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EX-32.1 - EXHIBIT 32.1 - Bank First Corptm2014665d1_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Bank First Corptm2014665d1_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Bank First Corptm2014665d1_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 March 31, 2020

 

OR

 

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

 

For the transition period from ____________ to ____________

 

Commission file number: 001-38676

 

BANK FIRST CORPORATION

(Exact name of registrant as specified in its charter)

 

WISCONSIN   39-1435359
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
402 North 8th Street, Manitowoc, Wisconsin   54220
(Address of principal executive offices)   (Zip Code)

(920) 652-3100

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer ¨ Accelerated filer x
Non-accelerated filer ¨ 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 ¨  No  x

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class  Trading Symbol(s)  Name on each exchange on which registered
Common Stock, par value $0.01 per share  BFC  The Nasdaq Stock Market LLC

 

The number of shares of the issuer’s common stock, par value $0.01, outstanding as of May 11, 2020 was 7,155,856 shares.

 

 

 

 

 

TABLE OF CONTENTS
Page Number
Part I. Financial Information 3
ITEM 1. Financial Statements 3
  Consolidated Balance Sheets – March 31, 2020 (unaudited) and December 31, 2019 3
  Consolidated Statements of Income – Three Months Ended March 31 2020 and 2019 (unaudited) 4
  Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2020 and 2019 (unaudited) 5
  Consolidated Statements of Changes in Stockholders’ Equity – Three Months Ended March 31, 2020 and 2019  (unaudited) 6
  Consolidated Statements of Cash Flows – Three Months Ended March 31, 2020 and 2019 (unaudited) 7
  Notes to Unaudited Consolidated Financial Statements 9
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 29
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 55
ITEM 4. Controls and Procedures 57
     
Part II. Other Information 57
ITEM 1. Legal Proceedings 57
ITEM 1A. Risk Factors 57
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 57
ITEM 3. Defaults Upon Senior Securities 58
ITEM 4. Mine Safety Disclosures 58
ITEM 5. Other Information 58
ITEM 6. Exhibits 59
Signatures   60

 

2

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS:

 

BANK FIRST CORPORATION

Consolidated Balance Sheets

(In thousands, except share and per share data)

 

   March 31, 2020   December 31, 2019 
   (Unaudited)   (Audited) 
   (In Thousands, except share and per share data) 
Assets        
Cash and due from banks  $27,659   $33,817 
Interest-bearing deposits   556    19,242 
Federal funds sold   25,938    33,393 
Cash and cash equivalents   54,153    86,452 
Securities held to maturity, at amortized cost ($46,988 and $44,803          
fair value at March 31, 2020 and December 31, 2019, respectively)   43,732    43,734 
Securities available for sale, at fair value   172,070    181,506 
Loans held for sale   2,659    587 
Loans, net   1,752,275    1,724,947 
Premises and equipment, net   36,615    35,286 
Goodwill   43,456    43,456 
Other investments   7,332    4,933 
Cash value of life insurance   25,105    24,945 
Identifiable intangible assets, net   9,333    9,666 
Other real estate owned ("OREO")   4,530    6,888 
Investment in minority-owned subsidiaries   41,267    40,287 
Other assets   7,793    7,481 
TOTAL ASSETS  $2,200,320   $2,210,168 
           
Liabilities and Stockholders' Equity          
Liabilities:          
Deposits:          
Interest-bearing deposits  $1,370,618   $1,366,846 
Noninterest-bearing deposits   476,591    476,465 
Total deposits   1,847,209    1,843,311 
Securities sold under repurchase agreements   35,786    45,865 
Notes payable   48,792    49,790 
Subordinated notes   18,585    18,622 
Other liabilities   12,266    22,369 
Total liabilities   1,962,638    1,979,957 
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 - 7,902,742 shares as of March 31, 2020 and December 31, 2019          
Outstanding - 7,155,955 and 7,084,728 shares          
     as of March 31, 2020 and December 31, 2019, respectively   79    79 
Additional paid-in capital   62,672    63,085 
Retained earnings   195,329    189,494 
Treasury stock, at cost - 746,787 and 818,014 shares          
     as of March 31, 2020 and December 31, 2019, respectively   (23,913)   (24,941)
Accumulated other comprehensive income   3,515    2,494 
Total stockholders' equity   237,682    230,211 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $2,200,320   $2,210,168 

 

See accompanying notes to consolidated financial statements.

 

3

 

 

ITEM 1. Financial Statements Continued:

 

BANK FIRST CORPORATION

Consolidated Statements of Income

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

 

   Three months ended March 31, 
   2020   2019 
Interest income:        
Loans, including fees  $21,672   $18,226 
Securities:          
Taxable   1,086    744 
Tax-exempt   425    426 
Other   113    327 
Total interest income   23,296    19,723 
Interest expense:          
Deposits   4,110    4,225 
Securities sold under repurchase agreements   103    130 
Borrowed funds   440    168 
Total interest expense   4,653    4,523 
Net interest income   18,643    15,200 
Provision for loan losses   975    625 
Net interest income after provision for loan losses   17,668    14,575 
Noninterest income:          
Service charges   916    679 
Income from Ansay and Associates, LLC ("Ansay")   891    875 
Income from UFS, LLC ("UFS")   897    594 
Loan servicing income   462    223 
Net gain on sales of mortgage loans   460    87 
Net gain on sale of other investments   -    234 
Noninterest income from strategic alliances   17    19 
Other   254    829 
Total noninterest income   3,897    3,540 
Noninterest expense:          
Salaries, commissions, and employee benefits   6,452    5,310 
Occupancy   1,275    849 
Data processing   1,199    913 
Postage, stationery, and supplies   172    123 
Net loss on sales and valuations of OREO   976    36 
Advertising   55    74 
Charitable contributions   123    131 
Outside service fees   801    684 
Amortization of intangibles   334    161 
Other   1,354    1,255 
Total noninterest expense   12,741    9,536 
Income before provision for income taxes   8,824    8,579 
Provision for income taxes   1,558    1,992 
Net Income  $7,266   $6,587 
Earnings per share - basic  $1.03   $1.00 
Earnings per share - diluted  $1.02   $1.00 
Dividends per share  $0.20   $0.20 

 

See accompanying notes to unaudited consolidated financial statements  

 

4

 

 

ITEM 1. Financial Statements Continued:

 

BANK FIRST CORPORATION

Consolidated Statements of Comprehensive Income

(In thousands) (Unaudited)

 

   Three Months Ended March 31, 
   2020   2019 
Net Income  $7,266   $6,587 
Other comprehensive income (loss):          
Unrealized gains (losses) on available for sale securities:          
Unrealized holding gains arising during period   1,588    2,357 
Amortization of unrealized holding gains on securities transferred from available for sale to held to maturity   (10)   (11)
Income tax expense   (557)   (493)
Total other comprehensive income   1,021    1,853 
Comprehensive income  $8,287   $8,440 

 

See accompanying notes to unaudited consolidated financial statements.

 

5

 

 

ITEM 1. Financial Statements Continued:

 

BANK FIRST CORPORATION

Consolidated Statement of Stockholders’ Equity

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

 

   Serial       Additional           Other   Total 
   Preferred   Common   Paid-in   Retained   Treasury   Comprehensive   Stockholders' 
   Stock   Stock   Capital   Earnings   Stock   Income (loss)   Equity 
       (In Thousands, except share and per share amounts)     
Balance at January 1, 2019  $-   $74   $27,601   $168,363   $(21,349)  $(366)  $174,323 
Net income   -    -    -    6,587    -    -    6,587 
Other comprehensive income   -    -    -    -    -    1,853    1,853 
Purchase of treasury stock   -    -    -    -    (2,489)   -    (2,489)
Issuance of treasury stock as deferred compensation payout   -    -    14    -    43    -    57 
Cash dividends ($0.20 per share)   -    -    -    (1,306)   -    -    (1,306)
Amortization of stock-based compensation   -    -    152    -    -    -    152 
Vesting of restricted stock awards   -    -    (462)   -    462    -    - 
                                    
Balance at March 31, 2019  $-   $74   $27,305   $173,644   $(23,333)  $1,487   $179,177 
                                    
Balance at January 1, 2020  $-   $79   $63,085   $189,494   $(24,941)  $2,494   $230,211 
Net income   -    -    -    7,266    -    -    7,266 
Other comprehensive income   -    -    -    -    -    1,021    1,021 
Purchase of treasury stock   -    -    -    -    (2,968)   -    (2,968)
Issuance of treasury stock as deferred compensation payout   -    -    -    -    3,368    -    3,368 
Cash dividends ($0.20 per share)   -    -    -    (1,431)   -    -    (1,431)
Amortization of stock-based compensation   -    -    215    -    -    -    215 
Vesting of restricted stock awards   -    -    (628)   -    628    -    - 
                                    
Balance at March 31, 2020  $-   $79   $62,672   $195,329   $(23,913)  $3,515   $237,682 

 

See accompanying notes to unaudited consolidated financial statements.

 

6

 

 

ITEM 1. Financial Statements Continued:

 

BANK FIRST CORPORATION

Consolidated Statements of Cash Flows

(In thousands) (Unaudited)

 

   Three Months Ended March 31, 
   2020   2019 
Cash flows from operating activities:          
Net income  $7,266   $6,587 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   975    625 
Depreciation and amortization of premises and equipment   423    277 
Amortization of intangibles   334    161 
Net amortization of securities   118    94 
Amortization of stock-based compensation   215    152 
Accretion of purchase accounting valuations   (705)   (1,024)
Net change in deferred loan fees and costs   (45)   (99)
Change in fair value of mortgage servicing rights ("MSR") and other investments   186    (536)
Loss from sale and disposal of premises and equipment   -    23 
Loss on sale of OREO and valuation allowance   976    36 
Proceeds from sales of mortgage loans   31,371    7,382 
Originations of mortgage loans held for sale   (33,226)   (7,977)
Gain on sales of mortgage loans   (460)   (87)
Realized gain on sale of other investments   -    (234)
Undistributed income of UFS joint venture   (897)   (594)
Undistributed income of Ansay joint venture   (891)   (875)
Net earnings on life insurance   (160)   (153)
Increase in other assets   (869)   (366)
Decrease in other liabilities   (6,725)   (4,786)
Net cash used in operating activities   (2,114)   (1,394)
Cash flows from investing activities, net of effects of business combination:          
Activity in securities available for sale and held to maturity:          
Maturities, prepayments, and calls   23,541    1,411 
Purchases   (12,643)   (3,015)
Net increase in loans   (27,710)   (3,314)
Dividends received from UFS   435    284 
Dividends received from Ansay   373    319 
Proceeds from sale of OREO   1,468    402 
Proceeds from sales of other investments   -    984 
Net purchases of Federal Home Loan Bank ("FHLB") stock   (640)   - 
Net purchases of Federal Reserve Bank ("FRB") stock   (1,702)   - 
Proceeds from sale of premises and equipment   25    - 
Purchases of premises and equipment   (1,782)   (999)
Net cash used in investing activities   (18,635)   (3,928)

 

7 

 

 

ITEM 1. Financial Statements Continued:

 

BANK FIRST CORPORATION

Consolidated Statements of Cash Flows (Continued)

(In thousands) (Unaudited)

 

   Three Months ended March 31, 
   2020   2019 
Cash flows from financing activities, net of effects of business combination:          
Net increase in deposits  $3,928   $16,557 
Net decrease in securities sold under repurchase agreements   (10,079)   (6,005)
Proceeds from advances of borrowed funds   73,000    - 
Repayment of borrowed funds   (74,000)   - 
Dividends paid   (1,431)   (1,306)
Repurchase of common stock   (2,968)   (2,489)
Net cash provided by (used in) financing activities   (11,550)   6,757 
Net increase (decrease) in cash and cash equivalents   (32,299)   1,435 
Cash and cash equivalents at beginning of period   86,452    107,743 
Cash and cash equivalents at end of period  $54,153   $109,178 
           
Supplemental disclosures of cash flow information:          
           
Cash paid during the period for:          
Interest  $4,809   $4,211 
Supplemental schedule of noncash activities:          
Loans transferred to OREO   91    726 
MSR resulting from sale of loans   243    78 
Amortization of unrealized holding gains on securities transferred from available for sale to held to maturity recognized in other comprehensive income, net of tax   (8)   (9)
Change in unrealized gains and losses on investment securities available for sale, net of tax   1,029    1,862 
Payment of deferred compensation through issuance of treasury stock   3,368    57 

 

See accompanying notes to consolidated financial statements.

 

8 

 

 

BANK FIRST CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

NOTE 1 – BASIS OF PRESENTATION

 

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

 

These interim unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures required by GAAP have been omitted or abbreviated. These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (“Annual Report”).

 

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

 

Critical Accounting Policies and Estimates

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 Annual Report.

 

Recent Accounting Developments Adopted

 

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The amendments in this ASU were issued to address concerns over the cost and complexity of the two-step goodwill impairment test and resulted in the removal of the second step of the test. The amendments require an entity to apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance did not amend the optional qualitative assessment of goodwill impairment. This ASU is intended to reduce the cost and complexity of the two-step goodwill impairment test and is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted for testing performed after January 1, 2017. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.

 

9

 

 

Recently Issued Not Yet Effective Accounting Standards

 

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 delayed 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. 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.

 

NOTE 2 – ACQUISITIONS

 

On July 12, 2019, the Company completed a merger with Partnership Community Bancshares, Inc. (“Partnership”), a bank holding company headquartered in Cedarburg, Wisconsin, pursuant to the Agreement and Plan of Bank Merger (“Merger Agreement”), dated as of January 22, 2019 and as amended on April 30, 2019, by and among the Company and Partnership, whereby Partnership merged with and into the Company, and Partnership Bank, Partnership’s wholly-owned banking subsidiary, merged with and into the Bank. Partnership’s principal activity was the ownership and operation of Partnership Bank, a state-chartered banking institution that operated four (4) branches in Wisconsin at the time of closing. The merger consideration totaled approximately $49.6 million.

 

Pursuant to the terms of the Merger Agreement, Partnership shareholders had the option to receive either 0.34879 shares of the Company’s common stock or $17.3001 in cash for each outstanding share of Partnership common stock, and cash in lieu of any remaining fractional share. The stock versus cash elections by the Partnership shareholders were subject to final consideration being made up of approximately $14.3 million in cash and 534,731 shares of Company common stock, valued at approximately $35.3 million (based on a value of $66.03 per share on the closing date).

 

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

 

On November 20, 2019, the Company entered into an Agreement and Plan of Merger with Tomah Bancshares, Inc. (“Timberwood”), a Wisconsin Corporation, under which Timberwood will merge with and into the Company and Timberwood’s banking subsidiary, Timberwood Bank, will merge with and into the Bank. The transaction is expected to close on May 15, 2020. Merger consideration consists of 100% common stock of the Company, and will total roughly $32.6 million, subject to the fair market valuation of the Company’s common stock on the date of closing. Based on results as of March 31, 2020, the combined company would have total assets of approximately $2.4 billion, loans of approximately $1.8 billion and deposits of approximately $2.0 billion.

 

10

 

 

NOTE 3 – EARNINGS PER SHARE

 

The two-class method is used in the calculation of basic and diluted earnings per share. Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings. There were no anti-dilutive stock options for the three months ended March 31, 2020 or 2019.

 

The following table presents the factors used in the earnings per share computations for the period indicated.

 

   Three Months Ended March 31, 
   2020   2019 
Basic          
Net income available to common shareholders  $7,266   $6,587 
Less: Earnings allocated to participating securities   (56)   (52)
Net income allocated to common shareholders  $7,210   $6,535 
           
Weighted average common shares outstanding including participating securities   7,083,520    6,574,362 
Less: Participating securities (1)   (54,830)   (52,176)
Average shares   7,028,690    6,522,186 
           
Basic earnings per common shares  $1.03   $1.00 
          
Diluted          
Net income available to common shareholders  $7,266   $6,587 
           
Weighted average common shares outstanding for basic earnings per common share   7,028,690    6,522,186 
Add: Dilutive effects of stock based compensation awards   99,556    54,148 
Average shares and dilutive potential common shares   7,128,246    6,576,334 
           
Diluted earnings per common share  $1.02   $1.00 

 

(1) Participating securities are restrited stock awards whereby the stock certificates have been issued, are included in outstanding shares, receive dividends and can be voted, but have not vested.

 

11

 

 

NOTE 4 – SECURITIES

 

The Company’s securities available for sale as of March 31, 2020 and December 31, 2019 is summarized as follows:

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Estimated 
   Cost   Gains   Losses   Fair Value 
March 31, 2020                    
Obligations of U.S. Government sponsored agencies  $13,431   $33   $(63)  $13,401 
Obligations of states and political subdivisions   59,442    2,655    (36)   62,061 
Mortgage-backed securities   52,418    1,847    (22)   54,243 
Corporate notes   42,060    401    (96)   42,365 
Total available for sale securities  $167,351   $4,936   $(217)  $172,070 
                    
December 31, 2019                    
Obligations of U.S. Government sponsored agencies  $12,218   $-   $(158)  $12,060 
Obligations of states and political subdivisions   52,594    2,197    (20)   54,771 
Mortgage-backed securities   50,770    988    (38)   51,720 
Corporate notes   62,794    172    (11)   62,955 
Total available for sale securities  $178,376   $3,357   $(227)  $181,506 

 

The Company’s securities held to maturity as of March 31, 2020 and December 31, 2019 is summarized as follows:

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Estimated 
   Cost   Gains   Losses   Fair Value 
March 31, 2020                    
U.S. Treasury securities  $33,525   $3,243   $-   $36,768 
Obligations of states and political subdivisions   10,207    13    -    10,220 
Total held to maturity securities  $43,732   $3,256   $-   $46,988 
                     
December 31, 2019                    
U.S. Treasury securities  $33,527   $1,076   $(22)  $34,581 
Obligations of states and political subdivisions   10,207    15    -    10,222 
Total held to maturity securities  $43,734   $1,091   $(22)  $44,803 

 

12

 

 

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 
March 31, 2020 - Available for Sale                              
Obligations of U.S. Government sponsored agencies  $11,076   $(63)  $-   $-   $11,076   $(63)
Obligations of states and political subdivisions   3,467    (36)   -    -    3,467    (36)
Mortgage-backed securities   2,918    (17)   1,731    (5)   4,649    (22)
Corporate notes   3,851    (96)   -    -    3,851    (96)
Totals  $21,312   $(212)  $1,731   $(5)  $23,043   $(217)
                               
December 31, 2019 - Available for Sale                              
Obligations of U.S. Government sponsored agencies  $12,059   $(158)  $-   $-   $12,059   $(158)
Obligations of states and political subdivisions   5,636    (19)   999    (1)   6,635    (20)
Mortgage-backed securities   4,038    (26)   2,187    (12)   6,225    (38)
Corporate notes   3,925    (11)   -    -    3,925    (11)
Totals  $25,658   $(214)  $3,186   $(13)  $28,844   $(227)
                               
December 31, 2019 - Held to Maturity                              
U.S. Treasury securities  $2,958   $(22)  $-   $-   $2,958   $(22)

 

As of March 31, 2020, 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 or until par is recovered. There were no other-than-temporary impairments charged to earnings during the three months ended March 31, 2020 or 2019.

 

The following is a summary of amortized cost and estimated fair value of securities by contractual maturity as of March 31, 2020. 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  $26,344   $26,347   $4,134   $4,177 
Due after one year through 5 years   21,833    22,298    13,470    14,137 
Due after 5 years through ten years   12,963    13,509    23,219    25,765 
Due after 10 years   53,793    55,673    2,909    2,909 
Subtotal   114,933    117,827    43,732    46,988 
Mortgage-backed securities   52,418    54,243    -    - 
Total  $167,351   $172,070   $43,732   $46,988 

 

There were no sales of securities available for sale during the three months ended March 31, 2020 or 2019.

 

13

 

 

NOTE 5 – LOANS, ALLOWANCE FOR LOAN LOSSES, AND CREDIT QUALITY

 

The following table presents total loans by portfolio segment and class of loan as of March 31, 2020 and December 31, 2019:

 

   March 31,   December 31, 
   2020   2019 
Commercial/industrial  $313,448   $          302,538 
Commercial real estate - owner occupied   458,490    459,782 
Commercial real estate - non-owner occupied   375,871    353,723 
Construction and development   140,991    132,296 
Residential 1-4 family   442,375    448,605 
Consumer   27,936    29,462 
Other   6,588    10,440 
Subtotals   1,765,699    1,736,846 
ALL   (12,967)   (11,396)
Loans, net of ALL   1,752,732    1,725,450 
Deferred loan fees and costs   (457)   (503)
Loans, net  $1,752,275   $1,724,947 

 

The ALL by loan type as of March 31, 2020 and 2019 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   Total 
ALL - January 1, 2020  $2,320   $4,587   $1,578   $548   $2,169   $141   $53   $11,396 
Charge-offs   (1)   (77)   -    -    -    -    (5)   (83)
Recoveries   -    640    1    -    34    -    4    679 
Provision   315    271    223    75    107    1    (17)   975 
ALL - March 31, 2020   2,634    5,421    1,802    623    2,310    142    35    12,967 
ALL ending balance individually evaluated for impairment   830    410    -    -    -    -    -    1,240 
ALL ending balance collectively evaluated for impairment  $1,804   $5,011   $1,802   $623   $2,310   $142   $35   $11,727 
Loans outstanding -March 31, 2020  $313,448   $458,490   $375,871   $140,991   $442,375   $27,936   $6,588   $1,765,699 
Loans ending balance individually evaluated for impairment   1,872    5,235    -    -    -    -    -    7,107 
Loans ending balance collectively evaluated for impairment  $311,576   $453,255   $375,871   $140,991   $442,375   $27,936   $6,588   $1,758,592 

 

14

 

 

   Commercial / Industrial   Commercial Real Estate - Owner Occupied   Commercial Real Estate - Non - Owner Occupied   Construction and Development   Residential 1-4 Family   Consumer   Other   Total 
ALL - January 1, 2019  $3,021   $3,750   $2,100   $725   $2,472   $148   $32   $12,248 
Charge-offs   (586)   (78)   (54)   -    (8)   (11)   (5)   (742)
Recoveries   -    1    -    -    78    1    2    82 
Provision   (166)   1,755    (136)   (329)   (508)   (3)   12    625 
ALL - March 31, 2019   2,269    5,428    1,910    396    2,034    135    41    12,213 
ALL ending balance individually evaluated for impairment   -    2,058    -    -    -    -    -    2,058 
ALL ending balance collectively evaluated for impairment  $2,269   $3,370   $1,910   $396   $2,034   $135   $41   $10,155 
Loans outstanding -March 31, 2019  $293,220   $412,126   $258,310   $67,537   $367,518   $27,242   $6,165   $1,432,118 
Loans ending balance individually evaluated for impairment   -    9,786    -    -    179    -    -    9,965 
Loans ending balance collectively evaluated for impairment  $293,220   $402,340   $258,310   $67,537   $367,339   $27,242   $6,165   $1,422,153 

 

The Company’s past due loans as of March 31, 2020 is summarized as follows:

 

       90 Days         
   30-89 Days   or more         
   Past Due   Past Due         
   Accruing   and Accruing   Non-Accrual   Total 
Commercial/industrial  $1,536   $                     80   $1,887   $3,503 
Commercial real estate - owner occupied   433    1,134    3,412    4,979 
Commercial real estate - non-owner occupied   316    -    74    390 
Construction and development   46    -    -    46 
Residential 1-4 family   2,050    214    555    2,819 
Consumer   142    1    32    175 
Other   -    -    -    - 
   $4,523   $1,429   $5,960   $11,912 

 

The Company’s past due loans as of December 31, 2019 is summarized as follows:

 

       90 Days         
   30-89 Days   or more         
   Past Due   Past Due         
   Accruing   and Accruing   Non-Accrual   Total 
Commercial/industrial  $235   $                       -   $1,923   $2,158 
Commercial real estate - owner occupied   1,124    -    2,513    3,637 
Commercial real estate - non-owner occupied   -    -    75    75 
Construction and development   768    11    -    779 
Residential 1-4 family   805    307    550    1,662 
Consumer   70    36    32    138 
Other   -    -    -    - 
   $3,002   $354   $5,093   $8,449 

 

15

 

 

The Company utilizes a numerical risk rating system for commercial relationships. All other types of relationships (ex: residential, consumer, other) are assigned a “Pass” rating, unless they have fallen 90 days past due or more, at which time they 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 March 31, 2020 is as follows:

 

    Pass (1-5)    6    7    8    Total 
Commercial/industrial  $302,998   $6,001   $4,449   $-   $313,448 
Commercial real estate - owner occupied   423,568    4,771    30,151    -    458,490 
Commercial real estate - non-owner occupied   364,938    10,543    390    -    375,871 
Construction and development   140,961    -    30    -    140,991 
Residential 1-4 family   440,481    254    1,640    -    442,375 
Consumer   27,904    -    32    -    27,936 
Other   6,588    -    -    -    6,588 
   $1,707,438   $21,569   $36,692   $-   $1,765,699 

 

The breakdown of loans by risk rating as of December 31, 2019 is as follows:

 

    Pass (1-5)    6    7    8    Total 
Commercial/industrial  $290,180   $5,329   $7,029   $-   $302,538 
Commercial real estate - owner occupied   422,336    5,603    31,843    -    459,782 
Commercial real estate - non-owner occupied   344,278    8,774    671    -    353,723 
Construction and development   132,266    -    30    -    132,296 
Residential 1-4 family   447,630    256    719    -    448,605 
Consumer   29,430    -    32    -    29,462 
Other   10,440    -    -    -    10,440 
   $1,676,560   $19,962   $40,324   $-   $1,736,846 

 

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 is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

 

16

 

 

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 March 31, 2020 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  $1,872   $3,591   $-   $-   $-   $-   $-   $-   $5,463 
Unpaid principal balance   1,872    3,591    -    -    -    -    -    -    5,463 
Related allowance   830    410    -    -    -    -    -    -    1,240 
                                              
With no related allowance recorded:                                             
Recorded investment  $-   $1,644   $-   $-   $-   $-   $-   $-   $1,644 
Unpaid principal balance   -    1,644    -    -    -    -    -    -    1,644 
Related allowance   -    -    -    -    -    -    -    -    - 
                                              
Total:                                             
Recorded investment  $1,872   $5,235   $-   $-   $-   $-   $-   $-   $7,107 
Unpaid principal balance   1,872    5,235    -    -    -    -    -    -    7,107 
Related allowance   830    410    -    -    -    -    -    -    1,240 
Average recorded investment  $1,875   $4,567   $-   $-   $-   $-   $-   $-   $6,442 

 

17

 

 

A summary of impaired loans individually evaluated as of December 31, 2019 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   Total 
With an allowance recorded:                                        
Recorded investment  $1,878   $960   $-   $-   $-   $-   $-   $2,838 
Unpaid principal balance   1,878    960    -    -    -    -    -    2,838 
Related allowance   760    80    -    -    -    -    -    840 
                                         
With no related allowance recorded:                                        
Recorded investment  $-   $2,938   $-   $-   $-   $-   $-   $2,938 
Unpaid principal balance   -    2,938    -    -    -    -    -    2,938 
Related allowance   -    -    -    -    -    -    -    - 
                                         
Total:                                        
Recorded investment  $1,878   $3,898   $-   $-   $-   $-   $-   $5,776 
Unpaid principal balance   1,878    3,898    -    -    -    -    -    5,776 
Related allowance   760    80    -    -    -    -    -    840 
Average recorded investment  $3,773   $5,847   $-   $-   $351   $-   $-   $9,971 

 

Interest recognized while these loans were impaired is considered immaterial to the consolidated financial statements for the three months ended March 31, 2020 and 2019.

 

The following table presents loans acquired with deteriorated credit quality as of March 31, 2020 and December 31, 2019. 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.

 

   March 31, 2020   December 31, 2019 
    Recorded Investment    Unpaid Principal Balance    Recorded Investment    Unpaid Principal Balance 
Commercial & Industrial  $144   $165   $191   $212 
Commercial real estate - owner occupied   171    402    518    785 
Commercial real estate - non-owner occupied   358    391    -    - 
Construction and development   92    102    213    237 
Residential 1-4 family   894    1,022    901    1,031 
Consumer   -    -    -    - 
Other   -    -    -    - 
   $1,659   $2,082   $1,823   $2,265 

 

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.

 

18

 

 

The following table represents the change in the accretable and non-accretable components of discounts on loans acquired with deteriorated credit quality for the three months ended March 31, 2020, and year ended December 31, 2019:

 

   March 31, 2020   December 31, 2019 
   Accretable   Non-accretable   Accretable   Non-accretable 
   discount   discount   discount   discount 
Balance at beginning of period  $222   $220   $318   $745 
Acquired balance, net   -    -    44    333 
Reclassifications between accretable and non-accretable   5    (5)   858    (858)
Accretion to loan interest income   (19)   -    (998)   - 
Balance at end of period  $208   $215   $222   $220 

 

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. As of March 31, 2020 and December 31, 2019 the Company had specific reserves of $-0- and $80,000 for TDRs, respectively, and none of them have subsequently defaulted.

 

The following table presents the TDRs during the three months ended March 31, 2020. There were no TDRs during the same period in 2019.

 

   Number of
Contracts
   Pre-Modification
Outstanding Recorded
Investment
   Post-Modification
Outstanding Recorded
Investment
 
Commerical Real Estate   1   $115   $115 

 

NOTE 6 – MORTGAGE SERVICING RIGHTS

 

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

 

19

 

 

Following is an analysis of activity in the MSR asset:

 

   Three Months Ended   Year Ended 
   March 31, 2020   December 31, 2019 
Fair value at beginning of period  $4,287   $3,085 
MSR asset acquired   -    1,859 
Servicing asset additions   243    740 
Loan payments and payoffs   (272)   (821)
Changes in valuation inputs and assumptions used in the valuation model   29    (576)
Amount recognized through earnings   -    (657)
Fair value at end of period  $4,287   $4,287 
Unpaid principal balance of loans serviced for others (in thousands)  $568,584   $554,374 
Mortgage servicing rights as a percent of loans serviced for others   0.75    0.77 

 

The primary economic assumptions utilized by the Company in measuring the value of MSRs were constant prepayment speeds of 14.3 and 12.1 months as of March 31, 2020 and December 31, 2019, respectively, and discount rates of 9.8% and 10% as of each period end.

 

NOTE 7 – NOTES PAYABLE

 

From time to time the Company utilizes FHLB advances to fund liquidity. At March 31, 2020 and December, 31, 2019, the Company had outstanding balances borrowed from the FHLB of $38.8 million and $39.8 million, respectively. The advances, rate, and maturities of FHLB advances were as follows:

 

          March 31,   December 31, 
   Maturity  Rate   2020   2019 
Fixed rate, fixed term  01/27/2020   1.42%  $-   $1,000 
Fixed rate, fixed term  11/02/2020   1.28%   400    400 
Fixed rate, fixed term  01/22/2021   1.67%   2,000    2,000 
Fixed rate, fixed term  01/25/2021   2.37%   5,000    5,000 
Fixed rate, fixed term  01/27/2021   1.60%   1,000    1,000 
Fixed rate, fixed term  11/03/2021   1.46%   400    400 
Fixed rate, fixed term  08/08/2022   1.76%   10,000    10,000 
Fixed rate, fixed term  08/08/2023   1.74%   10,000    10,000 
Fixed rate, fixed term  08/08/2024   1.75%   10,000    10,000 
           $38,800   $39,800 

 

20

 

 

Future maturities of borrowings were as follows:

 

   March 31,   December 31, 
   2020   2019 
1 year or less  $8,400   $1,400 
1 to 2 years   400    8,400 
2 to 3 years   10,000    10,000 
3 to 4 years   10,000    10,000 
4 to 5 years   10,000    10,000 
   $38,800   $39,800 

 

The Company maintains a $5.0 million line of credit with a commercial bank. At March 31, 2020 and December 31, 2019 the Company had outstanding balances on this note of $5.0 million. The note requires monthly payments of interest at a variable rate, and is due in full on May 25, 2020.

 

The Company maintains a $5.0 million line of credit with another commercial bank. At March 31, 2020 and December 31, 2019 the Company had outstanding balances on this note of $5.0 million. The note requires monthly payments of interest at a variable rate, and is due in full on May 19, 2020.

 

NOTE 8 – SUBORDINATED NOTES

 

During September 2017, the Company entered into subordinated note agreements with three separate commercial banks. The Company had outstanding balances of $11.5 million under these agreements as of March 31, 2020 and December 31, 2019. 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.

 

As a part of the Partnership acquisition, further detailed in Note 2, the Company assumed a subordinated note agreement with outstanding balance of $7.0 million, and a fair market value adjustment of $0.2 million ($0.1 million as of March 31, 2020 and December 31, 2019). The total amount outstanding was $7.1 million at March 31, 2020 and December 31, 2019. The note matures on October 1, 2025, requires quarterly interest-only payments at a rate of 7.1% prior to maturity, and can be prepaid without penalty after October 1, 2020.

 

NOTE 9 – REGULATORY MATTERS

 

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

 

The Economic Growth, Regulatory Relief, and Consumer Protection Act, signed into law in May 2018 raised the threshold for those bank holding companies subject to the Federal Reserve’s Small Bank Holding Company Policy Statement to $3 billion. As a result, as of the effective date of that change in 2018, the Company was no longer required to comply with the risk-based capital rules applicable to the Bank. The Federal Reserve may, however, require smaller bank holding companies to maintain certain minimum capital levels, depending upon general economic conditions and a bank holding company’s particular condition, risk profile and growth plans.

 

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 March 31, 2020 and December 31, 2019, the Bank met all capital adequacy requirements to which they are subject.

 

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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. The capital conservation buffer was 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 
March 31, 2020                                
Total capital (to risk-weighted assets):                                        
Corporation  $218,198    10.76%    NA      NA      NA      NA      NA      NA 
Bank  $225,087    11.11%  $162,142    8.00%  $212,811    10.50%  $202,678    10.00%
Tier 1 capital (to risk-weighted assets):                                        
Corporation  $186,646    9.20%    NA      NA      NA      NA      NA      NA 
Bank  $212,120    10.47%  $121,607    6.00%  $172,276    8.50%  $162,142    8.00%
Common Equity Tier 1 capital (to risk-weighted assets):                                        
Corporation  $186,646    9.20%    NA      NA      NA      NA      NA      NA 
Bank  $212,120    10.47%  $91,205    4.50%  $141,874    7.00%  $131,740    6.50%
Tier 1 capital (to average assets):                                        
Corporation  $186,646    8.68%    NA      NA      NA      NA      NA      NA 
Bank  $212,120    9.91%  $85,606    4.00%  $85,606    4.00%  $107,008    5.00%
December 31, 2019                                        
Total capital (to risk-weighted assets):                                        
Corporation  $208,900    10.35%    NA      NA      NA      NA      NA      NA 
Bank  $215,347    10.69%  $161,163    8.00%  $211,527    10.50%  $201,454    10.00%
Tier 1 capital (to risk-weighted assets):                                        
Corporation  $178,882    8.86%    NA      NA      NA      NA      NA      NA 
Bank  $203,951    10.12%  $120,872    6.00%  $171,236    8.50%  $161,163    8.00%
Common Equity Tier 1 capital (to risk-weighted assets):                                       
Corporation  $178,882    8.86%    NA      NA      NA      NA      NA      NA 
Bank  $203,951    10.12%  $90,654    4.50%  $141,018    7.00%  $130,945    6.50%
Tier 1 capital (to average assets):                                        
Corporation  $178,882    8.46%    NA      NA      NA      NA      NA      NA 
Bank  $203,951    9.67%  $84,390    4.00%   84,390    4.00%  $105,487    5.00%

 

NOTE 10 – COMMITMENTS AND CONTINGENCIES

 

The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate-lock commitments). Rate-lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans. Fair value is based on fees currently charged to enter into similar agreements and for fixed rate commitments also considers the difference between current levels of interest rates and committed rates. The notional amount of rate-lock commitments at March 31, 2020 and December 31, 2019 was approximately $68.8 million and $14.8 million, respectively.

 

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.

 

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The following commitments were outstanding:

 

   Notional Amount
   March 31, 2020   December 31, 2019 
Commitments to extend credit:          
Fixed  $44,700   $49,741 
Variable   341,993    333,468 
Credit card arrangements   9,641    11,148 
Letters of credit   17,186    17,121 

 

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) 
March 31, 2020                
Assets                    
Securities available for sale                    
Obligations of U.S. Government                    
sponsored agencies  $13,401   $   -   $13,401   $         - 
Obligations of states                    
and political subdivisions   62,061    -    62,061    - 
Mortgage-backed securities   54,243    -    54,243    - 
Corporate notes   42,365    -    42,365    - 
Mortgage servicing rights   4,287    -    4,287    - 
December 31, 2019                
Assets                    
Securities available for sale                    
Obligations of U.S. Government                    
sponsored agencies  $12,060   $-   $12,060   $- 
Obligations of states                    
and political subdivisions   54,771    -    54,771    - 
Mortgage-backed securities   51,720    -    51,720    - 
Corporate notes   62,955    -    62,955    - 
Mortgage servicing rights   4,287    -    4,287    - 

 

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

 

   March 31, 2020   December 31, 2019 
Total securities at beginning of period  $-   $400 
 Included in earnings   -    - 
 Included in other comprehensive income   -    - 
Purchases, issuance, and settlements   -    (400)
Transfer in and/or out of level 3   -    - 
Total securities at end of period  $-   $- 

 

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) 
March 31, 2020                
OREO  $4,530   $-   $-   $4,530 
Impaired Loans, net of impairment reserve   7,551    -    -    7,551 
   $12,081   $-   $-   $12,081 
December 31, 2019                    
OREO  $6,888   $-   $-   $6,888 
Impaired Loans, net of impairment reserve   6,847    -    -    6,847 
   $13,735   $-   $-   $13,735 

 

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 March 31, 2020              
               
Other real estate owned  Third party appraisals, sales contracts or brokered price options  Collateral discounts and estimated costs to sell   0% - 56%    32.3%
                 
Impaired loans  Third party appraisals and discounted cash flows  Collateral discounts and discount rates   0% - 100%    5.3%
                 
As of December 31, 2019              
               
Other real estate owned  Third party appraisals, sales contracts or brokered price options  Collateral discounts and estimated costs to sell   0% - 61%    33.5%
                 
Impaired loans  Third party appraisals and discounted cash flows  Collateral discounts and discount rates   0% - 100%    6.1%

 

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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.

 

25

 

 

The carrying value and estimated fair value of financial instruments at March 31, 2020 and December 31, 2019 follows:

 

       Fair Value 
March 31, 2020  Carrying
amount
   Level 1   Level 2   Level 3   Total 
Financial assets:                         
Cash and cash equivalents  $54,153   $54,153   $-   $-   $54,153 
Securities held to maturity   43,732    -    46,988    -    46,988 
Securities available for sale   172,070    -    172,070    -    172,070 
Loans held for sale   2,659    -    -    2,659    2,659 
Loans, net   1,752,275    -    -    1,774,641    1,774,641 
Other investments, at cost   7,332    -    -    7,332    7,332 
Mortgage servicing rights   4,287    -    4,287    -    4,287 
Cash surrender value of life insurance   25,105    25,105    -    -    25,105 
                          
Deposits  $1,847,209   $-   $-   $1,821,582   $1,821,582 
Securities sold under repurchase agreements   35,786    -    35,786    -    35,786 
Notes payable   48,792    -    48,792    -    48,792 
Subordinated notes   18,585    -    18,585    -    18,585 

 

       Fair Value 
December 31, 2019  Carrying
amount
   Level 1   Level 2   Level 3   Total 
Financial assets:                         
Cash and cash equivalents  $86,452   $86,452   $-   $-   $86,452 
Securities held to maturity   43,734    -    44,803    -    44,803 
Securities available for sale   181,506    -    181,506    -    181,506 
Loans held for sale   587    -    -    587    587 
Loans, net   1,724,947    -    -    1,723,542    1,723,542 
Other investments, at cost   4,933    -    -    4,933    4,933 
Mortgage servicing rights   4,287    -    4,287    -    4,287 
Cash surrender value of life insurance   24,945    24,945    -    -    24,945 
                          
Financial liabilities:                         
Deposits  $1,843,311   $-   $-   $1,783,638   $1,783,638 
Securities sold under repurchase agreements   45,865    -    45,865    -    45,865 
Notes payable   49,790    -    49,790    -    49,790 
Subordinated notes   18,622    -    18,622    -    18,622 

 

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.

 

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NOTE 12 – STOCK BASED COMPENSATION

 

The Company has made restricted share grants pursuant to the Bank First Corporation 2011 Equity 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, 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 March 31, 2020 and December 31, 2019, 202,569 and 177,462 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 Corporation common stock at the time of grant. The value of restricted stock grants that are expected to vest is amortized into expense over the vesting periods. For the three months ended March 31, 2020 and 2019, compensation expense of $0.2 million was recognized related to restricted stock awards.

 

As of March 31, 2020, there was $2.9 million of unrecognized compensation cost related to non-vested restricted stock awards granted under the plan. That cost is expected to be recognized over a weighted average period of 3.24 years. The aggregate grant date fair value of restricted stock awards that vested during the three months ended March 31, 2020, was approximately $0.6 million.

 

   For the three months ended March 31, 2020   For the three months ended March 31, 2019 
       Weighted-       Weighted- 
       Average Grant-       Average Grant- 
   Shares   Date Fair Value   Shares   Date Fair Value 
Restricted Stock                    
Outstanding at beginning of year   50,676   $43.03    51,776   $34.27 
Granted   25,107    61.49    17,015    56.62 
Vested   (16,800)   37.38    (16,039)   28.82 
Forfeited or cancelled   -    -    (176)   22.90 
Outstanding at end of year   58,983   $52.50    52,576   $43.31 

 

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NOTE 13 – LEASES

 

Accounting standards require lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements, establishing a right-of-use (“ROU”) model that requires a lessee to recognize a ROU lease asset and liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

 

Lessee Leases

 

The Company’s lessee leases are operating leases, and consist of leased real estate for branches. Options to extend and renew leases are generally exercised under normal circumstances. Advance notification is required prior to termination, and any noticing period is often limited to the months prior to renewal. Rent escalations are generally specified by a payment schedule, or are subject to a defined formula. The Company also elected the practical expedient to not separate lease and non-lease components for all leases, the majority of which consist of real estate common area maintenance expenses. Generally, leases do not include guaranteed residual values, but instead typically specify that the leased premises are to be returned in satisfactory condition with the Company liable for damages.

 

For operating leases, the lease liability and ROU asset (before adjustments) are recorded at the present value of future lease payments. Accounting standards require the use of the lease interest rate; however, this rate is typically not known. As an alternative, the use of an entity’s fully secured incremental borrowing rate is permitted. The Company is electing to utilize the Wall Street Journal Prime Rate on the date of lease commencement.

 

   Three-month period ended 
   March 31, 2020   March 31, 2019 
Amortization of ROU Assets - Operating Leases  $10   $16 
Interest on Lease Liabilities - Operating Leases   23    16 
Operating Lease Cost (Cost resulting from lease payments)   33    32 
ROU Assets - Operating Leases at beginning of period   1,699    - 
New ROU Assets - Operating Leases   -    1,744 
ROU Assets - Operating Leases at March 31,   1,689    1,744 
Weighted Average Lease Term (Years) - Operating Leases   31.54    31.68 
Weighted Average Discount Rate - Operating Leases   5.50%   5.50%

 

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liabilities as of March 31, 2020 is as follows:

 

   March 31, 2020 
Operating lease payments due:     
Within one year  $136 
After one but within two years   136 
After two but within three years   103 
After three but within four years   86 
After four years but within five years   86 
After five years   3,389 
Total undiscounted cash flows   3,936 
Discount on cash flows   (2,247)
Total operating lease liabilities  $1,689 

 

NOTE 14 – SUBSEQUENT EVENTS

 

COVID-19

 

In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. In late March in response to the COVID-19 pandemic, the government of Wisconsin and of most other states took preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential.

 

While banks such as Bank First have been designated an essential business, which allows us to continue to serve our customers, we serve many customers that have been deemed, or who are employed by businesses that have been deemed, to be non-essential. Many of our customers that have been categorized to date as essential businesses, or who are employed by businesses that have been categorized as essential businesses, have also been adversely affected by the COVID-19 pandemic.

 

The impact of the COVID-19 pandemic on the economy continues to evolve. The COVID-19 pandemic and its associated impacts on trade, travel, unemployment, consumer spending, and other economic activities has resulted in less economic activity and could have an adverse effect on our business, financial condition and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and our customers.

 

Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans and other products and services we offer, which are highly dependent on the business environment in our primary markets. We have actively reached out to our customers to provide guidance, direction and assistance in these uncertain times. We have also extended credit to our customers related to the Payroll Protection Program (“PPP”). As of May 11, 2020, we have secured funding of approximately 1,635 loans totaling approximately $266.8 million.

 

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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, 2019, included in our Annual Report and with our unaudited condensed accompanying notes set forth in this Quarterly Report on Form 10-Q for the quarterly period March 31, 2020.

 

FORWARD-LOOKING STATEMENTS

 

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

 

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

 

OVERVIEW

 

Bank First Corporation is 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 23 banking locations in Manitowoc, Outagamie, Brown, Winnebago, Sheboygan, Waupaca, Ozaukee, Monroe, Jefferson 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, 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 40% ownership interest in Ansay, an insurance agency providing clients throughout Wisconsin with insurance and risk management solutions (on October 1, 2019, TVG Holdings, Inc. purchased an additional 10% ownership interest in Ansay, increasing its ownership interest from 30% prior to that date). These unconsolidated subsidiary interests contribute noninterest income to the Bank through their underlying annual earnings.

 

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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.

 

On July 12, 2019, the Company consummated its merger with Partnership pursuant to the Agreement and Plan of Bank Merger, dated as of January 22, 2019 and as amended on April 30, 2019, by and among the Company and Partnership, whereby Partnership was merged with and into the Company, and Partnership Bank, Partnership’s wholly owned banking subsidiary, was merged with and into the Bank. The system integration was completed, and four branches of Partnership Bank opened on July 15, 2019 as branches of the bank, expanding the Bank’s presence into Ozaukee, Monroe and Jefferson counties.

 

On November 20, 2019, the Company entered into an Agreement and Plan of Merger with Tomah Bancshares, Inc. (“Timberwood”), a Wisconsin Corporation, under which Timberwood will merge with and into the Company and Timberwood’s banking subsidiary, Timberwood Bank, will merge with and into the Bank. The transaction is expected to close on May 15, 2020. Merger consideration consists of 100% common stock of the Company, and will total roughly $32,600,000, subject to the fair market valuation of the Company’s common stock on the date of closing. Based on results as of March 31, 2020, the combined company would have total assets of approximately $2.4 billion, loans of approximately $1.8 billion and deposits of approximately $2.0 billion.

 

RECENT EVENTS

 

During the first quarter of 2020, COVID-19 was declared a global pandemic by the World Health Organization and a National Public Health Emergency was declared in the United States. Shortly before the end of March 2020, in response to the COVID-19 pandemic, the government of Wisconsin and of most other states took preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential.

 

While banks such as Bank First have been designated an essential business, which allows us to continue to serve our customers, we serve many customers that have been deemed, or who are employed by businesses that have been deemed, to be non-essential. Many of our customers that have been categorized to date as essential businesses, or who are employed by businesses that have been categorized as essential businesses, have also been adversely affected by the COVID-19 pandemic.

 

The impact of the COVID-19 pandemic on the economy continues to evolve. The COVID-19 pandemic and its associated impacts on trade, travel, unemployment, consumer spending, and other economic activities has resulted in less economic activity and could have an adverse effect on our business, financial condition and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and our customers.

 

Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans and other products and services we offer, which are highly dependent on the business environment in our primary markets. We have actively reached out to our customers to provide guidance, direction and assistance in these uncertain times. We have also extended credit to our customers related to the Payroll Protection Program (“PPP”). As of May 11, 2020, we have secured funding of approximately 1,635 loans totaling approximately $266.8 million.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

 

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

 

   At or for the Three Months Ended 
(In thousands, except per share data)  3/31/2020   12/31/2019   9/30/2019   6/30/2019   3/31/2019 
Results of Operations:                         
                          
Interest income  $23,296   $23,795   $25,489   $20,158   $19,723 
Interest expense   4,653    5,015    5,176    4,784    4,523 
                          
Net interest income   18,643    18,780    20,313    15,374    15,200 
Provision for loan losses   975    1,125    3,000    500    625 
                          
Net interest income after provision for loan losses   17,668    17,655    17,313    14,874    14,575 
                          
Noninterest income   3,897    3,211    3,145    2,736    3,540 
Noninterest expense   12,741    11,182    12,087    9,955    9,536 
                          
Income before income tax expense   8,824    9,684    8,371    7,655    8,579 
Income tax expense   1,558    2,225    1,712    1,666    1,992 
                          
Net income  $7,266   $7,459   $6,659   $5,989   $6,587 
                          
Earnings per common share - basic  $1.03   $1.05   $0.95   $0.91   $1.00 
Earnings per common share - diluted   1.02    1.04    0.93    0.90    1.00 
                          
Common Shares:                         
                          
Basic weighted average   7,083,520    7,084,728    7,036,807    6,577,016    6,574,362 
Diluted weighted average   7,128,246    7,182,854    7,134,674    6,675,794    6,576,334 
Outstanding   7,155,955    7,084,728    7,084,728    6,576,171    6,577,045 
                          
Noninterest income / noninterest expense:                         
                          
Service charges  $916   $1,110   $918   $799   $679 
Income from Ansay   891    55    319    543    875 
Income from UFS   897    842    768    731    594 
Loan servicing income   462    (291)   374    244    223 
Net gain on sales of mortgage loans   460    627    533    154    87 
Net gain on sales of securities   -    611    -    23    234 
Noninterest income from strategic alliances   17    21    26    29    19 
Other noninterest income