10-Q 1 tv526289_10q.htm FORM 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C.  20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended June 30, 2019

 

OR

 

oTRANSITION 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  o

 

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

 

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

 

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

 

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

 

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

 

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 August 13, 2019, was 7,106,210 shares.

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page Number
Part I. Financial Information 3
ITEM 1. Financial Statements 3
  Consolidated Balance Sheets – June 30, 2019 (unaudited) and December 31, 2018 3
  Consolidated Statements of Income – Three and Six Months Ended June 30, 2019 and 2018 (unaudited) 4
  Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2019 and 2018  (unaudited) 5
  Consolidated Statements of Changes in Stockholders’ Equity – Six Months Ended June 30, 2019 and 2018  (unaudited) 6
  Consolidated Statements of Cash Flows – Six Months Ended June 30, 2019 and 2018 (unaudited) 7
  Notes to Unaudited Consolidated Financial Statements 9
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 31
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 61
ITEM 4. Controls and Procedures 63
Part II. Other Information 63
ITEM 1. Legal Proceedings 63
ITEM 1A. Risk Factors 63
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 63
ITEM 3. Defaults Upon Senior Securities 64
ITEM 4. Mine Safety Disclosures 64
ITEM 5. Other Information 64
ITEM 6. Exhibits 65
Signatures   66

 

  2 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS:

 

BANK FIRST CORPORATION

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

 

   June 30, 2019   December 31, 2018 
   (Unaudited)   (Audited) 
Assets          
Cash and due from banks  $19,204   $41,435 
Interest-bearing deposits   89,833    21,830 
Federal funds sold   16,837    44,478 
Cash and cash equivalents   125,874    107,743 
Securities held to maturity, at amortized cost ($40,552 and $40,477 fair value at June 30, 2019 and December 31, 2018, respectively)   39,537    40,768 
Securities available for sale, at fair value   120,083    118,906 
Loans, net   1,407,022    1,416,246 
Premises and equipment, net   28,097    24,489 
Goodwill   15,024    15,024 
Other investments   4,517    4,555 
Cash value of life insurance   24,488    24,178 
Intangible assets, net   4,974    5,297 
Other real estate owned ("OREO")   3,543    3,592 
Investment in minority-owned subsidiaries   26,434    25,397 
Other assets   6,874    6,970 
TOTAL ASSETS  $1,806,467   $1,793,165 
           
Liabilities and Stockholders' Equity          
Liabilities:          
Deposits:          
Interest-bearing deposits  $1,093,636   $1,108,402 
Noninterest-bearing deposits   481,362    448,765 
Total deposits   1,574,998    1,557,167 
Securities sold under repurchase agreements   20,034    31,489 
Subordinated notes   11,500    11,500 
Other liabilities   14,487    18,686 
Total liabilities   1,621,019    1,618,842 
Stockholders' equity:          
Serial preferred stock - $0.01 par value          
Authorized - 5,000,000 shares   -    - 
Common stock - $0.01 par value          
Authorized - 20,000,000 shares          
Issued - 7,368,083 shares as of June 30, 2019 and December 31, 2018          
Outstanding - 6,576,171 and 6,610,358 shares as of June 30, 2019 and December 31, 2018, respectively   74    74 
Additional paid-in capital   27,436    27,601 
Retained earnings   178,314    168,363 
Treasury stock, at cost - 791,912 and 757,725 shares          
     as of June 30, 2019 and December 31, 2018, respectively   (23,386)   (21,349)
Accumulated other comprehensive income (loss)   3,010    (366)
Total stockholders' equity   185,448    174,323 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $1,806,467   $1,793,165 

 

See accompanying notes to unaudited 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 June 30,    Six months ended June 30, 
   2019   2018   2019   2018 
     
Interest income:                    
Loans, including fees  $18,506   $17,888   $36,732   $35,614 
Securities:                    
Taxable   691    713    1,435    1,416 
Tax-exempt   413    448    839    914 
Other   548    323    875    737 
Total interest income   20,158    19,372    39,881    38,681 
Interest expense:                    
Deposits   4,442    2,797    8,667    5,160 
Securities sold under repurchase agreements   167    131    297    224 
Borrowed funds   175    675    343    1,247 
Total interest expense   4,784    3,603    9,307    6,631 
Net interest income   15,374    15,769    30,574    32,050 
Provision for loan losses   500    900    1,125    1,385 
Net interest income after provision for loan losses   14,874    14,869    29,449    30,665 
Noninterest income:                    
Service charges   799    786    1,478    1,632 
Income from Ansay and Associates, LLC ("Ansay")   543    562    1,418    1,758 
Income from UFS, LLC ('UFS")   731    586    1,325    1,195 
Loan servicing income   244    604    467    846 
Net gain on sales of mortgage loans   154    128    241    285 
Noninterest income from strategic alliances   29    21    48    44 
Other   213    340    1,042    710 
Total noninterest income   2,713    3,027    6,019    6,470 
Noninterest expense:                    
Salaries, commissions, and employee benefits   5,403    5,446    10,713    10,763 
Occupancy   832    532    1,681    1,882 
Data processing   960    925    1,873    1,864 
Postage, stationery, and supplies   192    159    315    326 
Net (gain) loss on sales and valuations of OREO   (135)   (38)   (99)   98 
Net (gain) loss on sales of securities   (23)   47    (23)   44 
Net gain on sales of other investments   -    -    (234)   - 
Advertising   53    54    127    106 
Charitable contributions   141    322    272    695 
Outside service fees   982    896    1,666    1,416 
Amortization of intangibles   161    189    322    378 
Other   1,366    1,532    2,621    2,469 
Total noninterest expense   9,932    10,064    19,234    20,041 
Income before provision for income taxes   7,655    7,832    16,234    17,094 
Provision for income taxes   1,666    1,431    3,658    3,631 
Net Income  $5,989   $6,401   $12,576   $13,463 
Earnings per share - basic  $0.91   $0.96   $1.91   $2.01 
Earnings per share - diluted  $0.90   $0.96   $1.89   $2.01 
Dividends per share  $0.20   $0.16   $0.40   $0.32 

 

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 June 30,    Six months ended June 30, 
   2019   2018   2019   2018 
     
Net Income  $5,989   $6,401   $12,576   $13,463 
Other comprehensive income (loss):                    
Unrealized gains (losses) on available for sale securities:                    
Unrealized holding gains (losses) arising during period   1,961    (406)   4,318    (2,180)
Amortization of unrealized holding gains on securities transferred from available for sale to held to maturity   (11)   (13)   (22)   (53)
Reclassification adjustment for (gains) losses included in net income   (23)   47    (23)   44 
Income tax benefit (expense)   (405)   78    (897)   543 
Total other comprehensive income (loss)   1,522    (294)   3,376    (1,646)
Comprehensive income  $7,511   $6,107   $15,952   $11,817 

 

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)

 

                       Accumulated     
   Serial       Additional           Other   Total 
   Preferred   Common   Paid-in   Retained   Treasury   Comprehensive   Stockholders' 
   Stock   Stock   Capital   Earnings   Stock   Income (Loss)   Equity 
                             
Balance at January 1, 2018  $-   $74   $27,528   $145,879   $(12,730)  $977   $161,728 
Net income   -    -    -    7,062    -    -    7,062 
Other comprehensive loss   -    -    -    -    -    (1,352)   (1,352)
Purchase of treasury stock   -    -    -    -    (5,648)   -    (5,648)
Sale of treasury stock   -    -    -    -    951    -    951 
Cash dividends ($0.16 per share)   -    -    -    (1,066)   -    -    (1,066)
Amortization of stock-based compensation   -    -    121    -    -    -    121 
Vesting of restricted stock awards   -    -    (433)   -    433    -    - 
                                    
Balance at March 31, 2018   -    74    27,216    151,875    (16,994)   (375)   161,796 
Net income   -    -    -    6,401    -    -    6,401 
Other comprehensive loss   -    -    -    -    -    (294)   (294)
Purchase of treasury stock   -    -    -    -    (2,171)   -    (2,171)
Sale of treasury stock   -    -    -    -    396    -    396 
Cash dividends ($0.16 per share)   -    -    -    (1,072)   -    -    (1,072)
Amortization of stock-based compensation   -    -    144    -    -    -    144 
Vesting of restricted stock awards   -    -    (50)   -    50    -    - 
                                    
Balance at June 30, 2018  $-   $74   $27,310   $157,204   $(18,719)  $(669)  $165,200 
                                    
Balance at January 1, 2019  $-   $74   $27,601   $168,363   $(21,349)  $(366)  $174,323 
Net income   -    -    -    6,587    -    -    6,587 
Other comprehensive income   -    -    -    -    -    1,854    1,854 
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)   1,488    179,178 
Net income   -    -    -    5,989    -    -    5,989 
Other comprehensive income   -    -    -    -    -    1,522    1,522 
Purchase of treasury stock   -    -    -    -    (161)   -    (161)
Issuance of treasury stock as deferred compensation payout   -    -    12    -    45    -    57 
Cash dividends ($0.20 per share)   -    -    -    (1,319)   -    -    (1,319)
Amortization of stock-based compensation   -    -    182    -    -    -    182 
Vesting of restricted stock awards   -    -    (63)   -    63    -    - 
                                    
Balance at June 30, 2019  $-   $74   $27,436   $178,314   $(23,386)  $3,010   $185,448 

 

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)

 

   Six Months Ended June 30, 
   2019   2018 
Cash flows from operating activities:          
Net income  $12,576   $13,463 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   1,125    1,385 
Depreciation and amortization of premises and equipment   551    579 
Amortization of intangibles   322    378 
Net amortization of securities   186    209 
Amortization of stock-based compensation   334    266 
Accretion of purchase accounting valuations   (2,158)   (3,698)
Net change in deferred loan fees and costs   (136)   (131)
Change in fair value of mortgage servicing rights ("MSR")   (413)   (226)
Loss from sale and disposal of premises and equipment   23    123 
(Gain) loss on sale of OREO and valuation allowance   (99)   98 
Proceeds from sales of mortgage loans   21,621    17,525 
Originations of mortgage loans held for sale   (21,589)   (17,864)
Gain on sales of mortgage loans   (241)   (285)
Realized (gain) loss on sale of securities available for sale and other investments   (257)   44 
Undistributed income of UFS joint venture   (1,325)   (1,195)
Undistributed income of Ansay joint venture   (1,418)   (1,758)
Net earnings on life insurance   (310)   (302)
(Increase) decrease in other assets   (779)   1,113 
Decrease in other liabilities   (5,803)   (5,149)
Net cash provided by operating activities   2,210    4,575 
Cash flows from investing activities:          
Activity in securities available for sale and held to maturity:          
Sales   748    3,326 
Maturities, prepayments, and calls   6,408    6,964 
Purchases   (3,015)   (16,458)
Net change in loans   9,402    (34,099)
Dividends received from UFS   1,067    501 
Dividends received from Ansay   639    501 
Proceeds from sale of OREO   1,070    1,771 
Proceeds from sales of other investments   984    - 
Net purchases of FHLB Stock   (90)   (204)
Proceeds from sale of premises and equipment   -    149 
Purchases of premises and equipment   (2,464)   (5,608)
Net cash provided by (used in) investing activities   14,749    (43,157)

  

  7 

 

 

ITEM 1. Financial Statements Continued:

 

BANK FIRST CORPORATION

Consolidated Statements of Cash Flows (Continued)

(In thousands) (Unaudited)

 

   Six Months ended June 30, 
   2019   2018 
Cash flows from financing activities:
Net increase (decrease) in deposits  $17,902   $(10,846)
Net decrease in securities sold under repurchase agreements   (11,455)   (34,135)
Proceeds from advances of borrowed funds   4,000    687,700 
Repayment of borrowed funds   (4,000)   (652,200)
Dividends paid   (2,625)   (2,138)
Proceeds from sales of common stock   -    1,347 
Repurchase of common stock   (2,650)   (7,819)
Net cash (used in) provided by financing activities   1,172    (18,091)
Net increase (decrease) in cash and cash equivalents   18,131    (56,673)
Cash and cash equivalents at beginning of period   107,743    101,977 
Cash and cash equivalents at end of period  $125,874   $45,304 
           
Supplemental disclosures of cash flow information:
           
Cash paid during the period for:          
Interest  $9,117   $7,453 
Income taxes   3,171    2,325 
Supplemental schedule of noncash activities:          
Loans transferred to OREO   920    649 
MSR resulting from sale of loans   209    164 
Amortization of unrealized holding gains on securities transferred from available for sale to held to maturity recognized in other from available for sale to held to maturity recognized in other comprehensive income, net of tax   (17)   (40)
Change in unrealized gains and losses on investment securities available for sale, net of tax   3,375    (1,606)
Payment of deferred compensation through issuance of treasury stock   114    - 

 

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 nineteen locations located in Manitowoc, Outagamie, Brown, Winnebago, Sheboygan, Waupaca 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, 2018 (“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 February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The update required lessees to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases. The provisions of the update also include (a) defining direct costs to only include those incremental costs that would not have been incurred if the lease had not been entered into, (b) circumstances under which the transfer contract in a sale-leaseback transaction should be accounted for as the sale of an asset by the seller-lessee and the purchase of an asset by the buyer-lessor, and (c) additional disclosure requirements. The provisions of this update became effective for interim and annual periods beginning after December 15, 2018. Adoption of this guidance required the Company to record a right-of-use asset approximating $1.7 million, included in premises and equipment, and a corresponding lease liability, included in other liabilities.

 

In March 2017, the FASB issued ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount, which continue to be amortized to maturity. This guidance became effective for interim and annual periods beginning after December 15, 2018. The adoption of this update did not have a material 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.” ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as, the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available for sale and held to maturity debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will become effective for interim and annual periods beginning after December 15, 2019. Management is currently evaluating the potential impact of this update, although the general expectation in the banking industry is that the implementation of this standard will result in higher required balances in the ALL. During July 2019 the FASB proposed delaying the effective date of ASU 2016-13 for smaller, publicly traded companies, until interim and annual periods beginning after December 15, 2022. If this proposal is enacted, this delay would apply to the Bank as long as it remained a “Smaller reporting company” as defined in Rule 12b-2 of the Exchange Act.

 

NOTE 2 – ACQUISITIONS

 

On October 27, 2017, the Company completed a merger with Waupaca Bancorporation, Inc. (“Waupaca”), a bank holding company headquartered in Waupaca, Wisconsin, pursuant to the Agreement and Plan of Bank Merger, dated as of May 11, 2017 and as amended on July 20, 2017, by and among the Company, BFNC Merger Sub, LLC, a wholly-owned subsidiary of the Company, and Waupaca, whereby Waupaca merged with and into the Company, and First National Bank, Waupaca’s wholly-owned banking subsidiary, was merged with and into the Bank. Waupaca’s principal activity was the ownership and operation of First National Bank, a national banking institution that operated eight (8) branches in Wisconsin at the time of closing. The merger consideration totaled approximately $78.1 million, 70% of which was distributed in cash and 30% of which was distributed in the form of Company common stock.

 

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

 

The Company entered into an Agreement and Plan of Merger with Partnership Community Bancshares, Inc. (“Partnership”), a Wisconsin Corporation, dated as of January 22, 2019 and as amended on April 30, 2019, under which Partnership will merge with and into the Company and Partnership’s banking subsidiary, Partnership Bank, will merge with and into the Bank. The transaction closed on July 12, 2019. Merger consideration consisted of 65% common stock of the Company and 35% cash, and totalled approximately $49.6 million.

 

We marked Partnership’s assets and liabilities to fair value based on information available at the time of acquisition. We acquired approximately $306.1 million in assets at fair value from Partnership and added four branches with approximately $272.6 million in loans and approximately $268.9 million in deposits. We expect to record goodwill of approximately $30.1 million and a core deposit intangible asset of approximately $5.4 million as a result of the merger. The Company is still finalizing the fair value estimates. The fair value results are preliminary and subject to refinement for up to one year after the closing as additional information becomes available.

 

Additional information regarding the Partnership merger is included in Note 14, “Subsequent Events.”

 

NOTE 3 – EARNINGS PER SHARE

 

Basic earnings per share are computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share are computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding and potential common shares using the treasury stock method.

 

  10 

 

 

A reconciliation of the numerators and denominators of the earnings per common share and earnings per common share assuming dilution, for the three and six months ended June 30, 2019 and 2018, are presented below:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2019   2018   2019   2018 
Net income from operations  $5,989   $6,401   $12,576   $13,463 
                     
Weighted average common shares outstanding   6,577,016    6,672,344    6,575,696    6,692,523 
Effect of dilutive potential common shares   98,778    -    66,526    - 
Diluted weighted average common shares outstanding   6,675,794    6,672,344    6,642,222    6,692,523 
                     
Earnings per share - basic  $0.91   $0.96   $1.91   $2.01 
Earnings per share - diluted  $0.90   $0.96   $1.89   $2.01 

  

NOTE 4 – SECURITIES

 

The Company’s securities available for sale as of June 30, 2019 and December 31, 2018 is summarized as follows:

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Estimated 
   Cost   Gains   Losses   Fair Value 
                 
June 30, 2019                    
Obligations of states and political subdivisions  $49,030   $2,155   $(4)  $51,181 
Mortgage-backed securities   50,610    1,446    (25)   52,031 
Corporate notes   16,761    211    (101)   16,871 
Total available for sale securities  $116,401   $3,812   $(130)  $120,083 
                     
December 31, 2018                    
Obligations of states and political subdivisions  $51,292   $709   $(108)  $51,893 
Mortgage-backed securities   51,519    66    (1,016)   50,569 
Corporate notes   16,708    -    (264)   16,444 
Total available for sale securities  $119,519   $775   $(1,388)  $118,906 


  11 

 

  

The Company’s securities held to maturity as of June 30, 2019 and December 31, 2018 is summarized as follows:


       Gross   Gross     
   Amortized   Unrealized   Unrealized   Estimated 
   Cost   Gains   Losses   Fair Value 
                 
June 30, 2019                    
U.S. Treasury securities  $28,978   $1,004   $(2)  $29,980 
Obligations of states and political subdivisions   10,559    13    -    10,572 
Total held to maturity securities  $39,537   $1,017   $(2)  $40,552 
                     
December 31, 2018                    
U.S. Treasury securities  $28,975   $92   $(389)  $28,678 
Obligations of states and political subdivisions   11,793    6    -    11,799 
Total held to maturity securities  $40,768   $98   $(389)  $40,477 

  

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 
                         
June 30, 2019 - Available for Sale                              
Obligations of states and political subdivisions  $-   $-   $1,646   $(4)  $1,646   $(4)
Mortgage-backed securities   -    -    3,460    (25)   3,460    (25)
Corporate notes   -    -    7,785    (101)   7,785    (101)
Totals  $-   $-   $12,891   $(130)  $12,891   $(130)
                               
June 30, 2019 - Held to Maturity                              
U.S. Treasury securities  $-   $-   $1,494   $(2)  $1,494   $(2)
                               
December 31, 2018 - Available for Sale                              
Obligations of states and political subdivisions  $10,024   $(64)  $4,132   $(44)  $14,156   $(108)
Mortgage-backed securities   13,352    (183)   31,718    (833)   45,070    (1,016)
Corporate notes   -    -    12,531    (264)   12,531    (264)
Totals  $23,376   $(247)  $48,381   $(1,141)  $71,757   $(1,388)
                               
December 31, 2018 - Held to Maturity                              
U.S. Treasury securities  $8,422   $(46)  $11,580   $(343)  $20,002   $(389)

 

  12 

 

 

As of June 30, 2019, 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 six months ended June 30, 2019 or 2018.

 

The following is a summary of amortized cost and estimated fair value of securities by contractual maturity as of June 30, 2019. 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  $2,533   $2,573   $2,324   $2,322 
Due after one year through five years   23,122    23,421    14,638    14,890 
Due after five years through ten years   9,827    10,311    19,666    20,431 
Due after ten years   30,309    31,747    2,909    2,909 
Subtotal   65,791    68,052    39,537    40,552 
Mortgage-backed securities   50,610    52,031    -    - 
Total  $116,401   $120,083   $39,537   $40,552 

  

The following is a summary of the proceeds from sales of securities available for sale, as well as gross gains and losses for the six months ended June 30, 2019 and 2018:

 

   2019   2018 
Proceeds from sales of securities  $748   $3,326 
Gross gains on sales   23    29 
Gross losses on sales   -    73 

 

  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 June 30, 2019 and December 31, 2018:

 

   June 30,   December 31, 
   2019   2018 
         
Commercial/industrial  $271,838   $297,576 
Commercial real estate - owner occupied   415,451    416,097 
Commercial real estate - non-owner occupied   255,072    252,717 
Construction and development   73,522    60,927 
Residential 1-4 family   370,261    368,673 
Consumer   28,138    26,854 
Other   5,493    6,369 
Subtotals   1,419,775    1,429,213 
ALL   (12,170)   (12,248)
Loans, net of ALL   1,407,605    1,416,965 
Deferred loan fees and costs   (583)   (719)
Loans, net  $1,407,022   $1,416,246 

  

The ALL by loan type as of June 30, 2019 and 2018 is summarized as follows:

 

   Commercial /
Industrial
   Commercial
Real Estate -
Owner
Occupied
  

Commercial
Real Estate -
Non - Owner

Occupied

   Construction
and
Development
   Residential
1-4 Family
   Consumer   Other   Unallocated   Total 
                                     
ALL - January 1, 2019  $3,021   $3,459   $2,100   $725   $2,472   $148   $32   $291   $12,248 
Charge-offs   (594)   (659)   (54)   -    (11)   (11)   (8)   -    (1,337)
Recoveries   1    2    1    -    122    4    4    -    134 
Provision   (285)   2,631    (99)   (314)   (556)   (2)   1    (251)   1,125 
ALL - June 30, 2019   2,143    5,433    1,948    411    2,027    139    29    40    12,170 
                                              
ALL ending balance individually evaluated for impairment   -    2,285    -    -    -    -    -    -    2,285 
                                              
ALL ending balance collectively evaluated for impairment  $2,143   $3,148   $1,948   $411   $2,027   $139   $29   $40   $9,885 
                                              
Loans outstanding - June 30, 2019  $271,838   $415,451   $255,072   $73,522   $370,261   $28,138   $5,493   $-   $1,419,775 
Loans ending balance individually evaluated for impairment   -    9,992    -    -    176    -    -    -    10,168 
                                              
Loans ending balance collectively evaluated for impairment  $271,838   $405,459   $255,072   $73,522   $370,085   $28,138   $5,493   $-   $1,409,607 

 

  14 

 

  

   Commercial /
Industrial
   Commercial
Real Estate -
Owner
Occupied
   Commercial
Real Estate -
Non - Owner
Occupied
   Construction
and
Development
   Residential
1-4 Family
   Consumer   Other   Unallocated   Total 
                                     
ALL - January 1, 2018  $2,362   $2,855   $1,987   $945   $2,728   $191   $23   $521   $11,612 
Charge-offs   -    (17)   (1)   (83)   (81)   (3)   (23)   -    (208)
Recoveries   1    58    2    -    188    3    6    -    258 
Provision   1,042    385    177    16    (33)   57    43    (302)   1,385 
ALL - June 30, 2018   3,405    3,281    2,165    878    2,802    248    49    219    13,047 
                                              
ALL ending balance individually evaluated for impairment   -    498    -    -    160    -    -    -    658 
                                              
ALL ending balance collectively evaluated for impairment  $3,405   $2,783   $2,165   $878   $2,642   $248   $49   $219   $12,389 
                                              
Loans outstanding - June 30, 2018  $314,087   $415,097   $226,677   $67,558   $365,502   $40,226   $5,714   $-   $1,434,861 
Loans ending balance individually evaluated for impairment   -    652    -    -    709    -    -    -    1,361 
                                              
Loans ending balance collectively evaluated for impairment  $314,087   $414,445   $226,677   $67,558   $364,793   $40,226   $5,714   $-   $1,433,500 

 

The Company’s past due loans as of June 30, 2019 is summarized as follows:

 

       90 Days         
   30-89 Days   or more         
   Past Due   Past Due         
   Accruing   and Accruing   Non-Accrual   Total 
                 
Commercial/industrial  $-   $589   $665   $1,254 
Commercial real estate - owner occupied   348    2,567    11,914    14,829 
Commercial real estate - non-owner occupied   -    -    -    - 
Construction and development   919    -    -    919 
Residential 1-4 family   744    276    1,028    2,048 
Consumer   61    1    4    66 
Other   -    -    -    - 
   $2,072   $3,433   $13,611   $19,116 

 

  15 

 

 

The Company’s past due loans as of December 31, 2018 is summarized as follows:

 

       90 Days         
   30-89 Days   or more         
   Past Due   Past Due         
   Accruing   and Accruing   Non-Accrual   Total 
                 
Commercial/industrial  $76   $-   $8,001   $8,077 
Commercial real estate - owner occupied   59    -    10,311    10,370 
Commercial real estate - non-owner occupied   -    58    233    291 
Construction and development   -    -    -    - 
Residential 1-4 family   275    362    1,549    2,186 
Consumer   9    3    5    17 
Other   -    -    -    - 
   $419   $423   $20,099   $20,941 

  

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

 

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

 

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

 

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

 

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

 

The breakdown of loans by risk rating as of June 30, 2019 is as follows:

 

   Pass (1-5)   6   7   8   Total 
                          
Commercial/industrial  $255,273   $6,127   $10,438   $-   $271,838 
Commercial real estate - owner occupied   381,034    4,237    30,180    -    415,451 
Commercial real estate - non-owner occupied   253,020    1,213    839    -    255,072 
Construction and development   73,522    -    -    -    73,522 
Residential 1-4 family   368,774    -    1,487    -    370,261 
Consumer   28,135    -    3    -    28,138 
Other   5,493    -    -    -    5,493 
                          
   $1,365,251   $11,577   $42,947   $-   $1,419,775 

  

  16 

 

 

The breakdown of loans by risk rating as of December 31, 2018 is as follows:

 

   Pass (1-5)   6   7   8   Total 
                          
Commercial/industrial  $277,993   $7,309   $12,274   $-   $297,576 
Commercial real estate - owner occupied   375,614    5,670    34,789    24    416,097 
Commercial real estate - non-owner occupied   249,625    -    3,092    -    252,717 
Construction and development   60,866    -    61    -    60,927 
Residential 1-4 family   364,289    664    3,718    2    368,673 
Consumer   26,835    -    18    1    26,854 
Other   6,369    -    -    -    6,369 
                          
   $1,361,591   $13,643   $53,952   $27   $1,429,213 

  

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.

 

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.

 

  17 

 

 

A summary of impaired loans individually evaluated as of June 30, 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   Unallocated   Total 
                                     
With an allowance recorded:                                             
Recorded investment  $-   $6,695   $-   $-   $-   $-   $-   $-   $6,695 
Unpaid principal balance   -    6,695    -    -    -    -    -    -    6,695 
Related allowance   -    2,285    -    -    -    -    -    -    2,285 
                                              
With no related allowance recorded:                                             
Recorded investment  $-   $3,297   $-   $-   $176   $-   $-   $-   $3,473 
Unpaid principal balance   -    3,297    -    -    176    -    -    -    3,473 
Related allowance   -    -    -    -    -    -    -    -    - 
                                              
Total:                                             
Recorded investment  $-   $9,992   $-   $-   $176   $-   $-   $-   $10,168 
Unpaid principal balance   -    9,992    -    -    176    -    -    -    10,168 
Related allowance   -    2,285    -    -    -    -    -    -    2,285 
                                              
Average recorded investment  $2,834   $8,894   $-   $-   $439   $-   $-   $-   $12,167 

 

  18 

 

 

A summary of impaired loans individually evaluated as of December 31, 2018 is as follows:

 

   Commercial/
Industrial
   Commercial
Real Estate -
Owner
Occupied
   Commercial
Real Estate -
Non - Owner
Occupied
   Construction
and
Development
   Residential
1-4 Family
   Consumer   Other   Unallocated   Total 
                                     
With an allowance recorded:                                             
Recorded investment  $5,667   $2,099   $-   $-   $523   $-   $-   $-   $8,289 
Unpaid principal balance   5,667    2,099    -    -    523    -    -    -    8,289 
Related allowance   566    353    -    -    160    -    -    -    1,079 
                                              
With no related allowance recorded:                                             
Recorded investment  $-   $5,697   $-   $-   $179   $-   $-   $-   $5,876 
Unpaid principal balance   -    5,697    -    -    179    -    -    -    5,876 
Related allowance   -    -    -    -    -    -    -    -    - 
                                              
Total:                                             
Recorded investment  $5,667   $7,796   $-   $-   $702   $-   $-   $-   $14,165 
Unpaid principal balance   5,667    7,796    -    -    702    -    -    -    14,165 
Related allowance   566    353    -    -    160    -    -    -    1,079 
                                              
Average recorded investment  $2,834   $4,036   $-   $-   $706   $-   $-   $-   $7,576 

  

Interest recognized while these loans were impaired is considered immaterial to the consolidated financial statements for the six months ended June 30, 2019 and 2018.

 

The following table presents loans acquired with deteriorated credit quality as of June 30, 2019 and December 31, 2018. 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.

 

   June 30, 2019   December 31, 2018 
   Recorded
Investment
   Unpaid
Principal
Balance
   Recorded
Investment
   Unpaid
Principal
Balance
 
Commercial & Industrial  $417   $420   $555   $701 
Commercial real estate - owner occupied   1,318    1,932    1,558    2,069 
Commercial real estate - non-owner occupied   -    -    233    475 
Construction and development   226    250    171    171 
Residential 1-4 family   1,072    1,170    1,664    1,828 
Consumer   -    -    -    - 
Other   -    -    -    - 
   $3,033   $3,772   $4,181   $5,244 

  

  19 

 

 

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

 

The following table represents the change in the accretable and non-accretable components of discounts on loans acquired with deteriorated credit quality for the periods ended June 30, 2019, and December 31, 2018:

 

   June 30, 2019   December 31, 2018 
   Accretable   Non-accretable   Accretable   Non-accretable 
   discount   discount   discount   discount 
                 
Balance at beginning of period  $318   $745   $583   $800 
Acquired balance, net   -    -    -    - 
Reclassifications between accretable and non-accretable   203    (203)   55    (55)
Accretion to loan interest income   (324)   -    (320)   - 
Disposals of loans   -    -    -    - 
Balance at end of period  $197   $542   $318   $745 

  

A troubled debt restructuring (TDR) includes a loan modification where a borrower is experiencing financial difficulty and we grant a concession to that borrower that we would not otherwise consider except for the borrower’s financial difficulties. A TDR may be either on accrual or nonaccrual status based upon the performance of the borrower and management’s assessment of collectability. If a TDR is placed on nonaccrual status, it remains there until a sufficient period of performance under the restructured terms has occurred at which time it is returned to accrual status, generally six months. As of June 30, 2019 and December 31, 2018 the Company had specific reserves of $2.1 million and $0.4 million for TDRs, respectively, and none of them have subsequently defaulted. There were no loan modifications resulting in TDRs during the six months ended June 30, 2019 and 2018.

 

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.

 

  20 

 

 

Following is an analysis of activity in the MSR asset:

 

   Six Months Ended   Year Ended 
   June 30, 2019   December 31, 2018 
         
Fair value at beginning of year  $3,085   $2,610 
Servicing asset additions   209    356 
Loan payments and payoffs   (246)   (475)
Changes in valuation inputs and assumptions used in the valuation model   37    594 
Amount recognized through earnings   -    475 
Fair value at end of period  $3,085   $3,085 
           
Unpaid principal balance of loans serviced for others  $319,173   $316,480 
Mortgage servicing rights as a percent of loans serviced for others   0.97    0.97 

  

The primary economic assumptions utilized by the Company in measuring the value of MSRs were constant prepayment speeds of 8.3 months as of June 30, 2019 and December 31, 2018, and discount rates of 10% as of both period ends.

 

NOTE 7 – NOTES PAYABLE

 

From time to time the Company utilizes short-term Federal Home Loan Bank (“FHLB”) advances to fund liquidity. The Bank had no advances outstanding from FHLB at June 30, 2019 or December 31, 2018.

 

The Company maintains a $5.0 million line of credit with a commercial bank. At June 30, 2019 and December 31, 2018, the Company had no outstanding balances on this note. 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. There were no outstanding balances on this note at June 30, 2019 or December 31, 2018. 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 June 30, 2019 and December 31, 2018. These notes were all issued with 10- year maturities, carry interest at a variable rate payable quarterly, are callable on or after the sixth anniversary of the issuance dates, and qualify for Tier 2 capital for regulatory purposes.

 

NOTE 9 – REGULATORY MATTERS

 

Banks and 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.

  

  21 

 

 

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 June 30, 2019 and December 31, 2018, the Bank met all capital adequacy requirements to which they are subject.

 

Beginning in 2016, an additional conservation buffer was added to the minimum requirements for capital adequacy purposes, subject to a three year phase-in period. As of December 31, 2018, the buffer was 1.88%. 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 
                                 
June 30, 2019                                        
Total capital (to risk-weighted assets):                                        
Company  $189,194    11.99%    NA      NA      NA      NA      NA      NA  
Bank  $187,186    11.88%  $126,048    8.00%  $165,437    10.50%  $157,560    10.00%
Tier 1 capital (to risk-weighted assets):                                        
Company  $165,524    10.49%    NA      NA      NA      NA      NA      NA  
Bank  $175,016    11.11%  $94,536    6.00%  $133,926    8.50%  $126,048    8.00%
Common Equity Tier 1 capital (to risk-weighted assets):                                        
Company  $165,524    10.49%    NA      NA      NA      NA      NA      NA  
Bank  $175,016    11.11%  $70,902    4.50%  $110,292    7.00%  $102,414    6.50%
Tier 1 capital (to average assets):                                        
Company  $165,524    9.27%    NA      NA      NA      NA      NA      NA  
Bank  $175,016    9.85%  $71,105    4.00%  $71,105    4.00%  $88,881    5.00%
December 31, 2018                                        
Total capital (to risk-weighted assets):                                        
Company  $181,201    11.35%    NA      NA      NA      NA      NA      NA  
Bank  $178,668    11.21%  $127,497    8.00%  $157,459    9.88%  $159,372    10.00%
Tier 1 capital (to risk-weighted assets):                                        
Company  $157,453    9.86%    NA      NA      NA      NA      NA      NA  
Bank  $166,420    10.44%  $95,623    6.00%  $125,585    7.88%  $127,497    8.00%
Common Equity Tier 1 capital (to risk-weighted assets):                                        
Company  $157,453    9.86%    NA      NA      NA      NA      NA      NA  
Bank  $166,420    10.44%  $71,717    4.50%  $101,679    6.38%  $103,592    6.50%
Tier 1 capital (to average assets):                                        
Company  $157,453    9.06%    NA      NA      NA      NA      NA      NA  
Bank  $166,420    9.59%  $69,410    4.00%  69,410    4.00%  $86,762    5.00%

 

NOTE 10 – COMMITMENTS

 

The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate-lock commitments). Rate-lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans. Fair value is based on fees currently charged to enter into similar agreements and for fixed rate commitments also considers the difference between current levels of interest rates and committed rates. The notional amount of rate-lock commitments at June 30, 2019 and December 31, 2018, respectively, was approximately $0.7 million and $3.3 million.

 

  22 

 

 

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

 

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

 

The following commitments were outstanding:

 

   Notional Amount 
   June 30, 2019   December 31, 2018 
Commitments to extend credit:          
Fixed  $44,412   $57,911 
Variable   251,085    268,541 
Credit card arrangements   8,064    7,119 
Letters of credit   23,962    25,261 

  

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.

 

  23 

 

 

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) 
                 
June 30, 2019                    
Assets                    
Securities available for sale                    
Obligations of states and political subdivisions  $51,181   $-   $50,781   $400 
Mortgage-backed securities   52,031    -    52,031    - 
Corporate notes   16,871    -    16,871    - 
Mortgage servicing rights   3,085    -    3,085    - 
                     
December 31, 2018                    
Assets                    
Securities available for sale                    
Obligations of states and political subdivisions  $51,893   $-   $51,493   $400 
Mortgage-backed securities   50,569    -    50,569    - 
Corporate notes   16,444    -    16,444    - 
Mortgage servicing rights   3,085    -    3,085    - 

 

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

 

   June 30, 2019   December 31, 2018 
         
Total securities at beginning of period  $400   $500 
Included in earnings   -    - 
Included in other comprehensive income   -    - 
Purchases, issuance, and settlements   -    (100)
Transfer in and/or out of level 3   -    - 
Total securities at end of period  $400   $400 

 

  24 

 

 

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) 
June 30, 2019                
Other real estate owned  $3,543   $-   $-   $3,543 
Impaired Loans, net of impairment reserve   13,008    -    -    13,008 
   $16,551   $-   $-   $16,551 
December 31, 2018                    
Other real estate owned  $3,592   $-   $-   $3,592 
Impaired Loans, net of impairment reserve   20,872    -    -    20,872 
   $24,464   $-   $-   $24,464 

  

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 June 30, 2019             
Other real estate owned  Third party appraisals, sales contracts or brokered price options  Collateral discounts and estimated costs to sell  0% - 40%   21.3%
               
Impaired loans  Third party appraisals and discounted cash flows  Collateral discounts and discount rates  0% - 100%   4.6%
               
As of December 31, 2018              
Other real estate owned  Third party appraisals, sales contracts or brokered price options  Collateral discounts and estimated costs to sell  0% - 40%   18.6%
               
Impaired loans  Third party appraisals and discounted cash flows  Collateral discounts and discount rates  0% - 100%   9.3%

 

  25 

 

 

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 — 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.

 

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.

 

  26 

 

 

The carrying value and estimated fair value of financial instruments at June 30, 2019 and December 31, 2018 follows:

 

       Fair Value 
June 30, 2019  Carrying
amount
   Level 1   Level 2   Level 3   Total 
Financial assets:                         
Cash and cash equivalents  $125,874   $125,874   $-   $-   $125,874 
Securities held to maturity   39,537    -    40,552    -    40,552 
Securities available for sale   120,083    -    119,683    400    120,083 
Loans, net   1,407,022    -    -    1,393,494    1,393,494 
Other investments   4,517    -    -    4,517    4,517 
Mortgage servicing rights   3,085    -    3,085    -    3,085 
Cash surrender value of life insurance   24,488    24,488    -    -    24,488 
                          
Deposits  $1,574,998   $-   $-   $1,560,172   $1,560,172 
Securities sold under repurchase agreements   20,034    -    20,034    -    20,034 
Subordinated notes   11,500    -    11,500    -    11,500 

 

       Fair Value 
December 31, 2018  Carrying
amount
   Level 1   Level 2   Level 3   Total 
Financial assets:                         
Cash and cash equivalents  $107,743   $107,743   $-   $-   $107,743 
Securities held to maturity   40,768    -    40,477    -    40,477 
Securities available for sale   118,906    -    118,506    400    118,906 
Loans, net   1,416,246    -    -    1,400,538    1,400,538 
Other investments, at cost   4,555    -    -    4,555    4,555 
Mortgage servicing rights   3,085    -    3,085    -    3,085 
Cash surrender value of life insurance   24,178    24,178    -    -    24,178 
                          
Financial liabilities:                         
Deposits  $1,557,167   $-   $-   $1,449,552   $1,449,552 
Securities sold under repurchase agreements   31,489    -    31,489    -    31,489 
Subordinated notes   11,500    -    11,500    -    11,500 

  

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

 

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

 

  27 

 

 

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

 

NOTE 12 – STOCK BASED COMPENSATION

 

The Company has made restricted share grants pursuant to the Bank First 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 June 30, 2019 and December 31, 2018, 177,377 and 160,362 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 six months ended June 30, 2019 and 2018, compensation expense of $0.3 million and $0.3 million, respectively, was recognized related to restricted stock awards.

 

As of June 30, 2019, there was $1.9 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 3.15 years. The aggregate grant date fair value of restricted stock awards that vested during the six months ended June 30, 2019, was approximately $0.5 million.

 

   For the six months ended June 30, 2019   For the six months ended June 30, 2018 
                 
       Weighted-       Weighted- 
       Average Grant-       Average Grant- 
   Shares   Date Fair Value   Shares   Date Fair Value 
Restricted Stock                    
Outstanding at beginning of period   51,776   $34.27    53,619   $26.59 
Granted   17,015    56.62    16,673    46.01 
Vested   (17,212)   30.54    (19,825)   24.36 
Forfeited or cancelled   (176)   22.90    -    - 
Outstanding at end of period   51,403   $43.06    50,467   $33.88 

  

  28 

 

 

NOTE 13 – LEASES

 

In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Subsequently, amendments ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018- 11, Targeted Improvements were issued. ASC 842 establishes 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.

 

The Company leases certain properties under operating leases that resulted in the recognition of ROU lease assets of approximately $1.7 million and corresponding lease liabilities of the same value on the Company’s Consolidated Balance Sheets.

 

ASC 842 was effective on January 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. The Company chose to use the effective date approach. As such, all periods presented after January 1, 2019 are under ASC 842 whereas periods presented prior to January 1, 2019 are in accordance with prior lease accounting of ASC 840. Financial information was not updated and the disclosures required under ASC 842 was not provided for dates and periods before January 1, 2019.

 

ASC 842 provides a number of optional practical expedients in transition. The Company has elected the ‘package of practical expedients,’ which permits the Company not to reassess under the new standard the prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected the use of the hindsight, a practical expedient which permits the use of information available after lease inception to determine the lease term via the knowledge of renewal options exercised not available as of the leases inception. The practical expedient pertaining to land easements is not applicable to the Company.

 

ASC 842 also requires certain accounting elections for ongoing application of ASC 842. The Company elected the short-term lease recognition exemption for all leases that qualify, meaning those with terms under twelve months. ROU assets or lease liabilities are not to be recognized for short-term leases. 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. However, since these non-lease items are subject to change, they are treated and disclosed as variable payments in the quantitative disclosures below. Consequently, ASC 842’s changed guidance on contract components will not significantly affect our financial reporting. Similarly, ASC 842’s narrowed definition of initial direct costs will not significantly affect financial reporting.

 

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. ASC 842 requires the use of the lease interest rate; however, this rate is typically not known. As an alternative, ASC 842 permits the use of an entity’s fully secured incremental borrowing rate. The Company is electing to utilize the Wall Street Journal Prime Rate on the date of lease commencement.

 

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   Six-month
period ended
 
   June 30, 2019 
Amortization of ROU Assets - Operating Leases  $26 
Interest on Lease Liabilities - Operating Leases   39 
Operating Lease Cost (Cost resulting from lease payments)   65 
New ROU Assets - Operating Leases   1,744 
Weighted Average Lease Term (Years) - Operating Leases   31.63 
Weighted Average Discount Rate - Operating Leases   5.50%

  

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liabilities as of June 30, 2019 is as follows:

 

   June 30, 2019 
Operating lease payments due:     
Within one year  $133 
After one but within two years   139 
After two but within three years   132 
After three but within four years   93 
After four years but within five years   85 
After five years   3,453 
Total undiscounted cash flows   4,035 
Discount on cash flows   (2,317)
Total operating lease liabilities  $1,718 

 

NOTE 14 – SUBSEQUENT EVENTS

 

As stated in Note 2, “Acquisitions,” effective July 12, 2019, the previously announced merger with Partnership was completed.

 

At the effective time of the merger, each share of common stock of Partnership issued and outstanding was converted into the right to receive either 0.35 shares of Bank First common stock or cash in the amount of $17.30. The Company paid approximately $14,285,000 in cash and issued 534,659 shares of Bank First common stock for the issued and outstanding shares of Partnership common stock.

 

The acquisition of Partnership was accounted for using the purchase method of accounting in accordance with ASC 805, Business Combinations. Assets acquired, liabilities assumed, and consideration exchanged were recorded at their respective acquisition date fair values. Determining the fair value of the assets and liabilities is a complicated process involving significant judgement regarding the methods and assumptions to be used. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available.

 

The Company is still finalizing the fair value estimates, but the following table presents the initial estimates of the fair value of the assets acquired and liabilities assumed of Partnership as of July 12, 2019.

 

   As Recorded by
Partnership
   Fair Value
Adjustments
   As Recorded by
the Company
 
Cash and cash equivelants  $4,511        $4,511
Investment securities   16,933    (512)a   16,421 
Other investments   441         441 
Gross loans   278,532    (5,908)b   272,624 
Allowance for loan losses   (2,253)   2,253c   - 
Net Loans   276,279    (3,655)   272,624 
Premises and equipment, net   6,066    (2,940)d   3,126 
Core deposit intangible   -    5,400e   5,400 
Existing intangible assets   195    (195)f   - 
Other assets   3,118    473g   3,591 
Total assets  $307,543   $(1,429)  $306,114 
                
Total deposits  $268,653   $272h  $268,925 
Subordinated debt   7,000    195i   7,195 
Other borrowings   9,800    (18)i   9,782 
Other liabilities   690    16j   706 
Total liabilities   286,143    465    286,608 
                
Net indentifiable assets acquired over liabilties assumed   21,400    (1,894)   19,506 
                
Goodwill   -    30,083    30,083 
                
Net assets acquired over liabilities assumed  $21,400   $28,189   $49,589 
                
Consideration:               
Shares of common stock issued        534,659      
Estimated value per share of Company's stock       $66.03      
                
Fair value of Company stock issued        35,304      
Cash paid for shares and in lieu of fractional shares        14,285      
                
Fair value of total consideration transferred       $49,589      

  

Explanation of fair value adjustments:

a.Adjustment reflects fair value adjustments of the available-for-sale portfolio at acquisition date.
b.Adjustment reflects fair value adjustments based on the Company's evaluation of the acquired loan portfolio.
c.Adjustment reflects the elimination of Partnership's allowance for loan losses.
d.Adjustment reflects the fair value adjustment of the acquired premises and equipment from Partnership's historical net cost basis.
e.Adjustment reflects the recording of a core deposit intangible asset.
f.Adjustment reflects removal of intangible assets from Partnership's balance sheet from a prior acquisition.
g.Adjustment reflects write-off of prepaid assets recorded on Partnership's balance sheet that had no value to the Company and the establishment of a deferred tax asset as a result of the purchase accounting adjustments.
h.Adjustment reflects the fair value adjustment to time deposits.
i.Adjustment reflects the fair value adjustment to subordinated debt and other borrowings due to the current rate environment for these items compared to those in place when they were originally instituted.
j.Adjustment to record an accrual for a severance agreement that was in place for Partnership prior to July 12, 2019.

 

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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, 2018, 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 June 30, 2019.

 

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 19 banking locations in Manitowoc, Outagamie, Brown, Winnebago, Sheboygan, Waupaca and Barron counties in Wisconsin. The Bank offers loan, deposit and treasury management products at each of its banking locations.

 

As with most community banks, the Bank derives a significant portion of its income from interest received on loans and investments. The Bank’s primary source of funding is deposits, both interest-bearing and noninterest-bearing. In order to maximize the Bank’s net interest income, or the difference between the income on interest-earning assets and the expense of interest-bearing liabilities, the Bank must not only manage the volume of these balance sheet items, but also the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities. To account for credit risk inherent in all loans, the Bank maintains an ALL to absorb possible losses on existing loans that may become uncollectible. The Bank establishes and maintains this allowance by charging a provision for loan losses against operating earnings. Beyond its net interest income, the Bank further receives income through the net gain on sale of loans held for sale as well as servicing income which is retained on those sold loans. In order to maintain its operations and bank locations, the Bank incurs various operating expenses which are further described within the “Results of Operations” later in this section.

 

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

 

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

 

The Company entered into an Agreement and Plan of Merger with Partnership Community Bancshares, Inc., a Wisconsin corporation, dated as of January 22, 2019 and as amended on April 30, 2019, under which Partnership will merge with and into the Company and Partnership’s banking subsidiary, Partnership Bank, will merge with and into the Bank. The transaction closed on July 12, 2019. Merger consideration consisted of 65% common stock of the Company and 35% cash, and totalled approximately $49.6 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   At or for the Six Months Ended 
(In thousands, except per share data)  6/30/2019   3/31/2019   12/31/2018   9/30/2018   6/30/2018   6/30/2019   6/30/2018 
                             
Results of Operations:                                   
                                    
Interest income  $20,158   $19,723   $19,753   $19,510   $19,372   $39,881   $38,681 
Interest expense   4,784    4,523    4,240    3,974    3,604    9,307    6,631 
                                    
Net interest income   15,374    15,200    15,513    15,536    15,768    30,574    32,050 
Provision for loan losses   500    625    750    800    900    1,125    1,385 
                                    
Net interest income after provision for loan losses   14,874    14,575    14,763    14,736    14,868    29,449    30,665 
                                    
Noninterest income   2,713    3,306    2,553    2,508    3,027    6,019    6,470 
Noninterest expense   9,932    9,302    9,893    9,708    10,064    19,234    20,041 
                                    
Income before income tax expense   7,655    8,579    7,423    7,536    7,831    16,234    17,094 
Income tax expense   1,666    1,992    1,362    1,604    1,431    3,658    3,631 
                                    
Net income  $5,989   $6,587   $6,061   $5,932   $6,400   $12,576   $13,463 
                                    
Earnings per common share - basic  $0.91   $1.00   $0.91   $0.89   $0.96   $1.91   $2.01 
Earnings per common share - diluted   0.90    1.00    0.91    0.89    0.96    1.89    2.01 
                                    
Common Shares:                                   
                                    
Basic weighted average   6,577,016    6,574,362    6,647,586    6,661,337    6,672,344    6,575,696    6,692,523 
Diluted weighted average   6,675,794    6,608,273    6,647,586    6,661,337    6,672,344    6,642,222    6,692,523 
Outstanding   6,576,171    6,577,045    6,610,358    6,659,021    6,662,292    6,576,171    6,662,292 
                                    
Noninterest income / noninterest expense:                                   
                                    
Service charges  $799   $679   $890   $971   $786   $1,478   $1,632 
Income from Ansay   543    875    180    176    562    1,418    1,758 
Income from UFS   731    594    708    660    586    1,325    1,195 
Loan servicing income   244    223    372    260    604    467    846 
Net gain on sales of mortgage loans   154    87    188    144    128    241    285 
Noninterest income from strategic alliances   29    19    22    24    21    48    44 
Other noninterest income   213    829    193    273    340    1,042    710 
                                    
Total noninterest income  $2,713   $3,306   $2,553   $2,508   $3,027   $6,019   $6,470 
                                    
Personnel expense  $5,403   $5,310   $5,532   $5,205   $5,446   $10,713   $10,763 
Occupancy, equipment and office   832    849    799    817    532    1,681    1,882 
Data processing   960    913    899    856    925    1,873    1,864 
Postage, stationery and supplies   192    123    156    138    159    315    326 
Net (gain) loss on sales of other real estate owned   (135)   36    (79)   233    (38)   (99)   98 
Net (gain) loss on sales of securities   (23)   (234)   -    (19)   47    (257)   44 
Advertising   53    74    78    36    54    127    106 
Charitable contributions   141    131    121    169    322    272    695 
Outside service fees   982    684    899    817    896    1,666    1,416 
Amortization of intangibles   161    161    189    189    189    322    378 
Other noninterest income   1,366    1,255    1,299    1,267    1,532    2,621    2,469 
                                    
Total noninterest expense  $9,932   $9,302   $9,893   $9,708   $10,064   $19,234   $20,041 

 

  32 

 

 

Period-end balances:                                   
                                    
Loans  $1,419,192   $1,431,498   $1,428,494   $1,441,477   $1,434,504   $1,419,192   $1,434,504 
Allowance for loan losses   12,170    12,213    12,248    11,560    13,047    12,170    13,047 
Investment securities available-for-sale, at fair value   120,083    122,761    118,906    119,623    121,550    120,083    121,550 
Investment securities held-to-maturity, at cost   39,537    40,769    40,768    40,882    41,203    39,537    41,203 
Goodwill and other intangibles, net   19,998    20,160    20,321    20,425    20,614    19,998    20,614 
Total assets   1,806,467    1,805,408    1,793,165    1,735,754    1,741,874    1,806,467    1,741,874 
Deposits   1,574,998    1,573,677    1,557,167    1,486,470    1,495,424    1,574,998    1,495,424 
Stockholders' equity   185,448    179,177    174,323    169,133    165,200    185,448    165,200 
Book value per common share   28.20    27.24    26.37    25.40    24.80    28.20    24.80 
Tangible book value per common share (1)   25.63    24.65    23.76    22.78    22.15    25.63    22.15 
                                    
Average balances:                                   
                                    
Loans  $1,420,710   $1,434,283   $1,435,745   $1,437,832   $1,424,604   $1,427,458   $1,414,727 
Interest-earning assets   1,679,604    1,652,106    1,637,080    1,654,966    1,676,017    1,665,930    1,673,742 
Total assets   1,801,530    1,773,345    1,755,835    1,772,768    1,794,227    1,787,515    1,790,288 
Deposits   1,563,322    1,548,306    1,510,978    1,487,865    1,474,952    1,556,139    1,473,184 
Interest-bearing liabilities   1,142,604    1,141,177    1,144,202    1,185,391    1,215,923    1,141,894    1,213,758 
Goodwill and other intangibles, net   20,096    20,259    20,377    20,610    20,474    20,177    20,488 
Stockholders' equity   181,498    175,058    170,992    167,651    162,860    178,295