owner Occupied","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","1,582","\u200b"],["Non-owner Occupied","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b"],["Construction & Development","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b"],["Residential 1-4 family","\u200b","\u200b","268","\u200b","\u200b","245","\u200b","\u200b","142","\u200b"],["Consumer and other","\u200b","\u200b","5","\u200b","\u200b","16","\u200b","\u200b","14","\u200b"],["Total loans past due 90 days, but still accruing","\u200b","\u200b","273","\u200b","\u200b","999","\u200b","\u200b","1,738","\u200b"],["Total nonperforming loans","\u200b","$","3,901","\u200b","$","8,240","\u200b","$","12,534","\u200b"],["OREO","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial real estate owned","\u200b","$","\u2014","\u200b","$","\u2014","\u200b","$","1,742","\u200b"],["Residential real estate owned","\u200b","\u200b","\u2014","\u200b","\u200b","10","\u200b","\u200b","143","\u200b"],["Bank property real estate owned","\u200b","\u200b","2,520","\u200b","\u200b","140","\u200b","\u200b","\u2014","\u200b"],["Total OREO","\u200b","$","2,520","\u200b","$","150","\u200b","$","1,885","\u200b"],["Total nonperforming assets (\"NPAs\")","\u200b","$","6,421","\u200b","$","8,390","\u200b","$","14,419","\u200b"],["Accruing troubled debt restructured loans","\u200b","$","450","\u200b","$","484","\u200b","$","1,132","\u200b"],["Ratios","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Nonaccrual loans to total loans","\u200b","\u200b","0.13","%","\u200b","0.32","%","\u200b","0.49","%"],["NPAs to total loans plus OREO","\u200b","\u200b","0.22","%","\u200b","0.38","%","\u200b","0.66","%"],["NPAs to total assets","\u200b","\u200b","0.18","%","\u200b","0.29","%","\u200b","0.53","%"],["ALL to nonaccrual loans","\u200b","\u200b","625","%","\u200b","281","%","\u200b","164","%"],["ALL to total loans","\u200b","\u200b","0.78","%","\u200b","0.91","%","\u200b","0.81","%"]] [[/GREPCENT_TABLE]] ​ 56 Table of Contents At December 31, 2022, 2021 and 2020, impaired loans had specific reserves of $8,000, $964,000 and $900,000, respectively. Levels of specific reserves are dependent on the specific underlying impaired loans at any given time. Management has evaluated the aforementioned loans and other loans classified as nonperforming and believes that all nonperforming loans have been adequately reserved for in the allowance for loan losses at December 31, 2022. 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. Troubled Debt Restructurings A troubled debt restructuring includes a loan modification where a borrower is experiencing financial difficulty and we grant a concession to that borrower that we would not otherwise consider except for the borrower’s financial difficulties. These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. Restructuring a loan in lieu of aggressively enforcing the collection of the loan may benefit the Company by increasing the ultimate probability of collection. A TDR may be either on accrual or nonaccrual status based upon the performance of the borrower and management’s assessment of collectability. If a TDR is placed on nonaccrual status, which would occur based on the same criteria as non-TDR loans, it remains there until a sufficient period of performance under the restructured terms has occurred at which it returned to accrual status, generally 6 months. As of December 31, 2022 and 2021, the Company had specific reserves of $8,000 and $7,000 for TDRs, respectively, and none of them have subsequently defaulted. ALLOWANCE FOR LOAN AND LEASE LOSSES ALLL represents management’s estimate of probable and inherent credit losses in the loan portfolio. Estimating the amount of the ALLL 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 ALLL, while recoveries of amounts previously charged off are credited to the ALLL. 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 ALLL 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 ALLL 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. 57 Table of Contents There are many factors affecting the ALLL; some are quantitative while others require qualitative judgment. The process for determining the ALLL (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 ALLL may be made for specific loans but the entire ALLL 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 ALLL as well. Such agencies may require that changes in the ALLL 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. The following table summarizes the changes in our ALLL for the years indicated: ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year ended","\u200b","Year ended","\u200b","Year ended","\u200b"],["\u200b","\u200b","December 31,","\u200b","December 31,","\u200b","December 31,","\u200b"],["\u200b","\u200b","2022","\u200b","2021","\u200b","2020"],["\u200b","\u200b","(dollars in thousands)"],["Balance of ALL at the beginning of period","","$","20,315","","$","17,658","","$","11,396"],["Net loans charged-off (recovered):","","\u200b","\u200b","","\u200b","\u200b","","\u200b","\u200b"],["Commercial & industrial","","\u200b","(499)","","\u200b","180","","\u200b","1,083"],["Commercial real estate - owner occupied","","\u200b","816","","\u200b","275","","\u200b","(346)"],["Commercial real estate - non-owner occupied","","\u200b","(360)","","\u200b","(5)","","\u200b","(40)"],["Construction & Development","","\u200b","(152)","","\u200b","(143)","","\u200b","33"],["Residential 1-4 family","","\u200b","26","","\u200b","110","","\u200b","21"],["Consumer","","\u200b","21","","\u200b","6","","\u200b","90"],["Other Loans","","\u200b","(17)","","\u200b","20","","\u200b","22"],["Total net loans charged-off","","\u200b","(165)","","\u200b","443","","\u200b","863"],["Provision charged to operating expense","","\u200b","2,200","","\u200b","3,100","","\u200b","7,125"],["Balance of ALL at end of period","\u200b","$","22,680","\u200b","$","20,315","\u200b","$","17,658","\u200b"],["Ratio of net charge-offs (recoveries) to average loans by loan composition","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial & industrial","\u200b","","(0.12)","%","","0.05","%","","0.23","%"],["Commercial real estate - owner occupied","\u200b","","0.13","%","","0.05","%","","(0.07)","%"],["Commercial real estate - non-owner occupied","\u200b","","(0.06)","%","","0.00","%","","(0.01)","%"],["Construction & Development","\u200b","","(0.09)","%","","(0.11)","%","","0.02","%"],["Residential 1-4 family","\u200b","","0.00","%","","0.02","%","","0.00","%"],["Consumer","\u200b","","0.05","%","","0.02","%","","0.31","%"],["Other Loans","\u200b","","(0.04)","%","","0.07","%","","0.16","%"],["Total net charge-offs to average loans","\u200b","","(0.01)","%","","0.02","%","","0.04","%"]] [[/GREPCENT_TABLE]] ​ 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. The dollar amount of the ALLL increased primarily as a result of loan growth and changes in the portfolio composition. Although the allowance is allocated between categories, the entire allowance is available to absorb losses attributable to all loan categories. Management believes that the ALLL is adequate. 58 Table of Contents The following table summarizes an allocation of the ALLL and the related percentage of loans outstanding in each category for the periods below. ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","December 31,","\u200b","December 31,","\u200b","December 31,","","\u200b"],["\u200b","\u200b","2022","\u200b","2021","\u200b","2020","","\u200b"],["\u200b","","\u200b","\u200b","\u200b","% of","\u200b","\u200b","\u200b","\u200b","% of","\u200b","\u200b","\u200b","\u200b","% of","","\u200b"],["(in thousands, except %)","","Amount","","Loans","","Amount","","Loans","","Amount","","Loans","\u200b"],["Loan Type:","\u200b","\u200b","\u200b","","\u200b","\u200b","\u200b","\u200b","","\u200b","\u200b","\u200b","\u200b","","\u200b","\u200b"],["Commercial & industrial","\u200b","$","4,071","","17","%","$","3,699","","16","%","$","2,049","","20","%","\u200b"],["Commercial real estate - owner occupied","\u200b","","5,204","","25","%","","5,633","","26","%","","6,108","","25","%","\u200b"],["Commercial real estate - non-owner occupied","\u200b","","5,405","","23","%","","5,151","","24","%","","3,904","","20","%","\u200b"],["Construction & development","\u200b","","1,592","","7","%","","984","","6","%","","1,027","","7","%","\u200b"],["Residential 1-4 family","\u200b","","5,944","","25","%","","4,445","","26","%","","3,960","","25","%","\u200b"],["Consumer","\u200b","","314","","2","%","","224","","1","%","","201","","1","%","\u200b"],["Other loans","\u200b","","150","","1","%","","179","","1","%","","409","","2","%","\u200b"],["Total allowance","\u200b","$","22,680","\u200b","100","%","$","20,315","\u200b","100","%","$","17,658","\u200b","100","%","\u200b"]] [[/GREPCENT_TABLE]] ​ SOURCES OF FUNDS General.   Deposits traditionally have been our primary source of funds for our investment and lending activities. We continue to focus on growing core deposits through our relationship driven banking philosophy and community-focused marketing programs. We also borrow from the FHLB of Chicago to supplement cash needs, to lengthen the maturities of liabilities for interest rate risk management purposes and to manage our cost of funds. Our additional sources of funds are scheduled payments and prepayments of principal and interest on loans and investment securities and fee income and proceeds from the sales of loans and securities. Deposits.  Our current deposit products include non-interest bearing and interest-bearing checking accounts, savings accounts, money market accounts, and certificate of deposits. As of December 31, 2022, deposit liabilities accounted for approximately 83.6% of our total liabilities and equity. We accept deposits primarily from customers in the communities in which our branches and offices are located, as well as from small businesses and other customers throughout our lending area. We rely on our competitive pricing and products, quality customer service, and convenient locations and hours to attract and retain deposits. Deposit rates and terms are based primarily on current business strategies, market interest rates, liquidity requirements and our deposit growth goals. Total deposits were $3.06 billion, $2.53 billion and $2.32 billion as of December 31, 2022, 2021 and 2020, respectively. Noninterest-bearing deposits at December 31, 2022, 2021 and 2020 were $934.1 million, $799.9 million and $715.6 million, respectively, while interest-bearing deposits were $2.13 billion, $1.73 billion and $1.61 billion at December 31, 2022, 2021 and 2020, respectively. At December 31, 2022, we had a total of $424.0 million in certificates of deposit, including $6.7 million of brokered deposits, of which $6.0 million had remaining maturities of one year or less. Based on historical experience and our current pricing strategy, we believe we will retain a large portion of these accounts upon maturity. 59 Table of Contents The following tables set forth the average balances of our deposits for the periods indicated: ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year ended","Year ended","Year ended","\u200b"],["\u200b","\u200b","December 31, 2022","December 31, 2021","December 31, 2020","\u200b"],["\u200b","","Amount","","Percent","","Amount","","Percent","","Amount","","Percent","","\u200b"],["\u200b","","(dollars in thousands)"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Noninterest-bearing demand deposits","","$","878,727","","31.6","%","$","785,364","","32.0","%","$","634,939","","29.7","%","\u200b"],["Interest-bearing checking deposits","\u200b","","253,443","","9.1","%","","209,970","","8.6","%","","194,718","","9.1","%","\u200b"],["Savings deposits","\u200b","","691,599","","24.8","%","","497,958","","20.3","%","","356,091","","16.7","%","\u200b"],["Money market accounts","\u200b","","666,717","","23.9","%","","664,591","","27.1","%","","563,847","","26.4","%","\u200b"],["Certificates of deposit","\u200b","","286,054","","10.3","%","","278,602","","11.4","%","","367,054","","17.2","%","\u200b"],["Brokered deposits","\u200b","","8,587","","0.3","%","","14,718","","0.6","%","","18,428","","0.9","%","\u200b"],["Total","\u200b","$","2,785,127","","100","%","$","2,451,203","\u200b","100","%","$","2,135,077","","100","%","\u200b"]] [[/GREPCENT_TABLE]] ​ The following table provides information on maturities of certificates of deposits which exceed FDIC insurance limits of $250,000 as of December 31, 2022: ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Time Deposits over FDIC","\u200b","Portion of Time Deposits in"],["\u200b","\u200b","Insurance Limits","","Excess of FDIC Insurance Limits"],["\u200b","","(dollars in thousands)"],["3 months or less remaining","\u200b","$","10,986","\u200b","$","3,986"],["Over 3 to 6 months remaining","\u200b","","20,876","\u200b","","13,876"],["Over 6 to 12 months remaining","\u200b","","33,266","\u200b","","14,016"],["Over 12 months or more remaining","\u200b","","34,064","\u200b","","15,314"],["Total","\u200b","$","99,192","\u200b","$","47,192"]] [[/GREPCENT_TABLE]] ​ Borrowings Deposits and investment securities for sale are the primary source of funds for our lending activities and general business purposes. However, we may also obtain advances from the FHLB, purchase federal funds and engage in overnight borrowing from the Federal Reserve, correspondent banks, or enter into repurchase agreements. Securities sold under repurchase agreements The Company has securities sold under repurchase agreements which have contractual maturities up to one year from the transaction date with variable and fixed rate terms. The agreements to repurchase require that the Company (seller) repurchase identical securities as those that are sold. The securities underlying the agreements are under the Company’s control. The following table summarizes securities sold under repurchase agreements, and the weighted average interest rates paid: ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year ended December 31,","\u200b"],["(dollars in thousands)","","2022","","2021","","2020"],["Average daily amount of securities sold under repurchase agreements during the period","\u200b","$","25,749","\u200b","$","34,637","\u200b","$","34,984","\u200b"],["Weighted average interest rate on average daily securities sold under repurchase agreements","\u200b","","2.11","%","","0.03","%","","0.32","%"],["Maximum outstanding securities sold under repurchase agreements at any month-end","\u200b","$","97,196","\u200b","$","57,915","\u200b","$","79,718","\u200b"],["Securities sold under repurchase agreements at period end","\u200b","$","97,196","\u200b","$","41,122","\u200b","$","36,377","\u200b"],["Weighted average interest rate on securities sold under repurchase agreements at period end","\u200b","","4.31","%","","0.02","%","","0.04","%"]] [[/GREPCENT_TABLE]] ​ 60 Table of Contents Lines of credit and other borrowings The Company’s other borrowings have historically consisted primarily of short-term FHLB of Chicago advances collateralized by a blanket pledge agreement on the Company’s FHLB capital stock and retail and commercial loans held in the Company’s portfolio. There were $1.9 million, $8.0 million and $23.3 million of advances outstanding from the FHLB at December 31, 2022, 2021, and 2020. The total loans pledged as collateral were $1.15 billion, $915.5 million and $825.3 million at December 31, 2022, 2021 and 2020, respectively. There were no outstanding letters of credit from the FHLB at December 31, 2022 and December 31, 2021, respectively. Outstanding letters of credit from the FHLB totaled $0.8 million at December 31, 2020. The following table summarizes short-term borrowings (borrowings with maturities of one year or less), which consist of borrowings from the FHLB, and the weighted average interest rates paid: ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year ended December 31,","","\u200b"],["(dollars in thousands)","","2022","","2021","","2020","","\u200b"],["Average daily amount of borrowings outstanding during the period","\u200b","$","139,498","\u200b","$","11,343","\u200b","$","35,622","\u200b","\u200b"],["Weighted average interest rate on average daily borrowing","\u200b","","0.42","%","","0.33","%","","1.37","%","\u200b"],["Maximum outstanding borrowings at any month-end","\u200b","$","308,756","\u200b","$","15,338","\u200b","$","58,800","\u200b","\u200b"],["Borrowing outstanding at period end","\u200b","$","1,929","\u200b","$","7,958","\u200b","$","23,338","\u200b","\u200b"],["Weighted average interest rate on borrowing at period end","\u200b","","1.71","%","","0.91","%","","1.22","%","\u200b"]] [[/GREPCENT_TABLE]] ​ The Corporation maintains a $7.5 million line of credit with a commercial bank, which was entered into on May 15, 2021, and renewed on May 15, 2022. There were no outstanding balances on this note at December 31, 2022 or 2021. Any future borrowings will require monthly payments of interest at a variable rate, and will be due in full on May 15, 2024. During September 2017, the Company entered into subordinated note agreements with three separate commercial banks. The Company had up to twelve months from entering these agreements to borrow funds up to a maximum availability of $22.5 million. As of December 31, 2022 and 2021, the Company had borrowed $11.5 million under these agreements. 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. On July 22, 2020, the Company entered into subordinated note agreements with two separate commercial banks. The Company had through December 31, 2020, to borrow funds up to a maximum availability of $6.0 million under each agreement, or $12.0 million total. These notes were issued with 10-year maturities, carry interest at a fixed rate of 5.0% through June 30, 2025, and at a variable rate thereafter, payable quarterly. These notes are callable on or after January 1, 2026 and qualify for Tier 2 capital for regulatory purposes. The Company had outstanding balances of $6.0 million under these agreements at December 31, 2022 and 2021. During August 2022, the Company entered into subordinated note agreements with an individual. The Company had outstanding balances of $6.0 million under these agreements as of December 31, 2022. These notes were issued with 10-year maturities, carry interest at a fixed rate of 5.25% through August 6, 2027, and at a variable rate thereafter, payable quarterly. These notes are callable on or after August 6, 2027 and qualify for Tier 2 capital for regulatory purposes. The individual associated with these subordinated note agreements is not a related party of the Company. INVESTMENT SECURITIES Our securities portfolio consists of securities available for sale and securities held to maturity. Securities are classified as held to maturity or available for sale at the time of purchase. Obligations of states and political subdivisions and mortgage-backed securities, all of which are issued by U.S. government agencies or U.S. government-sponsored enterprises, make up the largest components of the securities portfolio. We manage our investment portfolio to provide an adequate level of liquidity as well as to maintain neutral interest rate-sensitive positions, while earning an adequate level of investment income without taking undue or excessive risk. Securities available for sale consist of U.S. Treasury securities, obligations of states and political subdivision, agency mortgage-backed securities, corporate notes, and certificates of deposits. Securities classified as available for sale, which 61 Table of Contents management has the intent and ability to hold for an indefinite period of time, but not necessarily to maturity, are carried at fair value, with unrealized gains and losses, net of related deferred income taxes, included in stockholders’ equity as a separate component of other comprehensive income. The fair value of securities available for sale totaled $304.6 million and included gross unrealized gains of $0.5 million and gross unrealized losses of $21.8 million at December 31, 2022. At December, 31 2021, the fair value of securities available for sale totaled $212.7 million and included gross unrealized gains of $5.6 million and gross unrealized losses of $0.7 million. Securities classified as held to maturity consist of U.S. Treasury securities and obligations of states and political subdivisions. These securities, which management has the intent and ability to hold to maturity, are reported at amortized cost. Securities held to maturity as of December 31, 2022 and 2021, are carried at their amortized cost of $45.1 million and $5.9 million, respectively. The Company did not sell any securities in 2022. The Company recognized a net loss on sale of investment securities of $3,000 during the year ended December 31, 2021. The Company recognized a net gain on sale of investment securities of $3.2 million during the year ended December 31, 2020. The following tables set forth the composition and maturities of investment securities as of December 31, 2022 and December 31, 2021. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","After One, But","\u200b","After Five, But","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Within One Year","\u200b","Within Five Years","\u200b","Within Ten Years","\u200b","After Ten Years","\u200b","Total"],["\u200b","\u200b","\u200b","\u200b","\u200b","Weighted","\u200b","\u200b","\u200b","\u200b","Weighted","\u200b","\u200b","\u200b","\u200b","Weighted","\u200b","\u200b","\u200b","\u200b","Weighted","\u200b","\u200b","\u200b","\u200b","Weighted"],["\u200b","\u200b","Amortized","\u200b","Average","\u200b","Amortized","\u200b","Average","\u200b","Amortized","\u200b","Average","\u200b","Amortized","\u200b","Average","\u200b","Amortized","\u200b","Average"],["At December 31, 2022","","Cost","","Yield (1)","","Cost","","Yield (1)","","Cost","","Yield (1)","","Cost","","Yield (1)","","Cost","","Yield (1)"],["\u200b","\u200b","(dollars in thousands)","\u200b"],["Available for sale securities","","\u200b","","","","","\u200b","","","","","\u200b","","","","","\u200b","","","","","\u200b","","","","\u200b"],["U.S. Treasury securities","","$","99,991","","1.2","%","$","9,857","","1.2","%","$","39,766","","1.5","%","$","\u2014","","\u2014","%","$","149,614","","1.3","%"],["Obligations of U.S. Government sponsored agencies","\u200b","\u200b","\u2014","","\u2014","%","\u200b","\u2014","","\u2014","%","\u200b","12,846","","1.5","%","\u200b","12,089","","1.9","%","\u200b","24,935","","1.7","%"],["Obligations of states and political subdivisions","\u200b","","3,927","","3.0","%","","5,541","","3.6","%","","24,338","","3.5","%","","56,895","","3.0","%","","90,701","","3.2","%"],["Mortgage-backed securities","\u200b","","3,358","","2.4","%","","9,829","","2.9","%","","12,608","","3.2","%","","12,906","","3.4","%","","38,701","","3.1","%"],["Corporate notes","\u200b","","\u2014","","\u2014","%","","4,983","","3.3","%","","14,674","","3.6","%","","1,348","","8.6","%","","21,005","","3.8","%"],["Certificates of deposit","\u200b","\u200b","503","\u200b","1.1","%","\u200b","501","\u200b","1.2","%","\u200b","\u2014","\u200b","\u2014","%","\u200b","\u2014","\u200b","\u2014","%","\u200b","1,004","\u200b","1.2","%"],["Total available for sale securities","\u200b","$","107,779","","1.3","%","$","30,711","","2.5","%","$","104,232","","2.5","%","$","83,238","","3.0","%","$","325,960","","2.2","%"],["Held to maturity securities","\u200b","","\u200b","","\u200b","\u200b","","\u200b","","\u200b","\u200b","","\u200b","","\u200b","\u200b","","\u200b","","\u200b","\u200b","","\u200b","","\u200b","\u200b"],["U.S. Treasury securities","\u200b","$","\u2014","","\u2014","%","$","35,772","","2.7","%","$","4,130","","3.6","%","$","\u2014","","\u2014","\u200b","$","39,902","","2.9","%"],["Obligations of states and political subdivisions","\u200b","$","389","","3.2","%","$","3,935","","2.6","%","$","871","","3.1","%","$","\u2014","","\u2014","%","$","5,195","\u200b","2.7","%"],["Total held to maturity securities","\u200b","$","389","\u200b","3.2","%","$","39,707","\u200b","2.7","%","$","5,001","","4.2","%","$","\u2014","","\u2014","%","$","45,097","\u200b","2.9","%"],["Total","\u200b","$","108,168","","1.3","%","$","34,646","","2.6","%","$","105,103","","2.6","%","$","83,238","","3.0","%","$","371,057","","2.3","%"]] [[/GREPCENT_TABLE]] ​ 62 Table of Contents [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","After One, But","\u200b","After Five, But","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Within One Year","\u200b","Within Five Years","\u200b","Within Ten Years","\u200b","After Ten Years","\u200b","Total"],["\u200b","\u200b","\u200b","\u200b","\u200b","Weighted","\u200b","\u200b","\u200b","\u200b","Weighted","\u200b","\u200b","\u200b","\u200b","Weighted","\u200b","\u200b","\u200b","\u200b","Weighted","\u200b","\u200b","\u200b","\u200b","Weighted"],["\u200b","\u200b","Amortized","\u200b","Average","\u200b","Amortized","\u200b","Average","\u200b","Amortized","\u200b","Average","\u200b","Amortized","\u200b","Average","\u200b","Amortized","\u200b","Average"],["At December 31, 2021","","Cost","","Yield (1)","","Cost","","Yield (1)","","Cost","","Yield (1)","","Cost","","Yield (1)","","Cost","","Yield (1)"],["\u200b","","(dollars in thousands)","\u200b"],["Available for sale securities","","\u200b","","","","","\u200b","","","","","\u200b","","","","","\u200b","","","","","\u200b","","","","\u200b"],["U.S. Treasury securities","","$","\u2014","","0.0","%","$","\u2014","","0.0","%","$","49,574","","1.4","%","$","\u2014","","0.0","%","\u200b","49,574","","1.4","%"],["Obligations of U.S. Government sponsored agencies","\u200b","\u200b","304","","0.2","%","\u200b","\u2014","","0.0","%","\u200b","12,967","","1.4","%","\u200b","13,451","","1.8","%","\u200b","26,722","","1.6","%"],["Obligations of states and political subdivisions","\u200b","","\u2014","","0.0","%","","4,367","","3.7","%","","14,587","","3.4","%","","64,065","","3.1","%","","83,019","","3.2","%"],["Mortgage-backed securities","\u200b","","60","","2.6","%","","10,559","","2.5","%","","10,508","","3.0","%","","5,016","","2.5","%","","26,143","","2.7","%"],["Corporate notes","\u200b","","\u2014","","0.0","%","","4,972","","3.3","%","","14,311","","3.6","%","","1,477","","5.1","%","","20,760","","3.6","%"],["Certificates of deposit","\u200b","\u200b","503","\u200b","0.9","%","\u200b","1,026","\u200b","1.2","%","\u200b","\u2014","\u200b","0.0","%","\u200b","\u2014","\u200b","0.0","%","\u200b","1,529","\u200b","1.1","%"],["Total available for sale securities","\u200b","$","867","","0.7","%","$","20,924","","2.9","%","$","101,947","","2.1","%","$","84,009","","2.9","%","$","207,747","","2.5","%"],["Held to maturity securities","\u200b","","\u200b","","\u200b","\u200b","","\u200b","","","\u200b","","\u200b","","","\u200b","","\u200b","","","\u200b","","\u200b","","","\u200b"],["Obligations of states and political subdivisions","\u200b","$","715","","2.3","%","$","3,492","","2.6","%","$","1,704","","3.0","%","$","\u2014","","0.0","%","$","5,911","\u200b","2.7","%"],["Total","\u200b","$","1,582","","1.5","%","$","24,416","","2.8","%","$","103,651","","2.1","%","$","84,009","","2.9","%","$","213,658","","2.5","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","Weighted Average Yield is shown on a fully taxable equivalent basis using a federal tax rate of 21%."]] [[/GREPCENT_TABLE]] 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 of December 31, 2022, 267 debt securities had gross unrealized losses, with an aggregate depreciation of 6.85% from our amortized cost basis. The largest unrealized loss percentage of any single security was 30.37% (or $606,000) of its amortized cost. The largest unrealized dollar loss of any single security was $1.49 million (or 15.4%). As of December 31, 2021, 26 debt securities had gross unrealized losses, with an aggregate depreciation of 0.98% from our amortized cost basis. The largest unrealized loss percentage of any single security was 5.31% (or $256,000) of its amortized cost. This was also the largest unrealized dollar loss of any single security. LIQUIDITY AND CAPITAL RESOURCES Liquidity.    Liquidity is defined as the Company’s ability to generate adequate cash to meet its needs for day-to-day operations and material long and short-term commitments. Liquidity is the risk of potential loss if we were unable to meet our funding requirements at a reasonable cost. We are expected to maintain adequate liquidity at the Bank to meet the cash flow requirements of customers who may be either depositors wishing to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Our asset and liability management policy is intended to cause the Bank to maintain adequate liquidity and, therefore, enhance our ability to raise funds to support asset growth, meet deposit withdrawals and lending needs, maintain reserve requirements and otherwise sustain our operations. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all of our short-term and long-term cash requirements. We manage our liquidity based on demand and specific events and uncertainties to meet current and future financial obligations of a short-term nature. We also monitor our liquidity requirements in light of interest rate trends, changes in the economy and the scheduled maturity and interest rate sensitivity of the investment and loan portfolios and deposits. Our objective in managing liquidity is to respond to the needs of depositors and borrowers as well as to increase earnings enhancement opportunities in a changing marketplace. Our liquidity is maintained through 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 63 Table of Contents 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 shareholders’ equity was $453.1 million at December 31, 2022, compared to $322.7 million at December 31, 2021, and $294.9 million at December 31, 2020. Our total shareholders’ equity increased during 2022, 2021 and 2020 as a result of our profitability, reduced by dividends paid and common share repurchases. Growth in shareholders’ equity during 2022 and 2020 was further stimulated by the acquisitions of Denmark and Timberwood in these years, respectively. Our capital management consists of providing adequate equity to support our current and future operations. We are subject to various regulatory capital requirements administered by state and federal banking agencies, including the Federal Reserve and the OCC. Failure to meet minimum capital requirements may prompt certain actions by regulators that, if undertaken, could have a direct material adverse effect on our financial condition and results of operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank and Company 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 risk weighting and other factors. See “Business—Supervision and Regulation—Capital Requirements.” The following table reflects capital ratios computed pursuant to the regulatory capital rules as applicable to the Company and the Bank. As a result of the Economic Growth Act, the Company is no longer required to comply with its risk-based capital rules. For more information, see “Business—Supervision and Regulation—Capital Requirements.” ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","Minimum Capital Required","\u200b","\u200b","Minimum To Be Well-"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","Minimum Capital","\u200b","for Capital Adequacy Plus","\u200b","\u200b","Capitalized Under prompt"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","Required for Capital","\u200b","Capital Conservation Buffer","\u200b","\u200b","corrective Action"],["\u200b","\u200b","Actual","\u200b","\u200b","Adequacy","\u200b","Basel III Phase-In Schedule","\u200b","\u200b","Provisions"],["\u200b","\u200b","Amount","\u200b","Ratio","\u200b","\u200b","Amount","\u200b","Ratio","\u200b","Amount","\u200b","Ratio","\u200b","\u200b","Amount","\u200b","Ratio"],["\u200b","\u200b","(dollars in thousands)"],["At December 31, 2022","","\u200b","","","","","\u200b","","","","","","","","","\u200b","","","","\u200b"],["Bank First Corporation:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Total capital (to risk-weighted assets)","\u200b","$","387,814","","12.2","%","\u200b","253,689","","8.0","%","332,967","","10.5","%","\u200b","N/A","","N/A","\u200b"],["Tier I capital (to risk-weighted assets)","\u200b","\u200b","341,634","","10.8","%","\u200b","190,627","","6.0","%","269,545","","8.5","%","\u200b","N/A","","N/A","\u200b"],["Common equity tier I capital (to risk-weighted assets)","\u200b","\u200b","341,634","","10.8","%","\u200b","142,700","","4.5","%","221,978","","7.0","%","\u200b","N/A","","N/A","\u200b"],["Tier I capital (to average assets)","\u200b","\u200b","341,634","","9.7","%","\u200b","140,992","","4.0","%","140,992","","4.0","%","\u200b","N/A","","N/A","\u200b"],["Bank First, N.A:","\u200b","","\u200b","","\u200b","","\u200b","\u200b","","\u200b","","\u200b","","\u200b","","\u200b","\u200b","","\u200b","\u200b"],["Total capital (to risk-weighted assets)","\u200b","$","372,312","","11.8","%","\u200b","253,504","","8.0","%","332,724","","10.5","%","\u200b","316,880","","10.0","%"],["Tier I capital (to risk-weighted assets)","\u200b","\u200b","349,632","","11.0","%","\u200b","190,128","","6.0","%","269,348","","8.5","%","\u200b","253,504","","8.0","%"],["Common equity tier I capital (to risk-weighted assets)","\u200b","\u200b","349,632","","11.0","%","\u200b","142,596","","4.5","%","221,816","\u200b","7.0","%","\u200b","205,972","\u200b","6.5","%"],["Tier I capital (to average assets)","\u200b","\u200b","349,632","","9.9","%","\u200b","140,887","","4.0","%","140,887","","4.0","%","\u200b","176,108","","5.0","%"],["At December 31, 2021","","\u200b","\u200b","","","","\u200b","","","","","","","","","\u200b","","","","\u200b"],["Bank First Corporation:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Total capital (to risk-weighted assets)","\u200b","$","297,467","","12.4","%","\u200b","N/A","","N/A","","N/A","","N/A","","\u200b","N/A","","N/A","\u200b"],["Tier I capital (to risk-weighted assets)","\u200b","\u200b","259,652","","10.9","%","\u200b","N/A","","N/A","","N/A","","N/A","","\u200b","N/A","","N/A","\u200b"],["Common equity tier I capital (to risk-weighted assets)","\u200b","\u200b","259,652","","10.9","%","\u200b","N/A","","N/A","","N/A","","N/A","","\u200b","N/A","","N/A","\u200b"],["Tier I capital (to average assets)","\u200b","\u200b","259,652","","9.3","%","\u200b","N/A","","N/A","","N/A","","N/A","","\u200b","N/A","","N/A","\u200b"],["Bank First, N.A:","\u200b","","\u200b","","\u200b","","\u200b","\u200b","","","","","","\u200b","","\u200b","","","\u200b","\u200b"],["Total capital (to risk-weighted assets)","\u200b","$","291,994","","12.2","%","\u200b","191,339","","8.0","%","251,133","","10.50","%","\u200b","239,174","","10.0","%"],["Tier I capital (to risk-weighted assets)","\u200b","\u200b","271,679","","11.4","%","\u200b","143,505","","6.0","%","203,298","","8.50","%","\u200b","191,339","","8.0","%"],["Common equity tier I capital (to risk-weighted assets)","\u200b","\u200b","271,679","","11.4","%","\u200b","107,628","","4.5","%","167,422","\u200b","7.00","%","\u200b","155,463","\u200b","6.5","%"],["Tier I capital (to average assets)","\u200b","\u200b","271,679","","9.7","%","\u200b","111,825","","4.0","%","111,825","","4.00","%","\u200b","139,781","","5.0","%"]] [[/GREPCENT_TABLE]] ​ As previously mentioned, the Company carried $23.5 million of subordinated debt as of December 31, 2022 and $17.5 million of subordinated debt as of December 31, 2021, which is included in total capital for the Company in the tables above. 64 Table of Contents 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: [[GREPCENT_TABLE]] [["","\u25cf","Unused lines of credit"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25cf","Standby and direct pay letters of credit"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25cf","Credit card arrangements"]] [[/GREPCENT_TABLE]] ​ 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 occasionally expire without being drawn upon. Our off-balance sheet arrangements as of December 31, 2022 were as follows: ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Amounts of Commitments Expiring - By Period as of December 31, 2022"],["\u200b","\u200b","\u200b","\u200b","\u200b","Less Than","\u200b","One to","\u200b","Three to","\u200b","After Five"],["Other Commitments","","Total","","One Year","","Three Years","","Five Years","","Years"],["\u200b","\u200b","(dollars in thousands)"],["Unused lines of credit","\u200b","$","660,564","\u200b","$","299,202","\u200b","$","91,567","\u200b","$","52,037","\u200b","$","217,758"],["Standby and direct pay letters of credit","\u200b","","10,343","\u200b","","8,023","\u200b","","1,415","\u200b","","722","\u200b","","183"],["Credit card arrangements","\u200b","","17,364","\u200b","","\u2014","\u200b","","\u2014","\u200b","","\u2014","\u200b","","17,364"],["Total commitments","\u200b","$","688,271","\u200b","$","307,225","\u200b","$","92,982","\u200b","$","52,759","\u200b","$","235,305"]] [[/GREPCENT_TABLE]] ​ We closely monitor the amount of our remaining future commitments to borrowers in light of prevailing economic conditions and adjust these commitments as necessary. We will continue this process as new commitments are entered into or existing commitments are renewed. Effects of Inflation The effect of inflation on a financial institution differs significantly from the effect on an industrial company. While a financial institution’s operating expenses, particularly salary and employee benefits, are affected by general inflation, the asset and 65 Table of Contents liability structure of a financial institution consists largely of monetary items. Monetary items, such as cash, investments, loans, deposits and other borrowings, are those assets and liabilities which are or will be converted into a fixed number of dollars regardless of changes in prices. As a result, changes in interest rates have a more significant impact on a financial institution’s performance than does general inflation. For additional information regarding interest rates and changes in net interest income see “Quantitative and Qualitative Disclosures about Market Risk—Interest Rate Sensitivity.” Inflation may have impacts on the Bank’s customers, on businesses and consumers and their ability or willingness to invest, save or spend, and perhaps on their ability to repay loans. As such, there would likely be impacts on the general appetite of banking products and the credit health of the Bank’s customer base.