Bank First Corp - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2019

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

For the transition period from ____________ to ____________

Commission file number: 001-38676

BANK FIRST CORPORATION

(Exact name of registrant as specified in its charter)

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

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

(920) 652-3100

(Registrant’s telephone number, including area code)

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

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 ¨

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

Large accelerated filer ¨	Accelerated filer ¨
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 November 12, 2019 was 7,084,728 shares.

TABLE OF CONTENTS

		Page Number
Part I. Financial Information		3
ITEM 1.	Financial Statements	3
	Consolidated Balance Sheets – September 30, 2019 (unaudited) and December 31, 2018	3
	Consolidated Statements of Income – Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	4
	Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	5
	Consolidated Statements of Changes in Stockholders’ Equity – Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	6
	Consolidated Statements of Cash Flows – Nine Months Ended September 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	30
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	65
ITEM 6.	Exhibits	66
Signatures		67

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS:

BANK FIRST CORPORATION

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

	September 30, 2019			December 31, 2018
	(Unaudited)			(Audited)
Assets
Cash and due from banks	$	45,692		$	41,435
Interest-bearing deposits		16,115			21,830
Federal funds sold		56,594			44,478
Cash and cash equivalents		118,401			107,743
Securities held to maturity, at amortized cost ($43,910 and $40,477 fair value at September 30, 2019 and December 31, 2018, respectively)		42,605			40,768
Securities available for sale, at fair value		136,935			118,906
Loans held for sale		2,041			-
Loans, net		1,704,082			1,416,246
Premises and equipment, net		32,306			24,489
Goodwill		43,456			15,024
Other investments		4,933			4,555
Cash value of life insurance		24,787			24,178
Intangible assets, net		10,697			5,297
Other real estate owned ("OREO")		6,870			3,592
Investment in minority-owned subsidiaries		26,903			25,397
Other assets		9,485			6,970
TOTAL ASSETS	$	2,163,501		$	1,793,165
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Interest-bearing deposits	$	1,272,021		$	1,108,402
Noninterest-bearing deposits		566,059			448,765
Total deposits		1,838,080			1,557,167
Securities sold under repurchase agreements		12,201			31,489
Notes payable		49,786			-
Subordinated notes		18,658			11,500
Other liabilities		19,444			18,686
Total liabilities		1,938,169			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 - 7,902,742 and 7,368,083 shares as of September 30, 2019 and December 31, 2018, respectively
Outstanding - 7,084,728 and 6,610,358 shares as of September 30, 2019 and December 31, 2018, respectively		79			74
Additional paid-in capital		62,911			27,601
Retained earnings		183,551			168,363
Treasury stock, at cost - 818,014 and 757,725 shares as of September 30, 2019 and December 31, 2018, respectively		(24,941	)		(21,349	)
Accumulated other comprehensive income (loss)		3,732			(366	)
Total stockholders' equity		225,332			174,323
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	2,163,501		$	1,793,165

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

BANK FIRST CORPORATION

Consolidated Statements of Income

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

		Three months ended September 30,						Nine months ended September 30,
		2019			2018			2019			2018

Interest income:
Loans, including fees	$	23,897		$	18,054		$	60,629		$	53,668
Securities:
Taxable		865			781			2,300			2,196
Tax-exempt		413			428			1,253			1,342
Other		314			247			1,188			985
Total interest income		25,489			19,510			65,370			58,191
Interest expense:
Deposits		4,735			3,360			13,402			8,564
Securities sold under repurchase agreements		85			69			383			293
Borrowed funds		356			545			698			1,748
Total interest expense		5,176			3,974			14,483			10,605
Net interest income		20,313			15,536			50,887			47,586
Provision for loan losses		3,000			800			4,125			2,185
Net interest income after provision for loan losses		17,313			14,736			46,762			45,401
Noninterest income:
Service charges		918			971			2,396			2,603
Income from Ansay and Associates, LLC ("Ansay")		319			176			1,737			1,934
Income from UFS, LLC ("UFS")		768			660			2,093			1,855
Loan servicing income		374			260			841			1,106
Net gain on sales of mortgage loans		533			144			774			429
Noninterest income from strategic alliances		26			24			74			68
Other		207			273			1,249			983
Total noninterest income		3,145			2,508			9,164			8,978
Noninterest expense:
Salaries, commissions, and employee benefits		6,272			5,205			16,985			15,968
Occupancy		1,076			817			2,757			2,699
Data processing		1,158			856			3,031			2,720
Postage, stationery, and supplies		135			138			450			464
Net (gain) loss on sales and valuations of OREO		(10	)		233			(109	)		331
Net (gain) loss on sales of securities		-			(19	)		(23	)		31
Net gain on sales of other investments		-			-			(234	)		-
Advertising		53			36			180			142
Charitable contributions		225			169			497			864
Outside service fees		1,171			817			2,837			2,233
Amortization of intangibles		374			189			696			567
Other		1,633			1,267			4,254			3,730
Total noninterest expense		12,087			9,708			31,321			29,749
Income before provision for income taxes		8,371			7,536			24,605			24,630
Provision for income taxes		1,712			1,604			5,370			5,235
Net Income	$	6,659		$	5,932		$	19,235		$	19,395
Earnings per share - basic	$	0.95		$	0.89		$	2.86		$	2.90
Earnings per share - diluted	$	0.93		$	0.89		$	2.83		$	2.90
Dividends per share	$	0.20		$	0.16		$	0.60		$	0.48

See accompanying notes to unaudited consolidated financial statements

ITEM 1. Financial Statements Continued:

BANK FIRST CORPORATION

Consolidated Statements of Comprehensive Income

(In thousands) (Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
Net Income	$	6,659		$	5,932		$	19,235		$	19,395
Other comprehensive income (loss):
Unrealized gains (losses) on available for sale securities:
Unrealized holding gains (losses) arising during period		925			(1,029	)		5,244			(3,215	)
Amortization of unrealized holding gains on securities transferred from available for sale to held to maturity		(11	)		(11	)		(34	)		(65	)
Reclassification adjustment for (gains) losses included in net income		-			(19	)		(23	)		31
Income tax benefit (expense)		(192	)		222			(1,089	)		766
Total other comprehensive income (loss)		722			(837	)		4,098			(2,483	)
Comprehensive income	$	7,381		$	5,095		$	23,333		$	16,912

See accompanying notes to unaudited consolidated financial statements.

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
Net income		-		-		-			5,932			-			-			5,932
Other comprehensive loss		-		-		-			-			-			(837	)		(837	)
Purchase of treasury stock		-		-		-			-			(246	)		-			(246	)
Cash dividends ($0.16 per share)		-		-		-			(1,061	)		-			-			(1,061	)
Amortization of stock-based compensation		-		-		145			-			-			-			145
Balance at September 30, 2018	$	-	$	74	$	27,455		$	162,075		$	(18,965	)	$	(1,506	)	$	169,133
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
Net income		-		-		-			6,659			-			-			6,659
Other comprehensive income		-		-		-			-			-			722			722
Purchase of treasury stock		-		-		-			-			(1,555	)		-			(1,555	)
Cash dividends ($0.20 per share)		-		-		-			(1,422	)		-			-			(1,422	)
Amortization of stock-based compensation		-		-		177			-			-			-			177
Shares issued in the acquisition of Partnership Community Bancshares, Inc (534,659 shares)		-		5		35,298			-			-			-			35,303
Balance at September 30, 2019	$	-	$	79	$	62,911		$	183,551		$	(24,941	)	$	3,732		$	225,332

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

BANK FIRST CORPORATION

Consolidated Statements of Cash Flows

(In thousands) (Unaudited)

	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities:
Net income	$	19,235		$	19,395
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		4,125			2,185
Depreciation and amortization of premises and equipment		842			847
Amortization of intangibles		696			567
Net amortization of securities		286			315
Amortization of stock-based compensation		511			410
Accretion of purchase accounting valuations		(5,303	)		(4,921	)
Net change in deferred loan fees and costs		(197	)		(205	)
Change in fair value of mortgage servicing rights ("MSR")		(179	)		(151	)
(Gain) loss from sale and disposal of premises and equipment		23			(311	)
(Gain) loss on sale of OREO and valuation allowance		(109	)		331
Proceeds from sales of mortgage loans		45,951			25,332
Originations of mortgage loans held for sale		(47,661	)		(25,706	)
Gain on sales of mortgage loans		(774	)		(429	)
Realized (gain) loss on sale of securities available for sale and other investments		(257	)		31
Undistributed income of UFS joint venture		(2,093	)		(1,855	)
Undistributed income of Ansay joint venture		(1,737	)		(1,934	)
Net earnings on life insurance		(467	)		(305	)
(Increase) decrease in other assets		(2,085	)		683
Decrease in other liabilities		(1,667	)		(4,113	)
Net cash provided by operating activities		9,140			10,166
Cash flows from investing activities:
Activity in securities available for sale and held to maturity:
Sales		748			4,467
Maturities, prepayments, and calls		9,742			10,344
Purchases		(8,823	)		(19,846	)
Net increase in loans		(15,876	)		(42,259	)
Dividends received from UFS		1,366			1,237
Dividends received from Ansay		958			1,180
Proceeds from sale of OREO		1,092			1,815
Proceeds from sales of other investments		984			2,326
Net purchases of FHLB Stock		(65	)		-
Proceeds from sale of premises and equipment		-			435
Purchases of premises and equipment		(3,847	)		(6,117	)
Net cash used in business combination		(9,771	)		-
Net cash used in investing activities		(23,492	)		(46,418	)

ITEM 1. Financial Statements Continued:

BANK FIRST CORPORATION

Consolidated Statements of Cash Flows (Continued)

(In thousands) (Unaudited)

	Nine Months ended September 30,
	2019			2018
Cash flows from financing activities:
Net increase (decrease) in deposits	$	12,550		$	(19,722	)
Net decrease in securities sold under repurchase agreements		(19,288	)		(40,270	)
Proceeds from advances of borrowed funds		34,000			1,154,600
Repayment of borrowed funds		(4,000	)		(1,115,100	)
Proceeds from revolving line of credit		10,000			-
Dividends paid		(4,047	)		(3,199	)
Proceeds from sales of common stock		-			1,347
Repurchase of common stock		(4,205	)		(8,065	)
Net cash (used in) provided by financing activities		25,010			(30,409	)
Net increase (decrease) in cash and cash equivalents		10,658			(66,661	)
Cash and cash equivalents at beginning of period		107,743			101,977
Cash and cash equivalents at end of period	$	118,401		$	35,316

Supplemental disclosures of cash flow information:

Cash paid during the period for:
Interest	$	14,177		$	10,197
Income taxes		5,177			3,675
Supplemental schedule of noncash activities:
Loans transferred to OREO		4,260			768
MSR resulting from sale of loans		443			239
Amortization of unrealized holding gains on securities transferred from available for sale to held to maturity recognized in other comprehensive income, net of tax		(27	)		(51	)
Change in unrealized gains and losses on investment securities available for sale, net of tax		4,125			(2,515	)
Payment of deferred compensation through issuance of treasury stock		114			-

Acquisition:
Fair value of assets acquired	$	307,768		$	-
Fair value of liabilities assumed		286,612			-
Net assets acquired	$	21,156		$	-
Common stock issued in acquisition		35,304			-

See accompanying notes to consolidated financial statements.

BANK FIRST CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

NOTE 1 – BASIS OF PRESENTATION

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

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

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 was originally scheduled to become effective for the Company for interim and annual periods beginning after December 15, 2019. 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. This proposal was approved by the FASB during October 2019, with final ASUs to this effect expected to be issued in mid-November 2019. This delay applies to the Bank as it will be classified as a “Smaller reporting company” as defined in Rule 12b-2 of the Exchange Act as of the date of the enactment of the delay. 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. The delay in implementation is expected to give the Company additional time to fine-tune the process used to comply with this standard.

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.

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

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

The Company accounted for the transaction under the acquisition method of accounting, and thus, the financial position and results of operations of Partnership prior to the consummation date were not included in the accompanying consolidated financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective fair values at the date of acquisition. The Company determined the fair value of core deposit intangibles, securities, premises and equipment, loans, other assets and liabilities, deposits and borrowings with the assistance of third party valuations, appraisals, and third party advisors. The estimated fair values will be subject to refinement for up to one year after the consummation as additional information becomes available relative to the closing date fair values.

The fair value of the assets acquired and liabilities assumed on July 12, 2019 was as follows:

	As Recorded by Partnership		Fair Value Adjustments			As Recorded by the Company
Cash and cash equivelants	$	4,514	$			$	4,514
Investment securities		16,933		(291	)		16,642
Other investments		441					441
Loans		276,279		(957	)		275,322
Premises and equipment, net		6,066		(2,940	)		3,126
Core deposit intangible		-		4,236			4,236
Other assets		3,668		(181	)		3,487
Total assets acquired	$	307,901	$	(133	)	$	307,768

Deposits	$	268,653	$	154		$	268,807
Subordinated debt		7,000		195			7,195
Other borrowings		9,800		(18	)		9,782
Other liabilities		841		(13	)		828
Total liabilities assumed		286,294		318			286,612

Excess of assets acquired over liabilties assumed	$	21,607	$	(451	)	$	21,156
Less: purchase price							49,589
Goodwill						$	28,433

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.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Net income from operations	$	6,659	$	5,932	$	19,235	$	19,395

Weighted average common shares outstanding		7,036,807		6,661,337		6,731,089		6,682,472
Effect of dilutive potential common shares		97,867		-		77,088		-
Diluted weighted average common shares outstanding		7,134,674		6,661,337		6,808,177		6,682,472

Earnings per share - basic	$	0.95	$	0.89	$	2.86	$	2.90
Earnings per share - diluted	$	0.93	$	0.89	$	2.83	$	2.90

NOTE 4 – SECURITIES

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
September 30, 2019
Obligations of states and political subdivisions	$	49,105	$	2,454	$	(3	)	$	51,556
Mortgage-backed securities		66,208		2,023		(20	)		68,211
Corporate notes		17,014		164		(10	)		17,168
Total available for sale securities	$	132,327	$	4,641	$	(33	)	$	136,935

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

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
September 30, 2019
U.S. Treasury securities	$	32,047	$	1,293	$	(1	)	$	33,339
Obligations of states and political subdivisions		10,558		13		-			10,571
Total held to maturity securities	$	42,605	$	1,306	$	(1	)	$	43,910

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
September 30, 2019 - Available for Sale
Obligations of states and political subdivisions	$	-	$	-		$	997	$	(3	)	$	997	$	(3	)
Mortgage-backed securities		2,602		(6	)		2,269		(14	)		4,871		(20	)
Corporate notes		3,914		(10	)		-		-			3,914		(10	)
Totals	$	6,516	$	(16	)	$	3,266	$	(17	)	$	9,782	$	(33	)

September 30, 2019 - Held to Maturity
U.S. Treasury securities	$	-	$	-		$	1,497	$	(1	)	$	1,497	$	(1	)

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	)

As of September 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 nine months ended September 30, 2019 or 2018.

The following is a summary of amortized cost and estimated fair value of securities by contractual maturity as of September 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	$	1,888	$	1,901	$	3,327	$	3,327
Due after one year through five years		22,354		22,680		13,634		13,874
Due after five years through ten years		11,436		12,039		22,735		23,800
Due after ten years		30,441		32,104		2,909		2,909
Subtotal		66,119		68,724		42,605		43,910
Mortgage-backed securities		66,208		68,211		-		-
Total	$	132,327	$	136,935	$	42,605	$	43,910

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

	2019		2018
Proceeds from sales of securities	$	748	$	4,467
Gross gains on sales		23		41
Gross losses on sales		-		72

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 September 30, 2019 and December 31, 2018:

	September 30,			December 31,
	2019			2018

Commercial/industrial	$	310,536		$	297,576
Commercial real estate - owner occupied		467,030			416,097
Commercial real estate - non-owner occupied		337,558			252,717
Construction and development		118,055			60,927
Residential 1-4 family		443,906			368,673
Consumer		31,665			26,854
Other		5,985			6,369
Subtotals		1,714,735			1,429,213
ALL		(10,131	)		(12,248	)
Loans, net of ALL		1,704,604			1,416,965
Deferred loan fees and costs		(522	)		(719	)
Loans, net	$	1,704,082		$	1,416,246

The ALL by loan type as of September 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		(1,229	)		(4,974	)		(55	)		-			(83	)		(75	)		(29	)		-			(6,445	)
Recoveries		3			4			60			-			126			4			6			-			203
Provision		507			4,640			(186	)		(221	)		(423	)		70			18			(280	)		4,125
ALL - September 30, 2019		2,302			3,129			1,919			504			2,092			147			27			11			10,131

ALL ending balance individually evaluated for impairment		-			-			-			-			-			-			-			-			-

ALL ending balance collectively evaluated for impairment	$	2,302		$	3,129		$	1,919		$	504		$	2,092		$	147		$	27		$	11		$	10,131

Loans outstanding - September 30, 2019	$	310,536		$	467,030		$	337,558		$	118,055		$	443,906		$	31,665		$	5,985		$	-		$	1,714,735
Loans ending balance individually evaluated for impairment		-			-			-			-			-			-			-			-			-

Loans ending balance collectively evaluated for impairment	$	310,536		$	467,030		$	337,558		$	118,055		$	443,906		$	31,665		$	5,985		$	-		$	1,714,735

	Commercial / Industrial			Commercial Real Estate - Owner Occupied			Commercial Real Estate - Non - Owner Occupied			Construction and Development			Residential 1-4 Family			Consumer			Other			Unallocated			Total
ALL - January 1, 2018	$	2,362		$	2,855		$	1,987		$	945		$	2,728		$	191		$	23		$	521		$	11,612
Charge-offs		(35	)		(2,344	)		-			(83	)		(128	)		(7	)		(29	)		-			(2,626	)
Recoveries		2			138			3			-			228			10			8			-			389
Provision		326			2,591			(118	)		69			(419	)		(11	)		32			(285	)		2,185
ALL - September 30, 2018		2,655			3,240			1,872			931			2,409			183			34			236			11,560

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

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

Loans outstanding - September 30, 2018	$	314,379		$	420,727		$	233,442		$	68,137		$	364,325		$	34,365		$	6,795		$	-		$	1,442,170
Loans ending balance individually evaluated for impairment		-			5,397			-			-			704			-			-			-			6,101

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

The Company’s past due loans as of September 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	$	397	$	-	$	26	$	423
Commercial real estate - owner occupied		859		157		4,191		5,207
Commercial real estate - non-owner occupied		-		-		-		-
Construction and development		401		30		-		431
Residential 1-4 family		520		340		474		1,334
Consumer		4		-		1		5
Other		-		-		-		-
	$	2,181	$	527	$	4,692	$	7,400

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

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

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

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

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

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

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

		Pass (1-5)		6		7		8		Total
Commercial/industrial	$	295,413	$	5,742	$	9,381	$	-	$	310,536
Commercial real estate - owner occupied		440,027		3,302		23,700		1		467,030
Commercial real estate - non-owner occupied		335,554		1,165		839		-		337,558
Construction and development		118,055		-		-		-		118,055
Residential 1-4 family		443,021		-		885		-		443,906
Consumer		31,665		-		-		-		31,665
Other		5,985		-		-		-		5,985

	$	1,669,720	$	10,209	$	34,805	$	1	$	1,714,735

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.

As of September 30, 2019, there were no loans individually evaluated for impairment. A summary of impaired loans individually evaluated as of December 31, 2018 is as follows:

			Commercial		Commercial
			Real Estate-		Real Estate-		Construction
	Commercial/		Owner		Non - Owner		and		Residential
	Industrial		Occupied		Occupied		Development		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 nine months ended September 30, 2019 and 2018.

The following table presents loans acquired with deteriorated credit quality as of September 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.

	September 30, 2019				December 31, 2018
	Recorded Investment		Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance
Commercial & Industrial	$	53	$	75	$	555	$	701
Commercial real estate - owner occupied		508		886		1,558		2,069
Commercial real estate - non-owner occupied		-		-		233		475
Construction and development		218		242		171		171
Residential 1-4 family		906		1,048		1,664		1,828
Consumer		-		-		-		-
Other		-		-		-		-
	$	1,685	$	2,251	$	4,181	$	5,244

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 September 30, 2019, and December 31, 2018:

	September 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		43			333			-			-
Reclassifications between accretable and non-accretable		754			(754	)		55			(55	)
Accretion to loan interest income		(892	)		-			(320	)		-
Disposals of loans		-			-			-			-
Balance at end of period	$	223		$	324		$	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 September 30, 2019 and December 31, 2018 the Company had specific reserves of $-0- and $0.4 million for TDRs, respectively, and none of them have subsequently defaulted. There were no loan modifications resulting in TDRs during the nine months ended September 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.

Following is an analysis of activity in the MSR asset:

	Nine Months Ended			Year Ended
	September 30, 2019			December 31, 2018
Fair value at beginning of year	$	3,085		$	2,610
MSR asset acquired		1,859			-
Servicing asset additions		443			356
Loan payments and payoffs		(504	)		(475	)
Changes in valuation inputs and assumptions used in the valuation model		61			594
Amount recognized through earnings		-			475
Fair value at end of period	$	4,944		$	3,085

Unpaid principal balance of loans serviced for others	$	550,620		$	316,480
Mortgage servicing rights as a percent of loans serviced for others		0.90			0.97

The primary economic assumptions utilized by the Company in measuring the value of MSRs were constant prepayment speeds of 8.8 months as of September 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 advances outstanding from FHLB of $39.8 million at September 30, 2019. There were no advances outstanding from the FHLB as of December 31, 2018.

The Company maintains a $5.0 million line of credit with a commercial bank. At September 30, 2019 the Company had outstanding balances on this note of $5.0 million. The Company had no outstanding balances on this note at December 31, 2018. The note requires monthly payments of interest at a variable rate, and is due in full on May 25, 2020.

The Company maintains a $5.0 million line of credit with another commercial bank. At September 30, 2019 the Company had outstanding balances on this note of $5.0 million. There were no outstanding balances on this note at 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 September 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.

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

NOTE 9 – REGULATORY MATTERS

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

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

Under regulatory guidance for non-advanced approaches institutions, the Bank is required to maintain minimum amounts and ratios of common equity Tier I capital to risk-weighted assets. Additionally, under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital. As of September 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

September 30, 2019
Total capital (to risk-weighted assets):
Company	$	203,274		10.79	%		NA		NA			NA		NA			NA		NA
Bank	$	208,756		11.10	%	$	150,421		8.00	%	$	197,427		10.50	%	$	188,026		10.00	%
Tier 1 capital (to risk-weighted assets):
Company	$	174,485		9.26	%		NA		NA			NA		NA			NA		NA
Bank	$	198,625		10.56	%	$	112,816		6.00	%	$	159,822		8.50	%	$	150,421		8.00	%
Common Equity Tier 1 capital (to risk-weighted assets):
Company	$	174,485		9.26	%		NA		NA			NA		NA			NA		NA
Bank	$	198,625		10.56	%	$	84,612		4.50	%	$	131,618		7.00	%	$	122,217		6.50	%
Tier 1 capital (to average assets):
Company	$	174,485		8.57	%		NA		NA			NA		NA			NA		NA
Bank	$	198,625		9.79	%	$	81,142		4.00	%	$	81,142		4.00	%	$	101,428		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 AND CONTINGENCIES

The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate-lock commitments). Rate-lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans. Fair value is based on fees currently charged to enter into similar agreements and for fixed rate commitments also considers the difference between current levels of interest rates and committed rates. The notional amount of rate-lock commitments at September 30, 2019 and December 31, 2018, respectively, was approximately $20.7 million and $3.3 million.

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

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

The following commitments were outstanding:

	Notional Amount
	September 30, 2019		December 31, 2018
Commitments to extend credit:
Fixed	$	48,326	$	57,911
Variable		303,678		268,541
Credit card arrangements		8,445		7,119
Letters of credit		17,676		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.

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

	Instruments		Markets		Other		Significant
	Measured		for Identical		Observable		Unobservable
	At Fair		Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2019
Assets
Securities available for sale
Obligations of states and political subdivisions	$	51,556	$	-		51,556	$	-
Mortgage-backed securities		68,211		-		68,211		-
Corporate notes		17,168		-		17,168		-
Mortgage servicing rights		4,944		-		4,944		-

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:

	September 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		(400	)		(100	)
Transfer in and/or out of level 3		-			-
Total securities at end of period	$	-		$	400

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

			Quoted Prices
			In Active		Significant
	Assets		Markets		Other		Significant
	Measured		for Identical		Observable		Unobservable
	At Fair		Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2019
Other real estate owned	$	6,870	$	-	$	-	$	6,870
Impaired Loans, net of impairment reserve		6,336		-		-		6,336
	$	13,206	$	-	$	-	$	13,206
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 September 30, 2019
Other real estate owned	Third party appraisals, sales contracts or brokered price options	Collateral discounts and estimated costs to sell	0% - 56%	33.4%
Impaired loans	Third party appraisals and discounted cash flows	Collateral discounts and discount rates	0% - 100%	8.0%

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%

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

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

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

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

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

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

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

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

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

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

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

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

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

			Fair Value
September 30, 2019	Carrying amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	118,401	$	118,401	$	-	$	-	$	118,401
Securities held to maturity		42,605		-		43,910		-		43,910
Securities available for sale		136,935		-		136,935		-		136,935
Loans held for sale		2,041		-		-		2,041		2,041
Loans, net		1,704,082		-		-		1,696,023		1,696,023
Other investments		4,933		-		-		4,933		4,933
Mortgage servicing rights		4,944		-		4,944		-		4,944
Cash surrender value of life insurance		24,787		24,787		-		-		24,787

Deposits	$	1,838,080	$	-	$	-	$	1,773,387	$	1,773,387
Securities sold under repurchase agreements		12,201		-		12,201		-		12,201
Notes Payable		49,786		-		49,786		-		49,786
Subordinated notes		18,658		-		18,658		-		18,658

			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.

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 September 30, 2019 and December 31, 2018, 177,377 and 160,447 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 nine months ended September 30, 2019 and 2018, compensation expense of $0.5 million and $0.4 million, respectively, was recognized related to restricted stock awards.

As of September 30, 2019, there was $1.7 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 2.90 years. The aggregate grant date fair value of restricted stock awards that vested during the nine months ended September 30, 2019, was approximately $0.5 million.

	For the nine months ended September 30, 2019					For the nine months ended September 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		17,989			46.55
Vested		(17,212	)		30.54		(19,825	)		24.35
Forfeited or cancelled		(903	)		41.01		-			-
Outstanding at end of period		50,676		$	43.03		51,783		$	34.38

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.

	Nine-month period ended
	September 30, 2019
Amortization of ROU Assets - Operating Leases	$	35
Interest on Lease Liabilities - Operating Leases		63
Operating Lease Cost (Cost resulting from lease payments)		98
New ROU Assets - Operating Leases		1,744
Weighted Average Lease Term (Years) - Operating Leases		31.60
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 September 30, 2019 is as follows:

	September 30, 2019
Operating lease payments due:
Within one year	$	133
After one but within two years		141
After two but within three years		124
After three but within four years		86
After four years but within five years		86
After five years		3,432
Total undiscounted cash flows		4,002
Discount on cash flows		(2,294	)
Total operating lease liabilities	$	1,708

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 September 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 23 banking locations in Manitowoc, Outagamie, Brown, Winnebago, Sheboygan, Waupaca, Ozaukee, Monroe, Jefferson and Barron counties in Wisconsin. The Bank offers loan, deposit and treasury management products at each of its banking locations.

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

The Bank is a 49.8% member of a data processing subsidiary, UFS, which provides core data processing, endpoint management cloud services, cyber security and digital banking solutions for over 50 Midwest banks. The Bank, through its 100% owned subsidiary TVG Holdings, Inc., also holds a 30% ownership interest in Ansay, an insurance agency providing clients throughout Wisconsin with insurance and risk management solutions (on October 1, 2019, TVG Holdings, Inc. purchased another 10% ownership interest in Ansay, resulting in a 40% ownership interest from that date forward). 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.

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

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

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

	At or for the Three Months Ended															At or for the Nine Months Ended
(In thousands, except per share data)	9/30/2019			6/30/2019			3/31/2019			12/31/2018			9/30/2018			9/30/2019			9/30/2018
Results of Operations:

Interest income	$	25,489		$	20,158		$	19,723		$	19,753		$	19,510		$	65,370		$	58,191
Interest expense		5,176			4,784			4,523			4,240			3,974			14,483			10,605

Net interest income		20,313			15,374			15,200			15,513			15,536			50,887			47,586
Provision for loan losses		3,000			500			625			750			800			4,125			2,185

Net interest income after provision for loan losses		17,313			14,874			14,575			14,763			14,736			46,762			45,401

Noninterest income		3,145			2,713			3,306			2,553			2,508			9,164			8,978
Noninterest expense		12,087			9,932			9,302			9,893			9,708			31,321			29,749

Income before income tax expense		8,371			7,655			8,579			7,423			7,536			24,605			24,630
Income tax expense		1,712			1,666			1,992			1,362			1,604			5,370			5,235

Net income	$	6,659		$	5,989		$	6,587		$	6,061		$	5,932		$	19,235		$	19,395

Earnings per common share - basic	$	0.95		$	0.91		$	1.00		$	0.91		$	0.89		$	2.86		$	2.90
Earnings per common share - diluted		0.93			0.90			1.00			0.91			0.89			2.83			2.90

Common Shares:

Basic weighted average		7,036,807			6,577,016			6,574,362			6,647,586			6,661,337			6,731,089			6,682,472
Diluted weighted average		7,134,674			6,675,794			6,608,273			6,647,586			6,661,337			6,808,177			6,682,472
Outstanding		7,084,728			6,576,171			6,577,045			6,610,358			6,659,021			7,084,728			6,659,021

Noninterest income / noninterest expense:

Service charges	$	918		$	799		$	679		$	890		$	971		$	2,396		$	2,603
Income from Ansay		319			543			875			180			176			1,737			1,934
Income from UFS		768			731			594			708			660			2,093			1,855
Loan servicing income		374			244			223			372			260			841			1,106
Net gain on sales of mortgage loans		533			154			87			188			144			774			429
Noninterest income from strategic alliances		26			29			19			22			24			74			68
Other noninterest income		207			213			829			193			273			1,249			983

Total noninterest income	$	3,145		$	2,713		$	3,306		$	2,553		$	2,508		$	9,164		$	8,978

Personnel expense	$	6,272		$	5,403		$	5,310		$	5,532		$	5,205		$	16,985		$	15,968
Occupancy, equipment and office		1,076			832			849			799			817			2,757			2,699
Data processing		1,158			960			913			899			856			3,031			2,720
Postage, stationery and supplies		135			192			123			156			138			450			464
Net (gain) loss on sales of other real estate owned		(10	)		(135	)		36			(79	)		233			(109	)		331
Net (gain) loss on sales of securities		-			(23	)		(234	)		-			(19	)		(257	)		31
Advertising		53			53			74			78			36			180			142
Charitable contributions		225			141			131			121			169			497			864
Outside service fees		1,171			982			684			899			817			2,837			2,233
Amortization of intangibles		374			161			161			189			189			696			567
Other noninterest income		1,633			1,366			1,255			1,299			1,267			4,254			3,730

Total noninterest expense	$	12,087		$	9,932		$	9,302		$	9,893		$	9,708		$	31,321		$	29,749

Period-end balances:

Loans	$	1,714,213		$	1,419,192		$	1,431,498		$	1,428,494		$	1,441,477		$	1,714,213		$	1,441,477
Allowance for loan losses		10,131			12,170			12,213			12,248			11,560			10,131			11,560
Investment securities available-for-sale, at fair value		136,935			120,083			122,761			118,906			119,623			136,935			119,623
Investment securities held-to-maturity, at cost		42,605			39,537			40,769			40,768			40,882			42,605			40,882
Goodwill and other intangibles, net		54,153			19,998			20,160			20,321			20,425			54,153			20,425
Total assets		2,163,501			1,806,467			1,805,408			1,793,165			1,735,754			2,163,501			1,735,754
Deposits		1,838,080			1,574,998			1,573,677			1,557,167			1,486,470			1,838,080			1,486,470
Stockholders' equity		225,332			185,448			179,177			174,323			169,133			225,332			169,133
Book value per common share		31.81			28.20			27.24			26.37			25.40			31.81			25.40
Tangible book value per common share (1)		24.86			25.63			24.65			23.76			22.78			24.86			22.78

Average balances:

Loans	$	1,682,932		$	1,420,710		$	1,434,283		$	1,435,745		$	1,437,832		$	1,513,552		$	1,422,532
Interest-earning assets		1,923,451			1,679,604			1,652,106			1,637,080			1,654,966			1,752,714			1,667,419
Total assets		2,095,357			1,801,530			1,773,345			1,755,835			1,772,768			1,891,257			1,784,384
Deposits		1,786,373			1,563,322			1,548,306			1,510,978			1,487,865			1,633,726			1,478,132
Interest-bearing liabilities		1,310,757			1,142,604			1,141,177			1,144,202			1,185,391			1,198,799			1,204,199
Goodwill and other intangibles, net		42,373			20,096			20,259			20,377			20,610			25,612			20,504
Stockholders' equity		227,205			181,498			175,058			170,992			167,651			194,778			163,970

Financial ratios (2):

Return on average assets		1.27	%		1.33	%		1.49	%		1.37	%		1.33	%		1.36	%		1.45	%
Return on average common equity		11.72	%		13.20	%		15.05	%		14.06	%		14.04	%		13.17	%		15.77	%
Average equity to average assets		10.84	%		10.07	%		9.87	%		9.74	%		9.46	%		10.30	%		9.19	%
Stockholders' equity to assets		10.42	%		10.27	%		9.92	%		9.72	%		9.74	%		10.42	%		9.74	%
Tangible equity to tangible assets (1)		8.33	%		9.42	%		9.06	%		8.85	%		8.83	%		8.33	%		8.83	%
Loan yield		5.63	%		5.22	%		5.15	%		5.09	%		4.98	%		5.36	%		5.04	%
Earning asset yield		5.37	%		4.90	%		4.93	%		4.88	%		4.76	%		5.08	%		4.75	%
Cost of funds		1.57	%		1.68	%		1.61	%		1.47	%		1.33	%		1.62	%		1.18	%
Net interest margin, taxable equivalent		4.30	%		3.76	%		3.82	%		3.85	%		3.81	%		3.98	%		3.90	%
Net loan charge-offs to average loans		1.20	%		0.16	%		0.18	%		0.00	%		0.16	%		0.48	%		0.16	%
Nonperforming loans to total loans		0.30	%		1.20	%		1.14	%		1.44	%		1.99	%		0.30	%		1.99	%
Nonperforming assets to total assets		0.52	%		1.10	%		1.07	%		1.30	%		1.79	%		0.52	%		1.79	%
Allowance for loan losses to loans		0.59	%		0.86	%		0.85	%		0.86	%		0.80	%		0.59	%		0.80	%

(1)	These measures are not measures prepared in accordance with GAAP, and are therefore considered to be non-GAAP financial measures. See "GAAP reconciliation and management explanation of non-GAAP finanical measures" for a reconciliation of these measures to their most comparable GAAP measures.
(2)	Income statement-related ratios for partial year periods are annualized.

GAAP RECONCILIATION AND MANAGEMENT EXPLANATION OF NON-GAAP FINANCIAL MEASURES

We identify certain financial measures discussed in the Report as being “non-GAAP financial measures.” The non-GAAP financial measures presented in this Report are tangible book value per common share and tangible equity to tangible assets.

In accordance with the SEC’s rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows.

The non-GAAP financial measures that we discuss in this Report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in our selected historical consolidated financial data may differ from that of other companies reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures we have presented in our selected historical consolidated financial data when comparing such non-GAAP financial measures. The following discussion and reconciliations provide a more detailed analysis of these non-GAAP financial measures.

Tangible book value per common share and tangible equity to tangible assets are non-GAAP measures that exclude the impact of goodwill and other intangibles used by the Company’s management to evaluate capital adequacy. Because intangible assets such as goodwill and other intangibles vary extensively from company to company, we believe that the presentation of this information allows investors to more easily compare the Company’s capital position to other companies. The most directly comparable financial measures calculated in accordance with GAAP are book value per common share, return on average common equity and stockholders’ equity to total assets.

	At or for the Three Months Ended															At or for the Nine Months Ended
(In thousands, except per share data)	9/30/2019			6/30/2019			3/31/2019			12/31/2018			9/30/2019			9/30/2019			9/30/2018
Tangible Assets
Total assets	$	2,163,501		$	1,806,467		$	1,805,408		$	1,793,165		$	1,735,754		$	2,163,501		$	1,735,754
Adjustments:
Goodwill		(43,456	)		(15,024	)		(15,024	)		(15,024	)		(15,024	)		(43,456	)		(15,024	)
Core deposit intangible, net of amortization		(5,752	)		(1,890	)		(2,051	)		(2,212	)		(2,401	)		(5,752	)		(2,401	)
Tangible assets	$	2,114,293		$	1,789,553		$	1,788,333		$	1,775,929		$	1,718,329		$	2,114,293		$	1,718,329

Tangible Common Equity
Total stockholders' equity	$	225,332		$	185,448		$	179,177		$	174,323		$	169,133		$	225,332		$	169,133
Adjustments:
Goodwill		(43,456	)		(15,024	)		(15,024	)		(15,024	)		(15,024	)		(43,456	)		(15,024	)
Core deposit intangible, net of amortization		(5,752	)		(1,890	)		(2,051	)		(2,212	)		(2,401	)		(5,752	)		(2,401	)
Tangible common equity	$	176,124		$	168,534		$	162,102		$	157,087		$	151,708		$	176,124		$	151,708

Book value per common share	$	31.81		$	28.20		$	27.24		$	26.37		$	25.40		$	31.81		$	25.40
Tangible book value per common share		24.86			25.63			24.65			23.76			22.78			24.86			22.78

Total stockholders' equity to total assets		10.42	%		10.27	%		9.92	%		9.72	%		9.74	%		10.42	%		9.74	%
Tangible common equity to tangible assets		8.33	%		9.42	%		9.06	%		8.85	%		8.83	%		8.33	%		8.83	%

RESULTS OF OPERATIONS

Results of Operations for the Three Months Ended September 30, 2019 and September 30, 2018

General. Net income increased $0.7 million to $6.7 million for three months ended September 30, 2019, compared to $5.9 million for the same period in 2018. This increase was primarily due to the increased level of accretion to net interest income from purchase accounting marks on the loans and deposits acquired in the Waupaca acquisition during the fourth quarter of 2017 and Partnership acquisition during the third quarter of 2019, as well as the added scale of the four offices acquired in the Partnership acquisition. Accretion of purchase accounting marks added $1.0 million to net interest income, net of tax, during the third quarter of 2018 compared to $2.6 million, net of tax, in the third quarter of 2019, an increase of $1.6 million. This increase was countered by a $2.2 million (pretax) increase in provision for loan losses taken during the third quarter of 2019 compared to the third quarter of 2018.

Net Interest Income. The management of interest income and expense is fundamental to our financial performance. Net interest income, the difference between interest income and interest expense, is the largest component of the Company’s total revenue. Management closely monitors both total net interest income and the net interest margin (net interest income divided by average earning assets). We seek to maximize net interest income without exposing the Company to an excessive level of interest rate risk through our asset and liability policies. Interest rate risk is managed by monitoring the pricing, maturity and repricing options of all classes of interest-bearing assets and liabilities. Our net interest margin can also be adversely impacted by the reversal of interest on nonaccrual loans and the reinvestment of loan payoffs into lower yielding investment securities and other short-term investments.

Net interest and dividend income increased by $4.8 million to $20.3 million for the three months ended September 30, 2019, compared to $15.5 million for three months ended September 30, 2018. The increase in net interest income was primarily due to the previously mentioned increase in purchase accounting accretion from the third quarter of 2018 to the third quarter of 2019, as well as the added scale of four offices acquired in the Partnership acquisition. Interest income on loans increased by $5.8 million, or 32.4%, during the same period. Total average interest-earning assets was $1.9 billion for the three months ended September 30, 2019, up from $1.7 billion for the same period in 2018. Tax equivalent net interest margin increased 0.49% to 4.30% for the three months ended September 30, 2019, up from 3.81% for the same period in 2018. Net interest margin increased by 0.38% due to the increase in purchase accounting accretion quarter-over-quarter which added to an increase of 0.11% in core net interest margin. Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes on both volume and mix and pricing decisions, and external factors include changes in market interest rates, competition and the shape of the interest rate yield curve.

Interest Income. Total interest income increased $6.0 million, or 30.7%, to $25.5 million for the three months ended September 30, 2019 compared to $19.5 million for the same period in 2018. The increase in total interest income was primarily due the increase in purchase accounting accretion, as well as the added scale of four offices acquired in the Partnership acquisition. The average balance of loans increased by $245.1 million during the three months ended September 30, 2019 compared to the same period in 2018.

Interest Expense. Interest expense increased $1.2 million, or 30.3%, to $5.2 million for the three months ended September 30, 2019 compared to $4.0 million for the same period in 2018. The increase in interest expense was primarily due to the added scale of four offices acquired in the Partnership acquisition as well as a higher overall interest rate environment in the third quarter of 2019 compared to the third quarter of 2018.

Interest expense on interest-bearing deposits increased by $1.4 million to $4.7 million for the three months ended September 30, 2019, from $3.4 million for the same period in 2018. The average cost of interest-bearing deposits was 1.50% for the three months ended September 30, 2019, compared to 1.23% for the same period in 2018.

Provision for Loan Losses. Credit risk is inherent in the business of making loans. We establish an ALL through charges to earnings, which are shown in the statements of operations as the provision for loan losses. Specifically identifiable and quantifiable known losses are promptly charged off against the allowance. The provision for loan losses is determined by conducting a quarterly evaluation of the adequacy of our ALL and charging the shortfall or excess, if any, to the current quarter’s expense. This has the effect of creating variability in the amount and frequency of charges to earnings. The provision for loan losses and level of allowance for each period are dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in our market area. The determination of the amount is complex and involves a high degree of judgment and subjectivity.

We recorded a provision for loan losses of $3.0 million for the three months ended September 30, 2019, compared to $0.8 million for the same period in 2018. We recorded net charge-offs of $5.0 million for the three months ended September 30, 2019 compared to net charge-offs of $2.3 million for the same period in 2018. The ALL was $10.1 million, or 0.59% of total loans, at September 30, 2019 compared to $11.6 million, or 0.80% of total loans at September 30, 2018. As discussed in prior filings, the elevated level of provision for loan losses during the third quarter of 2019 was the result of exiting a significant portion of poor quality loan relationships during the quarter which remained from the acquisition of Waupaca during the fourth quarter of 2017.

Noninterest Income. Noninterest income is an important component of our total revenues. A significant portion of our noninterest income is associated with service charges and income from the Bank’s subsidiaries, Ansay and UFS. Other sources of noninterest income include loan servicing fees, gains on sales of mortgage loans, and other income from strategic alliances.

Noninterest income increased $0.6 million to $3.1 million for the three months ended September 30, 2019 compared to $2.5 million for the same period in 2018. Income from our investment in Ansay increased by 81.3% as they have experienced a change in the seasonality of their revenue during 2019 due to falling under different revenue recognition standards than they followed prior to 2019. Income from our investment in UFS increased by 16.4% as they continue to see significant growth in customers in their managed information technology business. Loan servicing income saw an increase of 43.8% quarter-over-quarter, resulting from the addition of a significant serviced portfolio acquired as a part of the acquisition of Partnership, which increased the Company’s serviced, off-balance sheet loan portfolio by 67.3%. Net gains on sales of mortgage loans saw an increase of 270.1% quarter-over-quarter as the Company continues to experience a very robust year in secondary market loan originations during 2019.

The major components of our noninterest income are listed below:

	Three Months Ended September 30,
(In thousands)	2019		2018		$ Change			% Change
Noninterest Income
Service Charges	$	918	$	971	$	(53	)		(5	%)
Income from Ansay & Associates, LLC		319		176		143			81	%
Income from UFS, LLC		768		660		108			16	%
Loan Servicing income		374		260		114			44	%
Net gain on sales of mortgage loans		533		144		389			270	%
Noninterest income from strategic alliances		26		24		2			8	%
Other		207		273		(66	)		(24	%)
Total noninterest income	$	3,145	$	2,508	$	637			25	%

Noninterest Expense. Noninterest expense increased $2.4 million to $12.1 million for the three months ended September 30, 2019 compared to $9.7 million for the same period in 2018. The increase in noninterest expense was primarily the result of the Partnership acquisition, which closed early in the third quarter of 2019. Personnel expense increased 20.5%, or $1.1 million, as a result of $0.2 million in severance payments paid to former Partnership employees and the added cost of staffing four acquired office locations. Occupancy expenses increased 31.7%, or $0.3 million, the result of significant investments made in equipment and facilities of these four acquired office locations. Data processing, outside service fees and other noninterest expense increased by 35.3%, 43.3% and 28.9%, respectively, as a result of one time large expenses included in transaction expenses from the Partnership acquisition. Finally, amortization of intangibles increased by 97.9% as a result of amortization related to the core deposit intangible that was established as part of the Partnership acquisition.

Net gains and losses from sales of ORE and securities are specific to the properties and securities which are sold and will vary greatly period to period, as they did in the third quarter of 2019 compared to the third quarter of 2018.

The major components of our noninterest expense are listed below:

	Three Months Ended September 30,
(In thousands)	2019			2018			$ Change			% Change
Noninterest Expense
Salaries, commissions, and employee benefits	$	6,272		$	5,205		$	1,067			20	%
Occupancy		1,076			817			259			32	%
Data Processing		1,158			856			302			35	%
Postage, stationary, and supplies		135			138			(3	)		(2	%)
Net (gain) loss on sales and valuation of ORE		(10	)		233			(243	)		NM
Net loss on sales of securities		-			(19	)		19			NM
Advertising		53			36			17			47	%
Charitable contributions		225			169			56			33	%
Outside service fees		1,171			817			354			43	%
Amortization of intangibles		374			189			185			98	%
Other		1,633			1,267			366			29	%
Total noninterest expenses	$	12,087		$	9,708		$	2,379			25	%

Income Tax Expense. We recorded a provision for income taxes of $1.7 million for the three months ended September, 2019 compared to a provision of $1.6 million for the same period during 2018, reflecting effective tax rates of 20.5% and 21.3%, respectively. The effective tax rates were reduced from the statutory federal and state income tax rates largely as a result of tax-exempt interest income produced by certain qualifying loans and investments in the Bank’s portfolios.

Results of Operations for the Nine Months Ended September 30, 2019 and September 30, 2018

General. Net income decreased $0.2 million to $19.2 million for the nine months ended September 30, 2019, compared to $19.4 million for the same period in 2018. This decrease was primarily due to the expenses related to the acquisition of Partnership during 2019.

Net Interest Income. The management of interest income and expense is fundamental to our financial performance. Net interest income, the difference between interest income and interest expense, is the largest component of the Company’s total revenue. Management closely monitors both total net interest income and the net interest margin (net interest income divided by average earning assets). We seek to maximize net interest income without exposing the Company to an excessive level of interest rate risk through our asset and liability policies. Interest rate risk is managed by monitoring the pricing, maturity and repricing options of all classes of interest-bearing assets and liabilities. Our net interest margin can also be adversely impacted by the reversal of interest on nonaccrual loans and the reinvestment of loan payoffs into lower yielding investment securities and other short-term investments

Net interest and dividend income increased by $3.3 million to $50.9 million for the nine months ended September 30, 2019, compared to $47.6 million for nine months ended September 30, 2018. The increase in net interest income was primarily due to a higher interest rate environment that existed during the first nine months of 2019 compared to the first nine months of 2018, as well as the added scale of four additional offices which were acquired as part of the Partnership acquisition early in the third quarter of 2019. Interest income on loans increased by $7.0 million, or 12.9%, during the same period. Total average interest-earning assets increased to $1.8 billion for the nine months ended September 30, 2019, compared to $1.7 billion for the same period in 2018. Tax equivalent net interest margin increased 0.08% to 3.98% for the nine months ended September 30, 2019, up from 3.90% for the same period in 2018. Net interest margin increased by 0.01% due to the increase in purchase accounting accretion period-over-period which added to an increase of 0.07% in core net interest margin. Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes on both volume and mix and pricing decisions, and external factors include changes in market interest rates, competition and the shape of the interest rate yield curve.

Interest Income. Total interest income increased $7.2 million, or 12.3%, to $65.4 million for the nine months ended September 30, 2019 compared to $58.2 million for the same period in 2018. The increase in total interest income was due to a rising interest rate environment as well as the added scale from the Partnership acquisition which occurred early in the third quarter of 2019. The average balance of loans increased by $91.0 million during the nine months ended September 30, 2019 compared to the same period in 2018.

Interest Expense. Interest expense increased $3.9 million, or 36.6%, to $14.5 million for the nine months ended September 30, 2019 compared to $10.6 million for the same period in 2018. The increase in interest expense was primarily due to an increasing interest rate environment, as well as the added scale from the Partnership acquisition.

Interest expense on interest-bearing deposits increased by $4.8 million to $13.4 million for the nine months ended September 30, 2019, from $8.6 million for the same period in 2018. The average cost of interest-bearing deposits was 1.55% for the nine months ended September 30, 2019, compared to 1.07% for the same period in 2018.

We recorded a provision for loan losses of $4.1 million for the nine months ended September 30, 2019, compared to $2.2 million for the same period in 2018. We recorded net charge-offs of $6.2 million for the nine months ended September 30, 2019 compared to net charge-offs of 2.2 million for the same period in 2018. The ALL was $10.1 million, or 0.59% of total loans, at September 30, 2019 compared to $11.6 million, or 0.80% of total loans at September 30, 2018. As discussed in prior filings, the elevated level of provision for loan losses during the third quarter of 2019 was the result of exiting a significant portion of poor quality loan relationships during the quarter which remained from the acquisition of Waupaca during the fourth quarter of 2017.

Noninterest income increased $0.2 million to $9.2 million for the nine months ended September 30, 2019 compared to $9.0 million for the same period in 2018. Income from Ansay decreased by $0.2 million period-over-period due to a change in revenue recognition standards, causing their income, which has historically been concentrated in the first two quarters of every year, to be realized much more ratably throughout the year for 2019 and years thereafter. Income from UFS increased by $0.2 million as they continue to see significant growth in customers in their managed information technology business. Loan servicing income saw a decline of 24.0% period-over-period, resulting from a $0.4 million increase in the valuation of our mortgage serving rights in the second quarter of 2018 which did not recur in the second quarter of 2019. Net gains on sales of mortgage loans saw an increase of 80.4% period-over-period as the Company continues to experience a very robust year in secondary market loan originations during 2019.Other noninterest income was positively impacted during the first half of 2019 by a revaluing of an investment which the Company holds in common stock of another financial institution, historically recorded at its cost basis, to fair value based on recent observable prices in orderly stock transactions, resulting in income of $0.6 million.

The major components of our noninterest income are listed below:

	Nine Months Ended September 30,
(In thousands)	2019		2018		$ Change			% Change
Noninterest Income
Service Charges	$	2,396	$	2,603	$	(207	)		(8	%)
Income from Ansay & Associates, LLC		1,737		1,934		(197	)		(10	%)
Income from UFS, LLC		2,093		1,855		238			13	%
Loan Servicing income		841		1,106		(265	)		(24	%)
Net gain on sales of mortgage loans		774		429		345			80	%
Noninterest income from strategic alliances		74		68		6			9	%
Other		1,249		983		266			27	%
Total noninterest income	$	9,164	$	8,978	$	186			2	%

Noninterest Expense. Noninterest expense increased $1.6 million to $31.3 million for the nine months ended September 30, 2019 compared to $29.8 million for the same period in 2018. The increase in noninterest expense was primarily the result of the Partnership acquisition, which closed early in the third quarter of 2019. Personnel expense increased 6.4%, or $1.0 million, as a result of $0.2 million in severance payments paid to former Partnership employees and the added cost of staffing four acquired office locations for most of the third quarter of 2019. Data processing, outside service fees and other noninterest expense increased by 11.4%, 27.0% and 14.0%, respectively, as a result of one time large expenses included in transaction expenses from the Partnership acquisition. Finally, amortization of intangibles increased by 22.8% as a result of amortization related to the core deposit intangible that was established as part of the Partnership acquisition. Charitable contributions declined significantly from the first nine months of 2018 to the first nine months of 2019 due primarily to one multi-year contribution commitment of $0.3 million made to an organization during the first quarter of 2018 which was fully accrued for in that quarter as well as several smaller one-time contributions made in the second quarter of 2018 which were not repeated in the first half of 2019.

Net gains and losses from sales of ORE and securities are specific to the properties and securities which are sold and will vary greatly period to period, as they did in the first nine months of 2019 compared to the first nine months of 2018.

The major components of our noninterest expense are listed below:

	Nine Months Ended September 30,
(In thousands)	2019			2018		$ Change			% Change
Noninterest Expense
Salaries, commissions, and employee benefits	$	16,985		$	15,968	$	1,017			6	%
Occupancy		2,757			2,699		58			2	%
Data Processing		3,031			2,720		311			11	%
Postage, stationary, and supplies		450			464		(14	)		(3	%)
Net (gain) loss on sales and valuation of other real estate owned		(109	)		331		(440	)		NM
Net loss on sales of securities		(257	)		31		(288	)		NM
Advertising		180			142		38			27	%
Charitable Contributions		497			864		(367	)		(42	%)
Outside service fees		2,837			2,233		604			27	%
Amortization of intangibles		696			567		129			23	%
Other		4,254			3,730		524			14	%
Total noninterest expenses	$	31,321		$	29,749	$	1,572			5	%

Income Tax Expense. We recorded a provision for income taxes of $5.4 million for the nine months ended September 30, 2019 compared to a provision of $5.2 million for the same period during 2018, reflecting effective tax rates of 21.82% and 21.25%, respectively. The effective tax rates were reduced from the statutory federal and state income tax rates largely as a result of tax-exempt interest income produced by certain qualifying loans and investments in the Bank’s portfolios.

NET INTEREST MARGIN

Net interest income represents the difference between interest earned, primarily on loans and investments, and interest paid on funding sources, primarily deposits and borrowings. Interest rate spread is the difference between the average rate earned on total interest-earning assets and the average rate paid on total interest-bearing liabilities. Net interest margin is the amount of net interest income, on a fully taxable-equivalent basis, expressed as a percentage of average interest-earning assets. The average rate earned on earning assets is the amount of annualized taxable equivalent interest income expressed as a percentage of average earning assets. The average rate paid on interest-bearing liabilities is equal to annualized interest expense as a percentage of average interest-bearing liabilities.

The following tables set forth the distribution of our average assets, liabilities and stockholders’ equity, and average rates earned or paid on a fully taxable equivalent basis for each of the periods indicated:

	Three Months Ended
	September 30, 2019									September 30, 2018
	Average Balance			Interest Income/ Expenses (1)			Rate Earned/ Paid (1)			Average Balance			Interest Income/ Expenses (1)			Rate Earned/ Paid (1)
	(dollars in thousands)
ASSETS
Interest-earning assets
Loans (2)
Taxable	$	1,582,587		$	88,515			5.59	%	$	1,352,459		$	68,290			5.05	%
Tax-exempt		100,345			7,966			7.94	%		85,373			4,227			4.95	%
Securities
Taxable (available for sale)		88,363			2,625			2.97	%		76,171			2,343			3.08	%
Tax-exempt (available for sale)		52,746			1,836			3.48	%		53,344			1,896			3.55	%
Taxable (held to maturity)		31,079			761			2.45	%		28,405			657			2.31	%
Tax-exempt (held to maturity)		10,558			295			2.79	%		12,683			375			2.96	%
Cash and due from banks		57,773			1,245			2.15	%		46,531			979			2.10	%
Total interest-earning assets		1,923,451			103,243			5.37	%		1,654,966			78,767			4.76	%
Non interest-earning assets		184,077									130,893
Allowance for loan losses		(12,171	)								(13,091	)
Total assets	$	2,095,357								$	1,772,768
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits
Checking accounts	$	91,598		$	1,939			2.12	%	$	94,579		$	1,131			1.20	%
Savings accounts		281,531			2,755			0.98	%		175,747			984			0.56	%
Money market accounts		469,211			5,268			1.12	%		422,167			4,384			1.04	%
Certificates of deposit		392,194			8,353			2.13	%		372,279			6,316			1.70	%
Brokered Deposits		15,507			470			3.03	%		17,700			515			2.91	%
Total interest-bearing deposits		1,250,041			18,785			1.50	%		1,082,472			13,330			1.23	%
Other borrowed funds		60,716			1,751			2.88	%		102,919			2,434			2.36	%
Total interest-bearing liabilities		1,310,757			20,536			1.57	%		1,185,391			15,764			1.33	%
Non-interest bearing liabilities
Demand Deposits		536,332									405,393
Other liabilities		21,063									14,333
Total Liabilities		1,868,152									1,605,117
Shareholders' equity		227,205									167,651
Total liabilities & sharesholders' equity	$	2,095,357								$	1,772,768
Net interest income on a fully taxable equivalent basis					82,707									63,003
Less taxable equivalent adjustment					(2,120	)								(1,365	)
Net interest income				$	80,587								$	61,638
Net interest spread (3)								3.80	%								3.43	%
Net interest margin (4)								4.30	%								3.81	%

(1)

Annualized on a fully taxable equivalent basis calculated using a federal tax rate of 21% for the three months ended September 30, 2019 and 2018, respectively.

(2)

Nonaccrual loans are included in average amounts outstanding.

(3)

Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(4)

Net interest margin represents net interest income on a fully tax equivalent basis as a percentage of average interest-earning assets.

	Nine Months Ended
	September 30, 2019									September 30, 2018
	Average Balance			Interest Income/ Expenses (1)			Rate Earned/ Paid (1)			Average Balance			Interest Income/ Expenses (1)			Rate Earned/ Paid (1)
	(dollars in thousands)
ASSETS
Interest-earning assets
Loans (2)
Taxable	$	1,417,376		$	76,317			5.38	%	$	1,337,326		$	68,359			5.11	%
Tax-exempt		96,176			6,005			6.24	%		85,206			4,297			5.04	%
Securities
Taxable (available for sale)		78,007			2,298			2.95	%		73,442			2,215			3.02	%
Tax-exempt (available for sale)		52,221			1,875			3.59	%		55,603			2,000			3.60	%
Taxable (held to maturity)		29,685			728			2.45	%		26,780			618			2.31	%
Tax-exempt (held to maturity)		11,105			310			2.79	%		13,380			402			3.00	%
Cash and due from banks		68,144			1,586			2.33	%		75,682			1,317			1.74	%
Total interest-earning assets		1,752,714			89,119			5.08	%		1,667,419			79,208			4.75	%
Non interest-earning assets		150,747									129,412
Allowance for loan losses		(12,204	)								(12,447	)
Total assets	$	1,891,257								$	1,784,384
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits
Checking accounts	$	81,051		$	1,880			2.32	%	$	107,189		$	1,148			1.07	%
Savings accounts		250,783			2,564			1.02	%		156,889			582			0.37	%
Money market accounts		425,662			4,847			1.14	%		434,455			4,185			0.96	%
Certificates of deposit		379,836			8,139			2.14	%		368,639			5,302			1.44	%
Brokered Deposits		16,661			488			2.93	%		8,039			234			2.91	%
Total interest-bearing deposits		1,153,993			17,918			1.55	%		1,075,211			11,451
Other borrowed funds		44,806			1,446			3.23	%		128,988			2,729			2.12	%
Total interest-bearing liabilities		1,198,799			19,364			1.62	%		1,204,199			14,180			1.18	%
Non-interest bearing liabilities
Demand Deposits		479,733									402,921
Other liabilities		17,947									13,294
Total Liabilities		1,696,479									1,620,414
Shareholders' equity		194,778									163,970
Total liabilities & sharesholders' equity	$	1,891,257								$	1,784,384
Net interest income on a fully taxable equivalent basis					69,755									65,028
Less taxable equivalent adjustment					(1,720	)								(1,406	)
Net interest income				$	68,035								$	63,622
Net interest spread (3)								3.47	%								3.57	%
Net interest margin (4)								3.98	%								3.90	%

(1)

Annualized on a fully taxable equivalent basis calculated using a federal tax rate of 21% for the nine months ended September 30, 2019 and 2018, respectively.

(2)

Nonaccrual loans are included in average amounts outstanding.

(3)

Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(4)

Net interest margin represents net interest income on a fully tax equivalent basis as a percentage of average interest-earning assets.

Rate/Volume Analysis

The following tables describe the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected our interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volumes (changes in average balance multiplied by prior year average rate) and (ii) changes attributable to changes in rate (change in average interest rate multiplied by prior year average balance), while (iii) changes attributable to the combined impact of volumes and rates have been allocated proportionately to separate volume and rate categories.

	Three Months Ended September 30, 2019 Compared with									Nine Months Ended September 30, 2019 Compared with
	Three Months Ended September 30, 2018									Nine Months Ended September 30, 2018
	Increase/(Decrease) Due to Change in									Increase/(Decrease) Due to Change in
	Volume			Rate			Total			Volume			Rate			Total
	(dollars in thousands)									(dollars in thousands)
Interest income
Loans
Taxable	$	12,386		$	7,839		$	20,225		$	4,207		$	3,751		$	7,958
Tax-exempt		842			2,897			3,739			599			1,109			1,708
Securities
Taxable (AFS)		359			(77	)		282			133			(50	)		83
Tax-exempt (AFS)		(21	)		(39	)		(60	)		(121	)		(4	)		(125	)
Taxable (HTM)		64			40			104			70			40			110
Tax-exempt (HTM)		(60	)		(20	)		(80	)		(65	)		(27	)		(92	)
Cash and due from banks		242			24			266			(113	)		382			269
Total interest income		13,812			10,664			24,476			4,710			5,201			9,911
Interest expense
Deposits
Checking accounts	$	(34	)	$	842		$	808		$	(194	)	$	926		$	732
Savings accounts		790			981			1,771			504			1,478			1,982
Money market accounts		511			373			884			(83	)		745			662
Certificates of deposit		353			1,684			2,037			166			2,671			2,837
Brokered Deposits		(68	)		23			(45	)		253			1			254
Total interest-bearing deposits		1,552			3,903			5,455			646			5,821			6,467
Other borrowed funds		(1,469	)		786			(683	)		(6,580	)		5,297			(1,283	)
Total interest expense		83			4,689			4,772			(5,934	)		11,118			5,184
Change in net interest income	$	13,729		$	5,975		$	19,704		$	10,644		$	(5,917	)	$	4,727

CHANGES IN FINANCIAL CONDITION

Total Assets. Total assets increased $370.3 million, or 20.7%, to $2.16 billion at September 30, 2019, from $1.79 billion at December 31, 2018.

Cash and Cash Equivalents. Cash and cash equivalents increased by $10.7 million to $118.4 million at September 30, 2019 from $107.7 million at December 31, 2018.

Investment Securities. The carrying value of total investment securities increased by $19.9 million to $179.5 million at September 30, 2019, from $159.7 million at December 31, 2018.

Loans. Net loans increased by $287.8 million, totaling $1.70 billion at September 30, 2019 compared to $1.42 billion at December 31, 2018.

Bank-Owned Life Insurance. At September 30, 2019, our investment in bank-owned life insurance was $24.8 million, an increase of $0.6 million from $24.2 million at December 31, 2018.

Deposits. Deposits increased $280.9 million, or 18.0%, to $1.84 billion at September 30, 2019 from $1.56 billion at December 31, 2018.

Borrowings. At September 30, 2019, borrowings consisted of advances from the FHLB of Chicago, as well as notes payable and subordinated debt to other banks. Total FHLB borrowings increased to $39.8 million at September 30, 2019 from no FHLB borrowings at December 31, 2018. Notes payable increased to $10.0 million at September 30, 2019 from no borrowings at December 31, 2018. Subordinated debt increased $7.2 million to $18.7 million at September 30, 2019 from $11.5 million at December 31, 2018.

Stockholders’ Equity. Total stockholders’ equity increased $51.0 million, or 29.3%, to $225.3 million at September 30, 2019, from $174.3 million at December 31, 2018.

LOANS

Our lending activities are conducted principally in Wisconsin. The Bank makes commercial and industrial loans, commercial real estate loans, construction and development loans, residential real estate loans, and a variety of consumer loans and other loans. Much of the loans made by the Bank are secured by real estate collateral. The Bank’s commercial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower, with liquidation of the underlying real estate collateral typically being viewed as the primary source of repayment in the event of borrower default. Although commercial business loans are also often collateralized by equipment, inventory, accounts receivable, or other business assets, the liquidation of collateral in the event of default is often an insufficient source of repayment. Repayment of the Bank’s residential loans are generally dependent on the health of the employment market in the borrowers’ geographic areas and that of the general economy with liquidation of the underlying real estate collateral being typically viewed as the primary source of repayment in the event of borrower default.

Our loan portfolio is our most significant earning asset, comprising 79.2% and 79.7% of our total assets as of September 30, 2019 and December 31, 2018, respectively. Our strategy is to grow our loan portfolio by originating quality commercial and consumer loans that comply with our credit policies and that produce revenues consistent with our financial objectives. We believe our loan portfolio is well-balanced, which provides us with the opportunity to grow while monitoring our loan concentrations.

Loans increased $285.7 million, or 20.0%, to $1.71 billion as of September 30, 2019 as compared to $1.43 billion as of December 31, 2018. This increase during the first nine months of 2019 has been comprised of an increase of $13.0 million or 4.4% in commercial and industrial loans, an increase of $135.9 million or 20.3% in commercial real estate loans, an increase of $57.1 million or 94% in construction and development loans, an increase of $75.3 million or 20.4% in residential 1-4 family loans and an increase of $4.4 million or 13.3% in consumer and other loans. The increase in loans during the nine months ended September 30, 2019 is primarily attributable to the loan portfolio which was purchased as part of the Partnership acquisition during the third quarter of 2019.

The following table presents the balance and associated percentage of each major category in our loan portfolio at September 30, 2019, December 31, 2018, and September 30, 2018:

	September 30,						December 31,						September 30,
	2019			% of Total			2018			% of Total			2018			% of Total
	(dollars in thousands)
Commercial & industrial
Commercial & industrial	$	310,536			18	%	$	297,576			21	%	$	314,379			22	%
Deferred costs net of unearned fees		(178	)		0	%		(248	)		0	%		(256	)		0	%
Total commercial & industrial		310,358			18	%		297,328			21	%		314,123			22	%
Commercial real estate
Owner Occupied		467,030			27	%		416,097			29	%		420,727			29	%
Non-owner occupied		337,558			20	%		252,717			18	%		233,442			16	%
Deferred costs net of unearned fees		(385	)		0	%		(465	)		0	%		(402	)		0	%
Total commercial real estate		804,203			47	%		668,349			47	%		653,767			45	%
Construction & Development
Construction & Development		118,055			7	%		60,927			4	%		68,137			5	%
Deferred costs net of unearned fees		(123	)		0	%		(125	)		0	%		(139	)		0	%
Total construction & development		117,932			7	%		60,802			4	%		67,998			5	%
Residential 1-4 family
Residential 1-4 family		443,906			26	%		368,673			26	%		364,325			25	%
Deferred costs net of unearned fees		42			0	%		17			0	%		4			0	%
Total residential 1-4 family		443,948			26	%		368,690			26	%		364,329			25	%
Consumer
Consumer		31,665			2	%		26,854			2	%		34,365			2	%
Deferred costs net of unearned fees		123			0	%		101			0	%		100			0	%
Total consumer		31,788			2	%		26,955			2	%		34,465			2	%
Other Loans
Other		5,985			0	%		6,369			0	%		6,795			0	%
Deferred costs net of unearned fees		(1	)		0	%		1			0	%		-			0	%
Total other loans		5,984			0	%		6,370			0	%		6,795			0	%
Total loans	$	1,714,213			100	%	$	1,428,494			100	%	$	1,441,477			100	%

Our directors and officers and their associates are customers of, and have other transactions with, the Bank in the normal course of business. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collection or present other unfavorable features. At September 30, 2019 and December 31, 2018, total loans outstanding to such directors and officers and their associates were $79.3 million and $84.1 million, respectively. During the nine months ended September 30, 2019, $19.7 million of additions and $24.6 million of repayments were made to these loans. At September 30, 2019 and December 31, 2018, all of the loans to directors and officers were performing according to their original terms.

Loan categories

The principal categories of our loan portfolio are discussed below:

Commercial and Industrial (C&I). Our C&I portfolio totaled $310.3 million and $297.3 million at September 30, 2019 and December 31, 2018, respectively, and represented 18% and 21% of our total loans at those dates.

Our C&I loan customers represent various small and middle-market established businesses involved in professional services, accommodation and food services, health care, financial services, wholesale trade, manufacturing, distribution, retailing and non-profits. Most clients are privately owned with markets that range from local to national in scope. Many of the loans to this segment are secured by liens on corporate assets and the personal guarantees of the principals. The regional economic strength or weakness impacts the relative risks in this loan category. There is little concentration in any one business sector, and loan risks are generally diversified among many borrowers.

Commercial Real Estate (CRE). Our CRE loan portfolio totaled $804.2 million and $668.3 million at September 30, 2019 and December 31, 2018, respectively, and represented 47% of our total loans at both of those dates.

Our CRE loans are secured by a variety of property types including multifamily dwellings, retail facilities, office buildings, commercial mixed use, lodging and industrial and warehouse properties. We do not have any specific industry or customer concentrations in our CRE portfolio. Our commercial real estate loans are generally for terms up to ten years, with loan-to-values that generally do not exceed 80%. Amortization schedules are long term and thus a balloon payment is generally due at maturity. Under most circumstances, the Bank will offer to rewrite or otherwise extend the loan at prevailing interest rates.

Construction and Development (C&D). Our C&D loan portfolio totaled $117.9 million and $60.8 million at September 30, 2019 and December 31, 2018, respectively, and represented 7% and 4% of our total loans at those dates.

Our C&D loans are generally for the purpose of creating value out of real estate through construction and development work, and also include loans used to purchase recreational use land. Borrowers typically provide a copy of a construction or development contract which is subject to bank acceptance prior to loan approval. Disbursements are handled by a title company. Borrowers are required to inject their own equity into the project prior to any note proceeds being disbursed. These loans are, by their nature, intended to be short term and are refinanced into other loan types at the end of the construction and development period.

Residential 1 – 4 Family. Residential 1 – 4 family loans held in portfolio amounted to $443.9 million and $368.7 million at September 30, 2019 and December 31, 2018, respectively, and represented 26% of our total loans at both of those dates.

We offer fixed and adjustable-rate residential mortgage loans with maturities up to 30 years. One-to-four family residential mortgage loans are generally underwritten according to Fannie Mae guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” We generally originate both fixed and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency, which is generally $424,100 for one-unit properties. In addition, we also offer loans above conforming lending limits typically referred to as “jumbo” loans. These loans are typically underwritten to the same guidelines as conforming loans; however, we may choose to hold a jumbo loan within its portfolio with underwriting criteria that does not exactly match conforming guidelines.

We do not offer reverse mortgages nor do we offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on his loan, resulting in an increased principal balance during the life of the loan. We also do not offer “subprime loans” (loans that are made with low down payments to borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (defined as loans having less than full documentation).

Residential real estate loans are originated both for sale to the secondary market as well as for retention in the Bank’s loan portfolio. The decision to sell a loan to the secondary market or retain within the portfolio is determined based on a variety of factors including but not limited to our asset/liability position, the current interest rate environment, and customer preference. Servicing rights are retained on all loans sold to the secondary market.

We were servicing mortgage loans sold to others without recourse of approximately $550.6 million at September 30, 2019 and $316.5 million at December 31, 2018.

Loans sold with the retention of servicing assets result in the capitalization of servicing rights. Loan servicing rights are included in other assets and are carried at fair value. The net balance of capitalized servicing rights amounted to $4.9 million at September 30, 2019 and $3.1 million at December 31, 2018.

Consumer Loans. Our consumer loan portfolio totaled $31.8 million and $27.0 million at September 30, 2019 and December 31, 2018, respectively, and represented 2% of our total loans at those dates. Consumer loans include secured and unsecured loans, lines of credit and personal installment loans.

Consumer loans generally have greater risk compared to longer-term loans secured by improved, owner-occupied real estate, particularly consumer loans that are secured by rapidly depreciable assets. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan repayments are dependent on the borrower’s continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

Other Loans. Our other loans totaled $6.0 million and $6.4 million at September 30, 2019 and December 31, 2018, respectively, and are immaterial to the overall loan portfolio. The other loans category consists primarily of over-drafted depository accounts, loans utilized to purchase or carry securities and loans to nonprofit organizations.

Loan Portfolio Maturities. The following tables summarize the dollar amount of loans maturing in our portfolio based on their loan type and contractual terms to maturity at September 30, 2019 and December 31, 2018, respectively. The tables do not include any estimate of prepayments, which can significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.

As of September 30, 2019	One Year or Less		One to Five Years		Over Five Years		Total
	(dollars in thousands)
Commercial & industrial	$	107,725	$	122,555	$	80,078	$	310,358
Commercial real estate		130,858		410,431		262,914		804,203
Construction & Development		31,147		49,270		37,515		117,932
Residential 1-4 family		31,192		70,520		342,236		443,948
Consumer and other		7,932		21,660		8,180		37,772
Total	$	308,854	$	674,436	$	730,923	$	1,714,213

As of December 31, 2018		One Year or Less		One to Five Years		Over Five Years		Total
		(dollars in thousands)
Commercial & industrial	$	89,358	$	111,354	$	96,616	$	297,328
Commercial real estate		114,017		313,836		240,496		668,349
Construction & Development		28,357		19,721		12,724		60,802
Residential 1-4 family		27,987		69,206		271,497		368,690
Consumer and other		4,980		21,385		6,960		33,325
Total	$	264,699	$	535,502	$	628,293	$	1,428,494

The following tables summarize the dollar amount of loans maturing in our portfolio based on whether the loan has a fixed or variable rate of interest and their contractual terms to maturity at September 30, 2019 and December 31, 2018, respectively. The tables do not include any estimate of prepayments, which can significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.

As of September 30, 2019	One Year or Less		One to Five Years		Over Five Years		Total
	(dollars in thousands)
Predetermined interest rates	$	170,799	$	564,065	$	330,822	$	1,065,686
Floating or adjustable interest rates		138,055		110,371		400,101		648,527
Total	$	308,854	$	674,436	$	730,923	$	1,714,213

As of December 31, 2018	One Year or Less		One to Five Years		Over Five Years		Total
		(dollars in thousands)
Predetermined interest rates	$	143,333	$	412,100	$	267,221	$	822,654
Floating or adjustable interest rates		121,366		123,402		361,072		605,840
Total	$	264,699	$	535,502	$	628,293	$	1,428,494

NONPERFORMING LOANS AND TROUBLED DEBT RESTRUCTURINGS

In order to operate with a sound risk profile, we focus on originating loans that we believe to be of high quality. We have established loan approval policies and procedures to assist us in maintaining the overall quality of our loan portfolio. When delinquencies in our loans exist, we rigorously monitor the levels of such delinquencies for any negative or adverse trends. From time to time, we may modify loans to extend the term or make other concessions to help a borrower with a deteriorating financial condition stay current on their loan and to avoid foreclosure. We generally do not forgive principal or interest on loans or modify the interest rates on loans to rates that are below market rates. Furthermore, we are committed to collecting on all of our loans and, as a result, at times have lower net charge-offs compared to many of our peer banks. We believe that our commitment to collecting on all of our loans results in higher loan recoveries.

Our nonperforming assets consist of nonperforming loans and foreclosed real estate. Nonperforming loans are those on which the accrual of interest has stopped, as well as loans that are contractually 90 days past due on which interest continues to accrue. The composition of our nonperforming assets is as follows:

	September 30,			December 31,			September 30,
	2019			2018			2018
	(dollars in thousands)
Nonaccruals	$	4,692		$	20,099		$	20,120
Loans past due > 90 days, but still accruing		527			423			8,617
Total nonperforming loans	$	5,219		$	20,522		$	28,737
Accruing troubled debt resructured loans	$	175		$	179		$	180
Nonperforming loans as a percent of gross loans		0.30	%		1.44	%		1.99	%
Nonperforming loans as a percent of total assets		0.24	%		1.14	%		1.66	%

At September 30, 2019 and December 31, 2018, impaired loans had specific reserves of $0.0 million and $1.1 million, respectively.

Nonaccrual Loans

Loans are typically placed on nonaccrual status when any payment of principal and/or interest is 90 days or more past due, unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. Loans are also placed on nonaccrual status when management believes, after considering economic and business conditions, that the principal or interest will not be collectible in the normal course of business. We monitor closely the performance of our loan portfolio. In addition to the monitoring and review of loan performance internally, we have also contracted with an independent organization to review our commercial and retail loan portfolios. The status of delinquent loans, as well as situations identified as potential problems, is reviewed on a regular basis by senior management.

Troubled Debt Restructurings

A troubled debt restructuring includes a loan modification where a borrower is experiencing financial difficulty and we grant a concession to that borrower that we would not otherwise consider except for the borrower’s financial difficulties. These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. Restructuring a loan in lieu of aggressively enforcing the collection of the loan may benefit the Company by increasing the ultimate probability of collection.

A TDR may be either on accrual or nonaccrual status based upon the performance of the borrower and management’s assessment of collectability. If a TDR is placed on nonaccrual status, which would occur based on the same criteria as non-TDR loans, it remains there until a sufficient period of performance under the restructured terms has occurred at which it returned to accrual status, generally 6 months.

As of September 30, 2019 and December 31, 2018 the Company had specific reserves of $0 million and $0.4 million for TDRs, respectively, and none of them have subsequently defaulted.

Classified loans

Accounting standards require the Company to identify loans, where full repayment of principal and interest is doubtful, as impaired loans. These standards require that impaired loans be valued at the present value of expected future cash flows, discounted at the loan’s effective interest rate, or using one of the following methods: the observable market price of the loan or the fair value of the underlying collateral if the loan is collateral dependent. We have implemented these standards in our quarterly review of the adequacy of the ALL, and identify and value impaired loans in accordance with guidance on these standards. As part of the review process, we also identify loans classified as watch, which have a potential weakness that deserves management’s close attention.

Loans totaling $45.0 million were classified substandard under the Bank’s policy at September 30, 2019 and loans totaling $67.6 million were classified substandard under the Bank’s policy as of December 31, 2018. The following table sets forth information related to the credit quality of our loan portfolio at September 30, 2019 and December 31, 2018.

Loan type (in thousands)	Pass		Watch		Substandard		Total
As of September 30, 2019 (unaudited)
Commercial & industrial	$	258,512	$	36,723	$	15,123	$	310,358
Commercial real estate		666,085		109,111		29,007		804,203
Construction & Development		111,246		6,686		-		117,932
Residential 1-4 family		435,197		7,866		885		443,948
Consumer		31,749		39		-		31,788
Other loans		2,569		3,415		-		5,984
Total loans	$	1,505,358	$	163,840	$	45,015	$	1,714,213

Loan type (in thousands)	Pass		Watch		Substandard		Total
As of December 31, 2018
Commercial & industrial	$	237,367	$	40,377	$	19,584	$	297,328
Commercial real estate		497,871		126,904		43,574		668,349
Construction & Development		57,967		2,774		61		60,802
Residential 1-4 family		351,772		12,534		4,384		368,690
Consumer		26,887		49		19		26,955
Other loans		3,112		3,258		-		6,370
Total loans	$	1,174,976	$	185,896	$	67,622	$	1,428,494

ALLOWANCE FOR LOAN LOSSES

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

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

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

The following table summarizes the changes in our ALL for the periods indicated:

	Nine months ended September 30,			Year ended December 31,			Nine months ended September 30,
	2019			2018			2018
	(dollars in thousands)
Period-end loans outstanding (net of unearned discount and deferred loan fees)	$	1,714,213		$	1,428,494		$	1,441,477
Average loans outstanding (net of unearned discount and deferred loan fees)	$	1,513,552		$	1,425,867		$	1,422,532
Balance of allowance for loan losses at the beginning of period	$	12,248		$	11,612		$	11,612
Loans charged-off:
Commercial & industrial		1,229			35			35
Commercial real estate - owner occupied		4,974			2,374			2,344
Commercial real estate - non-owner occupied		55			-			-
Construction & Development		-			83			83
Residential 1-4 family		83			140			128
Consumer		75			48			7
Other Loans		29			37			29
Total loans charged-off		6,445			2,717			2,626
Recoveries of loans previously charged off:
Commercial & industrial		3			2			2
Commercial real estate - owner occupied		4			158			138
Commercial real estate - non-owner occupied		60			3			3
Construction & Development		-			-			-
Residential 1-4 family		126			233			228
Consumer		4			12			10
Other Loans		6			10			8
Total recoveries of loans previously charged off:		203			418			389
Net Loan charge-offs (recoveries)		6,242			2,299			2,237
Provision charged to operating expense		4,125			2,935			2,185
Balance at end of period	$	10,131		$	12,248		$	11,560
Ratio of net charge offs (recoveries) during the year to average loans outstanding		0.48	%		0.16	%		0.16	%
Ratio of allowance for loan losses to loans outstanding		0.59	%		0.86	%		0.80	%

The level of charge-offs depends on many factors, including the national and regional economy. Cyclical lagging factors may result in charge-offs being higher than historical levels. Although the allowance is allocated between categories, the entire allowance is available to absorb losses attributable to all loan categories. Management believes that the current ALL is adequate.

The following table summarizes an allocation of the ALL and the related percentage of loans outstanding in each category for the periods below.

	September 30, 2019					December 31, 2018					September 30, 2018
(in thousands, except %)	Amount		% of Loans			Amount		% of Loans			Amount		% of Loans
Loan Type:
Commercial & industrial	$	2,302		18	%	$	3,021		21	%	$	2,655		22	%
Commercial real estate - owner occupied		3,129		27	%		3,459		29	%		3,240		29	%
Commercial real estate - non-owner occupied		1,919		20	%		2,100		18	%		1,872		16	%
Construction & Development		504		7	%		725		4	%		931		5	%
Residential 1-4 family		2,092		26	%		2,472		26	%		2,409		25	%
Consumer		147		2	%		148		2	%		183		2	%
Other Loans		27		0	%		32		0	%		34		0	%
Unallocated		11					291					236
Total allowance	$	10,131		100	%	$	12,248		100	%	$	11,560		100	%

SOURCES OF FUNDS

General. Deposits traditionally have been our primary source of funds for our investment and lending activities. We also borrow from the FHLB of Chicago to supplement cash needs, to lengthen the maturities of liabilities for interest rate risk management purposes and to manage our cost of funds. Our additional sources of funds are scheduled payments and prepayments of principal and interest on loans and investment securities and fee income and proceeds from the sales of loans and securities.

Deposits. Our current deposit products include non-interest bearing and interest-bearing checking accounts, savings accounts, money market accounts, and certificate of deposits. As of September 30, 2019, deposit liabilities accounted for approximately 85.0% of our total liabilities and equity. We accept deposits primarily from customers in the communities in which our branches and offices are located, as well as from small businesses and other customers throughout our lending area. We rely on our competitive pricing and products, quality customer service, and convenient locations and hours to attract and retain deposits. Deposit rates and terms are based primarily on current business strategies, market interest rates, liquidity requirements and our deposit growth goals.

Total deposits were $1.84 billion and $1.56 billion as of September 30, 2019 and December 31, 2018, respectively. Noninterest-bearing deposits at September 30, 2019 and December 31, 2018, were $566.1 million and $448.8 million, respectively, while interest-bearing deposits were $1.27 billion and $1.11 billion at September 30, 2019 and December 31, 2018, respectively.

At September 30, 2019, we had a total of $404.6 million in certificates of deposit, including $15.6 million of brokered deposits. Based on historical experience and our current pricing strategy, we believe we will retain a majority of these accounts upon maturity, although our long-term strategy is to minimize reliance on certificates of deposits by increasing relationship deposits in lower earning savings and demand deposit accounts.

The following tables set forth the average balances of our deposits for the periods indicated:

	Nine months ended September 30, 2019								Year ended December 31, 2018								Nine months ended September 30, 2018
	Amount		Percent			Weighted average rate			Amount		Percent			Weighted average rate			Amount		Percent			Weighted average rate
	(dollars in thousands)
Noninterest-bearing demand deposits	$	479,733		29.4	%		N/A		$	408,403		27.5	%		N/A		$	402,921		27.3	%		N/A
Interest-bearing checking deposits		81,051		5.0	%		2.32	%		99,894		6.7	%		1.13	%		107,189		7.3	%		1.07	%
Savings deposits		250,783		15.4	%		1.02	%		168,254		11.3	%		0.52	%		156,889		10.6	%		0.37	%
Money market accounts		425,662		26.1	%		1.14	%		428,052		28.8	%		0.99	%		434,455		29.4	%		0.96	%
Certificates of deposit		379,836		23.2	%		2.14	%		371,332		25.0	%		1.57	%		368,639		24.9	%		1.44	%
Brokered deposits		16,661		1.0	%		2.93	%		10,476		0.7	%		2.91	%		8,039		0.5	%		2.91	%
Total	$	1,633,726		100	%				$	1,486,411		100	%				$	1,478,132		100	%

Certificates of deposit of $100,000 or greater by maturity are as follows:

	September 30,		December 31,		September 30,
	2019		2018		2018
	(dollars in thousands)
Less than 3 months remaining	$	26,034	$	26,366	$	14,498
3 to 6 months remaining		32,640		46,593		25,116
6 to 12 months remaining		40,002		35,932		58,992
12 months or more remaining		85,277		89,501		76,042
Total	$	183,953	$	198,392	$	174,648

Retail certificates of deposit of $100,000 or greater totaled $184.0 million and $198.4 million at September 30, 2019 and December 31, 2018, respectively. Interest expense on retail certificates of deposit of $100,000 or greater was $2.6 million for the nine months ended September 30, 2019, and $2.5 million for the year ended December 31, 2018.

The following table sets forth certificates of deposit classified by interest rate as of the dates indicated:

	September 30,		December 31,		September 30,
	2019		2018		2018
	(dollars in thousands)
Interest Rate:
Less than 1.00%	$	2,654	$	1,824	$	3,472
1.00% to 1.99%		134,933		164,366		203,772
2.00% to 2.99%		234,276		204,825		171,207
3.00% to 3.99%		32,761		29,142		14,503
Total	$	404,624	$	400,157	$	392,954

Borrowings

Securities sold under repurchase agreements

The Company has securities sold under repurchase agreements which have contractual maturities up to one year from the transaction date with variable and fixed rate terms. The agreements to repurchase require that the Company (seller) repurchase identical securities as those that are sold. The securities underlying the agreements are under the Company’s control.

The following table summarizes securities sold under repurchase agreements, and the weighted average interest rates paid:

(dollars in thousands)	Nine months ended September 30, 2019			Year ended December 31, 2018			Nine months ended September 30, 2018
Average daily amount of securities sold under repurchase agreements during the period	$	22,134		$	22,315		$	23,437
Weighted average interest rate on average daily securities sold under repurchase agreements		2.31	%		1.79	%		1.67	%
Maximum outstanding securities sold under repurchase agreements at any month-end	$	42,338		$	48,010		$	48,010
Securities sold under repurchase agreements at period end	$	12,201		$	31,489		$	7,298
Weighted average interest rate on short-term borrowing at period end		1.83	%		2.43	%		2.25	%

Short-term borrowings

The Company’s short-term borrowings have historically consisted primarily of short-term FHLB of Chicago advances collateralized by a blanket pledge agreement on the Company’s FHLB capital stock and retail and commercial loans held in the Company’s portfolio. There were $39.8 million of advances outstanding from the FHLB at September 30, 2019. There were no advances outstanding from the FHLB as of December 31, 2018. From time to time the Company utilized short-term FHLB advances to fund liquidity during 2018.

The total loans pledged as collateral were $713.8 million at September 30, 2019 and $697.3 million at December 31, 2018. Outstanding letters of credit from the FHLB totaled $30.2 million at September 30, 2019 and $55.0 million at December 31, 2018.

The following table summarizes short-term borrowings (borrowings with maturities of one year or less), which consist of borrowings from the FHLB, and the weighted average interest rates paid:

(dollars in thousands)	Nine months ended September 30, 2019			Year ended December 31, 2018			Nine months ended September 30, 2018
Average daily amount of short-term borrowings outstanding during the period	$	8,873		$	73,464		$	88,986
Weighted average interest rate on average daily short-term borrowing		1.75	%		1.75	%		1.69	%
Maximum outstanding short-term borrowings outstanding at any month-end	$	39,800		$	100,000		$	100,000
Short-term borrowing outstanding at period end	$	39,800		$	-		$	46,000
Weighted average interest rate on short-term borrowing at period end		1.80	%		NA			2.24	%

Lines of credit and other borrowings.

We maintain a $5.0 million line of credit with a commercial bank. There were outstanding balances on this note of $5.0 million as of September 30, 2019. There were no advances on this note at December 31, 2018. Borrowings under this note carry interest at a variable rate with a floor of 3.50%, due in full on May 25, 2020.

We also maintain a $5.0 million line of credit with another commercial bank. There were outstanding balances on this note of $5.0 million as of September 30, 2019. There were no advances on this note at December 31, 2018. Borrowings under this note carry interest at a variable rate with a floor of 3.25%, due in full on May 19, 2020.

During September 2017, the Company entered into subordinated note agreements with three separate commercial banks, where the Company had up to twelve months from entering these agreements to borrow funds up to a maximum availability of $22.5 million. As of September 30, 2019 and December 31, 2018, outstanding balances under these agreements totaled $11.5 million. These notes were all issued with 10-year maturities, carry interest at a variable rate payable quarterly, are callable on or after the sixth anniversary of their issuance dates, and qualify for Tier 2 capital for regulatory purposes.

As part of the Partnership acquisition, the Company assumed a subordinated note agreement with an outstanding balance of $7.0 million, and a fair market value adjustment of $0.2 million. The note matures on October 1, 2025, requires quarterly interest-only payments at a rate of 7.1% prior to maturity, and can be prepaid without penalty after October 1, 2020. This note qualifies for Tier 2 capital for regulatory purposes.

INVESTMENT SECURITIES

Our securities portfolio consists of securities available for sale and securities held to maturity. Securities are classified as held to maturity or available for sale at the time of purchase. U.S. Treasury securities, obligations of states and political subdivisions and mortgage-backed securities, all of which are issued by U.S. government agencies or U.S. government-sponsored enterprises, make up the largest components of the securities portfolio. We manage our investment portfolio to provide an adequate level of liquidity as well as to maintain neutral interest rate-sensitive positions, while earning an adequate level of investment income without taking undue or excessive risk.

Securities available for sale consist of obligations of states and political subdivision, mortgage-backed securities, and corporate notes. Securities classified as available for sale, which management has the intent and ability to hold for an indefinite period of time, but not necessarily to maturity, are carried at fair value, with unrealized gains and losses, net of related deferred income taxes, included in stockholders’ equity as a separate component of other comprehensive income. The fair value of securities available for sale totaled $136.9 million and included gross unrealized gains of $4.6 million and gross unrealized losses of $33,000 at September 30, 2019. At December, 31 2018, the fair value of securities available for sale totaled $118.9 million and included gross unrealized gains of $0.8 million and gross unrealized losses of $1.4 million.

Securities classified as held to maturity consist of U.S. Treasury securities and obligations of states and political subdivisions. These securities, which management has the intent and ability to hold to maturity, are reported at amortized cost. Securities held to maturity totaled $42.6 million and $40.8 million at September 30, 2019 and December 31, 2018, respectively.

The Company recognized a net gain of $0.2 million on the sale of an investment previously classified as an “other investment” and a $22,000 gain on sale of available for sale securities during the nine-months ended September 30, 2019, and a net loss on sale of available for sale securities of $31,000 during the nine-months ended September 30, 2018.

The following table sets forth the fair value of available for sale investment securities, the amortized costs of held to maturity and the percentage distribution at the dates indicated:

	September 30,					December 31,
	2019					2018
	Amount		Percent			Amount		Percent
	(dollars in thousands)
Available for sale securities, at estimated fair value
Obligations of states and political subdivisions	$	51,556		38	%	$	51,893		44	%
Mortgage-backed securities		68,211		50	%		50,569		42	%
Corporate notes		17,168		13	%		16,444		14	%
Total securities available for sale		136,935		100	%		118,906		100	%
Held to maturity securities, at amortized cost
U.S. Treasury securities		32,047		75	%		28,975		71	%
Obligations of states and political subdivisions		10,558		25	%		11,793		29	%
Total securities held to maturity		42,605		100	%		40,768		100	%
Total	$	179,540				$	159,674

The following tables set forth the composition and maturities of investment securities as of September 30, 2019 and December 31, 2018. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Within One Year					After One, But Within Five Years					After Five, But Within Ten Years					After Ten Years					Total
	Amortized Cost		Weighted Average Yield (1)			Amortized Cost		Weighted Average Yield (1)			Amortized Cost		Weighted Average Yield (1)			Amortized Cost		Weighted Average Yield (1)			Amortized Cost		Weighted Average Yield (1)
	(dollars in thousands)
At September 30, 2019
Available for sale securities
Obligations of states and political subdivisions	$	1,888		3.3	%	$	5,566		3.4	%	$	11,436		3.7	%	$	30,215		3.9	%	$	49,105		3.8	%
Mortgage-backed securities		1,467		2.1	%		11,454		2.4	%		42,137		2.9	%		11,151		2.9	%		66,209		2.8	%
Corporate notes		-		-			16,788		3.0	%		-		-			226		8.6	%		17,014		3.0	%
Total available for sale securities		3,355		2.8	%		33,808		2.8	%		53,573		3.0	%		41,592		3.6	%		132,328		3.2	%
Held to maturity securities
U.S. Treasury securities		2,499		2.0	%		10,013		2.7	%		19,534		2.5	%		-		-	%		32,046		2.5	%
Obligations of states and political subdivisions		828		2.5	%		3,621		2.5	%		3,201		2.8	%		2,909		3.8	%		10,559		3.0	%
Total held to maturity securities		3,327		2.1	%		13,634		2.6	%		22,735		2.5	%		2,909		3.8	%		42,605		2.6	%
Total	$	6,682		2.5	%	$	47,442		2.8	%	$	76,308		2.9	%	$	44,501		3.6	%	$	174,933		3.0	%

	Within One Year					After One, But Within Five Years					After Five, But Within Ten Years					After Ten Years					Total
	Amortized Cost		Weighted Average Yield (1)			Amortized Cost		Weighted Average Yield (1)			Amortized Cost		Weighted Average Yield (1)			Amortized Cost		Weighted Average Yield (1)			Amortized Cost		Weighted Average Yield (1)
	(dollars in thousands)
At December 31, 2018
Available for sale securities
Obligations of states and political subdivisions	$	3,681		3.4	%	$	6,438		3.3	%	$	8,092		3.5	%	$	33,081		3.9	%	$	51,292		3.7	%
Mortgage-backed securities		1,838		1.6	%		13,009		2.4	%		34,810		2.9	%		1,862		3.2	%		51,519		2.7	%
Corporate notes		-		-			11,770		2.9	%		4,938		3.3	%		-		-			16,708		3.0	%
Total available for sale securities		5,519		2.8	%		31,217		2.7	%		47,840		3.0	%		34,943		3.9	%		119,519		3.2	%
Held to maturity securities
U.S. Treasury securities		1,492		2.0	%		11,020		2.6	%		16,463		2.5	%		-		-	%		28,975		2.5	%
Obligations of states and political subdivisions		1,434		3.3	%		3,140		2.1	%		3,440		2.8	%		3,779		3.6	%		11,793		3.0	%
Total held to maturity securities		2,926		2.6	%		14,160		2.5	%		19,903		2.6	%		3,779		3.6	%		40,768		2.6	%
Total	$	8,445		2.7	%	$	45,377		2.7	%	$	67,743		2.9	%	$	38,722		3.8	%	$	160,287		3.0	%

(1)	Weighted Average Yield is shown on a fully taxable equivalent basis using a federal tax rate of 21% at September 30, 2019 and December 31, 2018, respectively.

The Company evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (1) credit quality of individual securities and their issuers are assessed; (2) the length of time and the extent to which the fair value has been less than cost; (3) the financial condition and near-term prospects of the issuer; and (4) that the Company does not have the intent to sell the security and it is more likely than not that it will not have to sell the security before recovery of its cost basis.

As of September 30, 2019, 11 debt securities had gross unrealized losses, with an aggregate depreciation of 0.02% from our amortized cost basis. The largest unrealized loss percentage of any single security was 2.00% (or $7,000) of its amortized cost. The largest unrealized dollar loss of any single security was $10,000 (or 0.25%) of its amortized cost.

As of December 31, 2018, 64 debt securities had gross unrealized losses, with an aggregate depreciation of 1.11% from our amortized cost basis. The largest unrealized loss percentage of any single security was 4.98% (or $148,000) of its amortized cost. This was also the largest unrealized dollar loss of any security.

The unrealized losses on these debt securities arose primarily due to changing interest rates and are considered to be temporary.

LIQUIDITY AND CAPITAL RESOURCES

Impact of Inflation and Changing Prices. Our consolidated financial statements and related notes have been prepared in accordance with GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on our performance than they would on industrial companies.

Liquidity. Liquidity is defined as the Company’s ability to generate adequate cash to meet its needs for day-to-day operations and material long and short-term commitments. Liquidity is the risk of potential loss if we were unable to meet our funding requirements at a reasonable cost. We are expected to maintain adequate liquidity at the Bank to meet the cash flow requirements of customers who may be either depositors wishing to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Our asset and liability management policy is intended to cause the Bank to maintain adequate liquidity and, therefore, enhance our ability to raise funds to support asset growth, meet deposit withdrawals and lending needs, maintain reserve requirements and otherwise sustain our operations.

We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all of our short-term and long-term cash requirements. We manage our liquidity based on demand and specific events and uncertainties to meet current and future financial obligations of a short-term nature. We also monitor our liquidity requirements in light of interest rate trends, changes in the economy and the scheduled maturity and interest rate sensitivity of the investment and loan portfolios and deposits. Our objective in managing liquidity is to respond to the needs of depositors and borrowers as well as to increase earnings enhancement opportunities in a changing marketplace.

Our liquidity is maintained through investment portfolio, deposits, borrowings from the FHLB, and lines available from correspondent banks. Our highest priority is placed on growing noninterest bearing deposits through strong community involvement in the markets that we serve. Borrowings and brokered deposits are considered short-term supplements to our overall liquidity but are not intended to be relied upon for long-term needs. We believe that our present position is adequate to meet our current and future liquidity needs, and management knows of no trend or event that will have a material impact on the Company’s ability to maintain liquidity at satisfactory levels.

Capital Adequacy. Total stockholders’ equity was $225.3 million at September 30, 2019 compared to $174.3 million at December 31, 2018.

Our capital management consists of providing adequate equity to support our current and future operations. The Bank is subject to various regulatory capital requirements administered by state and federal banking agencies, including the Federal Reserve and the OCC. Failure to meet minimum capital requirements may prompt certain actions by regulators that, if undertaken, could have a direct material adverse effect on our financial condition and results of operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measure of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and the classifications are also subject to qualitative judgment by the regulator in regards to components, risk weighting and other factors.

The Bank is subject to the following risk-based capital ratios: a common equity Tier 1 (“CET1”) risk-based capital ratio, a Tier 1 risk-based capital ratio, which includes CET1 and additional Tier 1 capital, and a total capital ratio, which includes Tier 1 and Tier 2 capital. CET1 is primarily comprised of the sum of common stock instruments and related surplus net of treasury stock, retained earnings, and certain qualifying minority interests, less certain adjustments and deductions, including with respect to goodwill, intangible assets, mortgage servicing assets and deferred tax assets subject to temporary timing differences. Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred stock, tier 1 minority interests and grandfathered trust preferred securities. Tier 2 capital consists of instruments disqualified from Tier 1 capital, including qualifying subordinated debt, other preferred stock and certain hybrid capital instruments, and a limited amount of loan loss reserves up to a maximum of 1.25% of risk-weighted assets, subject to certain eligibility criteria. The capital rules also define the risk-weights assigned to assets and off-balance sheet items to determine the risk-weighted asset components of the risk-based capital rules, including, for example, certain “high volatility” commercial real estate, past due assets, structured securities and equity holdings.

The leverage capital ratio, which serves as a minimum capital standard, is the ratio of Tier 1 capital to quarterly average assets net of goodwill, certain other intangible assets, and certain required deduction items. The required minimum leverage ratio for all banks is 4%.

In addition, the capital rules require a capital conservation buffer of up to 2.5% above each of the minimum capital ratio requirements (CET1, Tier 1, and total risk-based capital), which is designed to absorb losses during periods of economic stress. These buffer requirements must be met for a bank to be able to pay dividends, engage in share buybacks or make discretionary bonus payments to executive management without restriction. This capital conservation buffer is being phased in, and was 1.875% as of January 1, 2018 and is 2.5% effective January 1, 2019.

Failure to be well-capitalized or to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our operations or financial condition. For example, only a well-capitalized depository institution may accept brokered deposits without prior regulatory approval. Failure to be well-capitalized or to meet minimum capital requirements could also result in restrictions on the Bank’s ability to pay dividends or otherwise distribute capital or to receive regulatory approval of applications or other restrictions on its growth.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, requires the federal bank regulatory agencies to take “prompt corrective action” regarding depository institutions that do not meet minimum capital requirements. FDICIA establishes five regulatory capital tiers: “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized”, and “critically undercapitalized”. A depository institution’s capital tier will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. The FDICIA imposes progressively more restrictive restraints on operations, management and capital distributions, depending on the category in which an institution is classified. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions may not accept brokered deposits absent a waiver from the FDIC, are subject to growth limitations and are required to submit capital restoration plans for regulatory approval. A depository institution’s holding company must guarantee any required capital restoration plan, up to an amount equal to the lesser of 5 percent of the depository institution’s assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. Federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. All of the federal bank regulatory agencies have adopted regulations establishing relevant capital measures and relevant capital levels for federally insured depository institutions. The Bank was well capitalized at December 31, 2018, and brokered deposits are not restricted.

To be well-capitalized, the Bank must maintain at least the following capital ratios:

·	6.5% CET1 to risk-weighted assets;

·	8.0% Tier 1 capital to risk-weighted assets;

10.0% Total capital to risk-weighted assets; and

·	5.0% leverage ratio.

The Bank’s regulatory capital ratios were above the applicable well-capitalized standards and met the then-applicable capital conservation buffer. Based on current estimates, we believe that the Bank will continue to exceed all applicable well-capitalized regulatory capital requirements and the capital conservation buffer in 2019.

The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Economic Growth Act”) signed into law in May 2018 scaled back certain requirements of the Dodd-Frank Act and provided other regulatory relief. Among the provisions of the Economic Growth Act was a requirement that the Federal Reserve raise the asset threshold for those bank holding companies subject to the Federal Reserve’s Small Bank Holding Company Policy Statement (“Policy Statement”) to $3 billion. As a result, as of the effective date of that change in 2018, the Company was no longer required to comply with the risk-based capital rules applicable to the Bank as described above. The Federal Reserve may however, require smaller bank holding companies subject to the Policy Statement to maintain certain minimum capital levels, depending upon general economic conditions and a bank holding company’s particular condition, risk profile and growth plans.

On November 21, 2018, the federal banking agencies jointly issued a proposed rule to simplify the regulatory capital requirements for eligible banks and holding companies with less than $10 billion in consolidated assets that opt into the Community Bank Leverage Ratio (“CBLR”) framework, as required by Section 201 of the Economic Growth, Relief and Consumer Protection Act (the “Regulatory Relief Act”). The Regulatory Relief Act mandates that the banking agencies develop a CBLR of not less than 8% and not more than 10% for qualifying community banking organizations. A qualifying community banking organization that exceeds the CBLR threshold would be exempt from the agencies’ current capital framework, including the risk-based capital requirements and capital conservation buffer described above, and would be deemed well-capitalized under the agencies’ prompt corrective action regulations. The Regulatory Relief Act defines a “qualifying community banking organization” as a depository institution or depository institution holding company with total consolidated assets of less than $10 billion. On September 17, 2019, the agencies approved a final rule that set the CBLR threshold for qualifying community banking organizations at not less than 9% provided they also hold less than 25% of their assets in off-balance sheet exposures and 5% or less of their assets in trading assets and liabilities.

On December 21, 2018, federal banking agencies issued a joint final rule to revise their regulatory capital rules to (i) address the upcoming implementation of the “current expected credit losses” (“CECL”) accounting standard under GAAP; (ii) provide an optional three-year phase-in period for the day-one adverse regulatory capital effects that banking organizations are expected to experience upon adopting CECL; and (iii) require the use of CECL in stress tests beginning with the 2020 capital planning and stress testing cycle for certain banking organizations. In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-13, which introduced CECL as the methodology to replace the current “incurred loss” methodology for financial assets measured at amortized cost, and changed the approaches for recognizing and recording credit losses on available-for-sale debt securities and purchased credit impaired financial assets. Under the incurred loss methodology, credit losses are recognized only when the losses are probable or have been incurred; under CECL, companies are required to recognize the full amount of expected credit losses for the lifetime of the financial assets, based on historical experience, current conditions and reasonable and supportable forecasts. This change will result in earlier recognition of credit losses that the Company deems expected but not yet probable.

Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance-sheet items. The following table reflects capital ratios computed utilizing the implemented Basel III regulatory capital framework discussed above:

	Actual					Minimum Capital Required for Capital Adequacy					Minimum Capital Required for Capital Adequacy Plus Capital Conservation Buffer Basel III Phase-In Schdule					Minimum Capital Required for Capital Adequacy Plus Capital Conservation Buffer Basel III Fully Phased In					Minimum To Be Well-Capitalized Under Ptompt Corective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)
At September 30, 2019
Bank First Corporation:
Total capital (to risk-weighted assets)	$	203,274		10.8	%		N/A		N/A			N/A		N/A			N/A		N/A			N/A		N/A
Tier I capital (to risk-weighted assets)		174,485		9.3	%		N/A		N/A			N/A		N/A			N/A		N/A			N/A		N/A
Common equity tier I capital (to risk-weighted assets)		174,485		9.3	%		N/A		N/A			N/A		N/A			N/A		N/A			N/A		N/A
Tier I capital (to average assets)		174,485		8.6	%		N/A		N/A			N/A		N/A			N/A		N/A			N/A		N/A
Bank First, N.A:
Total capital (to risk-weighted assets)	$	208,756		11.1	%		150,421		8.0	%		197,427		10.5	%		197,427		10.5	%		188,026		10.0	%
Tier I capital (to risk-weighted assets)		198,625		10.6	%		112,816		6.0	%		159,822		8.5	%		159,822		8.5	%		150,421		8.0	%
Common equity tier I capital (to risk-weighted assets)		198,625		10.6	%		84,612		4.5	%		131,618		7.0	%		131,618		7.0	%		122,217		6.5	%
Tier I capital (to average assets)		198,625		9.8	%		81,142		4.0	%		81,142		4.0	%		81,142		4.0	%		101,428		5.0	%
At December 31, 2018
Bank First Corporation:
Total capital (to risk-weighted assets)	$	181,201		11.4	%		N/A		N/A			N/A		N/A			N/A		N/A			N/A		N/A
Tier I capital (to risk-weighted assets)		157,453		9.9	%		N/A		N/A			N/A		N/A			N/A		N/A			N/A		N/A
Common equity tier I capital (to risk-weighted assets)		157,453		9.9	%		N/A		N/A			N/A		N/A			N/A		N/A			N/A		N/A
Tier I capital (to average assets)		157,453		9.1	%		N/A		N/A			N/A		N/A			N/A		N/A			N/A		N/A
Bank First, N.A:
Total capital (to risk-weighted assets)	$	178,668		11.2	%	$	127,497		8.0	%	$	157,459		9.88	%	$	167,340		10.5	%	$	159,372		10.0	%
Tier I capital (to risk-weighted		166,420		10.4	%		95,623		6.0	%		125,585		7.88	%		135,466		8.5	%		127,497		8.0	%
Common equity tier I capital (to risk-weighted assets)		166,420		10.4	%		71,717		4.5	%		101,679		6.38	%		111,560		7.0	%		103,592		6.5	%
Tier I capital (to average assets)		166,420		9.6	%		69,410		4.0	%		69,410		4.00	%		69,410		4.0	%		86,762		5.0	%

As previously mentioned, the Company carried $18.7 million and $11.5 million of subordinated debt as of September 30, 2019 and 2018, respectively, which is included in total capital for the Company in the tables above.

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

We are party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments primarily include commitments to originate and sell loans, standby and direct pay letters of credit, unused lines of credit and unadvanced portions of construction and development loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in these particular classes of financial instruments.

Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby and direct pay letters of credit and unadvanced portions of construction and development loans is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Off-Balance Sheet Arrangements. Our significant off-balance-sheet arrangements consist of the following:

·	Unused lines of credit

·	Standby and direct pay letters of credit

·	Credit card arrangements

Off-balance sheet arrangement means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the registrant is a party, under which the registrant has (1) any obligation under a guarantee contract, (2) retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement, (3) any obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument, or (4) any obligation, including a contingent obligation, arising out of a variable interest.

Loan commitments are made to accommodate the financial needs of our customers. Standby and direct pay letters of credit commit us to make payments on behalf of customers when certain specified future events occur. Both arrangements have credit risk essentially the same as that involved in extending loans to clients and are subject to our normal credit policies. Collateral (e.g., securities, receivables, inventory, equipment, etc.) is obtained based on management’s credit assessment of the customer.

Loan commitments and standby and direct pay letters of credit do not necessarily represent our future cash requirements because while the borrower has the ability to draw upon these commitments at any time, these commitments often expire without being drawn upon. Our off-balance sheet arrangements at the dates indicated were as follows:

	Amounts of Commitments Expiring - By Period as of September 30, 2019
Other Commitments	Total		Less Than One Year		One to Three Years		Three to Five Years		After Five Years
	(dollars in thousands)
Unused portion of existing lines of credit	$	352,004	$	203,687	$	39,567	$	31,502	$	77,248
Letters of credit		17,676		4,679		6,122		5,018		1,857
Credit card arrangements		8,445		-		-		-		8,445
Total commitments	$	378,125	$	208,366	$	45,689	$	36,520	$	87,550

	Amounts of Commitments Expiring - By Period as of December 31, 2018
Other Commitments	Total		Less Than One Year		One to Three Years		Three to Five Years		After Five Years
	(dollars in thousands)
Unused portion of existing lines of credit	$	326,452	$	205,200	$	45,589	$	51,371	$	24,292
Letters of credit		25,261		11,501		2,964		8,630		2,166
Credit card arrangements		7,119		-		-		-		7,119
Total commitments	$	358,832	$	216,701	$	48,553	$	60,001	$	33,577

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest rate risk inherent in its lending, investment and deposit-taking activities. To that end, management actively monitors and manages its interest rate risk exposure.

Our profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact our earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis. We monitor the impact of changes in interest rates on its net interest income using several tools.

Our primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on our net interest income and capital, while configuring our asset-liability structure to obtain the maximum yield-cost spread on that structure. We rely primarily on our asset-liability structure to control interest rate risk.

Interest Rate Sensitivity. Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay home mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and LIBOR (basis risk).

An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.

The Company actively manages its interest rate sensitivity position. The objectives of interest rate risk management are to control exposure of net interest income to risks associated with interest rate movements and to achieve sustainable growth in net interest income. The Company’s ALCO, using policies and procedures approved by the Company’s board of directors, is responsible for the management of the Company’s interest rate sensitivity position. The Company manages interest rate sensitivity by changing the mix, pricing and re-pricing characteristics of its assets and liabilities, through the management of its investment portfolio, its offerings of loan and selected deposit terms and through wholesale funding. Wholesale funding consists of, but is not limited to, multiple sources including borrowings with the FHLB of Chicago, the Federal Reserve Bank of Chicago’s discount window and certificates of deposit from institutional brokers.

The Company uses several tools to manage its interest rate risk including interest rate sensitivity analysis, or gap analysis, market value of portfolio equity analysis, interest rate simulations under various rate scenarios and net interest margin reports. The results of these reports are compared to limits established by the Company’s ALCO policies and appropriate adjustments are made if the results are outside the established limits.

There are an infinite number of potential interest rate scenarios, each of which can be accompanied by differing economic/political/regulatory climates; can generate multiple differing behavior patterns by markets, borrowers, depositors, etc.; and, can last for varying degrees of time. Therefore, by definition, interest rate risk sensitivity cannot be predicted with certainty. Accordingly, the Company’s interest rate risk measurement philosophy focuses on maintaining an appropriate balance between theoretical and practical scenarios; especially given the primary objective of the Company’s overall asset/liability management process is to facilitate meaningful strategy development and implementation.

Therefore, we model a set of interest rate scenarios capturing the financial effects of a range of plausible rate scenarios; the collective impact of which will enable the Company to clearly understand the nature and extent of its sensitivity to interest rate changes. Doing so necessitates an assessment of rate changes over varying time horizons and of varying/sufficient degrees such that the impact of embedded options within the balance sheet are sufficiently examined.

The following tables demonstrate the annualized result of an interest rate simulation and the estimated effect that a parallel interest rate shift, or “shock,” in the yield curve and subjective adjustments in deposit pricing might have on the Company’s projected net interest income over the next 12 months.

This simulation assumes that there is no growth in interest-earning assets or interest-bearing liabilities over the next 12 months. The changes to net interest income shown below are in compliance with the Company’s policy guidelines. As of September 30, 2019:

Change in Interest Rates (in Basis Points)		Percentage Change in Net Interst Income
+400		5.3
+300		4.0
+200		2.7
+100		1.6
-100		(3.3)

As of December 31, 2018:

Change in Interest Rates (in Basis Points)		Percentage Change in Net Interst Income
+400		5.0
+300		3.9
+200		2.7
+100		1.5
-100		(4.1)

Economic Value of Equity Analysis. We also analyze the sensitivity of the Company’s financial condition to changes in interest rates through our economic value of equity model. This analysis measures the difference between estimated changes in the present value of the Company’s assets and estimated changes in the present value of the Company’s liabilities assuming various changes in current interest rates. The Company’s economic value of equity analysis as of September 30, 2019 estimated that, in the event of an instantaneous 200 basis point increase in interest rates, the Company would experience an 8.2% increase in the economic value of equity. At the same date, our analysis estimated that, in the event of an instantaneous 100 basis point decrease in interest rates, the Company would experience a 6.9% decrease in the economic value of equity. The estimates of changes in the economic value of our equity require us to make certain assumptions including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain and, as a result, we cannot precisely predict the impact of changes in interest rates on the economic value of our equity. Although our economic value of equity analysis provides an indication of our interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on the economic value of our equity and will differ from actual results.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), undertook an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report, and, based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report, in recording, processing, summarizing and reporting in a timely manner the information that the Company is required to disclose in its reports under the Exchange Act and in accumulating and communicating to the Company’s management, including the Company’s CEO and CFO, such information as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

No changes were made to our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are a party to various litigation in the normal course of business. Management, after consulting with our legal counsel, believes that any liability resulting from litigation will not have a material effect on our financial position, results of operations or liquidity.

ITEM 1A. RISK FACTORS

Additional information regarding risk factors appears in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements” of this Form 10-Q and in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018. There have been no material changes during the quarterly period ended September 30, 2019 to the risk factors previously disclosed in the Company’s Annual Report.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)

None.

(b)

None.

(c)	Issuer Purchases of Equity Securities

The Company's Board of Directors authorized a $10 million share repurchase program on April 16, 2019. The program was announced in a Current Report on Form 8-K on April 18, 2019. The table below sets forth information regarding repurchases of our common stock during the third quarter of 2019 under that program as well as pursuant to the Company’s 401(k) Plan and Equity Plan.

(in thousands, except per share data)	Total Number of Shares Repurchased		Average Price Paid per Share⁽¹⁾		Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs⁽²⁾
July 2019		0	$	0		0		151,103
August 2019		5,120		54.89		5,120		146,856
September 2019⁽³⁾		20,255		62.92		1,750		145,404
Total		25,375	$	61.30		6,870		145,404

(1)	The average price paid per share is calculated on a trade date basis for all open market transactions and excludes commissions and other transaction expenses.

(2)	Based on the closing per share price as of September 30, 2019 ($66.18).

(3)	Includes 18,505 shares repurchased from the 401(k) Plan.

Other than the shares repurchased from the 401(k) Plan, the foregoing repurchases during the third quarter of 2019 were purchased through open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.

ITEM 3. – DEFAULTS UPON SENIOR SECURITIES

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

Porter Keadle Moore, LLC (“PKM”) served as the Company’s independent registered public accounting firm for the fiscal years ending December 31, 2018, 2017 and 2016. PKM advised the audit committee of the Company’s board of directors (which we refer to as the “Bank First Audit Committee”) that PKM provided the Company with access to a template that PKM developed in order to support income tax provision calculations as additional audit evidence during their engagements. While this template was never used as a primary source to calculate or record income tax provisions by the Company, PKM determined that the use of the template as audit support was a prohibited non-audit service under the SEC’s auditor independence rules as it could be considered to constitute the provision of prohibited bookkeeping or other services related to the accounting records or financial statements of the audit client.

PKM informed the Bank First Audit Committee that PKM concluded that its objectivity and impartiality with respect to all issues encompassed within its audit engagements regarding Bank First’s consolidated financial statements for each of the years it served as the Company’s independent registered public accounting firm have not been impaired, and that PKM believes that a reasonable investor with knowledge of all relevant facts and circumstances would conclude that PKM was capable of exercising objective and impartial judgment on all issues encompassed within such engagements because:

·	The Company utilized an internally developed spreadsheet to calculate its tax provisions on a monthly basis which drove and supported all journal entries related to the Company’s income tax provisions.

The template provided by PKM was never the primary source from which the Company derived its calculated tax provisions. It provided only a supplementary analysis from which to compare its internal calculations. The template served as a tool of convenience rather than of necessity for the Company’s management and staff.

·	The template, originally provided to the Company by PKM in 2012, was subsequently modified from time to time by the Company and was controlled by the Company in a local environment on its computer systems.

·	The Company owned and controlled the process and use of the template at all times. The Company’s management was solely responsible for all inputs entered into the template and the creation of the source data needed to generate those inputs.

·	The Company’s staff had the requisite skill, training, and competency necessary to perform the tax provision calculations without the use of the template.

Prior to being informed of this potential independence issue by PKM, the Company was already in the process of phasing out the use of the template and transitioning support of its income tax provision calculations to an alternate tool. Accordingly, since January 1, 2019, the Company no longer used the template and does not intend to use the template for any future periods.

After considering the facts and circumstances, the Bank First Audit Committee concurred with PKM’s conclusions that PKM’s objectivity and impartiality with respect to all issues encompassed within its audit engagements regarding the Company’s consolidated financial statements for all years in which it served as the Company’s independent registered public accounting firm had not been impaired, and it believes that a reasonable investor with knowledge of all relevant facts and circumstances would conclude that PKM is capable of exercising objective and impartial judgment on all issues encompassed within such engagements.

As disclosed by the Company on Form 8-K filed on October 11, 2019, due to a practice combination with Wipfli LLP on October 1, 2019, PKM resigned as the Company’s independent registered public accounting firm, effective as of October 11, 2019. Also on October 11, 2019, the Bank First Audit Committee engaged Dixon Hughes Goodman, LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2019.

ITEM 6. EXHIBITS

Exhibit Index

Exhibit Number		Description
31.1		Rule 13a-14(a) Certification of Chief Executive Officer*
31.2		Rules 13a-14(a) Certification of Chief Financial Officer*
32.1		Section 1350 Certification of Chief Executive Officer and Chief Financial Officer**
101 INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

Filed herewith.

Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		BANK FIRST CORPORATION

DATE:	November 12, 2019	BY:	/s/Kevin M. LeMahieu
			Kevin M. LeMahieu
			Chief Financial Officer
			(Principal Financial and Accounting Officer)