Bank First National Corp - FORM 10-Q

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EX-32.1 - EXHIBIT 32.1 - Bank First National Corp	tv507807_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Bank First National Corp	tv507807_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Bank First National Corp	tv507807_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number: 001-38676

BANK FIRST NATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

WISCONSIN		39-1435359
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

402 North 8^th Street, Manitowoc, Wisconsin		54220
(Address of principal executive offices)		(Zip Code)

(920) 652-3100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer x	Smaller reporting company x
	Emerging growth company x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares of the issuer’s common stock, par value $0.01, outstanding as of December 5, 2018 was 6,644,759 shares.

TABLE OF CONTENTS

		Page Number
Part I. Financial Information		3
ITEM 1.	Financial Statements	3
	Consolidated Balance Sheets – September 30, 2018 (unaudited) and December 31, 2017	3
	Consolidated Statements of Income – Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)	4
	Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)	5
	Consolidated Statements of Changes in Stockholders’ Equity – Nine Months Ended September 30, 2018 and 2017 (unaudited)	6
	Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2018 and 2017 (unaudited)	7
	Notes to Unaudited Consolidated Financial Statements	9
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	26
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	56
ITEM 4.	Controls and Procedures	58
Part II. Other Information		58
ITEM 1.	Legal Proceedings	58
ITEM 1A.	Risk Factors	58
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58
ITEM 3.	Defaults Upon Senior Securities	59
ITEM 4.	Mine Safety Disclosures	59
ITEM 5.	Other Information	59
ITEM 6.	Exhibits	60
Signatures		61

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS:

BANK FIRST NATIONAL CORPORATION

Consolidated Balance Sheets
(In thousands, except share and per share data)

	September 30, 2018			December 31, 2017
	(Unaudited)			(Audited)

Assets
Cash and due from banks	$	25,294		$	37,914
Interest-bearing deposits		8,307			15,186
Federal funds sold		1,715			48,877
Cash and cash equivalents		35,316			101,977
Securities held to maturity, at amortized cost ($40,129 and $39,808 fair value at September 30, 2018 and December 31, 2017, respectively)		40,882			39,991
Securities available for sale, at fair value		119,623			119,043
Loans held for sale		564			-
Loans, net		1,429,917			1,385,935
Premises and equipment, net		23,724			18,578
Goodwill		15,024			15,085
Other investments, at cost		4,900			7,226
Cash value of life insurance		24,027			23,722
Identifiable intangible assets, net		5,401			5,578
Other real estate owned (OREO)		4,892			6,270
Investment in minority-owned subsidiaries		22,887			21,515
Other assets		8,597			8,484
Total assets	$	1,735,754		$	1,753,404

Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing	$	398,226		$	436,638
Interest-bearing		1,088,244			1,070,004
Total deposits		1,486,470			1,506,642
Securities sold under repurchase agreements		7,298			47,568
Notes payable		48,000			8,500
Subordinated notes		11,500			11,500
Other liabilities		13,353			17,466
Total liabilities		1,566,621			1,591,676
Stockholders' equity:
Serial preferred stock - $0.01 par value Authorized - 5,000,000 shares		-			-
Common stock - $0.01 par value Authorized - 20,000,000 shares Issued - 7,368,083 shares as of September 30, 2018 and December 31, 2017
Outstanding - 6,659,021 shares at September 30, 2018 and 6,805,684 shares at December 31, 2017		74			74
Additional paid-in capital		27,455			27,528
Retained earnings		162,075			145,879
Treasury stock, at cost - 709,062 shares at September 30, 2018 and 562,399 shares at December 31, 2017		(18,965	)		(12,730	)
Accumulated other comprehensive income (loss)		(1,506	)		977
Total stockholders' equity		169,133			161,728
Total liabilities and stockholders' equity	$	1,735,754		$	1,753,404

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

BANK FIRST NATIONAL CORPORATION

Consolidated Statements of Income

(In thousands, except share and per share data) (Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2018			2017			2018		2017

Interest income:
Loans, including fees	$	18,054		$	11,450		$	53,668	$	32,742
Securities:
Taxable		781			436			2,196		1,307
Tax-exempt		428			406			1,342		1,203
Other		247			337			985		790
Total interest income		19,510			12,629			58,191		36,042
Interest expense:
Deposits		3,360			1,667			8,564		4,566
Securities sold under repurchase agreements		69			50			293		189
Borrowed funds		545			281			1,748		679
Total interest expense		3,974			1,998			10,605		5,434
Net interest income		15,536			10,631			47,586		30,608
Provision for loan loss		800			255			2,185		635
Net interest income after provision for loan loss		14,736			10,376			45,401		29,973
Noninterest income:
Service charges		971			820			2,603		2,156
Income from Ansay		176			117			1,934		1,788
Income from UFS		660			614			1,855		1,711
Loan servicing income		260			197			1,106		1,045
Net gain on sales of mortgage loans		144			319			429		713
Noninterest income from strategic alliances		24			25			68		70
Other		273			155			983		478
Total noninterest income		2,508			2,247			8,978		7,961
Noninterest expense:
Salaries, commissions, and employee benefits		5,205			3,577			15,968		10,914
Occupancy		817			845			2,699		2,171
Data processing		856			752			2,720		2,091
Postage, stationery, and supplies		138			121			464		273
Net (gain) loss on sales and valuations of OREO		233			(32	)		331		(39	)
Net (gain) loss on sales of securities		(19	)		-			31		9
Advertising		36			54			142		124
Charitable contributions		169			170			864		391
Outside service fees		817			585			2,233		1,926
Amortization of intangibles		189			-			567		3
Other		1,267			902			3,730		2,113
Total noninterest expense		9,708			6,974			29,749		19,976
Income before provision for income taxes		7,536			5,649			24,630		17,958
Provision for income taxes		1,604			1,818			5,235		5,923
Net Income	$	5,932		$	3,831		$	19,395	$	12,035
Earnings per common share - basic	$	0.89		$	0.62		$	2.90	$	1.95
Earnings per common share - diluted	$	0.89		$	0.62		$	2.90	$	1.95
Dividends per common share	$	0.16		$	0.16		$	0.48	$	0.48

See accompanying notes to unaudited consolidated financial statements

ITEM 1. Financial Statements Continued:

BANK FIRST NATIONAL CORPORATION

Consolidated Statements of Comprehensive Income

(In thousands) (Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017

Net Income	$	5,932		$	3,831		$	19,395		$	12,035
Other comprehensive income (loss):
Unrealized gains (losses) on available for sale securities:
Unrealized holding gains (losses) arising during period		(1,029	)		35			(3,215	)		1,746
Amortization of unrealized holding gains on securities transferred from available for sale to held to maturity		(11	)		(25	)		(65	)		(80	)
Reclassification adjustment for (gains) losses included in net income		(19	)		-			31			9
Income tax benefit (expense)		222			(4	)		766			(657	)
Total other comprehensive income (loss)		(837	)		6			(2,483	)		1,018
Comprehensive income	$	5,095		$	3,837		$	16,912		$	13,053

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

BANK FIRST NATIONAL CORPORATION

Consolidated Statement of Changes in Stockholders’ Equity

(In thousands, except per share data) (Unaudited)

														Accumulated
	Serial				Additional									Other			Total
	Preferred		Common		Paid-in			Retained			Treasury			Comprehensive			Stockholders'
	Stock		Stock		Capital			Earnings			Stock			Income (Loss)			Equity
			(In Thousands, except per share amounts)

Balance at January 1, 2017	$	-	$	67	$	2,828		$	134,773		$	(10,437	)	$	292		$	127,523
Net income		-		-		-			12,035			-			-			12,035
Other comprehensive income		-		-		-			-			-			1,018			1,018
Purchase of treasury stock		-		-		-			-			(3,588	)		-			(3,588	)
Sale of treasury stock		-		-		-			-			565			-			565
Cash dividends ($0.48 per share)		-		-		-			(2,959	)		-			-			(2,959	)
Amortization of stock-based compensation		-		-		338			-			-			-			338
Vesting of restricted stock awards		-		-		(442	)		-			442			-			-

Balance at September 30, 2017	$	-	$	67	$	2,724		$	143,849		$	(13,018	)	$	1,310		$	134,932

Balance at January 1, 2018	$	-	$	74	$	27,528		$	145,879		$	(12,730	)	$	977		$	161,728
Net income		-		-		-			19,395			-			-			19,395
Other comprehensive loss		-		-		-			-			-			(2,483	)		(2,483	)
Purchase of treasury stock		-		-		-			-			(8,065	)		-			(8,065	)
Sale of treasury stock		-		-		-			-			1,347			-			1,347
Cash dividends ($0.48 per share)		-		-		-			(3,199	)		-			-			(3,199	)
Amortization of stock-based compensation		-		-		410			-			-			-			410
Vesting of restricted stock awards		-		-		(483	)		-			483			-			-

Balance at September 30, 2018	$	-	$	74	$	27,455		$	162,075		$	(18,965	)	$	(1,506	)	$	169,133

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

BANK FIRST NATIONAL CORPORATION

Consolidated Statements of Cash Flows

(In thousands) (Unaudited)

	Nine Months Ended September 30,
	2018			2017
	(In Thousands)
Cash flows from operating activities:
Net income	$	19,395		$	12,035
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of securities		315			535
Depreciation and amortization of premises and equipment		847			729
Amortization of intangibles		567			3
Accretion of purchase accounting valuations		(4,921	)		-
Provision for loan losses		2,185			635
Amortization of stock-based compensation		410			338
Net change in deferred loan fees and costs		(205	)		71
Change in fair value of mortgage servicing rights (MSR) and other		(151	)		19
Proceeds from sales of mortgage loans		25,332			41,260
Originations of mortgage loans held for sale		(25,706	)		(41,644	)
Gain on sales of mortgage loans		(429	)		(713	)
Realized loss on sale of securities available for sale		31			9
Gain on sale and disposal of premises and equipment		(311	)		-
(Gain) loss on sale of OREO and valuation allowance		331			(39	)
Undistributed income of UFS joint venture		(1,855	)		(1,711	)
Undistributed income of Ansay joint venture		(1,934	)		(1,788	)
Net earnings on life insurance		(305	)		(407	)
Decrease (increase) in other assets		683			(1,020	)
Increase (decrease) in other liabilities		(4,113	)		(2,345	)
Net cash provided by operating activities		10,166			5,967
Cash flows from investing activities:
Sales of securities available for sale		4,467			37,152
Maturities, paydowns, and calls of:
Securities available for sale		8,284			5,996
Securities held to maturity		2,060			1,810
Purchases of:
Securities available for sale		(16,878	)		(15,160	)
Securities held to maturity		(2,968	)		(10,852	)
Net increase in loans		(42,259	)		(76,997	)
Dividends received from UFS		1,237			653
Dividends received from Ansay		1,180			618
Proceeds from sale of OREO		1,815			39
Net sales of other investments		2,326			500
Proceeds from sale of premises and equipment		435			-
Purchases of premises and equipment		(6,117	)		(1,616	)
Net cash used in investing activities		(46,418	)		(57,857	)

ITEM 1. Financial Statements Continued:

BANK FIRST NATIONAL CORPORATION

Consolidated Statements of Cash Flows (Continued)

(In thousands) (Unaudited)

	Nine Months ended September 30,
	2018			2017
	(In Thousands)
Cash flows from financing activities:
Net (decrease) increase in deposits	$	(19,722	)	$	14,364
Net decrease in securities sold under repurchase agreements		(40,270	)		(37,409	)
Proceeds from advances of notes payable		1,154,600			411,500
Repayment of notes payable		(1,115,100	)		(376,500	)
Dividends paid		(3,199	)		(2,959	)
Proceeds from sales of common stock		1,347			565
Repurchase of common stock		(8,065	)		(3,588	)
Net cash (used in) provided by financing activities		(30,409	)		5,973
Net increase (decrease) in cash and cash equivalents		(66,661	)		(45,917	)
Cash and cash equivalents at beginning of period		101,977			80,157
Cash and cash equivalents at end of period	$	35,316		$	34,240

Supplemental disclosures of cash flow information:

Cash paid during the period for:
Interest	$	10,197		$	5,085
Income taxes		3,675			5,750
Supplemental schedule of noncash activities:
Loans transferred to OREO		768			25
Mortgage servicing rights resulting from sale of loans		239			352
Amortization of unrealized holding gains on securities transferred from available for sale to held to maturity recognized in other comprehensive income, net of tax		(51	)		(49	)
Change in unrealized loss on investment securities available for sale, net of tax		(2,515	)		1,061

See accompanying notes to consolidated financial statements.

BANK FIRST NATIONAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

NOTE 1 – BASIS OF PRESENTATION

Bank First National Corporation (the “Company”) provides a variety of financial services to individual and corporate customers through its wholly owned subsidiary, Bank First, N.A. (the “Bank”). The Bank operates as a full-service financial institution with a primary market area including, but not limited to, the counties in which the Bank’s branches are located. The Bank has eighteen locations located in Manitowoc, Outagamie, Brown, Winnebago, Sheboygan, Waupaca and Barron counties in Wisconsin. The Company is subject to the regulations of certain federal agencies and undergoes periodic examinations by those regulatory authorities.

These interim unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures required by (GAAP) have been omitted or abbreviated. These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes included in the Company’s Registration Statement on Form 10 Amendment No.1 (Registration No. 001-38676) filed with the Securities and Exchange Commission (“SEC”) on October 17, 2018 (the “Registration Statement”).

The unaudited consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The results for interim periods are not necessarily indicative of results for a full year.

Subsequent Events

The Company has evaluated, for consideration of recognition or disclosure, subsequent events that occurred through the date of issuance of these financial statements. The Company has determined that there were no subsequent events other than that which is described below that occurred after September 30, 2018, but prior to the issuance of these financial statements that would have a material impact on the Company’s consolidated financial statements.

On October 16, 2018, the Company declared a regular quarterly dividend of $0.20 per share to be paid on January 7, 2019, to stockholders of record as of December 21, 2018, totaling approximately $1.3 million.

Critical Accounting Policies and Estimates

Preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, the allowance for loan losses (ALL), valuation of loans in acquisition transactions, useful lives for depreciation and amortization, fair value of financial instruments, other-than-temporary impairment calculations, valuation of deferred tax assets, uncertain income tax positions and contingencies. Estimates that are particularly susceptible to significant change for the Company include the determination of the ALL, the determination and assessment of deferred tax assets and liabilities, and the valuation of loans acquired in acquisition transactions; therefore, these are critical accounting policies. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: external market factors such as market interest rates and employment rates, changes to operating policies and procedures, changes in applicable banking or tax regulations, and changes to deferred tax estimates. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period presented.

There have been no material changes or developments with respect to the assumptions or methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as previously disclosed in the Company’s Registration Statement.

Recent Accounting Developments Adopted

In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09, Compensation — Stock Compensation (Topic 718). ASU 2017-09 applies to entities that change the terms or conditions of a share-based payment award to provide clarity and reduce diversity in practice as well as cost and complexity when applying the guidance in Topic 718 to the modification to the terms and conditions of a share-based payment award. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The Company adopted the updated guidance effective January 1, 2018 with no material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, to clarify the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets versus businesses. The update narrows the definition of a business by adding three principal clarifications: (1) if substantially all the fair value of the gross assets in the asset group is concentrated in either a single identifiable asset or group of similar identifiable assets the transaction does not involve a business, (2) if the asset group does not include a minimum of an input and a substantive process, it does not represent a business, and (3) if the integrated set of activities (including its inputs and processes) does not create, or have the ability to create, goods or services to customers, investment income (e.g., dividends or interest) or other revenue, it is not a business. The overall intention is to provide consistency in applying the guidance and make the definition of a business more operable. This update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and should be applied prospectively. The Company adopted the updated guidance effective January 1, 2018 with no material impact on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash to provide guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows to reduce diversity in practice. The amendment requires that a statement of cash flow explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash or restricted cash equivalents should be included in cash and cash equivalents when reconciling the beginning and end of period total amounts shown on the statement of cash flow. This amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and should be applied retrospectively to each period presented. The Company adopted the updated guidance effective January 1, 2018 with no material impact on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide guidance on specific cash flow issues, including: debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies, and distributions received from equity method investees. The amendments are effective for public business entities for fiscal years beginning after December 31, 2017, and interim periods within those fiscal years. The Company adopted the updated guidance effective January 1, 2018 with no material impact on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This amendment supersedes the guidance to classify equity securities with readily determinable fair values into different categories, requires equity securities to be measured at fair value with changes in the fair value recognized through net income, and simplifies the impairment assessment of equity investments without readily determinable fair values. The amendment also requires public business entities that are required to disclose the fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using the exit price notion. The amendment requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. This amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities are required to apply the amendment by means of a cumulative-effect adjustment as of the beginning of the fiscal year of adoption, with the exception of the amendment related to equity securities without readily determinable fair values, which should be applied prospectively to equity investments that exist as of the date of adoption. The Company adopted the updated guidance effective January 1, 2018 with no material impact on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), with several subsequent updates. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Topic 606 provides a five-step model to apply to revenue recognition, consisting of the following: (1) identify the contract; (2) identify the performance obligation in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when or as the performance obligation is satisfied. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company adopted the updated guidance using the modified retrospective approach effective January 1, 2018, with no material impact on its consolidated financial statements.

Recently Issued Not Yet Effective Accounting Standards

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The update will require lessees to recognize right-of-use assets and lease liabilities for all leases not considered short term leases. The provisions of the update also include (a) defining direct costs to only include those incremental costs that would not have been incurred if the lease had not been entered into, (b) circumstances under which the transfer contract in a sale-leaseback transaction should be accounted for as the sale of an asset by the seller-lessee and the purchase of an asset by the buyer-lessor, and (c) additional disclosure requirements. The provisions of this update become effective for interim and annual periods beginning after December 15, 2018. The Company’s assets and liabilities will increase based on the present value of the remaining leases in place at the adoption date; however, this is not expected to be material to the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as, the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will become effective for interim and annual periods beginning after December 15, 2019. Management is currently evaluating the potential impact of this update, although the general expectation in the banking industry is that the implementation of this standard will result in higher required balances in the ALL.

In March 2017, the FASB issued ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount, which continue to be amortized to maturity. Public business entities must prospectively apply the amendments in this ASU to annual periods beginning after December 15, 2018, including interim periods. The adoption of this update will not have a material impact on the Company’s consolidated financial statements.

NOTE 2 – ACQUISITIONS

On October 27, 2017, the Company completed a merger with Waupaca Bancorporation, Inc. (“Waupaca”), a bank holding company headquartered in Waupaca, Wisconsin, pursuant to the Agreement and Plan of Bank Merger, dated as of May 11, 2017 and as amended on July 20, 2017, by and among the Company, BFNC Merger Sub, LLC, a wholly-owned subsidiary of the Company, and Waupaca, whereby Waupaca merged with and into the Company, and First National Bank, Waupaca’s wholly-owned banking subsidiary, was merged with and into the Bank. Waupaca’s principal activity was the ownership and operation of First National Bank, a national banking institution that operated eight (8) branches in Wisconsin at the time of closing. The merger consideration totaled approximately $78,060,000, 70% of which was distributed in cash and 30% of which was distributed in the form of Company common stock.

For more information concerning this acquisition, see “Note 2 – Acquisition” in the Company’s audited consolidated financial statements included in the Company’s Registration Statement.

NOTE 3 – EARNINGS PER SHARE

Basic earnings per share are computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share are computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding and potential common shares using the treasury stock method. There were no potential common shares during the periods presented.

A reconciliation of the numerators and denominators of the earnings per common share, which equals earnings per common share assuming dilution, for the three and nine months ended September 30, 2018 and 2017, are presented below:

	Three months ended September 30,				Nine months ended September 30,
	2018		2017		2018		2017
Weighted-average common shares outstanding		6,659,021		6,143,576		6,682,472		6,176,329
Net income	$	5,932	$	3,831	$	19,395	$	12,035
Basic and diluted earnings per share	$	0.89	$	0.62	$	2.90	$	1.95

NOTE 4 – SECURITIES

The Company’s securities available for sale as of September 30, 2018 and December 31, 2017 is summarized as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value

September 30, 2018
U.S. Treasury securities	$	500	$	-	$	-		$	500
Obligations of states and political subdivisions		52,069		378		(388	)		52,059
Mortgage-backed securities		52,440		56		(1,726	)		50,770
Corporate notes		16,681		-		(387	)		16,294
Total available for sale securities	$	121,690	$	434	$	(2,501	)	$	119,623

December 31, 2017
U.S. Treasury securities	$	499	$	-	$	(1	)	$	498
Obligations of states and political subdivisions		58,026		1,467		(103	)		59,390
Mortgage-backed securities		42,800		157		(322	)		42,635
Corporate notes		16,602		-		(82	)		16,520
Total available for sale securities	$	117,927	$	1,624	$	(508	)	$	119,043

The Company’s securities held to maturity as of September 30, 2018 and December 31, 2017 is summarized as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value

September 30, 2018
U.S. Treasury securities	$	28,408	$	-	$	(755	)	$	27,653
Obligations of states and political subdivisions		12,474		3		(1	)		12,476
Total held to maturity securities	$	40,882	$	3	$	(756	)	$	40,129

December 31, 2017
U.S. Treasury securities	$	25,426	$	-	$	(157	)	$	25,269
Obligations of states and political subdivisions		14,565		5		(31	)		14,539
Total held to maturity securities	$	39,991	$	5	$	(188	)	$	39,808

The following table shows the fair value and gross unrealized losses of securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

	Less Than 12 Months					Greater Than 12 Months					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses

September 30, 2018 - Available for Sale
U.S. Treasury securities	$	-	$	-		$	-	$	-		$	-	$	-
Obligations of states and political subdivisions		21,188		(359	)		2,142		(29	)		23,330		(388	)
Mortgage-backed securities		43,066		(1,587	)		4,630		(139	)		47,696		(1,726	)
Corporate notes		12,390		(387	)		-		-			12,390		(387	)
Totals	$	76,644	$	(2,333	)	$	6,772	$	(168	)	$	83,416	$	(2,501	)

September 30, 2018 - Held to Maturity
U.S. Treasury securities	$	27,653	$	(755	)	$	-	$	-		$	27,653	$	(755	)
Obligations of states and political subdivisions		702		(1	)		-		-			702		(1	)
Totals	$	28,355	$	(756	)	$	-	$	-		$	28,355	$	(756	)

December 31, 2017 - Available for Sale
U.S. Treasury securities	$	498	$	(1	)	$	-	$	-		$	498	$	(1	)
Obligations of states and political subdivisions		3,700		(14	)		2,765		(89	)		6,465		(103	)
Mortgage-backed securities		29,696		(250	)		4,316		(72	)		34,012		(322	)
Corporate notes		12,642		(82	)		-		-			12,642		(82	)
Totals	$	46,536	$	(347	)	$	7,081	$	(161	)	$	53,617	$	(508	)

December 31, 2017 - Held to Maturity
U.S. Treasury securities	$	10,425	$	(50	)	$	12,281	$	(107	)	$	22,706	$	(157	)
Obligations of states and political subdivisions		1,609		(24	)		218		(7	)		1,827		(31	)
Totals	$	12,034	$	(74	)	$	12,499	$	(114	)	$	24,533	$	(188	)

As of September 30, 2018, the Company does not consider its securities with unrealized losses to be other-than-temporarily impaired, as the unrealized losses in each category have occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration. The Company has the intent and ability to hold its securities to maturity. There were no other-than-temporary impairments charged to earnings during the nine months ended September 30, 2018 or 2017.

The following is a summary of amortized cost and estimated fair value of securities by contractual maturity as of September 30, 2018. Contractual maturities will differ from expected maturities for mortgage-backed securities because borrowers may have the right to call or prepay obligations without penalties.

	Available for Sale				Held to Maturity
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	4,130	$	4,162	$	4,413	$	4,412
Due after one year through five years		17,312		17,149		13,297		13,157
Due after five years through ten years		14,656		14,525		19,392		18,780
Due after ten years		33,152		33,017		3,780		3,780
Subtotal		69,250		68,853		40,882		40,129
Mortgage-backed securities		52,440		50,770		-		-
Total	$	121,690	$	119,623	$	40,882	$	40,129

The following is a summary of the proceeds from sales of securities available for sale, as well as gross gains and losses for the nine months ended September 30, 2018 and 2017:

	2018		2017
Proceeds from sales of securities	$	4,467	$	37,152
Gross gains on sales		41		56
Gross losses on sales		72		65

NOTE 5 – LOANS, ALL AND CREDIT QUALITY

The following table presents total loans by portfolio segment and class of loan as of September 30, 2018 and December 31, 2017:

	September 30,			December 31,
	2018			2017

Commercial/industrial	$	314,379		$	263,787
Commercial real estate - owner occupied		420,727			418,928
Commercial real estate - non-owner occupied		233,442			225,290
Construction and development		68,137			75,907
Residential 1-4 family		364,325			377,141
Consumer		34,365			33,471
Other		6,795			3,511
Subtotals		1,442,170			1,398,035
ALL		(11,560	)		(11,612	)
Deferred loan fees and costs		(693	)		(488	)
Loans, net	$	1,429,917		$	1,385,935

The ALL by loan type as of September 30, 2018 and December 31, 2017 is summarized as follows:

	Commercial / Industrial			Commercial Real Estate - Owner Occupied			Commercial Real Estate - Non - Owner Occupied			Construction and Development			Residential 1-4 Family			Consumer			Other			Unallocated			Total

ALL - January 1, 2018	$	2,362		$	2,855		$	1,987		$	945		$	2,728		$	191		$	23		$	521		$	11,612
Charge-offs		(35	)		(2,344	)		-			(83	)		(128	)		(7	)		(29	)		-			(2,626	)
Recoveries		2			138			3			-			228			10			8			-			389
Provision		326			2,591			(118	)		69			(419	)		(11	)		32			(285	)		2,185
ALL - September 30, 2018		2,655			3,240			1,872			931			2,409			183			34			236			11,560

ALL ending balance individually evaluated for impairment		-			353			-			-			160			-			-			-			513

ALL ending balance collectively evaluated for impairment	$	2,655		$	2,887		$	1,872		$	931		$	2,249		$	183		$	34		$	236		$	11,047

Loans outstanding - September 30, 2018	$	314,379		$	420,727		$	233,442		$	68,137		$	364,325		$	34,365		$	6,795		$	-		$	1,442,170

Loans ending balance individually evaluated for impairment		-			5,397			-			-			704			-			-			-			6,101

Loans ending balance collectively evaluated for impairment	$	314,379		$	415,330		$	233,442		$	68,137		$	363,621		$	34,365		$	6,795		$	-		$	1,436,069

	Commercial / Industrial			Commercial Real Estate - Owner Occupied		Commercial Real Estate - Non - Owner Occupied			Construction and Development			Residential 1-4 Family			Consumer			Other			Unallocated			Total

ALL - January 1, 2017	$	1,905		$	2,576	$	1,900		$	727		$	2,685		$	189		$	84		$	662		$	10,728
Charge-offs		(4	)		-		(1	)		(15	)		(141	)		(7	)		(50	)		-			(218	)
Recoveries		7			-		-			-			36			1			3			-			47
Provision		454			279		88			233			148			8			(14	)		(141	)		1,055
ALL - December 31, 2017		2,362			2,855		1,987			945			2,728			191			23			521			11,612

ALL ending balance individually evaluated for impairment		-			121		-			-			160			-			-			-			281

ALL ending balance collectively evaluated for impairment	$	2,362		$	2,734	$	1,987		$	945		$	2,568		$	191		$	23		$	521		$	11,331

Loans outstanding - December 31, 2017	$	263,787		$	418,928	$	225,290		$	75,907		$	377,141		$	33,471		$	3,511		$	-		$	1,398,035

Loans ending balance individually evaluated for impairment		-			275		-			-			709			-			-			-			984

Loans ending balance collectively evaluated for impairment	$	263,787		$	418,653	$	225,290		$	75,907		$	376,432		$	33,471		$	3,511		$	-		$	1,397,051

The Company’s past due loans as of September 30, 2018 is summarized as follows:

			90 Days
	30-89 Days		or more
	Past Due Accruing		Past Due, Accruing		Non-Accrual		Total

Commercial/industrial	$	319	$	756	$	7,506	$	8,581
Commercial real estate - owner occupied		172		7,261		11,034		18,467
Commercial real estate - non-owner occupied		462		62		433		957
Construction and development		-		49		43		92
Residential 1-4 family		454		474		1,073		2,001
Consumer		51		15		31		97
Other		-		-		-		-
	$	1,458	$	8,617	$	20,120	$	30,195

The Company’s past due loans as of December 31, 2017 is summarized as follows:

			90 Days
	30-89 Days		or more
	Past Due Accruing		Past Due, Accruing		Non-Accrual		Total

Commercial/industrial	$	740	$	15	$	6,473	$	7,228
Commercial real estate - owner occupied		4,285		2,016		7,253		13,554
Commercial real estate - non-owner occupied		239		-		712		951
Construction and development		-		-		758		758
Residential 1-4 family		1,470		448		2,878		4,796
Consumer		38		7		53		98
Other		-		-		-		-
	$	6,772	$	2,486	$	18,127	$	27,385

We utilize a numerical risk rating system for commercial relationships. All other types of relationships (ex: residential, consumer, other) are assigned a “Pass” rating, unless they have fallen 90 days past due or more, at which time they receive a rating of 7. The Company uses split ratings for government guaranties on loans. The portion of a loan that is supported by a government guaranty is included with other Pass credits.

The determination of a commercial loan risk rating begins with completion of a matrix, which assigns scores based on the strength of the borrower’s debt service coverage, collateral coverage, balance sheet leverage, industry outlook, and customer concentration. A weighted average is taken of these individual scores to arrive at the overall rating. This rating is subject to adjustment by the loan officer based on facts and circumstances pertaining to the borrower. Risk ratings are subject to independent review.

Commercial borrowers with ratings between 1 and 5 are considered Pass credits, with 1 being most acceptable and 5 being just above the minimum level of acceptance.

Commercial borrowers rated 6 have potential weaknesses which may jeopardize repayment ability.

Borrowers rated 7 have a well-defined weakness or weaknesses such as the inability to demonstrate significant cash flow for debt service based on analysis of the company’s financial information. These loans remain on accrual status provided full collection of principal and interest is reasonably expected. Otherwise they are deemed impaired and placed on nonaccrual status. Borrowers rated 8 are the same as 7 rated credits with one exception: collection or liquidation in full is not probable.

The breakdown of loans by risk rating as of September 30, 2018 is as follows:

		Pass (1-5)		6		7		8		Total

Commercial/industrial	$	298,321	$	3,007	$	13,051	$	-	$	314,379
Commercial real estate - owner occupied		371,373		5,309		44,021		24		420,727
Commercial real estate - non-owner occupied		230,031		-		3,411		-		233,442
Construction and development		68,074		-		63		-		68,137
Residential 1-4 family		359,672		671		3,979		3		364,325
Consumer		34,296		-		69		-		34,365
Other		6,795		-		-		-		6,795

	$	1,368,562	$	8,987	$	64,594	$	27	$	1,442,170

The breakdown of loans by risk rating as of December 31, 2017 is as follows:


	Pass (1-5)		6		7		8		Total

Commercial/industrial	$	247,576	$	1,222	$	14,989	$	-	$	263,787
Commercial real estate - owner occupied		373,046		1,113		44,522		247		418,928
Commercial real estate - non-owner occupied		221,844		1,382		2,064		-		225,290
Construction and development		68,998		-		6,909		-		75,907
Residential 1-4 family		370,683		-		6,456		2		377,141
Consumer		33,426		-		43		2		33,471
Other		3,511		-		-		-		3,511

	$	1,319,084	$	3,717	$	74,983	$	251	$	1,398,035

The ALL represents management’s estimate of probable and inherent credit losses in the loan portfolio. Estimating the amount of the ALL requires the exercise of significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogenous loans based on historical loss experience, and consideration of other qualitative factors such as current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset on the consolidated balance sheets. Loan losses are charged off against the ALL, while recoveries of amounts previously charged off are credited to the ALL. A provision for loan losses (PFLL) is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

The ALL consists of specific reserves for certain individually evaluated impaired loans and general reserves for collectively evaluated non-impaired loans. Specific reserves reflect estimated losses on impaired loans from management’s analyses developed through specific credit allocations. The specific reserves are based on regular analyses of impaired, non-homogenous loans greater than $250,000. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific loans, including estimating the amount and timing of future cash flows and collateral values. The general reserve is based in part on the Bank’s historical loss experience which is updated quarterly. The general reserve portion of the ALL also includes consideration of certain qualitative factors such as 1) changes in lending policies and/or underwriting practices, 2) national and local economic conditions, 3) changes in portfolio volume and nature, 4) experience, ability and depth of lending management and other relevant staff, 5) levels of and trends in past-due and nonaccrual loans and quality, 6) changes in loan review and oversight, 7) impact and effects of concentrations and 8) other issues deemed relevant.

There are many factors affecting ALL; some are quantitative while others require qualitative judgment. The process for determining the ALL (which management believes adequately considers potential factors which might possibly result in credit losses) includes subjective elements and, therefore, may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses could be required that could adversely affect the Company’s earnings or financial position in future periods. Allocations of the ALL may be made for specific loans but the entire ALL is available for any loan that, in management’s judgment, should be charged off or for which an actual loss is realized. As an integral part of their examination process, various regulatory agencies review the ALL as well. Such agencies may require that changes in the ALL be recognized when such regulators’ credit evaluations differ from those of management based on information available to the regulators at the time of their examinations.

A summary of impaired loans individually evaluated as of September 30, 2018 is as follows:

	Commercial/ Industrial		Commercial Real Estate - Owner Occupied		Commercial Real Estate - Non - Owner Occupied		Construction and Development		Residential 1-4 Family		Consumer		Other		Unallocated		Total

With an allowance recorded:
Recorded investment	$	-	$	2,100	$	-	$	-	$	523	$	-	$	-	$	-	$	2,623
Unpaid principal balance		-		2,100		-		-		523		-		-		-		2,623
Related allowance		-		353		-		-		160		-		-		-		513

With no related allowance recorded:
Recorded investment	$	-	$	3,297	$	-	$	-	$	181	$	-	$	-	$	-	$	3,478
Unpaid principal balance		-		3,297		-		-		181		-		-		-		3,478
Related allowance		-		-		-		-		-		-		-		-		-

Total:
Recorded investment	$	-	$	5,397	$	-	$	-	$	704	$	-	$	-	$	-	$	6,101
Unpaid principal balance		-		5,397		-		-		704		-		-		-		6,101
Related allowance		-		353		-		-		160		-		-		-		513

Average recorded investment	$	-	$	2,836	$	-	$	-	$	707	$	-	$	-	$	-	$	3,545

A summary of impaired loans individually evaluated as of December 31, 2017 is as follows:

	Commercial/ Industrial		Commercial Real Estate - Owner Occupied		Commercial Real Estate - Non - Owner Occupied		Construction and Development		Residential 1-4 Family		Consumer		Other		Unallocated		Total

With an allowance recorded:
Recorded investment	$	-	$	275	$	-	$	-	$	523	$	-	$	-	$	-	$	798
Unpaid principal balance		-		275		-		-		523		-		-		-		798
Related allowance		-		121		-		-		160		-		-		-		281

With no related allowance recorded:
Recorded investment	$	-	$	-	$	-	$	-	$	186	$	-	$	-	$	-	$	186
Unpaid principal balance		-		-		-		-		186		-		-		-		186
Related allowance		-		-		-		-		-		-		-		-		-

Total:
Recorded investment	$	-	$	275	$	-	$	-	$	709	$	-	$	-	$	-	$	984
Unpaid principal balance		-		275		-		-		709		-		-		-		984
Related allowance		-		121		-		-		160		-		-		-		281

Average recorded investment	$	946	$	138	$	-	$	13	$	916	$	-	$	-	$	-	$	2,013

The following table presents loans acquired with deteriorated credit quality as of September 30, 2018 and December 31, 2017. No loans in this table had a related allowance at either date, and therefore, the below disclosures were not expanded to include loans with and without a related allowance.

	September 30, 2018				December 31, 2017
	Recorded Investment		Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance
Commercial & Industrial	$	458	$	462	$	628	$	738
Commercial real estate - owner occupied		1,791		2,080		2,609		2,951
Commercial real estate - non-owner occupied		239		481		712		1,213
Construction and development		402		446		758		884
Residential 1-4 family		1,671		2,185		2,153		3,108
Consumer		1		6		6		16
Other		-		-		-		-
	$	4,562	$	5,660	$	6,866	$	8,910

Due to the nature of these loan relationships, prepayment expectations have not been considered in the determination of future cash flows. Management regularly monitors these loan relationships, and if information becomes available that indicates expected cash flows will differ from initial expectations, it may necessitate reclassification between accretable and non-accretable components of the original discount calculation.

The following table represents the change in the accretable and non-accretable components of discounts on loans acquired with deteriorated credit quality for the period ended September 30, 2018:

	Accretable			Non-accretable
	discount			discount

Balance at beginning of period	$	583		$	800
Acquired balance, net		-			-
Reclassifications between accretable and non-accretable		15			(15	)
Accretion to loan interest income		(110	)		-
Disposals of loans		(135	)		(40	)
Balance at end of period	$	353		$	745

A troubled debt restructuring (TDR) 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. 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, it remains there until a sufficient period of performance under the restructured terms has occurred at which time it is returned to accrual status, generally six months. The Company did not have any specific reserves for TDR’s as of September 30, 2018 or December 31, 2017, and none of them have subsequently defaulted.

NOTE 6 – MORTGAGE SERVICING RIGHTS

Loans serviced for others are not included in the accompanying consolidated balance sheets. Mortgage servicing rights (MSRs) are recognized as separate assets when loans sold in the secondary market are sold with servicing retained. The Company utilizes a third-party consulting firm to determine an accurate assessment of the mortgage servicing rights fair value. The third-party firm collects relevant data points from numerous sources. Some of these data points relate directly to the pricing level or relative value of the mortgage servicing while other data points relate to the assumptions used to derive fair value. In addition, the valuation evaluates specific collateral types, and current and historical performance of the collateral in question. The valuation process focuses on the non-distressed secondary servicing market, common industry practices and current regulatory standards. The primary determinants of the fair value of mortgage servicing rights are servicing fee percentage, ancillary income, expected loan life or prepayment speeds, discount rates, costs to service, delinquency rates, foreclosure losses and recourse obligations. The valuation data also contains interest rate shock analyses for monitoring fair value changes in differing interest rate environments.

Following is an analysis of activity in the mortgage servicing rights asset:

	Nine Months Ended			Year Ended
	September 30, 2018			December 31, 2017

Fair value at beginning of year	$	2,610		$	2,406
Servicing asset additions		239			428
Loan payments and payoffs		(349	)		(440	)
Changes in valuation inputs and assumptions used in the valuation model		500			216
Amount recognized through earnings		390			204
Fair value at end of period	$	3,000		$	2,610

Unpaid principal balance of loans serviced for others	$	313,154		$	316,253
Mortgage servicing rights as a percent of loans serviced for others		0.96			0.83

The primary economic assumptions utilized by the Company in measuring the value of MSRs were constant prepayment speeds of 8.6 and 9.5 months as of September 30, 2018 and December 31, 2017, respectively, and discount rates of 10% as of both period ends.

NOTE 7 – NOTES PAYABLE

From time to time the Company utilizes short-term Federal Home Loan Bank (FHLB) advances to fund liquidity. As of September 30, 2018, outstanding balances in overnight borrowings from the FHLB totaled $46 million. There were no advances outstanding from the FHLB as of December 31, 2017.

The Company maintains a $5 million line of credit with a commercial bank. At September 30, 2018 and December 31, 2017, the Company had outstanding balances on this note of $2 million and $5 million, respectively. The note requires monthly payments of interest at a variable rate, and is due in full on May 25, 2019.

The Company maintains a $5 million line of credit with another commercial bank. There were no outstanding balances on this note at September 30, 2018 or December 31, 2017.

During September 2017 the Company entered into a term-loan agreement with a commercial bank under which it borrowed $3.5 million which was outstanding as of December 31, 2017. The borrowings bore interest at a variable rate. This note was paid in full during July, 2018.

NOTE 8 – SUBORDINATED NOTES

During September 2017, the Company entered into subordinated note agreements with three separate commercial banks. The Company borrowed $11.5 million under these agreements as of September 30, 2018 and December 31, 2017. These notes were all issued with 10-year maturities, carry interest at a variable rate payable quarterly, are callable on or after the sixth anniversary of the issuance dates, and qualify for Tier 2 capital for regulatory purposes.

NOTE 9 – REGULATORY MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.

Under regulatory guidance for non-advanced approaches institutions, the Bank is required to maintain minimum amounts and ratios of common equity Tier I capital to risk-weighted assets. Additionally, under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital. As of September 30, 2018 and December 31, 2017, the Bank and Company met all capital adequacy requirements to which they are subject.

Beginning in 2016, an additional conservation buffer was added to the minimum requirements for capital adequacy purposes, subject to a three year phase-in period. As of September 30, 2018 and December 31, 2017, the buffer was 1.88% and 1.25%, respectively. The capital conservative buffer will be fully phased in January 1, 2019 at 2.50%.

Actual and required capital amounts and ratios are presented below at period-end:

																To Be Well
											Minimum Capital					Capitalized Under
						For Capital					Adeqaucy with					Prompt Corrective
	Actual					Adequacy Purposes					Capital Buffer					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio

September 30, 2018
Total capital (to risk-weighted assets):
Company	$	176,314		11.04	%	$	127,802		8.00	%	$	157,756		9.88	%		NA		NA
Bank	$	175,411		11.00	%	$	127,596		8.00	%	$	157,502		9.88	%	$	159,495		10.00	%
Tier 1 capital (to risk-weighted assets):
Company	$	153,214		9.59	%	$	95,852		6.00	%	$	125,805		7.88	%		NA		NA
Bank	$	163,851		10.27	%	$	95,697		6.00	%	$	125,603		7.88	%	$	127,596		8.00	%
Common Equity Tier 1 capital (to risk-weighted assets):
Company	$	153,214		9.59	%	$	71,889		4.50	%	$	101,842		6.38	%		NA		NA
Bank	$	163,851		10.27	%	$	71,773		4.50	%	$	101,678		6.38	%	$	103,672		6.50	%
Tier 1 capital (to average assets):
Company	$	153,214		8.73	%	$	70,209		4.00	%		NA		NA			NA		NA
Bank	$	163,851		9.36	%	$	70,037		4.00	%		NA		NA		$	87,546		5.00	%
December 31, 2017
Total capital (to risk-weighted assets):
Company	$	165,809		10.80	%	$	122,868		8.00	%	$	142,066		9.25	%		NA		NA
Bank	$	171,642		11.20	%	$	122,643		8.00	%	$	141,806		9.25	%	$	153,304		10.00	%
Tier 1 capital (to risk-weighted assets):
Company	$	142,697		9.29	%	$	92,151		6.00	%	$	111,349		7.25	%		NA		NA
Bank	$	160,030		10.44	%	$	91,982		6.00	%	$	111,145		7.25	%	$	122,643		8.00	%
Common Equity Tier 1 capital (to risk-weighted assets):
Company	$	142,697		9.29	%	$	69,113		4.50	%	$	88,311		5.75	%		NA		NA
Bank	$	160,030		10.44	%	$	68,987		4.50	%	$	88,150		5.75	%	$	99,647		6.50	%
Tier 1 capital (to average assets):
Company	$	142,697		8.47	%	$	67,415		4.00	%		NA		NA			NA		NA
Bank	$	160,030		9.56	%	$	66,984		4.00	%		NA		NA		$	83,780		5.00	%

NOTE 10 – COMMITMENTS

The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate-lock commitments). Rate-lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans. Fair value is based on fees currently charged to enter into similar agreements and for fixed rate commitments also considers the difference between current levels of interest rates and committed rates. The notional amount of rate-lock commitments at September 30, 2018 and December 31, 2017, respectively, was $7,031,000 and $3,186,000.

The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

The Company’s exposure to credit loss is represented by the contractual or notional amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments. Since some of the commitments are expected to expire without being drawn upon and some of the commitments may not be drawn upon to the total extent of the commitment, the notional amount of these commitments does not necessarily represent future cash requirements.

The following commitments were outstanding:

	Notional Amount
	September 30, 2018		December 31, 2017
Commitments to extend credit:
Fixed	$	58,825	$	39,027
Variable		261,606		264,995
Credit card arrangements		6,523		5,642
Letters of credit		25,355		25,904

NOTE 11 – FAIR VALUE MEASUREMENTS

Accounting guidance establishes a fair value hierarchy to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.

Level 1:	Quoted prices (unadjusted) or identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2:	Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3:	Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Information regarding the fair value of assets measured at fair value on a recurring basis is as follows:

	Instruments		Markets		Other		Significant
	Measured		for Identical		Observable		Unobservable
	At Fair		Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)

September 30, 2018
Assets
Securities available for sale
Obligations of states and political subdivisions	$	52,059	$	-	$	51,659	$	400
Mortgage-backed securities		50,770		-		50,770		-
Corporate notes		16,294		-		16,294		-
U.S. Treasury securities		500		-		500		-
Mortgage servicing rights		3,000		-		3,000		-

December 31, 2017
Assets
Securities available for sale
Obligations of states and political subdivisions	$	59,390	$	-	$	58,890	$	500
Mortgage-backed securities		42,635		-		42,635		-
Corporate notes		16,520		-		16,520		-
U.S. Treasury securities		498		-		498		-
Mortgage servicing rights		2,610		-		2,610		-

Fair value of assets measured on a recurring basis using significant unobservable inputs (Level 3) are as follows:

	September 30, 2018			December 31, 2017

Total securities at beginning of year	$	500		$	1,010
Included in earnings		-			-
Included in other comprehensive income		-			-
Purchases, issuance, and settlements		(100	)		-
Transfer in and/or out of level 3		-			(510	)
Total securities at end of period	$	400		$	500

Information regarding the fair value of assets measured at fair value on a non-recurring basis is as follows:

			Quoted Prices
			In Active		Significant
	Assets		Markets		Other		Significant
	Measured		for Identical		Observable		Unobservable
	At Fair		Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2018
OREO	$	4,892	$	-	$	-	$	4,892
Impaired Loans, net of impairment reserve		22,189		-		-		22,189
	$	27,081	$	-	$	-	$	27,081
December 31, 2017
OREO	$	6,270	$	-	$	-	$	6,270
Impaired Loans, net of impairment reserve		18,372		-		-		18,372
	$	24,642	$	-	$	-	$	24,642

The following is a description of the valuation methodologies used by the Company for the items noted in the table above, including the general classification of such instruments in the fair value hierarchy. For individually evaluated impaired loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, the estimated fair value of the underlying collateral for collateral-dependent loans, or the estimated liquidity of the note. For OREO, the fair value is based upon the estimated fair value of the underlying collateral adjusted for the expected costs to sell. The following table shows significant unobservable inputs used in the fair value measurement of Level 3 assets:

	Valuation Technique	Unobservable Inputs	Range of Discounts			Weighted Average Discount
As of September 30, 2018
OREO	Third-party appraisals, sales contracts or brokered price options	Collateral discounts and estimated costs to sell		0% - 40	%		21.7	%
Impaired loans	Third-party appraisals and discounted cash flows	Collateral discounts and discount rates		0% - 100	%		8.5	%

As of December 31, 2017
OREO	Third-party appraisals, sales contracts or brokered price options	Collateral discounts and estimated costs to sell		0% - 100	%		15.7	%
Impaired loans	Third-party appraisals and discounted cash flows	Collateral discounts and discount rates		0% - 100	%		6.1	%

The following methods and assumptions were used by the Company to estimate fair value of financial instruments.

Cash and cash equivalents — Fair value approximates the carrying amount.

Securities — The fair value measurement is obtained from an independent pricing service and is based on recent sales of similar securities and other observable market data.

Loans held for sale — Fair value is based on commitments on hand from investors or prevailing market prices.

Loans — Fair value of variable rate loans that reprice frequently are based on carrying value. Fair value of other loans is estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings. Fair value of impaired and other nonperforming loans are estimated using discounted expected future cash flows or the fair value of the underlying collateral, if applicable.

Other investments — The carrying amount reported in the consolidated balance sheets for other investments approximates the fair value of these assets.

Mortgage servicing rights — Fair values were determined using the present value of future cash flows.

Cash value of life insurance — The carrying amount approximates its fair value.

Deposits — Fair value of deposits with no stated maturity, such as demand deposits, savings, and money market accounts, by definition, is the amount payable on demand on the reporting date. Fair value of fixed-rate time deposits is estimated using discounted cash flows applying interest rates currently offered on similar time deposits.

Securities sold under repurchase agreements — The fair value of securities sold under repurchase agreements with variable rates or due on demand is the amount payable at the reporting date. The fair value of securities sold under repurchase agreements with fixed terms is estimated using discounted cash flows with discount rates at interest rates currently offered for securities sold under repurchase agreements of similar remaining values.

Notes payable and Subordinated notes — Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. Fair value of borrowings is estimated by discounting future cash flows using the current rates at which similar borrowings would be made. Fair value of borrowed funds due on demand is the amount payable at the reporting date.

Off-balance-sheet instruments — Fair value is based on quoted market prices of similar financial instruments where available. If a quoted market price is not available, fair value is based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the company’s credit standing. Since this amount is immaterial, no amounts for fair value are presented.

The carrying value and estimated fair value of financial instruments at September 30, 2018 and December 31, 2017 follows:

			Fair value
September 30, 2018	Carrying amount		Level 1		Level 2		Level 3		Total

Financial assets:
Cash and cash equivalents	$	35,316	$	35,316	$	-	$	-	$	35,316
Securities held to maturity		40,882		-		40,129		-		40,129
Securities available for sale		119,623		-		119,223		400		119,623
Loans held for sale		564		-		-		564		564
Loans, net		1,429,917		-		-		1,416,546		1,416,546
Other investments, at cost		4,900		-		-		4,900		4,900
Mortgage servicing rights		3,000		-		3,000		-		3,000
Cash surrender value of life insurance		24,027		24,027		-		-		24,027

Financial liabilities:
Deposits	$	1,486,470	$	-	$	-	$	1,372,558	$	1,372,558
Securites sold under repurchase agreements		7,298		-		7,298		-		7,298
Notes payable		48,000		-		48,000		-		48,000
Subordinated notes		11,500		-		11,500		-		11,500

			Fair value
December 31, 2017	Carrying amount		Level 1		Level 2		Level 3		Total

Financial assets:
Cash and cash equivalents	$	101,977	$	101,977	$	-	$	-	$	101,977
Securities held to maturity		39,991		-		39,808		-		39,808
Securities available for sale		119,043		-		118,543		500		119,043
Loans, net		1,385,935		-		-		1,375,864		1,375,864
Other investments, at cost		7,226		-		-		7,226		7,226
Mortgage servicing rights		2,610		-		2,610		-		2,610
Cash surrender value of life insurance		23,722		23,722		-		-		23,722

Financial liabilities:
Deposits	$	1,506,642	$	-	$	-	$	1,454,580	$	1,454,580
Securites sold under repurchase agreements		47,568		-		47,568		-		47,568
Notes payable		8,500		-		8,500		-		8,500
Subordinated notes		11,500		-		11,500		-		11,500

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters that could affect the estimates. Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.

Deposits with no stated maturities are defined as having a fair value equivalent to the amount payable on demand. This prohibits adjusting fair value derived from retaining those deposits for an expected future period of time. This component, commonly referred to as a deposit base intangible, is neither considered in the above amounts nor is it recorded as an intangible asset on the consolidated balance sheet. Significant assets and liabilities that are not considered financial assets and liabilities include premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

NOTE 12 – STOCK-BASED COMPENSATION

The Company has made restricted share grants pursuant to the Bank First National Corporation 2011 Equity Plan (Plan). The purpose of the Plan is to provide financial incentives for selected employees and for the non-employee Directors of the Company, thereby promoting the long-term growth and financial success of the Company. The Company stock to be offered under the Plan pursuant to Stock Appreciation Rights (SAR), performance unit awards, and restricted stock and unrestricted Company stock awards must be Company stock previously issued and outstanding and reacquired by the Company. The number of shares of Company stock that may be issued pursuant to awards under the Plan shall not exceed, in the aggregate, 659,250. As of September 30, 2018 and December 31, 2017, 160,362 and 142,465 shares of Company stock have been awarded under the Plan, respectively. Compensation expense for restricted stock is based on the fair value of the awards of Bank First National Corporation common stock at the time of grant. The value of restricted stock grants that are expected to vest is amortized into expense over the vesting periods. For the nine months ended September 30, 2018 and 2017, compensation expense of $410,000 and $338,000, respectively, was recognized related to restricted stock awards.

As of September 30, 2018, there was $1,461,000 of unrecognized compensation cost related to non-vested restricted stock awards granted under the plan. That cost is expected to be recognized over a weighted average period of 2.75 years. The aggregate grant date fair value of restricted stock awards that vested during the nine months ended September 30, 2018, was approximately $483,000.

	For the nine months ended September 30, 2018					For the nine months ended September 30, 2017

				Weighted-					Weighted-
				Average Grant-					Average Grant-
	Shares			Date Fair Value		Shares			Date Fair Value
Restricted Stock
Outstanding at beginning of period		53,619		$	26.59		59,543		$	21.98
Granted		17,989			46.55		15,975			35.00
Vested		(19,825	)		24.35		(21,899	)		20.20
Forfeited or cancelled		-			-		-			-
Outstanding at end of period		51,783		$	34.38		53,619		$	26.59

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2017 set forth in our Registration Statement on Form 10 Amendment No. 1 (Registration No. 001-38676) and filed with the SEC on October 17, 2018 (the “Registration Statement”) and with our unaudited condensed accompanying notes set forth in this Quarterly Report on Form 10-Q for the quarterly period September 30, 2018.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this report are forward-looking statements within the meaning of and subject to the safe harbor protections of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements relating to the Company’s assets, business, cash flows, condition (financial or otherwise), credit quality, financial performance, liquidity, short and long-term performance goals, prospects, results of operations, strategic initiatives, potential future acquisitions, disposition and other growth opportunities. These statements, which are based upon certain assumptions and estimates and describe the Company’s future plans, results, strategies and expectations, can generally be identified by the use of the words and phrases “may,” “will,” “should,” “could,” “would,” “goal,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target,” “aim,” “predict,” “continue,” “seek,” “projection” and other variations of such words and phrases and similar expressions. These forward-looking statements are not historical facts, and are based upon current expectations, estimates and projections about the Company’s industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond the Company’s control. The inclusion of these forward-looking statements should not be regarded as a representation by the Company or any other person that such expectations, estimates and projections will be achieved. Accordingly, the Company cautions investors that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict and that are beyond the Company’s control. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable as of the date of this report, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. A number of factors could cause actual results to differ materially from those contemplated by the forward-looking statement in this report including, without limitation, the risks and other factors set forth in the Company’s Registration Statements under the captions “Cautionary Note Regarding Forward-Looking Statements” and “Risk factors.” Many of these factors are beyond the Company’s ability to control or predict. If one or more events related to these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to be incorrect, actual results may differ materially from the forward-looking statements. Accordingly, investors should not place undue reliance on any such forward-looking statements. Any forward-looking statements speaks only as of the date of this report, and the Company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law. New risks and uncertainties may emerge from time to time, and it is not possible for the Company to predict their occurrence or how they will affect the Company.

We qualify all of our forward-looking statements by these cautionary statements.

CRITICAL ACCOUNTING POLICIES

Our financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and general practices within the banking industry. Within our financial statements, certain financial information contains approximate measurements of financial effects of transactions and impacts at the consolidated balance sheet dates and our results of operations for the reporting periods. As certain accounting policies require significant estimates and assumptions that have a material impact on the carrying value of assets and liabilities, we have established critical accounting policies to facilitate making the judgments necessary to prepare our financial statements. Our critical accounting policies are described in our previously filed Registration Statement

OVERVIEW

Bank First National Corporation is a Wisconsin corporation that was organized primarily to serve as the holding company for Bank First, N.A. Bank First, N.A., which was incorporated in 1894, is a nationally-chartered bank headquartered in Manitowoc, Wisconsin. It is a member of the Board of Governors of the Federal Reserve System (“Federal Reserve”), and is regulated by the Office of the Comptroller of the Currency (“OCC”). Including its headquarters in Manitowoc, Wisconsin, the Bank has 18 banking locations in Manitowoc, Outagamie, Brown, Winnebago, Sheboygan, Waupaca and Barron 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 ALL to absorb possible losses on existing loans that may become uncollectible. The Bank establishes and maintains this allowance by charging a provision for loan losses against operating earnings. Beyond its net interest income, the Bank further receives income through the net gain on sale of loans held for sale as well as servicing income which is retained on those sold loans. In order to maintain its operations and bank locations, the Bank incurs various operating expenses which are further described within the “Results of Operations” later in this section.

The Bank is a 49.8% member of a data processing subsidiary, UFS, LLC which provides core data processing, endpoint management cloud services, cyber security and digital banking solutions for over 50 Midwest banks. The Bank, through its 100% owned subsidiary TVG Holdings, Inc., also holds a 30% ownership interest in Ansay & Associates, LLC, an insurance agency providing clients throughout the Midwest with insurance and risk management solutions. These unconsolidated subsidiary interests contribute noninterest income to the Bank through their underlying annual earnings.

On October 27, 2017, the Company consummated its merger with Waupaca pursuant to the Agreement and Plan of Bank Merger, dated as of May 11, 2017 and as amended on July 20, 2017, by and among the Company, BFNC Merger Sub, LLC, a wholly-owned subsidiary of the Company, and Waupaca, whereby Waupaca was merged with and into the Company, and First National Bank, Waupaca’s wholly owned banking subsidiary, was merged with and into the Bank. The system integration was completed, and six branches of First National Bank opened on October 30, 2017 as branches of the Bank, expanding the Bank’s presence into Barron and Waupaca counties.

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following tables present certain selected historical consolidated financial data as of the dates or for the period indicated:

	At or for the Three Months Ended										At or for the Nine Months Ended
(In thousands, except per share data)	9/30/2018		6/30/2018		3/31/2018		12/31/2017		9/30/2017		9/30/2018		9/30/2017

Results of Operations:

Interest income	$	19,510	$	19,372	$	19,309	$	17,430	$	12,629	$	58,191	$	36,042
Interest expense		3,974		3,604		3,027		2,298		1,998		10,605		5,434

Net interest income		15,536		15,768		16,282		15,132		10,631		47,586		30,608
Provision for loan losses		800		900		485		420		255		2,185		635

Net interest income after provision for loan losses		14,736		14,868		15,797		14,712		10,376		45,401		29,973

Noninterest income		2,508

Bank First National Corp - FORM 10-Q - December 7, 2018

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