ITEM 1. Financial Statements Continued:

BANK FIRST CORPORATION

Consolidated Statements of Comprehensive Income

(In thousands) (Unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019

Net Income	$	8,296	$	5,989	$	15,562	$	12,576
Other comprehensive income:
Unrealized gains (losses) on available for sale securities:
Unrealized holding gains arising during period		6,047		1,961		7,636		4,318
Amortization of unrealized holding gains on securities transferred from available for sale to held to maturity		(92)		(11)		(102)		(22)
Reclassification adjustment for gains included in net income		(3,233)		(23)		(3,233)		(23)
Income tax expense		(734)		(405)		(1,292)		(897)
Total other comprehensive income		1,988		1,522		3,009		3,376
Comprehensive income	$	10,284	$	7,511	$	18,571	$	15,952

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

ITEM 1. Financial Statements ~~Continued~~:Continued:

BANK FIRST CORPORATION

Consolidated Statement of Stockholders’ Equity
~~Consolidated Statements of Income~~
(In thousands, except share and per share data) (Unaudited)
Three months ended June 30, Six months ended June 30,
2019 2018 2019 2018

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

Accumulated

Serial

Additional

Other

Total

Preferred

Common

Paid-in

Retained

Treasury

Comprehensive

Stockholders'


Stock

Stock

Capital

Earnings

Stock

Income (loss)

Equity

(In Thousands, except share and per share amounts)

Balance at January 1, 2019

$
—

$
74

$
27,601

$
168,363

$
(21,349)

$
(366)

$
174,323
Net income

—

—

—

6,587

—

—

6,587
Other comprehensive income

—

—

—

—

—

1,853

1,853
Purchase of treasury stock

—

—

—

—

(2,489)

—

(2,489)
Issuance of treasury stock as deferred compensation payout

—

—

14

—

43

—

57
Cash dividends ($0.20 per share)

—

—

—

(1,306)

—

—

(1,306)
Amortization of stock-based compensation

—

—

152

—

—

—

152
Vesting of restricted stock awards

—

—

(462)

—

462

—

—

Balance at March 31, 2019

—

74

27,305

173,644

(23,333)

1,487

179,177
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)

$
3,009

$
185,447

Balance at January 1, 2020

$
—

$
79

$
63,085

$
189,494

$
(24,941)

$
2,494

$
230,211
Net income

—

—

—

7,266

—

—

7,266
Other comprehensive income

—

—

—

—

—

1,021

1,021
Purchase of treasury stock

—

—

—

—

(2,968)

—

(2,968)
Issuance of treasury stock as deferred compensation payout

—

—

—

—

3,368

—

3,368
Cash dividends ($0.20 per share)

—

—

—

(1,431)

—

—

(1,431)
Amortization of stock-based compensation

—

—

215

—

—

—

215
Vesting of restricted stock awards

—

—

(628)

—

628

—

—

Balance at March 31, 2020

—

79

62,672

195,329

(23,913)

3,515

237,682
Net income

—

—

—

8,296

—

—

8,296
Other comprehensive income

—

—

—

—

—

1,988

1,988
Cash dividends ($0.20 per share)

—

—

—

(1,543)

—

—

(1,543)
Amortization of stock-based compensation

—

—

296

—

—

—

296
Vesting of restricted stock awards

—

—

(66)

—

66

—

—
Shares issued in the acquisition of Tomah Bancshares, Inc. (575,641 shares)

—

6

29,375

—

—

—

29,381

Balance at June 30, 2020

$
—

$
85

$
92,277

$
202,082

$
(23,847)

$
5,503

$
276,100
~~(In thousands) (Unaudited)~~
Three months ended June 30, Six months ended June 30,
2019 2018 2019 2018

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

See accompanying notes to unaudited consolidated financial statements.

5
6

Table of Contents

ITEM 1. Financial Statements Continued:

BANK FIRST CORPORATION

Consolidated Statements of Cash Flows
~~Consolidated Statement~~(In thousands) (Unaudited)

Six Months Ended June 30,


2020

2019

Cash flows from operating activities:

Net income

$
15,562

$
12,576
Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan losses

4,125

1,125
Depreciation and amortization of premises and equipment

759

551
Amortization of intangibles

696

322
Net amortization of securities

308

186
Amortization of stock-based compensation

511

334
Accretion of purchase accounting valuations

(2,420)

(2,158)
Net change in deferred loan fees and costs

6,985

(136)
Change in fair value of mortgage servicing rights ("MSR") and other investments

1,200

(413)
Loss from sale and disposal of premises and equipment

—

23
Loss (gain) on sale of OREO and valuation allowance

1,443

(99)
Proceeds from sales of mortgage loans

106,806

21,621
Originations of mortgage loans held for sale

(106,619)

(21,589)
Gain on sales of mortgage loans

(1,792)

(241)
Realized gain on sale of securities

(3,233)

(23)
Realized gain on sale of other investments

—

(234)
Undistributed income of UFS joint venture

(1,747)

(1,325)
Undistributed income of Ansay joint venture

(1,601)

(1,418)
Net earnings on life insurance

(344)

(310)
Increase in other assets

(1,147)

(779)
Decrease in other liabilities

(504)

(5,803)
Net cash provided by operating activities

18,988

2,210
Cash flows from investing activities, net of effects of business combination:




Activity in securities available for sale and held to maturity:




Sales

59,697

748
Maturities, prepayments, and calls

56,560

6,408
Purchases

(23,708)

(3,015)
Net (increase) decrease in loans

(271,246)

9,402
Dividends received from UFS

1,047

1,067
Dividends received from Ansay

746

639
Proceeds from sale of OREO

3,424

1,070
Proceeds from sales of other investments

—

984
Net purchases of Federal Home Loan Bank ("FHLB") stock

(640)

(90)
Net purchases of Federal Reserve Bank ("FRB") stock

(1,702)

—
Proceeds from sale of premises and equipment

25

—
Purchases of premises and equipment

(3,617)

(2,464)
Net cash received in business combination

35,296

—
Net cash (used in) provided by investing activities

(144,118)

14,749

Table of ~~Stockholders’ Equity~~Contents

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

Accumulated
Serial Additional Other Total
Preferred Common Paid-in Retained Treasury Comprehensive Stockholders'
Stock Stock Capital Earnings Stock Income (Loss) Equity

Balance at January 1, 2018 $ - $ 74 $ 27,528 $ 145,879 $ (12,730 ) $ 977 $ 161,728
Net income - - - 7,062 - - 7,062
Other comprehensive loss - - - - - (1,352 ) (1,352 )
Purchase of treasury stock - - - - (5,648 ) - (5,648 )
Sale of treasury stock - - - - 951 - 951
Cash dividends ($0.16 per share) - - - (1,066 ) - - (1,066 )
Amortization of stock-based compensation - - 121 - - - 121
Vesting of restricted stock awards - - (433 ) - 433 - -

Balance at March 31, 2018 - 74 27,216 151,875 (16,994 ) (375 ) 161,796
Net income - - - 6,401 - - 6,401
Other comprehensive loss - - - - - (294 ) (294 )
Purchase of treasury stock - - - - (2,171 ) - (2,171 )
Sale of treasury stock - - - - 396 - 396
Cash dividends ($0.16 per share) - - - (1,072 ) - - (1,072 )
Amortization of stock-based compensation - - 144 - - - 144
Vesting of restricted stock awards - - (50 ) - 50 - -

Balance at June 30, 2018 $ - $ 74 $ 27,310 $ 157,204 $ (18,719 ) $ (669 ) $ 165,200

Balance at January 1, 2019 $ - $ 74 $ 27,601 $ 168,363 $ (21,349 ) $ (366 ) $ 174,323
Net income - - - 6,587 - - 6,587
Other comprehensive income - - - - - 1,854 1,854
Purchase of treasury stock - - - - (2,489 ) - (2,489 )
Issuance of treasury stock as deferred compensation payout - - 14 - 43 - 57
Cash dividends ($0.20 per share) - - - (1,306 ) - - (1,306 )
Amortization of stock-based compensation - - 152 - - - 152
Vesting of restricted stock awards - - (462 ) - 462 - -

Balance at March 31, 2019 - 74 27,305 173,644 (23,333 ) 1,488 179,178
Net income - - - 5,989 - - 5,989
Other comprehensive income - - - - - 1,522 1,522
Purchase of treasury stock - - - - (161 ) - (161 )
Issuance of treasury stock as deferred compensation payout - - 12 - 45 - 57
Cash dividends ($0.20 per share) - - - (1,319 ) - - (1,319 )
Amortization of stock-based compensation - - 182 - - - 182
Vesting of restricted stock awards - - (63 ) - 63 - -

Balance at June 30, 2019 $ - $ 74 $ 27,436 $ 178,314 $ (23,386 ) $ 3,010 $ 185,448
~~See accompanying notes to unaudited consolidated financial statements.~~
6
ITEM 1. Financial Statements Continued:
~~BANK FIRST CORPORATION~~
~~Consolidated Statements of Cash Flows~~
~~(In thousands) (Unaudited)~~
Six Months Ended June 30,
2019 2018
Cash flows from operating activities:
Net income $ 12,576 $ 13,463
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 1,125 1,385
Depreciation and amortization of premises and equipment 551 579
Amortization of intangibles 322 378
Net amortization of securities 186 209
Amortization of stock-based compensation 334 266
Accretion of purchase accounting valuations (2,158 ) (3,698 )
Net change in deferred loan fees and costs (136 ) (131 )
Change in fair value of mortgage servicing rights ("MSR") (413 ) (226 )
Loss from sale and disposal of premises and equipment 23 123
(Gain) loss on sale of OREO and valuation allowance (99 ) 98
Proceeds from sales of mortgage loans 21,621 17,525
Originations of mortgage loans held for sale (21,589 ) (17,864 )
Gain on sales of mortgage loans (241 ) (285 )
Realized (gain) loss on sale of securities available for sale and other investments (257 ) 44
Undistributed income of UFS joint venture (1,325 ) (1,195 )
Undistributed income of Ansay joint venture (1,418 ) (1,758 )
Net earnings on life insurance (310 ) (302 )
(Increase) decrease in other assets (779 ) 1,113
Decrease in other liabilities (5,803 ) (5,149 )
Net cash provided by operating activities 2,210 4,575
Cash flows from investing activities:
Activity in securities available for sale and held to maturity:
Sales 748 3,326
Maturities, prepayments, and calls 6,408 6,964
Purchases (3,015 ) (16,458 )
Net change in loans 9,402 (34,099 )
Dividends received from UFS 1,067 501
Dividends received from Ansay 639 501
Proceeds from sale of OREO 1,070 1,771
Proceeds from sales of other investments 984 -
Net purchases of FHLB Stock (90 ) (204 )
Proceeds from sale of premises and equipment - 149
Purchases of premises and equipment (2,464 ) (5,608 )
Net cash provided by (used in) investing activities 14,749 (43,157 )
7
~~ITEM 1. Financial Statements Continued:~~
BANK FIRST CORPORATION
Consolidated Statements of Cash Flows (Continued)
(In thousands) (Unaudited)

Six Months Ended June 30,

2020

2019

Cash flows from financing activities, net of effects of business combination:






Net increase in deposits

$
248,841

$
17,902
Net increase (decrease) in securities sold under repurchase agreements

10,760

(11,455)
Proceeds from advances of notes payable

87,000

4,000
Repayment of notes payable

(124,750)

(4,000)
Dividends paid

(2,974)

(2,625)
Repurchase of common stock

(2,968)

(2,650)
Net cash provided by financing activities

215,909

1,172
Net increase in cash and cash equivalents

90,779

18,131
Cash and cash equivalents at beginning of period

86,452

107,743
Cash and cash equivalents at end of period

$
177,231

$
125,874

Supplemental disclosures of cash flow information:





Cash paid during the period for:




Interest

$
8,555

$
9,117
Income taxes

—

3,171
Supplemental schedule of noncash activities:

Loans transferred to OREO

261

920
MSR resulting from sale of loans

713

209
Amortization of unrealized holding gains on securities transferred from available for sale to held to maturity recognized in other comprehensive income, net of tax

(81)

(17)
Change in unrealized gains and losses on investment securities available for sale, net of tax

924

3,375
Payment of deferred compensation through issuance of treasury stock

3,368

114

Acquisition:

Fair value of assets acquired

$
209,918

$
—
Fair value of liabilities assumed

191,701

—
Net assets acquired

$
18,217

$
—

Common stock issued in acquisition

29,381

—
Six Months ended June 30,
2019 2018
Cash flows from financing activities:
Net increase (decrease) in deposits $ 17,902 $ (10,846 )
Net decrease in securities sold under repurchase agreements (11,455 ) (34,135 )
Proceeds from advances of borrowed funds 4,000 687,700
Repayment of borrowed funds (4,000 ) (652,200 )
Dividends paid (2,625 ) (2,138 )
Proceeds from sales of common stock - 1,347
Repurchase of common stock (2,650 ) (7,819 )
Net cash (used in) provided by financing activities 1,172 (18,091 )
Net increase (decrease) in cash and cash equivalents 18,131 (56,673 )
Cash and cash equivalents at beginning of period 107,743 101,977
Cash and cash equivalents at end of period $ 125,874 $ 45,304

Supplemental disclosures of cash flow information:

Cash paid during the period for:
Interest $ 9,117 $ 7,453
Income taxes 3,171 2,325
Supplemental schedule of noncash activities:
Loans transferred to OREO 920 649
MSR resulting from sale of loans 209 164
Amortization of unrealized holding gains on securities transferred from available for sale to held to maturity recognized in other from available for sale to held to maturity recognized in other comprehensive income, net of tax (17 ) (40 )
Change in unrealized gains and losses on investment securities available for sale, net of tax 3,375 (1,606 )
Payment of deferred compensation through issuance of treasury stock 114 -

See accompanying notes to consolidated financial statements.

8
8

Table of Contents

BANK FIRST CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
NOTE 1 – BASIS OF PRESENTATION
Bank First Corporation (the “Company”) provides a variety of financial services to individual and corporate customers through its wholly-owned subsidiary, Bank First, N.A. (the “Bank”). The Bank operates as a full-service financial institution with a primary market area including, but not limited to, the counties in which the Bank’s branches are located. The Bank has ~~nineteen~~twenty-four 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~~2019 (“Annual Report”).
The unaudited consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The results for interim periods are not necessarily indicative of results for a full year.
Critical Accounting Policies and Estimates
Preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, the allowance for loan losses (“ALL”), valuation of loans in acquisition transactions, useful lives for depreciation and amortization, fair value of financial instruments, other-than-temporary impairment calculations, valuation of deferred tax assets, uncertain income tax positions and contingencies. Estimates that are particularly susceptible to significant change for the Company include the determination of the ALL, the determination and assessment of deferred tax assets and liabilities, and the valuation of loans acquired in acquisition transactions; therefore, these are critical accounting policies. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: external market factors such as market interest rates and employment rates, changes to operating policies and procedures, changes in applicable banking or tax regulations, and changes to deferred tax estimates. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period presented.
There have been no material changes or developments with respect to the assumptions or methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as previously disclosed in the Company’s Annual Report.
Recent Accounting Developments Adopted
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The update required lessees to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases. The provisions of the update also include (a) defining direct costs to only include those incremental costs that would not have been incurred if the lease had not been entered into, (b) circumstances under which the transfer contract in a sale-leaseback transaction should be accounted for as the sale of an asset by the seller-lessee and the purchase of an asset by the buyer-lessor, and (c) additional disclosure requirements. The provisions of this update became effective for interim and annual periods beginning after December 15, 2018. Adoption of this guidance required the Company to record a right-of-use asset approximating $1.7 million, included in premises and equipment, and a corresponding lease liability, included in other liabilities.
~~In March~~January 2017, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued ~~ASU 2017-08, “Receivables – Nonrefundable Fees~~Accounting Standards Update (“ASU”) 2017-04, “Intangibles-Goodwill and Other ~~Costs (Subtopic 310-20)~~(Topic 350): ~~Premium Amortization on Purchased Callable Debt Securities.”~~Simplifying the Test for Goodwill Impairment”. The amendments in this ASU ~~shorten~~were issued to address concerns over the ~~amortization period for certain callable debt securities held at a premium. Specifically,~~cost and complexity of the two-step goodwill impairment test and resulted in the removal of the second step of the test. The amendments require an entity to apply a one-step quantitative test and record the ~~premium~~amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to ~~be amortized~~exceed the total amount of goodwill allocated to the ~~earliest call date.~~reporting unit. The ~~amendments do~~new guidance did not ~~require an accounting change for securities held at a discount, which continue~~amend the optional qualitative assessment of goodwill impairment. This ASU is intended to ~~be amortized to maturity. This guidance became~~reduce the cost and complexity of the two-step goodwill impairment test and is effective for annual and interim ~~and annual periods~~goodwill impairment tests in fiscal years beginning after December 15, ~~2018.~~2019, with early adoption permitted for testing performed after January 1, 2017. The adoption of this ~~update~~guidance did not have a ~~material~~significant impact on the Company’s consolidated financial statements.
9
9

Table of Contents

Recently Issued Not Yet Effective Accounting Standards

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Certain aspects of this ASU ~~2016-13 requires~~were updated in November 2018 by the ~~measurement~~issuance of ~~all~~ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses”. The main objective of the ASU is to provide financial statement users with more decision-useful information about the expected credit losses ~~for~~on financial ~~assets~~instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the ~~reporting date based on historical experience,~~amendments in the ASU replace the incurred loss impairment methodology in current ~~conditions,~~GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable ~~forecasts and requires enhanced disclosures related~~information to inform credit loss estimates. During 2019 FASB issued ASU 2019-10 which delayed the ~~significant estimates and judgments used in estimating credit losses, as well as, the credit quality and underwriting standards~~effective date of ~~an organization’s portfolio. In addition,~~ ASU 2016-13 ~~amends the accounting~~ for ~~credit losses on available for sale and held to maturity debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will become effective for~~smaller, publicly traded companies, until interim and annual periods beginning after December 15, ~~2019.~~2022. This delay applies to the Company as it was classified as a “Smaller reporting company” as defined in Rule 12b-2 of the Exchange Act as of the date ASU 2019-10 was enacted. Management is currently evaluating the potential impact of this update, although the general expectation in the banking industry is that the implementation of this standard will result in higher required balances in the ALL. During July 2019 the FASB proposed delaying the effective date of ASU 2016-13 for smaller, publicly traded companies, until interim and annual periods beginning after December 15, 2022. If this proposal is enacted, this delay would apply to the Bank as long as it remained a “Smaller reporting company” as defined in Rule 12b-2 of the Exchange Act.

NOTE 2 – ACQUISITIONS

On ~~October 27, 2017,~~July 12, 2019, the Company completed a merger with ~~Waupaca Bancorporation,~~Partnership Community Bancshares, Inc. (“~~Waupaca”~~Partnership”), a bank holding company headquartered in ~~Waupaca,~~Cedarburg, Wisconsin, pursuant to the Agreement and Plan of Bank Merger (“Merger Agreement”), dated as of ~~May 11, 2017~~January 22, 2019 and as amended on ~~July 20, 2017,~~April 30, 2019, by and among the Company ~~BFNC Merger Sub, LLC, a wholly-owned subsidiary of the Company,~~ and ~~Waupaca,~~Partnership, whereby ~~Waupaca~~Partnership merged with and into the Company, and ~~First National~~Partnership Bank, ~~Waupaca’s~~Partnership’s wholly-owned banking subsidiary, ~~was~~ merged with and into the Bank. ~~Waupaca’s~~Partnership’s principal activity was the ownership and operation of ~~First National~~Partnership Bank, a ~~national~~state-chartered banking institution that operated ~~eight (8)~~four (4) branches in Wisconsin at the time of closing. The merger consideration totaled approximately ~~$78.1~~$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 ~~70% of which was distributed~~ in cash and ~~30% of which was distributed in the form~~534,731 shares of Company common ~~stock.~~

stock, valued at approximately $35.3 million (based on a value of $66.03 per share on the closing date).

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

~~The~~On May 15, 2020, the Company ~~entered into an~~completed a merger with Tomah Bancshares, Inc. (“Timberwood”), a bank holding company headquartered in Tomah, Wisconsin, pursuant to the Agreement and Plan of Bank Merger, ~~with Partnership Community Bancshares, Inc. (“Partnership”), a Wisconsin Corporation,~~ dated as of ~~January 22,~~November 20, 2019, by and ~~as amended on April 30, 2019, under which Partnership will merge~~among the Company and Timberwood, whereby Timberwood merged with and into the Company, and ~~Partnership’s~~Timberwood Bank, Timberwood’s wholly-owned banking subsidiary, ~~Partnership Bank, will merge~~merged with and into the Bank. ~~The transaction closed on July 12, 2019. Merger consideration consisted~~Timberwood’s principal activity was the ownership and operation of ~~65% common stock of the Company and 35% cash, and totalled approximately $49.6 million.~~

~~We marked Partnership’s assets and liabilities to fair value based on information available~~Timberwood Bank, a state-chartered banking institution that operated one (1) branch in Wisconsin at the time of ~~acquisition. We acquired~~closing. The merger consideration totaled approximately ~~$306.1 million in assets at fair value from Partnership and added four branches with approximately $272.6 million in loans and approximately $268.9 million in deposits. We expect~~$29.8 million.

Pursuant to ~~record goodwill of approximately $30.1 million and a core deposit intangible asset of approximately $5.4 million as a result~~the terms of the ~~merger.~~ Merger Agreement, Timberwood shareholders received 5.1445 shares of the Company’s common stock for each outstanding share of Timberwood common stock, and cash in lieu of any remaining fractional share. Company stock issued totaled 575,641 shares valued at approximately $29.4 million, with cash of $0.4 million comprising the remainder of merger consideration.

The Company ~~is still finalizing~~accounted for the transaction under the acquisition method of accounting, and thus, the financial position and results of operations of Timberwood 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 ~~estimates.~~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 ~~value results are preliminary and~~values will be subject to refinement for up to one year after ~~the closing~~deal consummation as additional information becomes ~~available.~~available relative to the closing date fair values.

Table of Contents

The fair value of the assets acquired and liabilities assumed on May 15, 2020 was as follows:


As Recorded by



As Recorded by

Timberwood

Fair Value Adjustments

the Company
Cash, cash equivelants and securities

$
79,614

$
(656)

$
78,958
Other investments

533



533
Loans

117,343

1,068

118,411
Premises and equipment, net

2,538

(1,006)

1,532
Core deposit intangible

—

1,697

1,697
Other assets

11,392

(2,605)

8,787
Total assets acquired

$
211,420

$
(1,502)

$
209,918

Deposits

$
170,362

$
742

$
171,104
Subordinated debt

6,500



6,500
Other borrowings

12,938

210

13,148
Other liabilities

1,923

(974)

949
Total liabilities assumed

$
191,723

$
(22)

$
191,701

Excess of assets acquired over liabilties assumed

$
19,697

$
(1,480)

$
18,217
Less: purchase price





29,812
Goodwill





$
11,595

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

NOTE 3 – EARNINGS PER SHARE
~~Basic~~The two-class method is used in the calculation of basic and diluted earnings per ~~share~~share. Under the two-class method, earnings available to common shareholders for the period are ~~computed by dividing net income by the weighted average number of shares of~~allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings. There were no anti-dilutive stock outstanding during the period. Diluted earnings per share are computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding and potential common shares using the treasury stock method.
10
~~A reconciliation of the numerators and denominators of the earnings per common share and earnings per common share assuming dilution,~~options for the three and six months ended June 30, ~~2019 and 2018, are presented below:~~2020 or 2019.
The following table presents the factors used in the earnings per share computations for the period indicated.
Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 2018
Net income from operations $ 5,989 $ 6,401 $ 12,576 $ 13,463

Weighted average common shares outstanding 6,577,016 6,672,344 6,575,696 6,692,523
Effect of dilutive potential common shares 98,778 - 66,526 -
Diluted weighted average common shares outstanding 6,675,794 6,672,344 6,642,222 6,692,523

Earnings per share - basic $ 0.91 $ 0.96 $ 1.91 $ 2.01
Earnings per share - diluted $ 0.90 $ 0.96 $ 1.89 $ 2.01

Three Months Ended June 30,

Six Months Ended June 30,


2020

2019

2020

2019
Basic

Net income available to common shareholders

$
8,296

$
5,989

$
15,562

$
12,576
Less: Earnings allocated to participating securities

(65)

(52)

(120)

(99)
Net income allocated to common shareholders

$
8,231

$
5,937

$
15,442

$
12,477

Weighted average common shares outstanding including participating securities

7,454,201

6,577,016

7,268,861

6,575,696
Less: Participating securities (1)

(59,002)

(51,990)

(56,227)

(51,918)
Average shares

7,395,199

6,525,026

7,212,634

6,523,778

Basic earnings per common shares

$
1.11

$
0.91

$
2.14

$
1.91

Diluted

Net income available to common shareholders

$
8,296

$
5,989

$
15,562

$
12,576

Weighted average common shares outstanding for basic earnings per common share

7,395,199

6,525,026

7,212,634

6,523,778
Add: Dilutive effects of stock based compensation awards

10,796

119,665

58,558

88,406
Average shares and dilutive potential common shares

7,405,995

6,644,691

7,271,192

6,612,184
Diluted earnings per common share

$
1.11

$
0.90

$
2.13

$
1.89

Table of Contents

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

NOTE 4 – SECURITIES
The Company’s securities available for sale as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019 is summarized as follows:




Gross

Gross



Amortized

Unrealized

Unrealized

Estimated

Cost

Gains

Losses

Fair Value

June 30, 2020








Obligations of U.S. Government sponsored agencies

$
14,045

$
556

$
(2)

$
14,599
Obligations of states and political subdivisions

71,446

3,799

(19)

75,226
Mortgage-backed securities

51,171

2,940

—

54,111
Corporate notes

27,291

221

—

27,512
Certificates of deposit

2,580

39

—

2,619
Total available for sale securities

$
166,533

$
7,555

$
(21)

$
174,067

December 31, 2019








Obligations of U.S. Government sponsored agencies

$
12,218

$
—

$
(158)

$
12,060
Obligations of states and political subdivisions

52,594

2,197

(20)

54,771
Mortgage-backed securities

50,770

988

(38)

51,720
Corporate notes

62,794

172

(11)

62,955
Total available for sale securities

$
178,376

$
3,357

$
(227)

$
181,506
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value

June 30, 2019
Obligations of states and political subdivisions $ 49,030 $ 2,155 $ (4 ) $ 51,181
Mortgage-backed securities 50,610 1,446 (25 ) 52,031
Corporate notes 16,761 211 (101 ) 16,871
Total available for sale securities $ 116,401 $ 3,812 $ (130 ) $ 120,083

December 31, 2018
Obligations of states and political subdivisions $ 51,292 $ 709 $ (108 ) $ 51,893
Mortgage-backed securities 51,519 66 (1,016 ) 50,569
Corporate notes 16,708 - (264 ) 16,444
Total available for sale securities $ 119,519 $ 775 $ (1,388 ) $ 118,906

11

The Company’s securities held to maturity as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019 is summarized as follows:

Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value

June 30, 2019




Gross

Gross


Amortized

Unrealized

Unrealized

Estimated

Cost

Gains

Losses

Fair Value

June 30, 2020








Obligations of states and political subdivisions

$
9,579

$
21

$
—

$
9,600

December 31, 2019








U.S. Treasury securities $ 28,978 $ 1,004 $ (2 ) $ 29,980

$
33,527

$
1,076

$
(22)

$
34,581
Obligations of states and political subdivisions 10,559 13 - 10,572

10,207

15

—

10,222
Total held to maturity securities $ 39,537 $ 1,017 $ (2 ) $ 40,552

$
43,734

$
1,091

$
(22)

$
44,803

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

Table of Contents

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

Less Than 12 Months

Greater Than 12 Months

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized


Value

Losses

Value

Losses

Value

Losses

June 30, 2020 - Available for Sale

Obligations of U.S. Government sponsored agencies

$
615

$
(2)

$
—

$
—

$
615

$
(2)
Obligations of states and political subdivisions

2,540

(19)

—

—

2,540

(19)
Totals

$
3,155

$
(21)

$
—

$
—

$
3,155

$
(21)

December 31, 2019 - Available for Sale












Obligations of U.S. Government sponsored agencies

$
12,059

$
(158)

$
—

$
—

$
12,059

$
(158)
Obligations of states and political subdivisions

5,636

(19)

999

(1)

6,635

(20)
Mortgage-backed securities

4,038

(26)

2,187

(12)

6,225

(38)
Corporate notes

3,925

(11)

—

—

3,925

(11)
Totals

$
25,658

$
(214)

$
3,186

$
(13)

$
28,844

$
(227)

December 31, 2019 - Held to Maturity












U.S. Treasury securities

$
2,958

$
(22)

$
—

$
—

$
2,958

$
(22)
Less Than 12 Months Greater Than 12 Months Total
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses

June 30, 2019 - Available for Sale
Obligations of states and political subdivisions $ - $ - $ 1,646 $ (4 ) $ 1,646 $ (4 )
Mortgage-backed securities - - 3,460 (25 ) 3,460 (25 )
Corporate notes - - 7,785 (101 ) 7,785 (101 )
Totals $ - $ - $ 12,891 $ (130 ) $ 12,891 $ (130 )

June 30, 2019 - Held to Maturity
U.S. Treasury securities $ - $ - $ 1,494 $ (2 ) $ 1,494 $ (2 )

December 31, 2018 - Available for Sale
Obligations of states and political subdivisions $ 10,024 $ (64 ) $ 4,132 $ (44 ) $ 14,156 $ (108 )
Mortgage-backed securities 13,352 (183 ) 31,718 (833 ) 45,070 (1,016 )
Corporate notes - - 12,531 (264 ) 12,531 (264 )
Totals $ 23,376 $ (247 ) $ 48,381 $ (1,141 ) $ 71,757 $ (1,388 )

December 31, 2018 - Held to Maturity
U.S. Treasury securities $ 8,422 $ (46 ) $ 11,580 $ (343 ) $ 20,002 $ (389 )
12

As of June 30, ~~2019,~~2020, the Company does not consider its securities with unrealized losses to be other-than-temporarily impaired, as the unrealized losses in each category have occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration. The Company has the intent and ability to hold its securities to maturity or until par is recovered. There were no other-than-temporary impairments charged to earnings during the six months ended June 30, ~~2019~~2020 or ~~2018.~~
2019.
The following is a summary of amortized cost and estimated fair value of securities by contractual maturity as of June 30, ~~2019.~~2020. Contractual maturities will differ from expected maturities for mortgage-backed securities because borrowers may have the right to call or prepay obligations without penalties.

Available for Sale Held to Maturity
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value

Available for Sale

Held to Maturity

Amortized

Estimated

Amortized

Estimated


Cost

Fair Value

Cost

Fair Value
Due in one year or less $ 2,533 $ 2,573 $ 2,324 $ 2,322

$
13,794

$
13,856

$
751

$
751
Due after one year through five years 23,122 23,421 14,638 14,890
Due after five years through ten years 9,827 10,311 19,666 20,431
Due after ten years 30,309 31,747 2,909 2,909
Due after one year through 5 years

12,529

13,063

3,524

3,545
Due after 5 years through ten years

11,149

11,691

2,395

2,395
Due after 10 years

77,890

81,346

2,909

2,909
Subtotal 65,791 68,052 39,537 40,552

115,362

119,956

9,579

9,600
Mortgage-backed securities 50,610 52,031 - -

51,171

54,111

—

—
Total $ 116,401 $ 120,083 $ 39,537 $ 40,552

$
166,533

$
174,067

$
9,579

$
9,600

The following is a summary of the proceeds from sales of securities available for sale and held to maturity, as well as gross gains and losses for the six months ended June 30, ~~2019~~2020 and ~~2018:~~2019.

2019 2018


2020

2019
Proceeds from sales of securities $ 748 $ 3,326

$
59,697

$
748
Gross gains on sales 23 29

3,284

23
Gross losses on sales - 73

(51)

—

13

13

Table of Contents

NOTE 5 – LOANS, ALLOWANCE FOR LOAN LOSSES, AND CREDIT QUALITY
The following table presents total loans by portfolio segment and class of loan as of June 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


June 30,

December 31,

2020

2019

Commercial/industrial

$
574,052

$
302,538
Commercial real estate - owner occupied

525,908

459,782
Commercial real estate - non-owner occupied

410,931

353,723
Construction and development

126,653

132,296
Residential 1‑4 family

451,070

448,605
Consumer

28,532

29,462
Other

5,365

10,440
Subtotals

2,122,511

1,736,846
ALL

(16,071)

(11,396)
Loans, net of ALL

2,106,440

1,725,450
Deferred loan fees and costs

(7,488)

(503)
Loans, net

$
2,098,952

$
1,724,947
June 30, December 31,
2019 2018

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

The ALL by loan type as of June 30, ~~2019~~2020 and ~~2018~~2019 is summarized as follows:

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

ALL - January 1, 2019 $ 3,021 $ 3,459 $ 2,100 $ 725 $ 2,472 $ 148 $ 32 $ 291 $ 12,248
Charge-offs (594 ) (659 ) (54 ) - (11 ) (11 ) (8 ) - (1,337 )
Recoveries 1 2 1 - 122 4 4 - 134
Provision (285 ) 2,631 (99 ) (314 ) (556 ) (2 ) 1 (251 ) 1,125
ALL - June 30, 2019 2,143 5,433 1,948 411 2,027 139 29 40 12,170

ALL ending balance individuallyevaluated for impairment - 2,285 - - - - - - 2,285

ALL ending balance collectivelyevaluated for impairment $ 2,143 $ 3,148 $ 1,948 $ 411 $ 2,027 $ 139 $ 29 $ 40 $ 9,885

Loans outstanding -June 30, 2019 $ 271,838 $ 415,451 $ 255,072 $ 73,522 $ 370,261 $ 28,138 $ 5,493 $ - $ 1,419,775
Loans ending balance individuallyevaluated for impairment - 9,992 - - 176 - - - 10,168

Loans ending balance collectivelyevaluated for impairment $ 271,838 $ 405,459 $ 255,072 $ 73,522 $ 370,085 $ 28,138 $ 5,493 $ - $ 1,409,607






Commercial












Commercial

Real Estate -

Construction

Commercial /

Real Estate -

Non – Owner

and

Residential

Industrial

Owner Occupied

Occupied

Development

1‑4 Family

Consumer

Other

Unallocated

Total

ALL - January 1, 2020

$
2,320

$
4,587

$
1,578

$
548

$
2,169

$
141

$
53

$
291

$
11,396
Charge-offs

(8)

(101)

—

—

(59)

—

(9)

—

(177)
Recoveries

1

640

40

—

37

—

9

—

727
Provision

235

905

2,180

224

558

19

4

(280)

4,125
ALL - June 30, 2020

2,548

6,031

3,798

772

2,705

160

57

11

16,071

ALL ending balance individually evaluated for impairment

702

525

1,469

—

—

—

—

—

2,696

ALL ending balance collectively evaluated for impairment

$
1,846

$
5,506

$
2,329

$
772

$
2,705

$
160

$
57

$
236

$
13,375

Loans outstanding - June 30, 2020

$
574,052

$
525,908

$
410,931

$
126,653

$
451,070

$
28,532

$
5,365

$
—

$
2,122,511
Loans ending balance individually evaluated for impairment

1,973

10,860

7,987

—

—

—

—

—

20,820

Loans ending balance collectively evaluated for impairment

$
572,079

$
515,048

$
402,944

$
126,653

$
451,070

$
28,532

$
5,365

$
—

$
2,101,691

14
14

Table of Contents

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

ALL - January 1, 2018 $ 2,362 $ 2,855 $ 1,987 $ 945 $ 2,728 $ 191 $ 23 $ 521 $ 11,612
Charge-offs - (17 ) (1 ) (83 ) (81 ) (3 ) (23 ) - (208 )
Recoveries 1 58 2 - 188 3 6 - 258
Provision 1,042 385 177 16 (33 ) 57 43 (302 ) 1,385
ALL - June 30, 2018 3,405 3,281 2,165 878 2,802 248 49 219 13,047

ALL ending balance individually evaluated for impairment - 498 - - 160 - - - 658

ALL ending balance collectively evaluated for impairment $ 3,405 $ 2,783 $ 2,165 $ 878 $ 2,642 $ 248 $ 49 $ 219 $ 12,389

Loans outstanding - June 30, 2018 $ 314,087 $ 415,097 $ 226,677 $ 67,558 $ 365,502 $ 40,226 $ 5,714 $ - $ 1,434,861
Loans ending balance individually evaluated for impairment - 652 - - 709 - - - 1,361

Loans ending balance collectively evaluated for impairment $ 314,087 $ 414,445 $ 226,677 $ 67,558 $ 364,793 $ 40,226 $ 5,714 $ - $ 1,433,500

Commercial












Commercial

Real Estate -

Construction

Commercial /

Real Estate –

Non – Owner

and

Residential

Industrial

Owner Occupied

Occupied

Development

1‑4 Family

Consumer

Other

Unallocated

Total

ALL - January 1, 2019

$
3,021

$
3,750

$
2,100

$
725

$
2,472

$
148

$
32

$
521

$
12,248
Charge-offs

(594)

(659)

(54)

—

(11)

(11)

(8)

—

(1,337)
Recoveries

1

2

1

—

122

4

4

—

134
Provision

(285)

2,380

(99)

(314)

(556)

(2)

1

(285)

1,125
ALL - June 30, 2019

2,143

5,473

1,948

411

2,027

139

29

236

12,170

ALL ending balance individually evaluated for impairment

—

2,285

—

—

—

—

—

—

2,285

ALL ending balance collectively evaluated for impairment

$
2,143

$
3,188

$
1,948

$
411

$
2,027

$
139

$
29

$
236

$
9,885

Loans outstanding -


















June 30, 2019

$
271,838

$
415,451

$
255,072

$
73,522

$
370,261

$
28,138

$
5,493

$
—

$
1,419,775
Loans ending balance individually evaluated for impairment

—

9,992

—

—

176

—

—

—

10,168

Loans ending balance collectively evaluated for impairment

$
271,838

$
405,459

$
255,072

$
73,522

$
370,085

$
28,138

$
5,493

$
—

$
1,409,607

The Company’s past due loans as of June 30, ~~2019~~2020 is summarized as follows:

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




90 Days




30‑89 Days

or more

Past Due

Past Due

Accruing

and Accruing

Non-Accrual

Total

Commercial/industrial $ - $ 589 $ 665 $ 1,254

$
—

$
—

$
1,989

$
1,989
Commercial real estate - owner occupied 348 2,567 11,914 14,829

73

—

12,253

12,326
Commercial real estate - non-owner occupied - - - -

—

—

7,522

7,522
Construction and development 919 - - 919

319

—

—

319
Residential 1-4 family 744 276 1,028 2,048
Residential 1‑4 family

220

78

1,241

1,539
Consumer 61 1 4 66

21

2

32

55
Other - - - -

—

—

—

—
$ 2,072 $ 3,433 $ 13,611 $ 19,116

$
633

$
80

$
23,037

$
23,750
15

The Company’s past due loans as of December 31, ~~2018~~2019 is summarized as follows:

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




90 Days




30‑89 Days

or more

Past Due

Past Due

Accruing

and Accruing

Non-Accrual

Total

Commercial/industrial $ 76 $ - $ 8,001 $ 8,077

$
235

$
—

$
1,923

$
2,158
Commercial real estate - owner occupied 59 - 10,311 10,370

1,124

—

2,513

3,637
Commercial real estate - non-owner occupied - 58 233 291

—

—

75

75
Construction and development - - - -

768

11

—

779
Residential 1-4 family 275 362 1,549 2,186
Residential 1‑4 family

805

307

550

1,662
Consumer 9 3 5 17

70

36

32

138
Other - - - -

—

—

—

—
$ 419 $ 423 $ 20,099 $ 20,941

$
3,002

$
354

$
5,093

$
8,449

~~We utilize~~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.

Table of Contents

The determination of a commercial loan risk rating begins with completion of a matrix, which assigns scores based on the strength of the borrower’s debt service coverage, collateral coverage, balance sheet leverage, industry outlook, and customer concentration. A weighted average is taken of these individual scores to arrive at the overall rating. This rating is subject to adjustment by the loan officer based on facts and circumstances pertaining to the borrower. Risk ratings are subject to independent review.
Commercial borrowers with ratings between 1 and 5 are considered Pass credits, with 1 being most acceptable and 5 being just above the minimum level of acceptance.
Commercial borrowers rated 6 have potential weaknesses which may jeopardize repayment ability.
Borrowers rated 7 have a well-defined weakness or weaknesses such as the inability to demonstrate significant cash flow for debt service based on analysis of the company’s financial information. These loans remain on accrual status provided full collection of principal and interest is reasonably expected. Otherwise they are deemed impaired and placed on nonaccrual status. Borrowers rated 8 are the same as 7 rated credits with one exception: collection or liquidation in full is not probable.
The breakdown of loans by risk rating as of June 30, ~~2019~~2020 is as follows:

Pass (1-5) 6 7 8 Total


Pass (1‑5)

6

7

8

Total

Commercial/industrial $ 255,273 $ 6,127 $ 10,438 $ - $ 271,838

$
565,623

$
3,046

$
5,383

$
—

$
574,052
Commercial real estate - owner occupied 381,034 4,237 30,180 - 415,451

482,490

9,944

33,474

—

525,908
Commercial real estate - non-owner occupied 253,020 1,213 839 - 255,072

400,361

—

10,570

—

410,931
Construction and development 73,522 - - - 73,522

126,513

—

140

—

126,653
Residential 1-4 family 368,774 - 1,487 - 370,261
Residential 1‑4 family

449,056

—

2,014

—

451,070
Consumer 28,135 - 3 - 28,138

28,500

—

32

—

28,532
Other 5,493 - - - 5,493

4,804

561

—

—

5,365

$ 1,365,251 $ 11,577 $ 42,947 $ - $ 1,419,775

$
2,057,347

$
13,551

$
51,613

$
—

$
2,122,511
16

The breakdown of loans by risk rating as of December 31, ~~2018~~2019 is as follows:

Pass (1-5) 6 7 8 Total


Pass (1‑5)

6

7

8

Total

Commercial/industrial $ 277,993 $ 7,309 $ 12,274 $ - $ 297,576

$
290,180

$
5,329

$
7,029

$
—

$
302,538
Commercial real estate - owner occupied 375,614 5,670 34,789 24 416,097

422,336

5,603

31,843

—

459,782
Commercial real estate - non-owner occupied 249,625 - 3,092 - 252,717

344,278

8,774

671

—

353,723
Construction and development 60,866 - 61 - 60,927

132,266

—

30

—

132,296
Residential 1-4 family 364,289 664 3,718 2 368,673
Residential 1‑4 family

447,630

256

719

—

448,605
Consumer 26,835 - 18 1 26,854

29,430

—

32

—

29,462
Other 6,369 - - - 6,369

10,440

—

—

—

10,440

$ 1,361,591 $ 13,643 $ 53,952 $ 27 $ 1,429,213

$
1,676,560

$
19,962

$
40,324

$
—

$
1,736,846

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

Table of Contents

The ALL consists of specific reserves for certain individually evaluated impaired loans and general reserves for collectively evaluated non-impaired loans. Specific reserves reflect estimated losses on impaired loans from management’s analyses developed through specific credit allocations. The specific reserves are based on regular analyses of impaired, non-homogenous loans greater than $250,000. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific loans, including estimating the amount and timing of future cash flows and collateral values. The general reserve is based in part on the Bank’s historical loss experience which is updated quarterly. The general reserve portion of the ALL also includes consideration of certain qualitative factors such as 1) changes in lending policies and/or underwriting practices, 2) national and local economic conditions, 3) changes in portfolio volume and nature, 4) experience, ability and depth of lending management and other relevant staff, 5) levels of and trends in past-due and nonaccrual loans and quality, 6) changes in loan review and oversight, 7) impact and effects of concentrations and 8) other issues deemed relevant.
There are many factors affecting ALL; some are quantitative while others require qualitative judgment. The process for determining the ALL (which management believes adequately considers potential factors which might possibly result in credit losses) includes subjective elements and, therefore, may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses could be required that could adversely affect the Company’s earnings or financial position in future periods. Allocations of the ALL may be made for specific loans but the entire ALL is available for any loan that, in management’s judgment, should be charged off or for which an actual loss is realized. As an integral part of their examination process, various regulatory agencies review the ALL as well. Such agencies may require that changes in the ALL be recognized when such regulators’ credit evaluations differ from those of management based on information available to the regulators at the time of their examinations.
17
A summary of impaired loans individually evaluated as of June 30, ~~2019~~2020 is as follows:

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




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 $ - $ 6,695 $ - $ - $ - $ - $ - $ - $ 6,695

$
1,973

$
5,681

$
7,987

$
—

$
—

$
—

$
—

$
—

$
15,641
Unpaid principal balance - 6,695 - - - - - - 6,695

1,973

5,681

7,987

—

—

—

—

—

15,641
Related allowance - 2,285 - - - - - - 2,285

702

525

1,469

—

—

—

—

—

2,696

With no related allowance recorded:


















Recorded investment $ - $ 3,297 $ - $ - $ 176 $ - $ - $ - $ 3,473

$
—

$
5,179

$
—

$
—

$
—

$
—

$
—

$
—

$
5,179
Unpaid principal balance - 3,297 - - 176 - - - 3,473

—

5,179

—

—

—

—

—

—

5,179
Related allowance - - - - - - - - -

—

—

—

—

—

—

—

—

—

Total:


















Recorded investment $ - $ 9,992 $ - $ - $ 176 $ - $ - $ - $ 10,168

$
1,973

$
10,860

$
7,987

$
—

$
—

$
—

$
—

$
—

$
20,820
Unpaid principal balance - 9,992 - - 176 - - - 10,168

1,973

10,860

7,987

—

—

—

—

—

20,820
Related allowance - 2,285 - - - - - - 2,285

702

525

1,469

—

—

—

—

—

2,696

Average recorded investment $ 2,834 $ 8,894 $ - $ - $ 439 $ - $ - $ - $ 12,167

$
1,926

$
7,379

$
3,994

$
—

$
—

$
—

$
—

$
—

$
13,299

18
17

Table of Contents

A summary of impaired loans individually evaluated as of December 31, ~~2018~~2019 is as follows:

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




Commercial

Commercial










Real Estate -

Real Estate -

Construction

Commercial/

Owner

Non – Owner

and

Residential

Industrial

Occupied

Occupied

Development

1‑4 Family

Consumer

Other

Total

With an allowance recorded:
















Recorded investment $ 5,667 $ 2,099 $ - $ - $ 523 $ - $ - $ - $ 8,289

$
1,878

$
960

$
—

$
—

$
—

$
—

$
—

$
2,838
Unpaid principal balance 5,667 2,099 - - 523 - - - 8,289

1,878

960

—

—

—

—

—

2,838
Related allowance 566 353 - - 160 - - - 1,079

760

80

—

—

—

—

—

840

With no related allowance recorded:
















Recorded investment $ - $ 5,697 $ - $ - $ 179 $ - $ - $ - $ 5,876

$
—

$
2,938

$
—

$
—

$
—

$
—

$
—

$
2,938
Unpaid principal balance - 5,697 - - 179 - - - 5,876

—

2,938

—

—

—

—

—

2,938
Related allowance - - - - - - - - -

—

—

—

—

—

—

—

—

Total:
















Recorded investment $ 5,667 $ 7,796 $ - $ - $ 702 $ - $ - $ - $ 14,165

$
1,878

$
3,898

$
—

$
—

$
—

$
—

$
—

$
5,776
Unpaid principal balance 5,667 7,796 - - 702 - - - 14,165

1,878

3,898

—

—

—

—

—

5,776
Related allowance 566 353 - - 160 - - - 1,079

760

80

—

—

—

—

—

840

Average recorded investment $ 2,834 $ 4,036 $ - $ - $ 706 $ - $ - $ - $ 7,576

$
3,773

$
5,847

$
—

$
—

$
351

$
—

$
—

$
9,971

Interest recognized while these loans were impaired is considered immaterial to the consolidated financial statements for the six months ended June 30, ~~2019~~2020 and ~~2018.~~2019.
The following table presents loans acquired with deteriorated credit quality as of June 30, ~~2019~~2020 and December 31, ~~2018.~~2019. No loans in this table had a related allowance at either date, and therefore, the below disclosures were not expanded to include loans with and without a related ~~allowance~~.allowance.

June 30, 2019 December 31, 2018
Recorded
Investment Unpaid
Principal
Balance Recorded
Investment Unpaid
Principal
Balance

June 30, 2020

December 31, 2019




Unpaid



Unpaid

Recorded

Principal

Recorded

Principal

Investment

Balance

Investment

Balance
Commercial & Industrial $ 417 $ 420 $ 555 $ 701

$
1,265

$
1,393

$
191

$
212
Commercial real estate - owner occupied 1,318 1,932 1,558 2,069

5,414

7,190

518

785
Commercial real estate - non-owner occupied - - 233 475

1,244

1,409

—

—
Construction and development 226 250 171 171

94

104

213

237
Residential 1-4 family 1,072 1,170 1,664 1,828
Residential 1‑4 family

888

1,013

901

1,031
Consumer - - - -

—

—

—

—
Other - - - -

—

—

—

—
$ 3,033 $ 3,772 $ 4,181 $ 5,244

$
8,905

$
11,109

$
1,823

$
2,265
19

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

Table of Contents

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~~six months ended June 30, ~~2019,~~2020, and year ended December 31, ~~2018:~~2019:

June 30, 2019 December 31, 2018
Accretable Non-accretable Accretable Non-accretable
discount discount discount discount

June 30, 2020

December 31, 2019

Accretable

Non-accretable

Accretable

Non-accretable


discount

discount

discount

discount

Balance at beginning of period $ 318 $ 745 $ 583 $ 800

$
222

$
220

$
318

$
745
Acquired balance, net - - - -

1,064

727

44

333
Reclassifications between accretable and non-accretable 203 (203 ) 55 (55 )

11

(11)

858

(858)
Accretion to loan interest income (324 ) - (320 ) -

(29)

—

(998)

—
Disposals of loans - - - -
Balance at end of period $ 197 $ 542 $ 318 $ 745

$
1,268

$
936

$
222

$
220

A troubled debt restructuring ~~(TDR)~~(“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. 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 ~~time~~ it is returned to accrual status, generally ~~six~~6 months.
As of June 30, ~~2019~~2020 and December 31, ~~2018~~2019 the Company had specific reserves of ~~$2.1 million~~$0 and ~~$0.4 million~~$80,000 for TDRs, respectively, and none of them have subsequently defaulted. ~~There were no~~
During the first half of 2020 the Bank has experienced an increase in customer requests for loan modifications ~~resulting~~and payment deferrals as a result of impacts of the COVID-19 pandemic. The Coronavirus Aid, Relief, and Economic Security (CARES) act, signed into law on March 27, 2020, allowed financial institutions the option to exempt loan modifications related to the COVID-19 pandemic that would otherwise be categorized as a TDR from consideration for TDR treatment. Modifications in the scope of the exemption include forbearance agreements, interest-rate modifications, repayment plan changes and any other similar arrangements that would delay payments of principal or interest. This relief is allowable on modifications on loans which were not more than 30 days past due as of December 31, 2019, and that occur after March 1, 2020, and before the earlier of 60 days after the date on which the national emergency related to the COVID-19 outbreak is terminated
The following table presents the TDRs during the six months ended June 30, ~~2019 and 2018.~~2020. There were no TDRs during the same period in 2019.




Pre-Modification

Post-Modification

Outstanding

Outstanding

Number of

Recorded

Recorded

Contracts

Investment

Investment
Commerical Real Estate

1

$
115

$
115

Table of Contents

NOTE 6 – MORTGAGE SERVICING RIGHTS
Loans serviced for others are not included in the accompanying consolidated balance sheets. MSRs are recognized as separate assets when loans sold in the secondary market are sold with servicing retained. The Company utilizes a third-party consulting firm to determine an accurate assessment of the MSRs fair value. The third-party firm collects relevant data points from numerous sources. Some of these data points relate directly to the pricing level or relative value of the mortgage servicing while other data points relate to the assumptions used to derive fair value. In addition, the valuation evaluates specific collateral types, and current and historical performance of the collateral in question. The valuation process focuses on the non-distressed secondary servicing market, common industry practices and current regulatory standards. The primary determinants of the fair value of MSRs are servicing fee percentage, ancillary income, expected loan life or prepayment speeds, discount rates, costs to service, delinquency rates, foreclosure losses and recourse obligations. The valuation data also contains interest rate shock analyses for monitoring fair value changes in differing interest rate environments.
20
Following is an analysis of activity in the MSR asset:

Six Months Ended Year Ended
June 30, 2019 December 31, 2018

Six Months Ended

Year Ended

June 30, 2020

December 31, 2019

Fair value at beginning of year $ 3,085 $ 2,610

$
4,287

$
3,085
MSR asset acquired

384

1,859
Servicing asset additions 209 356

713

740
Loan payments and payoffs (246 ) (475 )

(705)

(821)
Changes in valuation inputs and assumptions used in the valuation model 37 594

(553)

(576)
Amount recognized through earnings - 475

(545)

(657)
Fair value at end of period $ 3,085 $ 3,085

$
4,126

$
4,287

Unpaid principal balance of loans serviced for others $ 319,173 $ 316,480

$
643,676

$
554,374
Mortgage servicing rights as a percent of loans serviced for others 0.97 0.97
MSR as a percent of loans serviced for others

0.64

0.77

The primary economic assumptions utilized by the Company in measuring the value of MSRs were constant prepayment speeds of ~~8.3~~17.5 and 12.1 months as of June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, and discount rates of 10.1% and 10% as of ~~both~~each period ~~ends.~~end.

Table of Contents

NOTE 7 – NOTES PAYABLE
From time to time the Company utilizes ~~short-term Federal Home Loan Bank (“FHLB”)~~FHLB advances to fund liquidity. ~~The Bank had no advances outstanding from FHLB at~~At June 30, ~~2019 or~~2020 and December, 31, ~~2018.~~2019, the Company had outstanding balances borrowed from the FHLB of $25.0 million and $39.8 million, respectively. The advances, rate, and maturities of FHLB advances were as follows:







June 30,


December 31,

Maturity

Rate

2020

2019

(dollars in thousands)
Fixed rate, fixed term

01/27/2020

1.42
%
$
—

$
1,000
Fixed rate, fixed term

11/02/2020

1.28
%

400

400
Fixed rate, fixed term

11/02/2020

2.83
%

500

—
Fixed rate, fixed term

12/08/2020

2.76
%

500

—
Fixed rate, fixed term

12/28/2020

2.07
%

250

—
Fixed rate, fixed term

01/22/2021

1.67
%

2,000

2,000
Fixed rate, fixed term

01/25/2021

2.37
%

5,000

5,000
Fixed rate, fixed term

01/27/2021

1.60
%

1,000

1,000
Fixed rate, fixed term

03/29/2021

0.00
%

2,377

—
Fixed rate, fixed term

05/03/2021

2.87
%

500

—
Fixed rate, fixed term

05/03/2021

0.00
%

4,000

—
Fixed rate, fixed term

05/03/2021

0.00
%

4,000

—
Fixed rate, fixed term

06/28/2021

2.00
%

250

—
Fixed rate, fixed term

11/03/2021

1.46
%

400

400
Fixed rate, fixed term

12/08/2021

2.87
%

500

—
Fixed rate, fixed term

12/27/2021

1.99
%

250

—
Fixed rate, fixed term

01/24/2022

2.51
%

250

—
Fixed rate, fixed term

05/02/2022

2.98
%

500

—
Fixed rate, fixed term

06/08/2022

2.92
%

500

—
Fixed rate, fixed term

08/08/2022

1.76
%

—

10,000
Fixed rate, fixed term

11/21/2022

3.02
%

600

—
Fixed rate, fixed term

08/08/2023

1.74
%

—

10,000
Fixed rate, fixed term

11/21/2023

3.06
%

600

—
Fixed rate, fixed term

08/08/2024

1.75
%

—

10,000
Fixed rate, fixed term

01/04/2027

0.00
%

103

—
Fixed rate, fixed term

04/22/2030

0.00
%

508

—

24,988

39,800
Adjustment due to purchase accounting

184

(10)

$
25,172

$
39,790

Future maturities of borrowings were as follows:


June 30,

December 31,

2020

2019
1 year or less

$
20,777

$
1,400
1 to 2 years

2,400

8,400
2 to 3 years

600

10,000
3 to 4 years

600

10,000
4 to 5 years

—

10,000
Over 5 years

611

—

$
24,988

$
39,800

The Company ~~maintains~~maintained a $5.0 million line of credit with a commercial bank. At ~~June 30, 2019 and~~ December 31, ~~2018,~~2019 the Company had no outstanding balances on this ~~note.~~note of $5.0 million. There were 0 outstanding balances on this note at June 30, 2020. The note ~~requires~~required monthly payments of interest at a variable rate, and iswas due in full on May 25, ~~2020.~~2021. Subsequent to June 30, 2020, on July 22, 2020, this agreement was terminated.

Table of Contents

The Company ~~maintains~~maintained a $5.0 million line of credit with another commercial bank. At December 31, 2019 the Company had outstanding balances on this note of $5.0 million. This note was not renewed when it matured on May 19, 2020.

The Company maintains a $7.5 million line of credit with another commercial bank, which was entered into on May 15, 2020. There were no0 outstanding balances on this note at June 30, ~~2019 or December 31, 2018. The note requires~~2020. Any future borrowings will require monthly payments of interest at a variable rate, and iswill be due in full on May ~~19, 2020.~~15, 2021.

NOTE 8 – SUBORDINATED NOTES

During September 2017, the Company entered into subordinated note agreements with three separate commercial banks. The Company had outstanding balances of $11.5 million under these agreements as of June 30, ~~2019~~2020 and December 31, ~~2018.~~2019. These notes were all issued with ~~10- year~~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 an initial fair market value adjustment of $0.2 million ($49,000 and $122,000 as of June 30, 2020 and December 31, 2019, respectively). The total amount outstanding was $7.0 million and $7.1 million at June, 2020 and December 31, 2019, respectively. 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, and quality for Tier 2 capital for regulatory purposes.

Subsequent to June 30, 2020, on July 22, 2020, the Company entered into subordinated note agreements with two separate commercial banks. The Company has through December 31, 2020, to borrow funds up to a maximum availability of $6.0 million under each agreement, or $12.0 million total. These notes were issued with 10-year maturities, will carry interest at a fixed rate of 5.0% through June 30, 2025, and at a variable rate thereafter, payable quarterly. These notes are callable on or after January 1, 2026 and qualify for Tier 2 capital for regulatory purposes.

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 June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, 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%.

Table of Contents

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

To Be Well

Minimum Capital

Capitalized Under

For Capital

Adeqaucy with

Prompt Corrective

Actual

Adequacy Purposes

Capital Buffer

Action Provisions


Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

June 30, 2020

Total capital (to risk-weighted assets):

















Corporation

$
243,784

11.57
%

NA

NA

NA

NA

NA

NA

Bank

$
240,638

11.42
%
$
168,605

8.00
%
$
221,294

10.50
%
$
210,757

10.00
%
Tier 1 capital (to risk-weighted assets):















Corporation

$
209,164

9.92
%

NA

NA

NA

NA

NA

NA

Bank

$
224,567

10.66
%
$
126,454

6.00
%
$
179,143

8.50
%
$
168,605

8.00
%
Common Equity Tier 1 capital (to risk-weighted assets):

















Corporation

$
209,164

9.92
%

NA

NA

NA

NA

NA

NA

Bank

$
224,567

10.66
%
$
94,840

4.50
%
$
147,530

7.00
%
$
136,992

6.50
%
Tier 1 capital (to average assets):

















Corporation

$
209,164

8.50
%

NA

NA

NA

NA

NA

NA

Bank

$
224,567

9.18
%
$
97,879

4.00
%
$
97,879

4.00
%
$
122,349

5.00
%
December 31, 2019

















Total capital (to risk-weighted assets):

















Corporation

$
208,900

10.35
%

NA

NA

NA

NA

NA

NA

Bank

$
215,347

10.69
%
$
161,163

8.00
%
$
211,527

10.50
%
$
201,454

10.00
%
Tier 1 capital (to risk-weighted assets):

















Corporation

$
178,882

8.86
%

NA

NA

NA

NA

NA

NA

Bank

$
203,951

10.12
%
$
120,872

6.00
%
$
171,236

8.50
%
$
161,163

8.00
%
Common Equity Tier 1 capital (to risk-weighted assets):

















Corporation

$
178,882

8.86
%

NA

NA

NA

NA

NA

NA

Bank

$
203,951

10.12
%
$
90,654

4.50
%
$
141,018

7.00
%
$
130,945

6.50
%
Tier 1 capital (to average assets):

















Corporation

$
178,882

8.46
%

NA

NA

NA

NA

NA

NA

Bank

$
203,951

9.67
%
$
84,390

4.00
%

84,390

4.00
%
$
105,487

5.00
%

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

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

NOTE 10 – COMMITMENTS
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 June 30, ~~2019~~2020 and December 31, ~~2018, respectively,~~2019 was approximately ~~$0.7~~$62.0 million and ~~$3.3 million.~~
22
$14.8 million, respectively.
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

Table of Contents

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

Notional Amount
June 30, 2019 December 31, 2018

Notional Amount


June 30, 2020

December 31, 2019
Commitments to extend credit:

Fixed $ 44,412 $ 57,911

$
68,022

$
49,741
Variable 251,085 268,541

377,052

333,468
Credit card arrangements 8,064 7,119

9,719

11,148
Letters of credit 23,962 25,261

7,501

17,121

NOTE 11 – FAIR VALUE MEASUREMENTS
Accounting guidance establishes a fair value hierarchy to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.
~~Level 1:~~ 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.~~
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.
23
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)

June 30, 2020








Assets








Securities available for sale








Obligations of U.S. Government sponsored agencies

$
14,599

$
—

$
14,599

$
—
Obligations of states and political subdivisions

75,226

—

75,226

—
Mortgage-backed securities

54,111

—

54,111

—
Corporate notes

27,512

—

27,512

—
Certificates of deposit

2,619

—

2,619

—
Mortgage servicing rights

4,126

—

4,126

—

December 31, 2019








Assets








Securities available for sale








Obligations of U.S. Government sponsored agencies

$
12,060

$
—

$
12,060

$
—
Obligations of states and political subdivisions

54,771

—

54,771

—
Mortgage-backed securities

51,720

—

51,720

—
Corporate notes

62,955

—

62,955

—
Mortgage servicing rights

4,287

—

4,287

—

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

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

December 31, 2018
Assets
Securities available for sale
Obligations of states and political subdivisions $ 51,893 $ - $ 51,493 $ 400
Mortgage-backed securities 50,569 - 50,569 -
Corporate notes 16,444 - 16,444 -
Mortgage servicing rights 3,085 - 3,085 -

Table of Contents

~~Fair value of~~There were no assets measured on a recurring basis using significant unobservable inputs (Level 3) ~~are as follows:~~.


June 30, 2020

December 31, 2019

Total securities at beginning of period

$
—

$
400
Included in earnings

—

—
Included in other comprehensive income

—

—
Purchases, issuance, and settlements

—

(400)
Transfer in and/or out of level 3

—

—
Total securities at end of period

$
—

$
—
June 30, 2019 December 31, 2018

Total securities at beginning of period $ 400 $ 500
Included in earnings - -
Included in other comprehensive income - -
Purchases, issuance, and settlements - (100 )
Transfer in and/or out of level 3 - -
Total securities at end of period $ 400 $ 400
24

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

Quoted Prices
In Active Significant
Assets Markets Other Significant
Measured for Identical Observable Unobservable
At Fair Assets Inputs Inputs
Value (Level 1) (Level 2) (Level 3)
June 30, 2019
Other real estate owned $ 3,543 $ - $ - $ 3,543
Impaired Loans, net of impairment reserve 13,008 - - 13,008
$ 16,551 $ - $ - $ 16,551
December 31, 2018
Other real estate owned $ 3,592 $ - $ - $ 3,592
Impaired Loans, net of impairment reserve 20,872 - - 20,872
$ 24,464 $ - $ - $ 24,464




Quoted Prices




In Active

Significant

Assets

Markets

Other

Significant

Measured

for Identical

Observable

Unobservable

At Fair

Assets

Inputs

Inputs

Value

(Level 1)

(Level 2)

(Level 3)
June 30, 2020








OREO

$
2,269

$
—

$
—

$
2,269
Impaired Loans, net of impairment reserve

27,561

—

—

27,561

$
29,830

$
—

$
—

$
29,830
December 31, 2019








OREO

$
6,888

$
—

$
—

$
6,888
Impaired Loans, net of impairment reserve

6,847

—

—

6,847

$
13,735

$
—

$
—

$
13,735

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

~~Valuation Technique~~

Weighted

Valuation

Unobservable
~~Inputs~~

Range of
~~Discounts~~

~~Weighted~~
Average
~~Discount~~

Technique

Inputs

Discounts

Discount
As of June 30, ~~2019~~2020

Other real estate owned
Third party appraisals, sales contracts or brokered price options
Collateral discounts and estimated costs to sell
0% - ~~40%~~100%

34.3
~~21.3~~
%
Impaired loans
Third party appraisals and discounted cash flows
Collateral discounts and discount rates
0% - 100%

6.8
~~4.6~~
%

As of December 31, ~~2018~~2019

Other real estate owned
Third party appraisals, sales contracts or brokered price options
Collateral discounts and estimated costs to sell
0% - ~~40%~~61%

33.5
~~18.6~~
%
Impaired loans
Third party appraisals and discounted cash flows
Collateral discounts and discount rates
0% - 100%

6.1
~~9.3~~
%
25

The following methods and assumptions were used by the Company to estimate fair value of financial instruments.
Cash and cash equivalents— Fair value approximates the carrying amount.

Table of Contents

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.
~~Subordinated~~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.
26
The carrying value and estimated fair value of financial instruments at June 30, ~~2019~~2020 and December 31, ~~2018~~2019 follows:

Fair Value
June 30, 2019 Carrying
amount Level 1 Level 2 Level 3 Total

Fair Value


Carrying








June 30, 2020

amount

Level 1

Level 2

Level 3

Total
Financial assets:

Cash and cash equivalents $ 125,874 $ 125,874 $ - $ - $ 125,874

$
177,321

$
177,321

$
—

$
—

$
177,321
Securities held to maturity 39,537 - 40,552 - 40,552

9,579

—

9,600

—

9,600
Securities available for sale 120,083 - 119,683 400 120,083

174,067

—

174,067

—

174,067
Loans held for sale

1,479

—

—

1,479

1,479
Loans, net 1,407,022 - - 1,393,494 1,393,494

2,098,952

—

—

2,112,222

2,112,222
Other investments 4,517 - - 4,517 4,517
Other investments, at cost

7,838

—

—

7,838

7,838
Mortgage servicing rights 3,085 - 3,085 - 3,085

4,126

—

4,126

—

4,126
Cash surrender value of life insurance 24,488 24,488 - - 24,488

30,996

30,996

—

—

30,996

Deposits $ 1,574,998 $ - $ - $ 1,560,172 $ 1,560,172

$
2,263,145

$
—

$
—

$
2,238,793

$
2,238,793
Securities sold under repurchase agreements 20,034 - 20,034 - 20,034

57,442

—

57,422

—

57,422
Notes payable

25,172

—

25,172

—

25,172
Subordinated notes 11,500 - 11,500 - 11,500

18,549

—

18,549

—

18,549

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

Table of Contents

Fair Value


Carrying








December 31, 2019

amount

Level 1

Level 2

Level 3

Total
Financial assets:

Cash and cash equivalents

$
86,452

$
86,452

$
—

$
—

$
86,452
Securities held to maturity

43,734

—

44,803

—

44,803
Securities available for sale

181,506

—

181,506

—

181,506
Loans held for sale

587

—

—

587

587
Loans, net

1,724,947

—

—

1,723,542

1,723,542
Other investments, at cost

4,933

—

—

4,933

4,933
Mortgage servicing rights

4,287

—

4,287

—

4,287
Cash surrender value of life insurance

24,945

24,945

—

—

24,945

Financial liabilities:










Deposits

$
1,843,311

$
—

$
—

$
1,783,638

$
1,783,638
Securities sold under repurchase agreements

45,865

—

45,865

—

45,865
Notes payable

49,790

—

49,790

—

49,790
Subordinated notes

18,622

—

18,622

—

18,622

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters that could affect the estimates. Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.
27
Deposits with no stated maturities are defined as having a fair value equivalent to the amount payable on demand. This prohibits adjusting fair value derived from retaining those deposits for an expected future period of time. This component, commonly referred to as a deposit base intangible, is neither considered in the above amounts nor is it recorded as an intangible asset on the consolidated balance sheet. Significant assets and liabilities that are not considered financial assets and liabilities include premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

NOTE 12 – STOCK BASED COMPENSATION
The Company has made restricted share grants pursuant to the Bank First Corporation 2011 Equity Plan. The purpose of the Plan is to provide financial incentives for selected employees and for the non-employee ~~Directors~~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,~~stock appreciation rights, performance unit awards, and restricted stock and unrestricted Company stock awards must be Company stock previously issued and outstanding and reacquired by the Company. The number of shares of Company stock that may be issued pursuant to awards under the Plan shall not exceed, in the aggregate, 659,250. As of June 30, ~~2019~~2020 and December 31, ~~2018, 177,377~~2019, 204,529 and ~~160,362~~177,462 shares of Company stock have been awarded under the Plan, respectively. Compensation expense for restricted stock is based on the fair value of the awards of Bank First Corporation common stock at the time of grant. The value of restricted stock grants that are expected to vest is amortized into expense over the vesting periods. For the six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, compensation expense of ~~$0.3~~$0.5 million and $0.3 million, respectively, was recognized related to restricted stock awards.

Table of Contents

As of June 30, ~~2019,~~2020, there was ~~$1.9~~$2.7 million of unrecognized compensation cost related to non-vested restricted stock awards granted under the ~~plan.~~Plan. That cost is expected to be recognized over a weighted average period of ~~3.15~~ 3.14 years. The aggregate grant date fair value of restricted stock awards that vested during the six months ended June 30, ~~2019,~~2020, was approximately ~~$0.5 million~~.$0.7 million.

For the six months ended June 30, 2019 For the six months ended June 30, 2018

Weighted- Weighted-
Average Grant- Average Grant-
Shares Date Fair Value Shares Date Fair Value

For the six months ended June 30, 2020

For the six months ended June 30, 2019

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
Outstanding at beginning of year

50,676

$
43.03

51,776

$
34.27
Granted 17,015 56.62 16,673 46.01

27,067

65.34

17,015

56.62
Vested (17,212 ) 30.54 (19,825 ) 24.36

(18,623)

37.28

(17,212)

30.54
Forfeited or cancelled (176 ) 22.90 - -

(99)

26.50

(176)

22.90
Outstanding at end of period 51,403 $ 43.06 50,467 $ 33.88
Outstanding at end of year

59,021

$
52.99

51,403

$
43.06

28

NOTE 13 – LEASES
~~In February 2016, the FASB established Topic 842, Leases, by issuing~~ Accounting ~~Standards Update (ASU) No. 2016-02, which requires~~standards require 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 establishesarrangements, establishing a right-of-use (“ROU”) model that requires a lessee to recognize a ROU lease asset and liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
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~~Accounting standards require 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.~~rate is permitted. The Company is electing to utilize the Wall Street Journal Prime Rate on the date of lease commencement.

29


Six-month period ended

June 30, 2020

June 30, 2019

Amortization of ROU Assets - Operating Leases

$
20

$
26

Interest on Lease Liabilities - Operating Leases

46

39

Operating Lease Cost (Cost resulting from lease payments)

66

65

ROU Assets - Operating Leases at beginning of period

1,699

—

New ROU Assets - Operating Leases

—

1,744

ROU Assets - Operating Leases at June 30,

1,678

1,718

Weighted Average Lease Term (Years) - Operating Leases

31.52

31.63

Weighted Average Discount Rate - Operating Leases

5.50
%

5.50
%

28

Table of Contents

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

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liabilities as of June 30, ~~2019~~2020 is as ~~follows~~:follows:

June 30, 2019

June 30, 2020
Operating lease payments due:

Within one year $ 133

$
139
After one but within two years 139

132
After two but within three years 132

93
After three but within four years 93

85
After four years but within five years 85

85
After five years 3,453

3,368
Total undiscounted cash flows 4,035

3,902
Discount on cash flows (2,317 )

(2,224)
Total operating lease liabilities $ 1,718

$
1,678

~~NOTE 14 – SUBSEQUENT EVENTS~~

~~As stated in Note 2, “Acquisitions,” effective July 12, 2019, the previously announced merger with Partnership was completed.~~
At the effective time of the merger, each share of common stock of Partnership issued and outstanding was converted into the right to receive either 0.35 shares of Bank First common stock or cash in the amount of $17.30. The Company paid approximately $14,285,000 in cash and issued 534,659 shares of Bank First common stock for the issued and outstanding shares of Partnership common stock.
~~The acquisition of Partnership was accounted for using the purchase method of accounting in accordance with ASC 805,~~~~Business Combinations.~~ Assets acquired, liabilities assumed, and consideration exchanged were recorded at their respective acquisition date fair values. Determining the fair value of the assets and liabilities is a complicated process involving significant judgement regarding the methods and assumptions to be used. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available.
The Company is still finalizing the fair value estimates, but the following table presents the initial estimates of the fair value of the assets acquired and liabilities assumed of Partnership as of July 12, 2019.
As Recorded by
Partnership Fair Value
Adjustments As Recorded by
the Company
Cash and cash equivelants $ 4,511 $ 4,511
Investment securities 16,933 (512 )a 16,421
Other investments 441 441
Gross loans 278,532 (5,908 )b 272,624
Allowance for loan losses (2,253 ) 2,253 c -
Net Loans 276,279 (3,655 ) 272,624
Premises and equipment, net 6,066 (2,940 )d 3,126
Core deposit intangible - 5,400 e 5,400
Existing intangible assets 195 (195 )f -
Other assets 3,118 473 g 3,591
Total assets $ 307,543 $ (1,429 ) $ 306,114

Total deposits $ 268,653 $ 272 h $ 268,925
Subordinated debt 7,000 195 i 7,195
Other borrowings 9,800 (18 )i 9,782
Other liabilities 690 16 ^j 706
Total liabilities 286,143 465 286,608

Net indentifiable assets acquired over liabilties assumed 21,400 (1,894 ) 19,506

Goodwill - 30,083 30,083

Net assets acquired over liabilities assumed $ 21,400 $ 28,189 $ 49,589

Consideration:
Shares of common stock issued 534,659
Estimated value per share of Company's stock $ 66.03

Fair value of Company stock issued 35,304
Cash paid for shares and in lieu of fractional shares 14,285

Fair value of total consideration transferred $ 49,589
~~Explanation of fair value adjustments:~~
a. ~~Adjustment reflects fair value adjustments of the available-for-sale portfolio at acquisition date.~~
b. ~~Adjustment reflects fair value adjustments based on the Company's evaluation of the acquired loan portfolio.~~
c. ~~Adjustment reflects the elimination of Partnership's allowance for loan losses.~~
d. ~~Adjustment reflects the fair value adjustment of the acquired premises and equipment from Partnership's historical net cost basis.~~
e. ~~Adjustment reflects the recording of a core deposit intangible asset.~~
f. ~~Adjustment reflects removal of intangible assets from Partnership's balance sheet from a prior acquisition.~~
g. Adjustment reflects write-off of prepaid assets recorded on Partnership's balance sheet that had no value to the Company and the establishment of a deferred tax asset as a result of the purchase accounting adjustments.
h. ~~Adjustment reflects the fair value adjustment to time deposits.~~
i. Adjustment reflects the fair value adjustment to subordinated debt and other borrowings due to the current rate environment for these items compared to those in place when they were originally instituted.
j. ~~Adjustment to record an accrual for a severance agreement that was in place for Partnership prior to July 12, 2019.~~
30
29

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements for the year ended December 31, ~~2018,~~2019, included in our Annual Report and with our unaudited condensed accompanying notes set forth in this Quarterly Report on Form 10-Q for the quarterly period June 30, ~~2019.~~2020.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report are forward-looking statements within the meaning of and subject to the safe harbor protections of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements relating to the Company’s assets, business, cash flows, condition (financial or otherwise), credit quality, financial performance, liquidity, short and long-term performance goals, prospects, results of operations, strategic initiatives, potential future acquisitions, disposition and other growth opportunities. These statements, which are based upon certain assumptions and estimates and describe the Company’s future plans, results, strategies and expectations, can generally be identified by the use of the words and phrases “may,” “will,” “should,” “could,” “would,” “goal,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target,” “aim,” “predict,” “continue,” “seek,” “projection” and other variations of such words and phrases and similar expressions. These forward-looking statements are not historical facts, and are based upon current expectations, estimates and projections about the Company’s industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond the Company’s control. The inclusion of these forward-looking statements should not be regarded as a representation by the Company or any other person that such expectations, estimates and projections will be achieved. Accordingly, the Company cautions investors that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict and that are beyond the Company’s control. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable as of the date of this report, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. A number of factors could cause actual results to differ materially from those contemplated by the forward-looking statement in this report including, without limitation, the risks and other factors set forth in the Company’s Registration Statements under the captions “Cautionary Note Regarding Forward-Looking Statements” and “Risk factors.” Many of these factors are beyond the Company’s ability to control or predict. If one or more events related to these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to be incorrect, actual results may differ materially from the forward-looking statements. Accordingly, investors should not place undue reliance on any such forward-looking statements. Any forward-looking statements speaks only as of the date of this report, and the Company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law. New risks and uncertainties may emerge from time to time, and it is not possible for the Company to predict their occurrence or how they will affect the Company.
We qualify all of our forward-looking statements by these cautionary statements.
OVERVIEW
Bank First Corporation is a Wisconsin corporation that was organized primarily to serve as the holding company for Bank First, N.A. Bank First, N.A., which was incorporated in 1894, is a nationally-chartered bank headquartered in Manitowoc, Wisconsin. It is a member of the Board of Governors of the Federal Reserve System (“Federal Reserve”), and is regulated by the Office of the Comptroller of the Currency (“OCC”). Including its headquarters in Manitowoc, Wisconsin, the Bank has 1924 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.

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

The Bank is a 49.8% member of a data processing subsidiary, UFS, ~~LLC~~ which provides core data processing, endpoint management cloud services, cyber security and digital banking solutions for over 50 Midwest banks. The Bank, through its 100% owned subsidiary TVG Holdings, Inc., also holds a ~~30%~~40% ownership interest in Ansay, ~~& Associates, LLC,~~ an insurance agency providing clients throughout Wisconsin with insurance and risk management ~~solutions.~~solutions (on October 1, 2019, TVG Holdings, Inc. purchased an additional 10% ownership interest in Ansay, increasing its ownership interest from 30% prior to that date). These unconsolidated subsidiary interests contribute noninterest income to the Bank through their underlying annual earnings.

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

~~The~~On July 12, 2019, the Company ~~entered into an~~consummated its merger with Partnership pursuant to the Agreement and Plan of Bank Merger, ~~with Partnership Community Bancshares, Inc., a Wisconsin corporation,~~ dated as of January 22, 2019 and as amended on April 30, 2019, ~~under which~~by and among the Company and Partnership, ~~will merge~~whereby Partnership was merged with and into the Company, and Partnership Bank, Partnership’s wholly owned banking subsidiary, ~~Partnership Bank, will merge~~was merged with and into the Bank. The ~~transaction closed~~system integration was completed, and four branches of Partnership Bank opened on July ~~12, 2019.~~15, 2019 as branches of the bank, expanding the Bank’s presence into Ozaukee, Monroe and Jefferson counties.

On May 15, 2020, the Company consummated its merger with Timberwood pursuant to the Agreement and Plan of Bank Merger, ~~consideration consisted~~dated as of ~~65% common stock of~~November 20, 2019, by and among the Company and ~~35% cash,~~Timberwood, whereby Timberwood was merged with and ~~totalled~~into the Company, and Timberwood Bank, Timberwood’s wholly owned banking subsidiary, was merged with and into the Bank. The system integration was completed, and the sole branch of Timberwood Bank opened on May 18, 2020 as a branch of the bank, expanding the Bank’s presence in Monroe County.

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

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

Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans and other products and services we offer, which are highly dependent on the business environment in our primary markets. We have actively reached out to our customers to provide guidance, direction and assistance in these uncertain times. We have also extended credit to our customers related to the Payroll Protection Program (“PPP”). As of August 5, 2020, we have secured funding of approximately ~~$49.6~~1,859 loans totaling approximately $279.5 million.

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

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

	At or for the Three Months Ended															At or for the Six Months Ended

																					At or for the Three Months Ended															At or for the Six Months Ended
(In thousands, except per share data)	6/30/2019			3/31/2019			12/31/2018			9/30/2018			6/30/2018			6/30/2019			6/30/2018		6/30/2020			3/31/2020			12/31/2019			9/30/2019			6/30/2019			6/30/2020			6/30/2019

Results of Operations:


Interest income	$	20,158		$	19,723		$	19,753		$	19,510		$	19,372		$	39,881		$	38,681	$	24,382		$	23,296		$	23,795		$	25,489		$	20,158		$	47,678		$	39,881
Interest expense		4,784			4,523			4,240			3,974			3,604			9,307			6,631		3,586			4,653			5,015			5,176			4,784			8,239			9,307


Net interest income		15,374			15,200			15,513			15,536			15,768			30,574			32,050		20,796			18,643			18,780			20,313			15,374			39,439			30,574
Provision for loan losses		500			625			750			800			900			1,125			1,385		3,150			975			1,125			3,000			500			4,125			1,125


Net interest income after provision for loan losses		14,874			14,575			14,763			14,736			14,868			29,449			30,665		17,646			17,668			17,655			17,313			14,874			35,314			29,449


Noninterest income		2,713			3,306			2,553			2,508			3,027			6,019			6,470		7,764			3,897			3,211			3,145			2,736			11,661			6,276
Noninterest expense		9,932			9,302			9,893			9,708			10,064			19,234			20,041		14,438			12,741			11,182			12,087			9,955			27,179			19,491


Income before income tax expense		7,655			8,579			7,423			7,536			7,831			16,234			17,094		10,972			8,824			9,684			8,371			7,655			19,796			16,234
Income tax expense		1,666			1,992			1,362			1,604			1,431			3,658			3,631		2,676			1,558			2,225			1,712			1,666			4,234			3,658


Net income	$	5,989		$	6,587		$	6,061		$	5,932		$	6,400		$	12,576		$	13,463	$	8,296		$	7,266		$	7,459		$	6,659		$	5,989		$	15,562		$	12,576


Earnings per common share - basic	$	0.91		$	1.00		$	0.91		$	0.89		$	0.96		$	1.91		$	2.01	$	1.11		$	1.03		$	1.05		$	0.95		$	0.91		$	2.14		$	1.91
Earnings per common share - diluted		0.90			1.00			0.91			0.89			0.96			1.89			2.01		1.11			1.02			1.04			0.93			0.90			2.14			1.89


Common Shares:


Basic weighted average		6,577,016			6,574,362			6,647,586			6,661,337			6,672,344			6,575,696			6,692,523		7,395,199			7,083,520			7,084,728			7,036,807			6,577,016			7,212,634			6,575,696
Diluted weighted average		6,675,794			6,608,273			6,647,586			6,661,337			6,672,344			6,642,222			6,692,523		7,405,995			7,128,246			7,182,854			7,134,674			6,675,794			7,271,192			6,642,222
Outstanding		6,576,171			6,577,045			6,610,358			6,659,021			6,662,292			6,576,171			6,662,292		7,733,457			7,155,955			7,084,728			7,084,728			6,576,171			7,733,457			6,576,171


Noninterest income / noninterest expense:


Service charges	$	799		$	679		$	890		$	971		$	786		$	1,478		$	1,632	$	1,158		$	916		$	1,110		$	918		$	799		$	2,074		$	1,478
Income from Ansay		543			875			180			176			562			1,418			1,758		710			891			55			319			543			1,601			1,418
Income from UFS		731			594			708			660			586			1,325			1,195		850			897			842			768			731			1,747			1,325
Loan servicing income		244			223			372			260			604			467			846		226			462			(291)			374			244			688			467
Net gain on sales of mortgage loans		154			87			188			144			128			241			285		1,332			460			627			533			154			1,792			241
Net gain on sales of securities																						3,233			—			611			—			23			3,233			257
Noninterest income from strategic alliances		29			19			22			24			21			48			44		16			17			21			26			29			33			48
Other noninterest income		213			829			193			273			340			1,042			710		239			254			236			207			213			493			1,042


Total noninterest income	$	2,713		$	3,306		$	2,553		$	2,508		$	3,027		$	6,019		$	6,470	$	7,764		$	3,897		$	3,211		$	3,145		$	2,736		$	11,661		$	6,276


Personnel expense	$	5,403		$	5,310		$	5,532		$	5,205		$	5,446		$	10,713		$	10,763	$	6,608		$	6,452		$	5,918		$	6,272		$	5,403		$	13,060		$	10,713
Occupancy, equipment and office		832			849			799			817			532			1,681			1,882		921			1,275			1,103			1,076			832			2,196			1,681
Data processing		960			913			899			856			925			1,873			1,864		1,334			1,199			1,478			1,158			960			2,533			1,873
Postage, stationery and supplies		192			123			156			138			159			315			326		277			172			141			135			192			449			315
Net (gain) loss on sales of other real estate owned		(135	)		36			(79	)		233			(38	)		(99	)		98
Net (gain) loss on sales of securities		(23	)		(234	)		-			(19	)		47			(257	)		44
Net (gain) loss on sales and valuations of other real estate owned																						467			976			36			(10)			(135)			1,443			(99)
Advertising		53			74			78			36			54			127			106		69			55			88			53			53			124			127
Charitable contributions		141			131			121			169			322			272			695		127			123			69			225			141			250			272
Outside service fees		982			684			899			817			896			1,666			1,416		1,394			801			204			1,171			982			2,195			1,666
Amortization of intangibles		161			161			189			189			189			322			378		362			334			373			374			161			696			322
Other noninterest income		1,366			1,255			1,299			1,267			1,532			2,621			2,469

Penalty for early extinguishment of debt																						1,323			—			—			—			—			1,323			—
Other noninterest expense																						1,556			1,354			1,772			1,633			1,366			2,910			2,621

Total noninterest expense	$	9,932		$	9,302		$	9,893		$	9,708		$	10,064		$	19,234		$	20,041	$	14,438		$	12,741		$	11,182		$	12,087		$	9,955		$	27,179		$	19,491

Period-end balances:

Loans																					$	2,115,023		$	1,765,242		$	1,736,343		$	1,714,213		$	1,419,192		$	2,115,023		$	1,419,192
Allowance for loan losses																						16,071			12,967			11,396			10,131			12,170			16,071			12,170
Investment securities available-for-sale, at fair value																						174,067			172,070			181,506			136,935			120,083			174,067			120,083
Investment securities held-to-maturity, at cost																						9,579			43,732			43,734			42,605			39,537			9,579			39,537
Goodwill and other intangibles, net																						65,559			52,789			53,122			54,153			19,998			65,559			19,998
Total assets																						2,657,911			2,200,320			2,210,168			2,163,501			1,806,467			2,657,911			1,806,467
Deposits																						2,263,145			1,847,209			1,843,311			1,838,080			1,574,998			2,263,145			1,574,998
Stockholders' equity																						276,100			237,682			230,211			225,332			185,448			276,100			185,448
Book value per common share																						35.70			33.21			32.49			31.81			28.20			35.70			28.20
Tangible book value per common share (1)																						27.76			26.44			25.60			24.86			25.63			27.76			25.63

Average balances:

Loans																					$	2,034,738		$	1,744,576		$	1,718,705		$	1,682,932		$	1,420,710		$	1,889,657		$	1,427,458
Interest-earning assets																						2,329,097			2,011,382			1,976,420			1,923,451			1,679,604			2,170,238			1,665,930
Total assets																						2,520,882			2,196,662			2,160,080			2,095,357			1,801,530			2,358,772			1,787,515
Deposits																						2,130,100			1,843,039			1,835,430			1,786,373			1,563,322			1,986,569			1,556,139
Interest-bearing liabilities																						1,589,127			1,476,814			1,373,320			1,310,757			1,142,604			1,532,970			1,141,894
Goodwill and other intangibles, net																						53,836			48,606			49,071			42,373			20,096			51,275			20,177
Stockholders' equity																						256,529			233,470			228,404			227,205			181,498			244,999			178,295

Financial ratios (2):

Return on average assets																						1.32	%		1.32	%		1.37	%		1.27	%		1.33	%		1.32	%		1.41	%
Return on average common equity																						12.94	%		12.45	%		12.96	%		11.72	%		13.20	%		12.70	%		14.11	%
Average equity to average assets																						10.18	%		10.63	%		10.57	%		10.84	%		10.07	%		10.39	%		9.97	%
Stockholders' equity to assets																						10.39	%		10.80	%		10.42	%		10.42	%		10.27	%		10.39	%		10.27	%
Tangible equity to tangible assets (1)																						8.27	%		8.79	%		8.39	%		8.33	%		9.42	%		8.27	%		9.42	%
Loan yield																						4.60	%		5.00	%		5.15	%		5.63	%		5.22	%		4.78	%		5.19	%
Earning asset yield																						4.29	%		4.74	%		4.86	%		5.37	%		4.90	%		4.50	%		4.92	%
Cost of funds																						0.91	%		1.27	%		1.45	%		1.57	%		1.68	%		1.08	%		1.64	%
Net interest margin, taxable equivalent																						3.67	%		3.81	%		3.85	%		4.30	%		3.76	%		3.74	%		3.79	%
Net loan charge-offs to average loans																						0.01	%		(0.14)	%		(0.01)	%		1.20	%		0.16	%		(0.03)	%		0.17	%
Nonperforming loans to total loans																						1.09	%		0.42	%		0.31	%		0.30	%		1.20	%		1.09	%		1.20	%
Nonperforming assets to total assets																						0.94	%		0.51	%		0.52	%		0.52	%		1.10	%		0.94	%		1.10	%
Allowance for loan losses to loans																						0.76	%		0.73	%		0.66	%		0.59	%		0.86	%		0.76	%		0.86	%

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Period-end balances:

Loans $ 1,419,192 $ 1,431,498 $ 1,428,494 $ 1,441,477 $ 1,434,504 $ 1,419,192 $ 1,434,504
Allowance for loan losses 12,170 12,213 12,248 11,560 13,047 12,170 13,047
Investment securities available-for-sale, at fair value 120,083 122,761 118,906 119,623 121,550 120,083 121,550
Investment securities held-to-maturity, at cost 39,537 40,769 40,768 40,882 41,203 39,537 41,203
Goodwill and other intangibles, net 19,998 20,160 20,321 20,425 20,614 19,998 20,614
Total assets 1,806,467 1,805,408 1,793,165 1,735,754 1,741,874 1,806,467 1,741,874
Deposits 1,574,998 1,573,677 1,557,167 1,486,470 1,495,424 1,574,998 1,495,424
Stockholders' equity 185,448 179,177 174,323 169,133 165,200 185,448 165,200
Book value per common share 28.20 27.24 26.37 25.40 24.80 28.20 24.80
Tangible book value per common share (1) 25.63 24.65 23.76 22.78 22.15 25.63 22.15

Average balances:

Loans $ 1,420,710 $ 1,434,283 $ 1,435,745 $ 1,437,832 $ 1,424,604 $ 1,427,458 $ 1,414,727
Interest-earning assets 1,679,604 1,652,106 1,637,080 1,654,966 1,676,017 1,665,930 1,673,742
Total assets 1,801,530 1,773,345 1,755,835 1,772,768 1,794,227 1,787,515 1,790,288
Deposits 1,563,322 1,548,306 1,510,978 1,487,865 1,474,952 1,556,139 1,473,184
Interest-bearing liabilities 1,142,604 1,141,177 1,144,202 1,185,391 1,215,923 1,141,894 1,213,758
Goodwill and other intangibles, net 20,096 20,259 20,377 20,610 20,474 20,177 20,488
Stockholders' equity 181,498 175,058 170,992 167,651 162,860 178,295 162,100

Financial ratios (2):

Return on average assets 1.33 % 1.49 % 1.37 % 1.33 % 1.42 % 1.41 % 1.50 %
Return on average common equity 13.20 % 15.05 % 14.06 % 14.04 % 15.59 % 14.11 % 16.61 %
Average equity to average assets 10.07 % 9.87 % 9.74 % 9.46 % 9.08 % 9.97 % 9.48 %
Stockholders' equity to assets 10.27 % 9.92 % 9.72 % 9.74 % 9.48 % 10.27 % 9.48 %
Tangible equity to tangible assets (1) 9.42 % 9.06 % 8.85 % 8.83 % 8.56 % 9.42 % 8.56 %
Loan yield 5.22 % 5.15 % 5.09 % 4.98 % 5.04 % 5.19 % 5.08 %
Earning asset yield 4.90 % 4.93 % 4.88 % 4.76 % 4.72 % 4.92 % 4.75 %
Cost of funds 1.68 % 1.61 % 1.47 % 1.33 % 1.19 % 1.64 % 1.10 %
Net interest margin, taxable equivalent 3.76 % 3.82 % 3.85 % 3.81 % 3.86 % 3.79 % 3.95 %
Net loan charge-offs to average loans 0.16 % 0.18 % 0.00 % 0.16 % 0.00 % 0.17 % -0.01 %
Nonperforming loans to total loans 1.20 % 1.14 % 1.44 % 1.99 % 1.43 % 1.20 % 1.43 %
Nonperforming assets to total assets 1.10 % 1.07 % 1.30 % 1.79 % 1.32 % 1.10 % 1.32 %
Allowance for loan losses to loans 0.86 % 0.85 % 0.86 % 0.80 % 0.91 % 0.86 % 0.91 %
(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.
33
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 Six Months Ended

At or for the Three Months Ended

At or for the Six Months Ended

(In thousands, except per share data) 6/30/2019 3/31/2019 12/31/2018 9/30/2018 6/30/2018 6/30/2019 6/30/2018

6/30/2020

3/31/2020

12/31/2019

9/30/2019

6/30/2019

6/30/2020

6/30/2019

Tangible Assets















Total assets $ 1,806,467 $ 1,805,408 $ 1,793,165 $ 1,735,754 $ 1,741,874 $ 1,806,467 $ 1,741,874

$
2,657,911

$
2,200,320

$
2,210,268

$
2,163,501

$
1,806,467

$
2,657,911

$
1,806,467

Adjustments:















Goodwill (15,024 ) (15,024 ) (15,024 ) (15,024 ) (15,024 ) (15,024 ) (15,024 )

(55,052)

(43,456)

(43,456)

(43,456)

(15,024)

(55,052)

(15,024)

Core deposit intangible, net of amortization (1,890 ) (2,051 ) (2,212 ) (2,401 ) (2,590 ) (1,890 ) (2,590 )

(6,381)

(5,046)

(5,379)

(5,752)

(1,890)

(6,381)

(1,890)

Tangible assets $ 1,789,553 $ 1,788,333 $ 1,775,929 $ 1,718,329 $ 1,724,260 $ 1,789,553 $ 1,724,260

$
2,596,478

$
2,151,818

$
2,161,433

$
2,114,293

$
1,789,553

$
2,596,478

$
1,789,553

Tangible Common Equity















Total stockholders' equity $ 185,448 $ 179,177 $ 174,323 $ 169,133 $ 165,200 $ 185,448 $ 165,200

$
276,100

$
237,682

$
230,211

$
225,332

$
185,448

$
276,100

$
185,448

Adjustments:













Goodwill (15,024 ) (15,024 ) (15,024 ) (15,024 ) (15,024 ) (15,024 ) (15,024 )

(55,052)

(43,456)

(43,456)

(43,456)

(15,024)

(55,052)

(15,024)

Core deposit intangible, net of amortization (1,890 ) (2,051 ) (2,212 ) (2,401 ) (2,590 ) (1,890 ) (2,590 )

(6,381)

(5,046)

(5,379)

(5,752)

(1,890)

(6,381)

(1,890)

Tangible common equity $ 168,534 $ 162,102 $ 157,087 $ 151,708 $ 147,586 $ 168,534 $ 147,586

$
214,667

$
189,180

$
181,376

$
176,124

$
168,534

$
214,667

$
168,534

Book value per common share $ 28.20 $ 27.24 $ 26.37 $ 25.40 $ 24.80 $ 28.20 $ 24.80

$
35.70

$
33.21

$
32.49

$
31.81

$
28.20

$
35.70

$
28.20

Tangible book value per common share 25.63 24.65 23.76 22.78 22.15 25.63 22.15

27.76

26.44

25.60

24.86

25.63

27.76

25.63

Total stockholders' equity to total assets 10.27 % 9.92 % 9.72 % 9.74 % 9.48 % 10.27 % 9.48 %

10.39
%

10.80
%

10.42
%

10.42
%

10.27
%

10.39
%

10.27
%
Tangible common equity to tangible assets 9.42 % 9.06 % 8.85 % 8.83 % 8.56 % 9.42 % 8.56 %

8.27
%

8.79
%

8.39
%

8.33
%

9.42
%

8.27
%

9.42
%

RESULTS OF OPERATIONS
Results of Operations for the Three Months Ended June 30, ~~2019~~2020 and June 30, ~~2018~~
2019
~~General.~~General. Net income ~~decreased $0.4~~increased $2.3 million to ~~$6.0~~$8.3 million for three months ended June 30, ~~2019,~~2020, compared to ~~$6.4~~$6.0 million for the same period in ~~2018.~~2019. This ~~decrease~~increase was primarily due to the ~~reduced level~~added scale of ~~accretion to net interest income from purchase accounting marks on~~ the ~~loans and deposits~~four offices acquired in the ~~Waupaca~~Partnership acquisition during the ~~fourth~~third quarter of ~~2017. This accretion added $1.2 million to net interest income, net of tax,~~2019 as well as the one office acquired in the Timberwood acquisition during the second quarter of ~~2018 compared to $0.7 million, net~~2020.

Table of tax, in the second quarter of 2019, a reduction of $0.5 million. Due to a higher overall interest rate environment, we also experienced a 32.7% increase in interest expense, from $3.6 million in the second quarter of 2018 to $4.8 million in the second quarter of 2019.Contents

Net Interest ~~Income.~~ 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 ~~decreased~~increased by ~~$0.4~~$5.4 million to ~~$15.4~~$20.8 million for the three months ended June 30, ~~2019,~~2020 compared to ~~$15.8~~$15.4 million for three months ended June 30, ~~2018.~~2019. The ~~decrease~~increase in net interest income was primarily due to the ~~previously mentioned reduction~~added scale of five offices acquired in ~~purchase accounting accretion from~~ the ~~second quarter of 2018 to the second quarter of 2019.~~aforementioned acquisitions. Interest income on loans increased by ~~$0.6~~$4.9 million, or ~~3.45%~~27.2%, during the same period. Total average interest-earning assets was ~~$1.68~~$2.33 billion for the three months ended June 30, ~~2019, which matched the total~~2020, up from $1.68 billion for the same period in ~~2018.~~2019. Tax equivalent net interest margin decreased ~~0.10%~~0.09% to ~~3.76%~~3.67% for the three-months ended June 30, ~~2019,~~2020, down from ~~3.86%~~3.76% for the same period in ~~2018.~~2019. Net interest margin decreased by ~~0.18%~~0.05% due to ~~the reduction~~a decrease in purchase accounting accretion quarter-over-quarter which ~~was offset by an increase~~added to a decrease of ~~0.08%~~0.04% 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 ~~$0.8~~$4.2 million, or ~~4.06%~~21.0%, to ~~$20.2~~$24.4 million for the three months ended June 30, ~~2019~~2020 compared to ~~$19.4~~$20.2 million for the same period in ~~2018.~~2019. The increase in total interest income was primarily due ~~a rising interest rate environment, which was offset by~~ the ~~reduction~~added scale of four offices acquired in ~~purchase accounting accretion.~~the Partnership acquisition as well as the one office acquired in the Timberwood acquisition during the second quarter of 2020. The average balance of loans ~~decreased~~increased by ~~$3.9~~$614.0 million during the three months ended June 30, ~~2019~~2020 compared to the same period in ~~2018.~~2019.

Interest Expense.Interest expense ~~increased~~decreased $1.2 million, or ~~32.7%~~25.0%, to ~~$4.8~~$3.6 million for the three months ended June 30, ~~2019~~2020 compared to ~~$3.6~~$4.8 million for the same period in ~~2018.~~2019. The ~~increase~~decrease in interest expense was primarily due to ~~an increasing~~the lower overall interest rate ~~environment.~~

environment due to the COVID-19 pandemic, which was counteracted to a certain extent by the added scale of five offices acquired in the aforementioned acquisitions.

Interest expense on interest-bearing deposits ~~increased~~decreased by ~~$1.6~~$1.2 million to ~~$4.4~~$3.2 million for the three months ended June 30, ~~2019,~~2020, from ~~$2.8~~$4.4 million for the same period in ~~2018. This increase was primarily due to an increasing interest rate environment.~~2019. The average cost of interest-bearing deposits was ~~1.62%~~0.88% for the three months ended June 30, ~~2019,~~2020, compared to ~~1.06%~~1.62% for the same period in ~~2018.~~2019.

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 ~~$0.5~~$3.2 million for the three months ended June 30, ~~2019,~~2020 compared to ~~$0.9~~$0.5 million for the same period in ~~2018.~~2019. We recorded net charge-offs of ~~$0.5~~$0.1 million for the three months ended June 30, ~~2019~~2020 compared to ~~negligible~~ net ~~charge offs~~charge-offs of $0.5 million for the same period in ~~2018.~~2019. The ALL was $16.1 million, or 0.76% of total loans, at June 30, 2020 compared to $12.2 million, or 0.86% of total loans at June 30, ~~2019~~2019. The elevated provision during the second quarter of 2020 compared to ~~$13.0 million, or 0.91%~~the provision during the second quarter of ~~total~~2019 was primarily the result of increased qualitative factors in the calculation of the ALL at June 30, 2020, in response to the heightened economic risks resulting from the COVID-19 pandemic. The reduced percentage of ALL to loans at June 30, ~~2018.~~2020, compared to June 30, 2019, is the result of significant reductions during the third quarter of 2019 of problem loans acquired in the Waupaca transaction, as well as acquiring approximately $275.3 million and $118.4 million in loans carried at fair value with no related ALL in the Partnership and Timberwood transactions during the third quarter of 2019 and second quarter of 2020, respectively.

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 ~~& Associates, LLC~~ and ~~UFS, LLC.~~UFS. Other sources of noninterest income include loan servicing fees, gains on sales of mortgage loans, and other income from strategic alliances.

Table of Contents

Noninterest income ~~decreased $0.3~~increased $5.0 million to ~~$2.7~~$7.7 million for the three months ended June 30, ~~2019~~2020 compared to ~~$3.0~~$2.7 million for the same period in ~~2018.~~2019. Income from service charges increased by 44.9% due to an expanded base of customer relationships, many of which were the result of the Partnership and Timberwood acquisitions. Income from our investment in Ansay increased by 30.8% as a result of the Company’s increased ownership of that entity from 30.0% during the first half of 2019 to 40.0% during the first half of 2020. Income from our investment in UFS ~~LLC,~~ increased by ~~25%~~16.3% as they continue to see significant growth in customers in their managed information technology business. Loan servicing income ~~saw a decline of 60% quarter-over-quarter,~~decreased by 7.4% resulting from a ~~$0.4~~negative valuation adjustment of $0.5 million of the Company’s mortgage servicing asset which counteracted the addition of significant serviced portfolios acquired as a part of the acquisitions of Partnership and Timberwood. Net gains on sales of mortgage loans saw a very significant increase quarter-over-quarter as the Company continues to experience very robust activity in ~~the valuation of our mortgage serving rights in~~secondary market loan originations. During the second quarter of ~~2018 which~~2020 the Company sold $36.6 million of U.S. Treasury notes. This sale resulted in a gain of $3.1 million, and was an event that did not ~~recur in~~occur during the second quarter of ~~2019.~~

2019, causing a positive comparison between those periods.

The major components of our noninterest income are listed below:


											Three Months Ended June 30,
											2020		2019		$Change		% Change
	Three Months Ended June 30,
	2019		2018		$ Change			% Change
(In thousands)
											(In thousands)
Noninterest Income
Service Charges	$	799	$	786	$	13			2	%	$	1,158	$	799	$	359	45	%
Income from Ansay & Associates, LLC		543		562		(19	)		(3	)%
Income from UFS, LLC		731		586		145			25	%
Income from Ansay												710		543		167	31	%
Income from UFS												850		731		119	16	%
Loan Servicing income		244		604		(360	)		(60	)%		226		244		(18)	(7)	%
Net gain on sales of mortgage loans		154		128		26			20	%		1,332		154		1,178	765	%
Net gain on sales of securities												3,233		23		3,210	NM
Noninterest income from strategic alliances		29		21		8			38	%		16		29		(13)	(45)	%
Other		213		340		(127	)		(37	)%		239		213		26	12	%
Total noninterest income	$	2,713	$	3,027	$	(314	)		(10	)%	$	7,764	$	2,736	$	5,028	184	%

Noninterest Expense.Noninterest expense ~~decreased $0.1~~increased $4.5 million to ~~$9.9~~$14.4 million for the three months ended June 30, ~~2019~~2020 compared to ~~$10.1~~$9.9 million for the same period in ~~2018.~~2019. The ~~decrease~~increase in noninterest expense was primarily the result of the Partnership and Timberwood acquisitions. Personnel expense increased 22.3%, or $1.2 million, as a ~~product~~result of ~~many offsetting increases and decreases~~the added cost of staffing five acquired office locations in ~~the individual components of noninterest expense.~~addition to customary annual pay increases. Occupancy expenses and postage, stationary and supplies expense increased ~~$0.3 million from $0.5 million in the second quarter of 2018 to $0.8 million in the second quarter of 2019,~~10.7% and 44.3%, respectively, the result of significant investments made in equipment to allow staff to work remotely and supplies to maintain safe work environments due to the COVID-19 pandemic. Data processing and outside service fees increased by 39.0% and 42.0%, respectively, as a result of one-time expenses incurred in relation to the Timberwood acquisition. Amortization of intangibles increased by 124.8% as a result of amortization related to the core deposit intangibles that were established as part of the Partnership and Timberwood acquisitions. Finally, the Company incurred a $1.3 million penalty for early extinguishment of borrowings from the FHLB during the second quarter of ~~2019 for equipment and facilities of branch locations anticipated to be acquired in the Partnership acquisition, a cost that was~~2020, an event which did not ~~exist in~~occur during the second quarter of 2019.

Net gains and losses from sales and valuations of ORE ~~and securities,~~ are specific to the properties ~~and securities~~ which are sold or held and will vary greatly period to ~~period. Charitable contributions declined significantly from~~period, as they did in the second quarter of ~~2018~~2020 compared to the second quarter of ~~2019 due primarily to several one-time contributions made during the second quarter~~2019.

Table of ~~2018 which were not repeated in the second quarter of 2019.~~Contents

The major components of our noninterest expense are listed below:


													Three Months Ended June 30,
													2020		2019		$Change		% Change
	Three Months Ended June 30,
	2019			2018			$ Change			% Change
(In thousands)
													(In thousands)
Noninterest Expense
Salaries, commissions, and employee benefits	$	5,403		$	5,446		$	(43	)		(1	)%	$	6,608	$	5,403	$	1,205	22	%
Occupancy		832			532			300			56	%		921		832		89	11	%
Data Processing		960			925			35			4	%		1,334		960		374	39	%
Postage, stationary, and supplies		192			159			33			21	%		277		192		85	44	%
Net gain on sales and valuation of ORE		(135	)		(38	)		(97	)		NM
Net (gain) loss on sales of securities		(23	)		47			(70	)		NM
Net loss (gain) on sales and valuation of ORE														467		(135)		602	NM
Advertising		53			54			(1	)		(2	)%		69		53		16	30	%
Charitable contributions		141			322			(181	)		(56	)%		127		141		(14)	(10)	%
Outside service fees		982			896			86			10	%		1,394		982		412	42	%
Amortization of intangibles		161			189			(28	)		(15	)%		362		161		201	125	%
Penalty for early extinguishment of debt														1,323		—		1,323	NM
Other		1,366			1,532			(166	)		(11	)%		1,556		1,366		190	14	%
Total noninterest expenses	$	9,932		$	10,064		$	(132	)		(1	)%	$	14,438	$	9,955	$	4,483	45	%

Income Tax Expense.We recorded a provision for income taxes of ~~$1.7~~$2.7 million for the three months ended June ~~2019~~30, 2020 compared to a provision of ~~$1.4~~$1.7 million for the same period during ~~2018,~~2019, reflecting effective tax rates of ~~21.8%~~24.4% and ~~18.3%~~21.8%, respectively. The effective tax rates were reduced from the statutory federal and state income tax rates ~~largely~~during both periods as a result of tax-exempt interest income produced by certain qualifying loans and investments in the Bank’s portfolios. The effective tax rate for the second quarter of 2020 was increased due to significant costs as part of the Timberwood acquisition which are not deductible for tax purposes.

Results of Operations for the Six Months Ended June 30, ~~2019~~2020 and June 30, ~~2018~~

2019

General. Net income ~~decreased $0.9~~increased $3.0 million to ~~$12.6~~$15.6 million for the six months ended June 30, ~~2019,~~2020, compared to ~~$13.5~~$12.6 million for the same period in ~~2018.~~2019. This ~~decrease~~increase was primarily due to the ~~reduced level~~added scale of ~~accretion to net interest income from purchase accounting marks on~~ the ~~loans and deposits~~four offices acquired in the ~~Waupaca~~Partnership acquisition during the ~~fourth~~third quarter of ~~2017. This accretion added $2.6 million to net interest income, net of tax,~~2019 as well as the one office acquired in the Timberwood acquisition during the ~~six months ended June 30, 2018 compared to $1.4 million, net~~second quarter of tax, for the same period in 2019, a reduction of $1.2 million. Due to a higher overall interest rate environment, we also experienced a 40.4% increase in interest expense, from $6.6 million in the first six months of 2018 to $9.3 million in the first six months of 2019.2020.

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 ~~decreased~~increased by ~~$1.5~~$8.8 million to ~~$30.6~~$39.4 million for the six months ended June 30, ~~2019,~~2020, compared to ~~$32.1~~$30.6 million for six months ended June 30, ~~2018.~~2019. The ~~decrease~~increase in net interest income was primarily due to the ~~previously mentioned reduction~~added scale of five offices acquired in ~~purchase accounting accretion from~~ the ~~first half of 2018 to the first half of 2019.~~aforementioned acquisitions. Interest income on loans increased by ~~$1.1~~$8.2 million, or ~~3.2%~~22.0%, during the same period. Total average interest-earning assets ~~decreased~~increased to ~~$1.67~~$2.17 billion for the six months ended June 30, ~~2019, negligibly different from~~2020, compared to $1.67 billion for the same period in ~~2018.~~2019. Tax equivalent net interest margin decreased ~~0.16%~~0.05% to ~~3.79%~~3.74% for the six months ended June 30, ~~2019,~~2020, down from ~~3.95%~~3.79% for the same period in ~~2018.~~2019. Net interest margin ~~declined~~decreased by ~~0.21%~~0.04% due to ~~the reduction~~a decrease in purchase accounting accretion ~~quarter-over-quarter~~period-over-period which ~~was offset by~~added to an increase of ~~0.05%~~0.01% 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 ~~$1.2~~$7.8 million, or ~~3.1%~~19.6%, to ~~$39.9~~$47.7 million for the six months ended June 30, ~~2019~~2020 compared to ~~$38.7~~$39.9 million for the same period in ~~2018.~~2019. The increase in total interest income was primarily due ~~a rising interest rate environment, which was offset by~~ the ~~reduction~~added scale of four offices acquired in ~~purchase accounting accretion.~~the Partnership acquisition as well as the one office acquired in the Timberwood acquisition during the second quarter of 2020. The average balance of loans increased by ~~$12.7~~$462.2 million during the six months ended June 30, ~~2019~~2020 compared to the same period in ~~2018.~~2019.

Interest ~~Expense.~~Expense. Interest expense ~~increased $2.7~~decreased $1.1 million, or ~~40.3%~~11.5%, to ~~$9.3~~$8.2 million for the six months ended June 30, ~~2019~~2020 compared to ~~$6.6~~$9.3 million for the same period in ~~2018.~~2019. The ~~increase~~decrease in interest expense was primarily due to ~~an increasing~~the lower overall interest rate ~~environment.~~environment due to the COVID-19 pandemic, which was counteracted to a certain extent by the added scale of five offices acquired in the aforementioned acquisitions.

Table of Contents

Interest expense on interest-bearing deposits ~~increased~~decreased by ~~$3.5~~$1.4 million to ~~$8.7~~$7.3 million for the six months ended June 30, ~~2019,~~2020, from ~~$5.2~~$8.7 million for the same period in ~~2018. This increase was primarily due to an increasing interest rate environment.~~2019. The average cost of interest-bearing deposits was ~~1.58%~~1.04% for the six months ended June 30, ~~2019,~~2020, compared to ~~0.98%~~1.58% for the same period in ~~2018.~~2019.

We recorded a provision for loan losses of ~~$1.1~~$4.1 million for the six months ended June 30, ~~2019,~~2020, compared to ~~$1.4~~$1.1 million for the same period in ~~2018.~~2019. We recorded net ~~charge-offs~~recoveries of ~~$1.2~~$0.6 million for the six months ended June 30, ~~2019~~2020 compared to ~~negligible~~ net ~~recoveries~~charge-offs of 1.2 million for the same period in ~~2018.~~2019. The ALL was $16.1 million, or 0.76% of total loans, at June 30, 2020 compared to $12.2 million, or 0.86% of total loans at June 30, ~~2019~~2019. The elevated provision during the first half of 2020 compared to ~~$13.0 million, or 0.91%~~the provision during the first half of ~~total~~2019 was primarily the result of increased qualitative factors in the calculation of the ALL at June 30, 2020, in response to the heightened economic risks resulting from the COVID-19 pandemic. The reduced percentage of ALL to loans at June 30, ~~2018.~~2020, compared to June 30, 2019, is the result of significant reductions during the third quarter of 2019 of problem loans acquired in the Waupaca transaction, as well as acquiring approximately $275.3 million and $118.4 million in loans carried at fair value with no related ALL in the Partnership and Timberwood transactions during the third quarter of 2019 and second quarter of 2020, respectively.

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 & Associates, LLC and UFS, LLC. Other sources of noninterest income include loan servicing fees, gains on sales of mortgage loans, and other income from strategic alliances.

~~Noninterest income decreased $0.5~~increased $5.4 million to ~~$6.0~~$11.7 million for the six months ended June 30, ~~2019~~2020 compared to ~~$6.5~~$6.3 million for the same period in ~~2018. One reason for~~2019.

Income from service charges increased by 40.3% due to an expanded base of customer relationships, many of which were the ~~decrease in noninterest income was a lower contribution~~result of the Partnership and Timberwood acquisitions. Income from our investment in Ansay & Associates, LLC (Ansay). Due to a change in accounting standards, income from Ansay, which has historically been concentrated in the first two quarters of every year, will be realized much more ratably throughout the year for 2019 and years thereafter. Asincreased by 12.9% as a result of ~~this change, year-over-year income contributions by this investment decreased by $0.3 million for~~ the ~~first six months~~Company’s increased ownership of ~~2019. . Loan servicing income saw a decline of 45% period-over-period, resulting~~that entity 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. Other noninterest income was positively impacted30.0% during the first half of 2019 to 40.0% during the first half of 2020. Income from our investment in UFS increased by 31.8% as they continue to see significant growth in customers in their managed information technology business. Loan servicing income increased by 47.3% resulting from a ~~revaluing~~negative valuation adjustment of $0.5 million of the Company’s mortgage servicing asset which was more than counteracted by the addition of significant serviced portfolios acquired as a part of the acquisitions of Partnership and Timberwood. Net gains on sales of mortgage loans saw a very significant increase period-over-period as the Company continues to experience very robust activity in secondary market loan originations. During the first half of 2020 the Company sold $36.6 million of U.S. Treasury notes. This sale resulted in a gain of $3.1 million, and was an event that did not occur during the first half of 2019, causing a positive comparison between those periods. Finally, during the first half of 2019 the Company revalued an investment ~~which the Company holds~~ in common stock of another financial institution, which had historically ~~recorded~~been held at ~~its~~ cost, ~~basis,~~ to fair value based on recent observable prices in orderly stock transactions, resulting in other noninterest income of $0.6 million. While this common stock continued to be held and valued in a similar fashion during the first half of 2020, the appreciation in value was less than $0.1 million, creating a negative variance between those periods in other noninterest income.

The major components of our noninterest income are listed below:


											Six Months Ended June 30,
											2020		2019		$ Change		% Change
	Six Months Ended June 30,
	2019		2018		$ Change			% Change
(In thousands)
											(In thousands)
Noninterest Income
Service Charges	$	1,478	$	1,632	$	(154	)		(9	)%	$	2,074	$	1,478	$	596	40	%
Income from Ansay & Associates, LLC		1,418		1,758		(340	)		(19	)%
Income from UFS, LLC		1,325		1,195		130			11	%
Income from Ansay												1,601		1,418		183	13	%
Income from UFS												1,747		1,325		422	32	%
Loan Servicing income		467		846		(379	)		(45	)%		688		467		221	47	%
Net gain on sales of mortgage loans		241		285		(44	)		(15	)%		1,792		241		1,551	644	%
Net gain on sales of securities												3,233		257		2,976	NM
Noninterest income from strategic alliances		48		44		4			9	%		33		48		(15)	(31)	%
Other		1,042		710		332			47	%		493		1,042		(549)	(53)	%
Total noninterest income	$	6,019	$	6,470	$	(451	)		(7	)%	$	11,661	$	6,276	$	5,385	86	%

Table of Contents

Noninterest Expense.Noninterest expense ~~decreased $0.8~~increased $7.7 million to ~~$19.2~~$27.2 million for the six months ended June 30, ~~2019~~2020 compared to ~~$20.0~~$19.5 million for the same period in ~~2018.~~2019. The ~~decrease~~increase in noninterest expense was primarily the result of the Partnership and Timberwood acquisitions. Personnel expense increased 21.9%, or $2.3 million, as a ~~product~~result of ~~many offsetting increases and decreases~~the added cost of staffing five acquired office locations in ~~the individual components of noninterest expense.~~addition to customary annual pay increases. Occupancy expenses ~~decreased $0.2 million from $1.9 million in the first half of 2018 to $1.7 million in the first half of 2019,~~and postage, stationary and supplies expense increased 30.6% and 42.5%, respectively, the result of significant investments made in equipment to allow staff to work remotely and supplies to maintain safe work environments due to the COVID-19 pandemic. Data processing and outside service fees increased by 35.2% and 31.8%, respectively, as a result of one-time expenses incurred in relation to the Timberwood acquisition. Amortization of intangibles increased by 116.1% as a result of amortization related to the core deposit intangibles that were established as part of the Partnership and Timberwood acquisitions. Finally, the Company incurred a $1.3 million penalty for early extinguishment of borrowings from the FHLB during the first ~~quarter~~half of ~~2018 for equipment and facilities of branch locations acquired in the Waupaca acquisition, a cost that outpaced similar expenditures~~2020, an event which did not occur during the ~~second quarter~~first half of ~~2019 for branch locations anticipated to be acquired in the Partnership acquisition.~~ 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. Charitable contributions declined significantly from~~period, as they did in the first ~~half~~six months of ~~2018~~2020 compared to the first ~~half~~six 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, none of which were repeated in the first half of 2019. Outside service fees and other noninterest expense increased by a combined $0.4 million, due primarily to expenses incurred in 2019 resulting from the Company’s public company status and pending acquisition of Partnership, neither of which existed in the first half of 2018.

The major components of our noninterest expense are listed below:


												Six Months Ended June 30,
												2020		2019		$ Change		% Change
	Six Months Ended June 30,
	2019			2018		$ Change			% Change
(In thousands)
												(In thousands)
Noninterest Expense
Salaries, commissions, and employee benefits	$	10,713		$	10,763	$	(50	)		(0	)%	$	13,060	$	10,713	$	2,347	22	%
Occupancy		1,681			1,882		(201	)		(11	)%		2,196		1,681		515	31	%
Data Processing		1,873			1,864		9			0	%		2,533		1,873		660	35	%
Postage, stationary, and supplies		315			326		(11	)		(3	)%		449		315		134	43	%
Net (gain) loss on sales and valuation of other real estate owned		(99	)		98		(197	)		NM
Net (gain) loss on sales of securities		(257	)		44		(301	)		NM
Net loss (gain) on sales and valuation of ORE													1,443		(99)		1,542	NM
Advertising		127			106		21			20	%		124		127		(3)	(2)	%
Charitable Contributions		272			695		(423	)		(61	)%		250		272		(22)	(8)	%
Outside service fees		1,666			1,416		250			18	%		2,195		1,666		529	32	%
Amortization of intangibles		322			378		(56	)		(15	)%		696		322		374	116	%
Penalty for early extinguishment of debt													1,323		—		1,323	NM
Other		2,621			2,469		152			6	%		2,910		2,621		289	11	%
Total noninterest expenses	$	19,234		$	20,041	$	(807	)		(4	)%	$	27,179	$	19,491	$	7,688	39	%

Income Tax ~~Expense.~~Expense. We recorded a provision for income taxes of ~~$3.7~~$4.2 million for the six months ended June 30, ~~2019~~2020 compared to a provision of ~~$3.6~~$3.7 million for the same period during ~~2018,~~2019, reflecting effective tax rates of ~~22.5%~~21.4% and ~~21.2%~~22.5%, 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. The effective tax rate for the first half of 2020 was negatively impacted by non-deductible expenses in relation to the Timberwood acquisition, but positively impacted by favorable tax treatment of the payout of balances from a terminated deferred compensation plan in shares of the Company’s common stock. These two items served to offset one another.

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.

Table of Contents

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
June 30, 2019 June 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 $ 1,326,394 $ 70,224 5.29 % $ 1,337,974 $ 68,282 5.10 %
Tax-exempt 94,316 5,067 5.37 % 86,579 4,390 5.07 %
Securities
Taxable (available for sale) 74,055 2,014 2.72 % 76,232 2,137 2.80 %
Tax-exempt (available for sale) 51,954 1,870 3.60 % 55,281 2,005 3.63 %
Taxable (held to maturity) 28,977 713 2.46 % 26,476 617 2.33 %
Tax-exempt (held to maturity) 10,979 302 2.75 % 13,243 403 3.04 %
Cash and due from banks 92,929 2,186 2.35 % 80,232 1,298 1.62 %
Total interest-earning assets 1,679,604 82,376 4.90 % 1,676,017 79,132 4.72 %
Non interest-earning assets 134,201 130,651
Allowance for loan losses (12,275 ) (12,441 )
Total assets $ 1,801,530 $ 1,794,227
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits
Checking accounts $ 72,458 $ 2,001 2.76 % $ 110,531 $ 1,228 1.11 %
Savings accounts 248,539 2,671 1.07 % 153,741 487 0.32 %
Money market accounts 400,664 4,682 1.17 % 433,925 4,237 0.98 %
Certificates of deposit 363,799 7,975 2.19 % 368,359 5,264 1.43 %
Brokered Deposits 16,789 489 2.91 % 6,222 181 2.91 %
Total interest bearing deposits 1,102,249 17,818 1.62 % 1,072,778 11,397 1.06 %
Other borrowed funds 40,355 1,374 3.40 % 143,145 3,024 2.11 %
Total interest-bearing liabilities 1,142,604 19,192 1.68 % 1,215,923 14,421 1.19 %
Non-interest bearing liabilities
Demand Deposits 461,073 402,275
Other liabilities 16,355 13,169
Total Liabilities 1,620,032 1,631,367
Shareholders' equity 181,498 162,860
Total liabilities & sharesholders' equity $ 1,801,530 $ 1,794,227
Net interest income on a fully taxable equivalent basis 63,184 64,711
Less taxable equivalent adjustment (1,520 ) (1,420 )
Net interest income $ 61,664 $ 63,291
Net interest spread (3) 3.22 % 3.54 %
Net interest margin (4) 3.76 % 3.86 %

Three Months Ended

June 30, 2020

June 30, 2019


Interest





Interest


Average

Income/

Rate Earned/ Paid

Average

Income/

Rate Earned/ Paid

Balance

Expenses (1)

(1)

Balance

Expenses (1)

(1)

(dollars in thousands)

ASSETS

Interest-earning assets













Loans (2)













Taxable

$
1,917,156

$
88,760

4.63
%
$
1,326,394

$
70,224

5.29
%
Tax-exempt

117,582

6,048

5.14
%

94,316

5,067

5.37
%
Securities













Taxable (available for sale)

109,530

2,426

2.21
%

74,055

2,014

2.72
%
Tax-exempt (available for sale)

68,401

2,205

3.22
%

51,954

1,870

3.60
%
Taxable (held to maturity)

2,948

62

2.10
%

28,977

713

2.46
%
Tax-exempt (held to maturity)

9,764

268

2.74
%

10,979

302

2.75
%
Cash and due from banks

103,716

85

0.08
%

92,929

2,186

2.35
%
Total interest-earning assets

2,329,097

99,854

4.29
%

1,679,604

82,376

4.90
%
Non interest-earning assets

205,962





134,201





Allowance for loan losses

(14,177)





(12,275)





Total assets

$
2,520,882





$
1,801,530





LIABILITIES AND SHAREHOLDERS' EQUITY













Interest-bearing deposits













Checking accounts

$
197,067

$
493

0.25
%
$
72,458

$
2,001

2.76
%
Savings accounts

346,279

1,815

0.52
%

248,539

2,671

1.07
%
Money market accounts

536,139

3,092

0.58
%

400,664

4,682

1.17
%
Certificates of deposit

372,003

6,988

1.88
%

363,799

7,975

2.19
%
Brokered Deposits

18,532

531

2.87
%

16,789

489

2.91
%
Total interest bearing deposits

1,470,020

12,919

0.88
%

1,102,249

17,818

1.62
%
Other borrowed funds

119,107

1,504

1.26
%

40,355

1,374

3.40
%
Total interest-bearing liabilities

1,589,127

14,423

0.91
%

1,142,604

19,192

1.68
%
Non-interest bearing liabilities













Demand Deposits

660,080





461,073





Other liabilities

15,146





16,355





Total Liabilities

2,264,353





1,620,032





Shareholders' equity

256,529





181,498





Total liabilities & sharesholders' equity

$
2,520,882





$
1,801,530





Net interest income on a fully taxable equivalent basis



85,431





63,184



Less taxable equivalent adjustment



(1,789)





(1,520)



Net interest income



$
83,642





$
61,664



Net interest spread (3)





3.38
%





3.22
%
Net interest margin (4)





3.67
%





3.76
%
(1) Annualized on a fully taxable equivalent basis calculated using a federal tax rate of 21% for the ~~period~~three months ended June 30, ~~2019~~2020 and ~~2018, respectively.~~2019.
(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~~.
39 assets.
39

Table of Contents

Six Months Ended
June 30, 2019 June 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 $ 1,333,402 $ 70,116 5.26 % $ 1,329,608 $ 68,395 5.14 %
Tax-exempt 94,056 5,009 5.33 % 85,119 4,333 5.09 %
Securities
Taxable (available for sale) 72,743 2,132 2.93 % 72,055 2,152 2.99 %
Tax-exempt (available for sale) 51,954 1,895 3.65 % 56,752 2,054 3.62 %
Taxable (held to maturity) 28,976 711 2.45 % 25,955 596 2.30 %
Tax-exempt (held to maturity) 11,384 318 2.79 % 13,733 414 3.01 %
Cash and due from banks 73,415 1,759 2.40 % 90,520 1,489 1.64 %
Total interest-earning assets 1,665,930 81,940 4.92 % 1,673,742 79,433 4.75 %
Non interest-earning assets 133,806 128,665
Allowance for loan losses (12,221 ) (12,119 )
Total assets $ 1,787,515 $ 1,790,288
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits
Checking accounts $ 75,690 $ 1,850 2.44 % $ 113,598 $ 1,156 1.02 %
Savings accounts 235,155 2,466 1.05 % 147,304 377 0.26 %
Money market accounts 403,527 4,633 1.15 % 440,700 4,085 0.93 %
Certificates of deposit 373,556 8,030 2.15 % 366,789 4,786 1.30 %
Brokered Deposits 17,247 498 2.89 % 3,128 91 2.91 %
Total interest bearing deposits 1,105,175 17,477 1.58 % 1,071,519 10,495 0.98 %
Other borrowed funds 36,719 1,291 3.52 % 142,239 2,879 2.02 %
Total interest-bearing liabilities 1,141,894 18,768 1.64 % 1,213,758 13,374 1.10 %
Non-interest bearing liabilities
Demand Deposits 450,964 401,665
Other liabilities 16,362 12,765
Total Liabilities 1,609,220 1,628,188
Shareholders' equity 178,295 162,100
Total liabilities & sharesholders' equity $ 1,787,515 $ 1,790,288
Net interest income on a fully taxable equivalent basis 63,172 66,059
Less taxable equivalent adjustment (1,517 ) (1,421 )
Net interest income $ 61,655 $ 64,638
Net interest spread (3) 3.27 % 3.64 %
Net interest margin (4) 3.79 % 3.95 %

Six Months Ended

June 30, 2020

June 30, 2019




Interest





Interest


Average

Income/

Rate Earned/ Paid

Average

Income/

Rate Earned/ Paid

Balance

Expenses (1)

(1)

Balance

Expenses (1)

(1)

(dollars in thousands)

ASSETS













Interest-earning assets













Loans (2)













Taxable

$
1,771,514

$
85,566

4.83
%
$
1,333,402

$
70,116

5.26
%
Tax-exempt

118,143

6,057

5.13
%

94,056

5,009

5.33
%
Securities

Taxable (available for sale)

121,653

2,994

2.46
%

72,743

2,132

2.93
%
Tax-exempt (available for sale)

61,958

2,044

3.30
%

51,954

1,895

3.65
%
Taxable (held to maturity)

18,236

435

2.39
%

28,976

711

2.45
%
Tax-exempt (held to maturity)

9,986

274

2.74
%

11,384

318

2.79
%
Cash and due from banks

68,748

269

0.39
%

73,415

1,759

2.40
%
Total interest-earning assets

2,170,238

97,639

4.50
%

1,665,930

81,940

4.92
%
Non interest-earning assets

201,565



133,806



Allowance for loan losses

(13,031)



(12,221)



Total assets

$
2,358,772



$
1,787,515



LIABILITIES AND SHAREHOLDERS' EQUITY









Interest-bearing deposits













Checking accounts

$
193,946

$
1,063

0.55
%
$
75,690

$
1,850

2.44
%
Savings accounts

324,795

2,130

0.66
%

235,155

2,466

1.05
%
Money market accounts

517,476

3,817

0.74
%

403,527

4,633

1.15
%
Certificates of deposit

368,417

7,214

1.96
%

373,556

8,030

2.15
%
Brokered Deposits

17,056

500

2.93
%

17,247

498

2.89
%
Total interest bearing deposits

1,421,690

14,724

1.04
%

1,105,175

17,477

1.58
%
Other borrowed funds

111,280

1,844

1.66
%

36,719

1,291

3.52
%
Total interest-bearing liabilities

1,532,970

16,568

1.08
%

1,141,894

18,768

1.64
%
Non-interest bearing liabilities













Demand Deposits

564,879



450,964



Other liabilities

15,924



16,362



Total Liabilities

2,113,773



1,609,220



Shareholders' equity

244,999



178,295



Total liabilities & sharesholders' equity

$
2,358,772



$
1,787,515



Net interest income on a fully taxable equivalent basis

81,071



63,172



Less taxable equivalent adjustment

(1,759)



(1,517)



Net interest income

$
79,312



$
61,655



Net interest spread (3)

3.42
%

3.27
%
Net interest margin (4)

3.74
%

3.79
%
(1) Annualized on a fully taxable equivalent basis calculated using a federal tax rate of 21% for the ~~period~~six months ended June 30, ~~2019~~2020 and ~~2018, respectively.~~2019.
(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.
40

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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 June 30, 2020						Six Months Ended June 30, 2020
																			Compared with						Compared with
																			Three Months Ended June 30, 2019						Six Months Ended June 30, 2019
																			Increase/(Decrease) Due to Change in						Increase/(Decrease) Due to Change in
																			Volume		Rate		Total		Volume		Rate		Total
	Three Months Ended June 30, 2019 Compared with									Six Months Ended June 30, 2019 Compared with
	Three Months Ended June 30, 2018									Six Months Ended June 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)
																			(dollars in thousands)						(dollars in thousands)
Interest income
Loans
Taxable	$	(584	)	$	2,526		$	1,942		$	196		$	1,525		$	1,721		$	25,810	$	(7,274)	$	18,536	$	20,543	$	(5,093)	$	15,450
Tax-exempt		406			271			677			470			206			676			1,186		(205)		981		1,227		(179)		1,048
Securities
Taxable (AFS)		(60	)		(63	)		(123	)		21			(41	)		(20	)		673		(261)		412		1,132		(270)		862
Tax-exempt (AFS)		(120	)		(15	)		(135	)		(175	)		16			(159	)		500		(165)		335		296		(147)		149
Taxable (HTM)		60			36			96			72			43			115			(560)		(91)		(651)		(257)		(19)		(276)
Tax-exempt (HTM)		(65	)		(36	)		(101	)		(67	)		(29	)		(96	)		(33)		(1)		(34)		(38)		(6)		(44)
Cash and due from banks		230			658			888			(191	)		461			270			287		(2,388)		(2,101)		(105)		(1,385)		(1,490)
Total interest income		(133	)		3,377			3,244			326			2,181			2,507			27,863		(10,385)		17,478		22,798		(7,099)		15,699
Interest expense
Deposits
Checking accounts	$	(233	)	$	1,006		$	773		$	(217	)	$	911		$	694		$	(3,200)	$	1,692	$	(1,508)	$	(1,563)	$	776	$	(787)
Savings accounts		448			1,736			2,184			337			1,752			2,089			2,828		(3,684)		(856)		(19,533)		19,197		(336)
Money market accounts		(284	)		729			445			(300	)		848			548			3,194		(4,784)		(1,590)		3,066		(3,882)		(816)
Certificates of deposit		(64	)		2,775			2,711			90			3,154			3,244			185		(1,172)		(987)		(109)		(707)		(816)
Brokered Deposits		308			0			308			408			(1	)		407			50		(8)		42		(5)		7		2
Total interest bearing deposits		175			6,246			6,421			318			6,664			6,982			3,057		(7,956)		(4,899)		(18,144)		15,391		(2,753)
Other borrowed funds		(2,202	)		551			(1,650	)		(2,136	)		548			(1,588	)		192		(62)		130		748		(195)		553
Total interest expense		(2,027	)		6,798			4,771			(1,818	)		7,212			5,394			3,249		(8,018)		(4,769)		(17,396)		15,196		(2,200)
Change in net interest income	$	1,894		$	(3,421	)	$	(1,527	)	$	2,144		$	(5,031	)	$	(2,887	)	$	24,614	$	(2,367)	$	22,247	$	40,194	$	(22,295)	$	17,899

CHANGES IN FINANCIAL CONDITION

Total Assets.Total assets increased ~~$13.3~~$447.6 million, or ~~0.7%~~20.3%, to ~~$1.81~~$2.66 billion at June 30, ~~2019,~~2020, from ~~$1.79~~$2.21 billion at December 31, ~~2018.~~2019.

Cash and Cash Equivalents.Cash and cash equivalents increased by ~~$18.2~~$90.7 million to ~~$125.9~~$117.2 million at June 30, ~~2019~~2020 from ~~$107.7~~$86.5 million at December 31, ~~2018.~~2019.

Investment Securities.The carrying value of total investment securities decreased by ~~$0.1~~$41.6 million to ~~$159.6~~$183.6 million at June 30, ~~2019,~~2020, from ~~$159.7~~$225.2 million at December 31, ~~2018.~~2019. This decrease was largely the result of the aforementioned sale of $36.6 million of U.S. Treasury notes during the first half of 2020.

Loans.Net loans ~~decreased~~increased by ~~$9.2~~$374.0 million, totaling ~~$1.41~~$2.10 billion at June 30, ~~2019~~2020 compared to ~~$1.42~~$1.72 billion at December 31, ~~2018.~~2019. This increase was primarily the result of loans originated during the second quarter of 2020 under the PPP, offset by pay-downs of commercial lines with proceeds from these loans. This increase is also the result of loans acquired in the Timberwood acquisition.

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Bank-Owned Life Insurance.At June 30, ~~2019,~~2020, our investment in bank-owned life insurance was ~~$24.5~~$31.0 million, an increase of ~~$0.3~~$6.1 million from ~~$24.2~~$24.9 million at December 31, ~~2018.~~2019. This increase was primarily the result of bank-owned life insurance acquired in the Timberwood acquisition.

Deposits.Deposits increased ~~$17.8~~$419.8 million, or ~~1.1%~~22.8%, to ~~$1.57~~$2.26 billion at June 30, ~~2019~~2020 from ~~$1.56~~$1.84 billion at December 31, ~~2018.~~2019. This increase was primarily the result of proceeds of much of the loans originated under the PPP remaining in the depository accounts of the Company's customers, as well as a result of the deposits acquired in the Timberwood acquisition.

Borrowings.At June 30, ~~2019, and December 31, 2018,~~2020, borrowings consisted of advances from the FHLB of Chicago, as well as notes payable and subordinated debt to other banks. Total FHLB borrowings decreased to $25.0 million at June 30, 2020 from $39.8 million of FHLB borrowings at December 31, 2019. Notes payable to other banks ~~totaling $11.5 million.~~totaled $0 at June 30, 2020 and $10.0 million at December 31, 2019. Subordinated debt owed to other banks totaled $18.5 million at June 30, 2020 and $18.6 million December 31, 2019.

Stockholders’ Equity.Total stockholders’ equity increased ~~$11.1~~$45.9 million, or ~~6.2%~~19.9%, to ~~$185.4~~$276.1 million at June 30, ~~2019,~~2020, from ~~$174.3~~$230.2 million at December 31, ~~2018.~~2019.

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 ~~78.6%~~79.6% and ~~79.7%~~78.6% of our total assets as of June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, 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 ~~decreased $9.3~~increased $378.7 million, or ~~0.7%~~21.8%, to ~~$1.42~~$2.12 billion as of June 30, ~~2019~~2020 as compared to ~~$1.43~~$1.74 billion as of December 31, ~~2018.~~2019. This ~~decline~~increase during the first six months of ~~2019~~2020 has been comprised of an ~~decrease~~increase of ~~$25.7~~$264.4 million or ~~8.6%~~87.4% in commercial and industrial loans, an increase of ~~$1.8~~$123.4 million or ~~0.3%~~15.2% in commercial real estate loans, ~~an increase~~a decrease of ~~$12.6~~$5.6 million or ~~20.7%~~4.2% in construction and development loans, an increase of ~~$1.6~~$2.5 million or ~~0.4%~~0.6% in residential 1-4 family loans and ~~an increase~~a decrease of ~~$0.4~~$6.0 million or ~~1.3%~~15.0% in consumer and other loans. The ~~decrease~~increase in loans was primarily due to the acquisition of Timberwood, which included $118.4 million in loan balances, as well as the origination of $278.1 million in PPP loans during the first six months ~~ended June 30, 2019 is attributable to modest organic loan growth, which was more than offset by a planned reduction~~ of ~~a portion~~2020, consisting of ~~the loan portfolio acquired from Waupaca. The reduction~~1,826 individual loans with an average original balance of ~~a portion of the loan portfolio acquired from Waupaca focused on out of market loans as well as loans of poor asset quality.~~$152,327.

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The following table presents the balance and associated percentage of each major category in our loan portfolio at June 30, ~~2019,~~2020, December 31, ~~2018,~~2019, and June 30, ~~2018:~~2019:


																			June 30,				December 31,				June 30,
																			2020		% of Total		2019		% of Total		2019		% of Total
	June 30,						December 31,						June 30,
	2019			% of Total			2018			% of Total			2018			% of Total
	(dollars in thousands)
																			(dollars in thousands)
Commercial & industrial
Commercial & industrial	$	271,838			19	%	$	297,576			21	%	$	314,087			22	%	$	574,052	27	%	$	302,538	17	%	$	271,838	19	%
Deferred costs net of unearned fees		(207	)		0	%		(248	)		0	%		(278	)		0	%		(7,258)	0	%		(158)	0	%		(207)	0	%
Total commercial & industrial		271,631			19	%		297,328			21	%		313,809			22	%		566,794	27	%		302,380	17	%		271,631	19	%
Commercial real estate
Owner Occupied		415,451			29	%		416,097			29	%		415,097			29	%		525,908	25	%		459,782	26	%		415,451	29	%
Non-owner occupied		255,072			18	%		252,717			18	%		226,677			16	%		410,931	19	%		353,723	20	%		255,072	18	%
Deferred costs net of unearned fees		(428	)		0	%		(465	)		0	%		(326	)		0	%		(329)	0	%		(362)	0	%		(428)	0	%
Total commercial real estate		670,095			47	%		668,349			47	%		641,448			45	%		936,510	44	%		813,143	46	%		670,095	47	%
Construction & Development
Construction & Development		73,522			5	%		60,927			4	%		67,558			5	%		126,653	6	%		132,296	8	%		73,522	5	%
Deferred costs net of unearned fees		(106	)		0	%		(125	)		0	%		(86	)		0	%		(81)	0	%		(133)	0	%		(106)	0	%
Total construction & development		73,416			5	%		60,802			4	%		67,472			5	%		126,572	6	%		132,163	8	%		73,416	5	%
Residential 1-4 family
Residential 1-4 family		370,261			26	%		368,673			26	%		365,502			25	%		451,070	22	%		448,605	26	%		370,261	26	%
Deferred costs net of unearned fees		43			0	%		17			0	%		239			0	%		49	0	%		25	0	%		43	0	%
Total residential 1-4 family		370,304			26	%		368,690			26	%		365,741			25	%		451,119	22	%		448,630	26	%		370,304	26	%
Consumer
Consumer		28,138			2	%		26,854			2	%		40,226			3	%		28,532	1	%		29,462	2	%		28,138	2	%
Deferred costs net of unearned fees		114			0	%		101			0	%		94			0	%		128	0	%		124	0	%		114	0	%
Total consumer		28,252			2	%		26,955			2	%		40,320			3	%		28,660	1	%		29,586	2	%		28,252	2	%
Other Loans
Other		5,493			0	%		6,369			0	%		5,714			0	%		5,365	0	%		10,440	1	%		5,493	0	%
Deferred costs net of unearned fees		1			0	%		1			0	%		-			0	%		3	0	%		1	0	%		1	0	%
Total other loans		5,494			0	%		6,370			0	%		5,714			0	%		5,368	0	%		10,441	1	%		5,494	0	%
Total loans	$	1,419,192			100	%	$	1,428,494			100	%	$	1,434,504			100	%	$	2,115,023	100	%	$	1,736,343	100	%	$	1,419,192	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 June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, total loans outstanding to such directors and officers and their associates were ~~$82.9~~$63.2 million and ~~$84.1~~$68.6 million, respectively. During the six months ended June 30, ~~2019, $15.1~~2020, $11.0 million of additions and $16.3 million of repayments were made to these loans. At June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, 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 ~~$271.6~~$566.8 million and ~~$297.3~~$302.4 million at June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, and represented ~~19%~~27% and ~~21%~~17% 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.

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Commercial Real Estate (CRE).Our CRE loan portfolio totaled ~~$670.1~~$936.5 million and ~~$668.3~~$813.1 million at June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, and represented ~~47%~~44% and 46% 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 ~~$73.4~~$126.6 million and ~~$60.8~~$132.2 million at June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, and represented 5%6% and 4%8% 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~~.period.

Residential 1 – 4 Family.Residential 1 – 4 family loans held in portfolio amounted to ~~$370.3~~$451.1 million and ~~$368.7~~$448.6 million at June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, and represented 22% and 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 ~~$319.2~~$643.7 million at June 30, ~~2019~~2020 and ~~$316.5~~$554.4 million at December 31, ~~2018.~~

2019.

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 ~~$3.1~~$4.1 million and $4.3 million at ~~both~~ June 30, ~~2019~~2020 and December 31, ~~2019.~~2019, respectively.

Consumer Loans.Our consumer loan portfolio totaled ~~$28.3~~$28.7 million and ~~$27.0~~$29.6 million at June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, and represented 1% and 2% of our total loans at those dates. Consumer loans include secured and unsecured loans, lines of credit and personal installment loans.

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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 ~~$5.5~~$5.4 million and ~~$6.4~~$10.4 million at June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, 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 June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, 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.

One Year or

One to Five

Over Five


As of June 30, 2020

Less

Years

Years

Total

(dollars in thousands)
Commercial & industrial

$
79,257

$
399,202

$
88,335

$
566,794
Commercial real estate

131,615

446,157

358,738

936,510
Construction & Development

26,983

19,053

80,536

126,572
Residential 1-4 family

22,435

67,938

360,746

451,119
Consumer and other

6,733

17,797

9,498

34,028
Total

$
267,023

$
950,147

$
897,853

$
2,115,023


One Year or

One to Five

Over Five


As of December 31, 2019

Less

Years

Years

Total

(dollars in thousands)
Commercial & industrial

$
93,244

$
120,816

$
88,320

$
302,380
Commercial real estate

120,010

421,789

271,344

813,143
Construction & Development

27,079

43,132

61,952

132,163
Residential 1-4 family

27,120

65,537

355,973

448,630
Consumer and other

10,825

20,438

8,764

40,027
Total

$
278,278

$
671,712

$
786,353

$
1,736,343

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 June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, 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 June 30, 2019 One Year or
Less One to Five
Years Over Five
Years Total
(dollars in thousands)
Commercial & industrial $ 91,663 $ 111,403 $ 68,565 $ 271,631
Commercial real estate 107,408 328,491 234,196 670,095
Construction & Development 23,794 30,196 19,426 73,416
Residential 1-4 family 26,835 61,228 282,241 370,304
Consumer and other 5,800 20,747 7,199 33,746
Total $ 255,500 $ 552,065 $ 611,627 $ 1,419,192


One Year or

One to Five

Over Five


As of June 30, 2020

Less

Years

Years

Total

(dollars in thousands)
Predetermined interest rates

$
158,124

$
844,768

$
441,825

$
1,444,717
Floating or adjustable interest rates

108,899

105,379

456,028

670,306
Total

$
267,023

$
950,147

$
897,853

$
2,115,023

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
45
45

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As of June 30, 2019 One Year or
Less One to Five
Years Over Five
Years Total
(dollars in thousands)
Predetermined interest rates $ 133,480 $ 438,290 $ 256,695 $ 828,465
Floating or adjustable interest rates 122,020 113,775 354,932 590,727
Total $ 255,500 $ 552,065 $ 611,627 $ 1,419,192

One Year or

One to Five

Over Five


As of December 31, 2019

Less

Years

Years

Total

(dollars in thousands)
Predetermined interest rates

$
141,578

$
574,071

$
389,942

$
1,105,591
Floating or adjustable interest rates

136,700

97,641

396,411

630,752
Total

$
278,278

$
671,712

$
786,353

$
1,736,343
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:


June 30,

December 31,

June 30,

2020

2019

2019

June 30, December 31, June 30,
2019 2018 2018
(dollars in thousands)

(dollars in thousands)

Nonaccruals $ 13,611 $ 20,099 $ 19,431

$
23,037

$
5,093

$
13,611

Loans past due > 90 days, but still accruing 3,433 423 1,066

81

354

3,433

Total nonperforming loans $ 17,044 $ 20,522 $ 20,497

$
23,118

$
5,447

$
17,044

Accruing troubled debt resructured loans $ 176 $ 179 $ 182

$
1,206

$
1,844

$
176

Nonperforming loans as a percent of gross loans 1.20 % 1.44 % 1.43 %

1.09
%

0.31
%

1.20
%
Nonperforming loans as a percent of total assets 0.94 % 1.14 % 1.18 %

0.87
%

0.25
%

0.94
%

At June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, impaired loans had specific reserves of ~~$2.3~~$2.7 million and ~~$1.1~~$0.8 million, respectively. ~~The increase year-over-year is due to a $1.7 million specific reserve established on one loan during the first quarter of 2019.~~
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. The increase in nonaccural loans during the first six months of 2020 was primarily due to negative impacts of the current economic environment on six large commercial customers.
46
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.

Table of Contents

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 June 30, ~~2019~~2020 and December 31, ~~2018~~2019 the Company had specific reserves of ~~$1.7 million~~$0 and ~~$0.4 million~~$80,000 for TDRs, respectively, and none of them have subsequently defaulted.

During the first half of 2020 the Bank has experienced an increase in customer requests for loan modifications and payment deferrals as a result of impacts of the COVID-19 pandemic. The Coronavirus Aid, Relief, and Economic Security (CARES) act, signed into law on March 27, 2020, allowed financial institutions the option to exempt loan modifications related to the COVID-19 pandemic that would otherwise be categorized as a TDR from consideration for TDR treatment. Modifications in the scope of the exemption include forbearance agreements, interest-rate modifications, repayment plan changes and any other similar arrangements that would delay payments of principal or interest. This relief is allowable on modifications on loans which were not more than 30 days past due as of December 31, 2019, and that occur after March 1, 2020, and before the earlier of 60 days after the date on which the national emergency related to the COVID-19 outbreak is terminated

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 ~~$54.5~~$65.2 million were classified substandard under the Bank’s policy at June 30, ~~2019~~2020 and loans totaling ~~$67.6~~$60.3 million were classified substandard under the Bank’s policy as of December 31, ~~2018.~~2019. The following table sets forth information related to the credit quality of our loan portfolio at June 30, ~~2019~~2020 and December 31, ~~2018.~~2019.


Loan type (in thousands)	Pass		Watch		Substandard		Total		Pass		Watch		Substandard		Total
As of June 30, 2019 (unaudited)
As of June 30, 2020 (unaudited)
Commercial & industrial	$	219,271	$	35,795	$	16,565	$	271,631	$	523,327	$	35,038	$	8,429	$	566,794
Commercial real estate		524,287		109,339		36,469		670,095		773,971		108,551		53,988		936,510
Construction & Development		68,001		5,415		-		73,416		126,432		—		140		126,572
Residential 1-4 family		361,260		7,557		1,487		370,304		440,967		8,138		2,014		451,119
Consumer		28,207		42		3		28,252		28,614		14		32		28,660
Other loans		2,013		3,481		-		5,494		1,600		3,207		561		5,368
Total loans	$	1,203,039	$	161,629	$	54,524	$	1,419,192	$	1,894,911	$	154,948	$	65,164	$	2,115,023

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

Loan type (in thousands)

Pass

Watch

Substandard

Total
As of December 31, 2019








Commercial & industrial

$
270,948

$
19,074

$
12,358

$
302,380
Commercial real estate

693,642

72,610

46,891

813,143
Construction & Development

128,820

3,313

30

132,163
Residential 1-4 family

441,144

6,511

975

448,630
Consumer

29,517

37

32

29,586
Other loans

6,504

3,937

—

10,441
Total loans

$
1,570,575

$
105,482

$
60,286

$
1,736,343

47
47

Table of Contents

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 require the exercise of significant judgment and the use of estimates related to the amount and timing of expected future cash flows or impaired loans, estimated losses on pools of homogenous loans based on historical loss experience, and consideration of other qualitative factors such as current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset on the consolidated balance sheets. Loan losses are charged off against the 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.

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.

Table of Contents

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


										Six months ended			Year ended			Six months ended
										June 30,			December 31,			June 30,
										2020			2019			2019
	Six months ended June 30,			Year ended December 31,			Six months ended June 30,
	2019			2018			2018
	(dollars in thousands)
										(dollars in thousands)
Period-end loans outstanding (net of unearned discount and deferred loan fees)	$	1,419,192		$	1,428,494		$	1,434,504		$	2,115,023		$	1,736,343		$	1,419,192
Average loans outstanding (net of unearned discount and deferred loan fees)	$	1,427,458		$	1,425,867		$	1,414,727		$	1,889,657		$	1,565,261		$	1,427,458
Balance of allowance for loan losses at the beginning of period	$	12,248		$	11,612		$	11,612		$	11,396		$	12,248		$	12,248
Loans charged-off:
Commercial & industrial		594			35			-			8			1,229			594
Commercial real estate - owner occupied		659			2,374			17			101			4,994			659
Commercial real estate - non-owner occupied		54			-			1			—			62			54
Construction & Development		-			83			83			—			—			—
Residential 1-4 family		11			140			81			59			276			11
Consumer		11			48			3			—			76			11
Other Loans		8			37			23			9			41			8
Total loans charged-off		1,337			2,717			208			177			6,678			1,337
Recoveries of loans previously charged off:
Commercial & industrial		1			2			1			1			11			1
Commercial real estate - owner occupied		2			158			58			640			356			2
Commercial real estate - non-owner occupied		1			3			2			40			60			1
Construction & Development		-			-			-			—			—			—
Residential 1-4 family		122			233			188			37			130			122
Consumer		4			12			3			—			11			4
Other Loans		4			10			6			9			8			4
Total recoveries of loans previously charged off:		134			418			258			727			576			134
Net Loan charge-offs (recoveries)		1,203			2,299			(50	)		(550)			6,102			1,203
Provision charged to operating expense		1,125			2,935			1,385			4,125			5,250			1,125
Balance at end of period	$	12,170		$	12,248		$	13,047		$	16,071		$	11,396		$	12,170
Ratio of net charge offs (recoveries) during the year to average loans outstanding		0.17	%		0.16	%		(0.01	)%		(0.03)	%		0.39	%		0.17	%
Ratio of allowance for loan losses to loans outstanding		0.86	%		0.86	%		0.91	%		0.76	%		0.66	%		0.86	%

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.

Table of Contents

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

	June 30, 2019					December 31, 2018					June 30, 2018

																June 30,				December 31,				June 30,
																2020				2019				2019
(in thousands, except %)	Amount		% of Loans			Amount		% of Loans			Amount		% of Loans			Amount		% of Loans		Amount		% of Loans		Amount		% of Loans
Loan Type:
Commercial & industrial	$	2,143		19	%	$	3,021		21	%	$	3,405		22	%	$	2,548	27	%	$	2,320	17	%	$	2,143	19	%
Commercial real estate - owner occupied		5,433		29	%		3,459		29	%		3,281		29	%		6,031	25	%		4,587	26	%		5,473	29	%
Commercial real estate - non-owner occupied		1,948		18	%		2,100		18	%		2,165		16	%		3,798	19	%		1,578	20	%		1,948	18	%
Construction & Development		411		5	%		725		4	%		878		5	%		772	6	%		548	8	%		411	5	%
Residential 1-4 family		2,027		26	%		2,472		26	%		2,802		25	%		2,705	22	%		2,169	26	%		2,027	26	%
Consumer		139		2	%		148		2	%		248		3	%		160	1	%		141	2	%		139	2	%
Other Loans		29		0	%		32		0	%		49		0	%		57	0	%		53	1	%		29	0	%
Unallocated		40					291					219
Total allowance	$	12,170		100	%	$	12,248		100	%	$	13,047		100	%	$	16,071	100	%	$	11,396	100	%	$	12,170	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 June 30, ~~2019,~~2020, deposit liabilities accounted for approximately ~~87.2%~~85.1% 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 ~~$1.57~~$2.26 billion and ~~$1.56~~$1.84 billion as of June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. Noninterest-bearing deposits at June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, were ~~$481.4~~$708.3 million and ~~$448.8~~$476.5 million, respectively, while interest-bearing deposits were ~~$1.10~~$1.55 billion and ~~$1.11~~$1.37 billion at June 30, ~~2019~~2020 and December 31, ~~2018, respectively~~.2019, respectively.

At June 30, ~~2019,~~2020, we had a total of ~~$368.3~~$405.1 million in certificates of deposit, including ~~$15.1~~$20.6 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~~.accounts.

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


																									Six months ended						Year ended						Six months ended
																									June 30, 2020							December 31, 2019					June 30, 2019
																													Weighted						Weighted						Weighted
																									Amount		Percent		average rate		Amount		Percent		average rate		Amount		Percent		average rate
	Six months ended June 30, 2019								Year ended December 31, 2018								Six months ended June 30, 2018
	Amount		Percent			Weighted average rate			Amount		Percent			Weighted average rate			Amount		Percent			Weighted average rate
	(dollars in thousands)
																									(dollars in thousands)
Noninterest-bearing demand deposits	$	450,964		29.0	%		N/A		$	408,403		27.5	%		N/A		$	401,665		27.3	%		N/A		$	564,879	28.4	%	N/A		$	495,039	29.4	%	N/A		$	450,964	29.0	%	N/A
Interest-bearing checking deposits		75,690		4.9	%		2.44	%		99,894		6.7	%		1.13	%		113,598		7.7	%		1.02	%		193,946	9.8	%	0.55	%		90,273	5.4	%	1.98	%		75,690	4.9	%	2.44	%
Savings deposits		235,155		15.1	%		1.05	%		168,254		11.3	%		0.52	%		147,304		10.0	%		0.26	%		324,795	16.3	%	0.66	%		261,977	15.6	%	0.98	%		235,155	15.1	%	1.05	%
Money market accounts		403,527		25.9	%		1.15	%		428,052		28.8	%		0.99	%		440,700		29.9	%		0.93	%		517,476	26.0	%	0.74	%		440,773	26.2	%	1.11	%		403,527	25.9	%	1.15	%
Certificates of deposit		373,556		24.0	%		2.15	%		371,332		25.0	%		1.57	%		366,789		24.9	%		1.30	%		368,417	18.5	%	1.96	%		380,117	22.6	%	2.14	%		373,556	24.0	%	2.15	%
Brokered deposits		17,247		1.1	%		2.89	%		10,476		0.7	%		2.91	%		3,128		0.2	%		2.91	%		17,056	0.9	%	2.93	%		16,387	1.0	%	2.95	%		17,247	1.1	%	2.89	%
Total	$	1,556,139		100	%				$	1,486,411		100	%				$	1,473,184		100	%				$	1,986,569	100	%			$	1,684,566	100	%			$	1,556,139	100	%

Table of Contents

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


							June 30,		December 31,		June 30,
							2020		2019		2019
	June 30,		December 31,		June 30,
	2019		2018		2018
	(dollars in thousands)
							(dollars in thousands)
Less than 3 months remaining	$	19,944	$	26,366	$	24,157	$	28,327	$	34,306	$	19,944
3 to 6 months remaining		20,503		46,593		14,802		27,435		23,201		20,503
6 to 12 months remaining		46,014		35,932		67,201		71,600		38,937		46,014
12 months or more remaining		91,221		89,501		67,083		53,877		80,151		91,221
Total	$	177,682	$	198,392	$	173,243	$	181,239	$	176,595	$	177,682

Retail certificates of deposit of $100,000 or greater totaled ~~$177.7~~$181.2 million and ~~$198.4~~$176.6 million at June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. Interest expense on retail certificates of deposit of $100,000 or greater was $1.7 million for the six months ended ~~June 30, 2019,~~March 31, 2020, and ~~$2.5~~$3.5 million for the year ended December 31, ~~2018.~~

2019.

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


							June 30,		December 31,		June 30,
							2020		2019		2019
	June 30,		December 31,		June 30,
	2019		2018		2018
	(dollars in thousands)
							(dollars in thousands)
Interest Rate:
Less than 1.00%	$	852	$	1,824	$	5,541	$	53,821	$	168	$	852
1.00% to 1.99%		122,398		164,366		241,151		172,736		165,763		122,398
2.00% to 2.99%		212,328		204,825		123,589		147,204		190,164		212,328
3.00% to 3.99%		32,734		29,142		18,963		31,381		32,911		32,734
Total	$	368,312	$	400,157	$	389,244	$	405,142	$	389,006	$	368,312

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)
Six months ended
June 30, 2019
Year ended
December 31, 2018 Six months ended
June 30, 2018
Average daily amount of securities sold under repurchase agreements during the period $ 25,178 $ 22,315 $ 28,315
Weighted average interest rate on average daily securities sold under repurcase agreements 2.38 % 1.79 % 1.58 %
Maximum outstanding securities sold under repourchase agreements at any month-end $ 42,338 $ 48,010 $ 48,010
Securities sold under repruchase agreements at period end $ 20,034 $ 31,489 $ 13,433
Weighted average interest rate on short-term borrowing at period end 2.30 % 2.43 % 1.97 %

Six months

Year ended

Six months

ended

December 31,

ended

(dollars in thousands)

June 30, 2020

2019

June 30, 2019

Average daily amount of securities sold under repurchase agreements during the period

$
45,633

$
21,522

$
25,178

Weighted average interest rate on average daily securities sold under repurchase agreements

0.47
%

2.14
%

2.38
%
Maximum outstanding securities sold under repurchase agreements at any month-end

$
79,718

$
45,865

$
42,338

Securities sold under repurchase agreements at period end

$
57,442

$
45,865

$
20,034

Weighted average interest rate on securities sold under repurchase agreements at period end

0.03
%

1.47
%

2.30
%

~~Short-term borrowings~~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 no$25.0 million of advances outstanding from the FHLB at June 30, ~~2019 or~~2020, and $39.8 million as of December 31, ~~2018. From time to time the Company utilized short-term FHLB advances to fund liquidity during 2018.~~2019.

Table of Contents

The total loans pledged as collateral were ~~$678.1~~$807.0 million at June 30, ~~2019~~2020 and ~~$697.3~~$815.2 million at December 31, ~~2018.~~2019. Outstanding letters of credit from the FHLB totaled ~~$55.0~~$6.6 million at ~~both June 30, 2019~~March 31, 2020 and December 31, ~~2018.~~

2019.

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) Six months ended
June 30, 2019 Year ended
December 31, 2018 Six months ended
June 30, 2018
Average daily amount of short-term borrowings outstanding during the period $ - $ 73,464 $ 95,855
Weighted average interest rate on average daily short-term borrowing NA 1.75 % 1.59 %
Maximum outstanding short-term borrowings outstanding at any month-end $ - $ 100,000 $ 100,000
Short-term borrowing outstanding at period end $ - $ - $ 40,000
Weighted average intrest rate on short-term borrowing at period end NA NA 2.03 %

Six months

Year ended

Six months

ended

December 31,

ended
(dollars in thousands)

June 30, 2020

2019

June 30, 2019
Average daily amount of borrowings outstanding during the period

$
46,573

$
16,665

$
—
Weighted average interest rate on average daily borrowing

1.64
%

1.90
%

NA
Maximum outstanding borrowings at any month-end

$
58,800

$
39,800

$
—
Borrowing outstanding at period end

$
24,988

$
39,800

$
—
Weighted average interest rate on borrowing at period end

1.29
%

1.80
%

NA

Lines of credit and other borrowings.
We ~~maintain~~maintained a $5.0 million line of credit with a commercial bank. There were no outstanding balances on this note as of June 30, ~~2019 or~~2020. At December 31, ~~2018. Any future borrowings~~2019, the Company had an outstanding balance of $5.0 million on this line. Borrowings under this note ~~would carry~~carried interest at a variable rate with a floor of 3.50%, and was due in full on May 25, ~~2019.~~
2021. Subsequent to June 30, 2020, on July 22, 2020, this agreement was terminated.
We also ~~maintain~~maintained a $5.0 million line of credit with another commercial bank. At December 31, 2019, the Company had an outstanding balance of $5.0 million on this line. This note was not renewed when it matured on May 19, 2020.
We maintain a $7.5 million line of credit with another commercial bank, which was entered into on May 15, 2020. There were no outstanding balances on this note ~~as of~~at June 30, ~~2019 or December 31, 2018.~~2020. Any future borrowings ~~under this note would carry~~will required monthly payments of interest at a variable rate, ~~with a floor of 3.25%,~~and will be due in full on May ~~19, 2019.~~
15, 2021.
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 June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, 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 ($49,000 and $61,000 at June 30, 2020 and December 31, 2019, respectively). The total amount outstanding was $7.0 million and $7.1 million at June 30, 2020 and December 31, 2019, respectively. 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.
Subsequent to June 30, 2020, on July 22, 2020, the Company entered into subordinated note agreements with two separate commercial banks. The Company has through December 31, 2020, to borrow funds up to a maximum availability of $6.0 million under each agreement, or $12.0 million total. These notes were issued with 10-year maturities, will carry interest at a fixed rate of 5.0% through June 30, 2025, and at a variable rate thereafter, payable quarterly. These notes are callable on or after January 1, 2026 and qualify for Tier 2 capital for regulatory purposes.
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.

Table of Contents

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 ~~$120.1~~$174.1 million and included gross unrealized gains of ~~$3.8~~$7.5 million and gross unrealized losses of ~~$0.1 million~~$0 at June 30, ~~2019.~~2020. At December, 31 ~~2018,~~2019, the fair value of securities available for sale totaled ~~$118.9~~$181.5 million and included gross unrealized gains of ~~$0.8~~$3.4 million and gross unrealized losses of ~~$1.4~~$0.2 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 ~~$39.6~~$9.6 million and ~~$40.8~~$43.7 million at June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

The Company recognized a net gain on sale of available for sale securities of $0.1 million during the six-months ended June 30, 2020, The Company recognized a net gain of $3.1 million on sale of held to maturity securities during the six-months ended June 30, 2020. 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 six-months ended June 30, ~~2019, and a net loss on sale of available for sale securities of $44,000 during the six-months ended June 30, 2018.~~

2019.

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:


											June 30,				December 31,
											2020				2019
											Amount		Percent		Amount		Percent
	June 30,					December 31,
	2019					2018
	Amount		Percent			Amount		Percent
	(dollars in thousands)
											(dollars in thousands)
Available for sale securities, at estimated fair value
Obligations of U.S. Government sponsored agencies											$	14,599	8	%	$	12,060	7	%
Obligations of states and political subdivisions	$	51,181		43	%	$	51,893		44	%		75,226	43	%		54,771	30	%
Mortgage-backed securities		52,031		43	%		50,569		42	%		54,111	31	%		51,720	28	%
Corporate notes		16,871		14	%		16,444		14	%		27,512	16	%		62,955	35	%
Certificates of deposit												2,619	2	%		—	0	%
Total securities available for sale		120,083		100	%		118,906		100	%		174,067	100	%		181,506	100	%
Held to maturity securities, at amortized cost
U.S. Treasury securities		28,978		73	%		28,975		71	%		—	0	%		33,527	77	%
Obligations of states and political subdivisions		10,559		27	%		11,793		29	%		9,579	100	%		10,207	23	%
Total securities held to maturity		39,537		100	%		40,768		100	%		9,579	100	%		43,734	100	%
Total	$	159,620				$	159,674				$	183,646			$	225,240

Table of Contents

The following tables set forth the composition and maturities of investment securities as of June 30, ~~2019~~2020 and December 31, ~~2018.~~2019. 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~~.penalties.


																														After One, But				After Five, But
																														Within Five				Within Ten
																										Within One Year				Years				Years				After Ten Years				Total
																												Weighted				Weighted				Weighted				Weighted				Weighted
																										Amortized		Average		Amortized		Average		Amortized		Average		Amortized		Average		Amortized		Average
																										Cost		Yield(1)		Cost		Yield(1)		Cost		Yield(1)		Cost		Yield(1)		Cost		Yield(1)
	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 June 30, 2019
																										(dollars in thousands)
At June 30, 2020
Available for sale securities
Obligations of U.S. Government sponsored agencies																										$	305	(0.4)	%	$	312	0.1	%	$	2,291	2.1	%	$	11,137	2.3	%	$	14,045	2.1	%
Obligations of states and political subdivisions	$	2,533		4.2	%	$	6,361		3.3	%	$	9,827		3.6	%	$	30,309		3.9	%	$	49,030		3.8	%		831	3.3	%		5,427	3.7	%		8,858	3.2	%		56,330	3.3	%		71,446	3.3	%
Mortgage-backed securities		1,666		2.1	%		11,046		2.4	%		36,273		2.9	%		1,625		3.3	%		50,610		2.8	%		1,706	2.2	%		15,803	2.5	%		19,531	2.8	%		14,131	2.6	%		51,171	2.6	%
Corporate notes		-		-			16,761		3.0	%		-		-			-		-			16,761		3.0	%		11,913	2.9	%		4,955	3.3	%		—	0.0	%		10,423	1.3	%		27,291	2.3	%
Certificates of deposit																											745	2.0	%		1,835	1.0	%		—	—			—	—			2,580	1.3	%
Total available for sale securities		4,199		3.4	%		34,168		2.9	%		46,100		3.1	%		31,934		3.9	%		116,401		3.2	%	$	15,500	2.7	%	$	28,332	2.7	%	$	30,680	2.9	%	$	92,021	2.8	%	$	166,533	2.8	%
Held to maturity securities
U.S. Treasury securities		1,496		2.0	%		11,017		2.6	%		16,465		2.5	%		-		-	%		28,978		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	%	$	751	1.8	%	$	3,524	2.6	%	$	2,395	2.9	%	$	2,909	3.8	%	$	9,579	2.9	%
Total held to maturity securities		2,324		2.2	%		14,638		2.6	%		19,666		2.6	%		2,909		3.8	%		39,537		2.6	%
Total	$	6,523		2.9	%	$	48,806		2.8	%	$	65,766		2.9	%	$	34,843		3.9	%	$	155,938		3.1	%	$	16,251	2.7	%	$	31,856	2.7	%	$	33,075	2.9	%	$	94,930	2.9	%	$	176,112	2.8	%

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 %

After One, But

After Five, But

Within One Year

Within Five Years

Within Ten Years

After Ten Years

Total

Weighted

Weighted

Weighted

Weighted

Weighted

Amortized

Average

Amortized

Average

Amortized

Average

Amortized

Average

Amortized

Average


Cost

Yield(1)

Cost

Yield(1)

Cost

Yield(1)

Cost

Yield(1)

Cost

Yield(1)


(dollars in thousands)

At December 31, 2019

Available for sale securities

Obligations of U.S. Government sponsored agencies

$
—

—

$
—

—

$
—

—

$
12,218

2.3
%
$
12,218

2.3
%
Obligations of states and political subdivisions

1,685

3.1
%

6,524

3.5
%

13,153

3.7
%

31,231

3.7
%

52,593

3.6
%
Mortgage-backed securities

1,469

2.1
%

18,395

2.5
%

19,514

2.9
%

11,392

2.8
%

50,770

2.7
%
Corporate notes

45,752

1.8
%

16,815

3.0
%

—

0.0
%

228

8.3
%

62,795

2.1
%
Total available for sale securities

$
48,906

1.9
%
$
41,734

2.8
%
$
32,667

3.2
% ��
$
55,069

3.2
%
$
178,376

2.8
%
Held to maturity securities





















U.S. Treasury securities

$
3,508

2.3
%
$
12,501

2.6
%
$
17,517

2.4
%
$
—

—

$
33,526

2.4
%
Obligations of states and political subdivisions

628

1.6
%

4,276

2.4
%

2,395

2.9
%

2,909

3.8
%

10,208

2.9
%
Total held to maturity securities

4,136

2.1
%

16,777

2.5
%

19,912

2.5
%

2,909

3.8
%

43,734

2.5
%
Total

$
53,042

1.9
%
$
58,511

2.8
%
$
52,579

2.9
%
$
57,978

3.2
%
$
222,110

2.7
%
(1) Weighted Average Yield is shown on a fully taxable equivalent basis using a federal tax rate of 21% at June 30, ~~2019~~2020 and December 31, ~~2018, respectively~~.2019, respectively.
54
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.

Table of Contents

As of June 30, ~~2019, 13~~2020, 7 debt securities had gross unrealized losses, with annegligible aggregate depreciation ~~of 0.09%~~ from our amortized cost basis. The largest unrealized loss percentage of any single security was ~~2.45%~~0.49% (or ~~$97,400)~~$14,000) of its amortized cost. This was also the largest unrealized dollar loss of any security.

As of December 31, ~~2018, 64~~2019, 20 debt securities had gross unrealized losses, with an aggregate depreciation of ~~1.11%~~0.11% from our amortized cost basis. The largest unrealized loss percentage of any single security was ~~4.98%~~1.87% (or ~~$148,000)~~$6,000) of its amortized cost. ~~This was also the~~The largest unrealized dollar loss of any ~~security.~~

single security was $67,000 (or 1.46%) of its amortized cost.

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 ~~$185.4~~$276.1 million at June 30, ~~2019~~2020 compared to ~~$174.3~~$230.2 million at December 31, ~~2018.~~

2019.

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.

Table of Contents

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.

Table of Contents

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,~~As a result of the Economic Growth Act, the federal banking agencies ~~jointly issued~~were also required to develop a ~~proposed rule~~“Community Bank Leverage Ratio” (the ratio of a bank’s Tier 1 capital to ~~simplify the regulatory capital requirements~~average total consolidated assets) for ~~eligible banks and holding companies~~financial institutions with assets of less than $10 ~~billion~~billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in ~~consolidated assets that~~compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under prompt corrective action statutes. The federal banking agencies may consider a financial institutions risk profile when evaluation whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies set the minimum capital for the new Community Bank Leverage Ratio at 9%. The Bank does not intend to 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. Under the proposed rule, if a qualifying community banking organization elects to use the CBLR framework, it will be considered “well-capitalized” so long as its CBLR is greater than 9%. The agencies are expected to issue a final rule in the first quarter of 2019.

Framework.

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~~for more information regarding 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~~assets, including 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~~implementation date for the ~~lifetime~~Company, see the Company’s Annual Report.

Table 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.Contents

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:


																																		Minimum
																																		Capital
																																		Required for
																																		Capital
																																		Adequacy Plus				Minimum To Be
																																		Capital				Well-
																														Minimum				Conservation				Capitalized
																														Capital				Buffer				Under
																														Required for				Basel III Fully				Ptompt
																														Capital				Phased				Corective Action
																										Actual				Adequacy				In				Provisions
																										Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
	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 June 30, 2019
																										(dollars in thousands)
At June 30, 2020
Bank First Corporation:
Total capital (to risk-weighted assets)	$	189,194		12.0	%		N/A		N/A			N/A		N/A			N/A		N/A			N/A		N/A		$	243,784	11.6	%		N/A	N/A			N/A	N/A			N/A	N/A
Tier I capital (to risk-weighted assets)		165,524		10.5	%		N/A		N/A			N/A		N/A			N/A		N/A			N/A		N/A			209,164	9.9	%		N/A	N/A			N/A	N/A			N/A	N/A
Common equity tier I capital (to risk-weighted assets)		165,524		10.5	%		N/A		N/A			N/A		N/A			N/A		N/A			N/A		N/A			209,164	9.9	%		N/A	N/A			N/A	N/A			N/A	N/A
Tier I capital (to average assets)		165,524		9.3	%		N/A		N/A			N/A		N/A			N/A		N/A			N/A		N/A			209,164	8.5	%		N/A	N/A			N/A	N/A			N/A	N/A
Bank First, N.A:
Total capital (to risk-weighted assets)	$	187,186		11.9	%	$	126,048		8.0	%	$	165,437		10.5	%	$	165,437		10.5	%	$	157,560		10.0	%	$	240,638	11.4	%		168,605	8.0	%		221,294	10.5	%		210,757	10.0	%
Tier I capital (to risk-weighted assets)		175,016		11.1	%		94,536		6.0	%		133,926		8.5	%		133,926		8.5	%		126,048		8.0	%		224,567	10.7	%		126,454	6.0	%		179,143	8.5	%		168,605	8.0	%
Common equity tier I capital (to risk-weighted assets)		175,016		11.1	%		70,902		4.5	%		110,292		7.0	%		110,292		7.0	%		102,414		6.5	%		224,567	10.7	%		94,840	4.5	%		147,530	7.0	%		136,992	6.5	%
Tier I capital (to average assets)		175,015		9.9	%		71,105		4.0	%		71,105		4.0	%		71,105		4.0	%		88,881		5.0	%		224,567	9.2	%		97,879	4.0	%		97,879	4.0	%		122,349	5.0	%
At December 31, 2018
At December 31, 2019
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		$	208,900	10.4	%		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			178,882	8.9	%		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			178,882	8.9	%		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			178,882	8.5	%		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	%	$	215,347	10.7	%		161,163	8.0	%		211,527	10.5	%		201,454	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	%
Tier I capital (to risk-weighted assets)																											203,951	10.1	%		120,872	6.0	%		171,236	8.5	%		161,163	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	%		203,951	10.1	%		90,654	4.5	%		141,018	7.0	%		130,945	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	%		203,951	9.7	%		84,390	4.0	%		84,390	4.0	%		105,487	5.0	%

As previously mentioned, the Company carried ~~$11.5~~$18.5 million of subordinated debt as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019, 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

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●

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 June 30, 2019

											Amounts of Commitments Expiring - By Period as of June 30, 2020
													Less Than		One to Three		Three to Five		After Five
Other Commitments	Total		Less Than One Year		One to Three Years		Three to Five Years		After Five Years		Total		One Year		Years		Years		Years
	(dollars in thousands)
Unused portion of existing lines of credit	$	295,497	$	183,786	$	38,090	$	37,687	$	35,934
Letters of credit		23,962		10,719		2,547		8,530		2,166
											(dollars in thousands)
Unused lines of credit											$	445,074	$	240,479	$	60,359	$	30,266	$	113,970
Standby and direct pay letters of credit												7,501		5,088		1,643		770		—
Credit card arrangements		8,064		-		-		-		8,064		9,719		—		—		—		9,719
Total commitments	$	327,523	$	194,505	$	40,637	$	46,217	$	46,164	$	462,294	$	245,567	$	62,002	$	31,036	$	123,689

	Amounts of Commitments Expiring - By Period as of December 31, 2018

											Amounts of Commitments Expiring - By Period as of December 31, 2019
													Less Than		One to Three		Three to Five		After Five
Other Commitments	Total		Less Than One Year		One to Three Years		Three to Five Years		After Five Years		Total		One Year		Years		Years		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
											(dollars in thousands)
Unused lines of credit											$	383,209	$	194,890	$	47,214	$	28,215	$	112,890
Standby and direct pay letters of credit												17,121		5,354		5,050		5,426		1,291
Credit card arrangements		7,119		-		-		-		7,119		11,148		—		—		—		11,148
Total commitments	$	358,832	$	216,701	$	48,553	$	60,001	$	33,577	$	411,478	$	200,244	$	52,264	$	33,641	$	125,329

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.

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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.

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As of June 30, ~~2019:~~2020:

Change in Interest Rates (in

Percentage Change in

Basis Points)

Net Interst Income

+400

8.2
%
+300

7.5
%
+200

6.7
%
+100

4.1
%
(100)

(3.5)
%
Change in Interest Rates (in
Basis Points)
Percentage Change in
Net Interst Income
+400 8.7
+300 6.5
+200 4.4
+100 2.3
-100 (3.5 )

As of December 31, ~~2018:~~2019:

Change in Interest Rates (in

Percentage Change in

Basis Points)

Net Interst Income

+400

(0.6)
%
+300

(0.4)
%
+200

(0.2)
%
+100

0.0
%
(100)

(1.1)
%

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 June 30, ~~2019~~2020 estimated that, in the event of an instantaneous 200 basis point increase in interest rates, the Company would experience a ~~8.2%~~15.26% 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 ~~9.5%~~1.43% 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.

62
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 June 30, ~~2019~~2020 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.

Table of Contents

PART II. OTHER INFORMATION
~~ITEM 1.~~ ~~LEGAL PROCEEDINGS~~
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~~
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.~~2019. There have been no material changes during the quarterly period ended June 30, ~~2019~~2020 to the risk factors previously disclosed in the Company’s Annual Report.

~~ITEM 2.~~ ~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~
~~(a)~~ ~~On June 28, 2019, the Company issued 1,534 shares of restricted stock to a former member of Senior Management who had retired, pursuant to the terms of the Company’s Deferred Compensation Plan.~~
~~(b)~~ ~~None.~~
~~(c)~~ ~~Issuer Purchases of Equity Securities~~
ITEM 2.       UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
63
(a)None.
(b)None.
(c)None.

The Company's Board of Directors authorized a $10 million share repurchase program on April 16, 2019. This 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 second 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⁽³⁾ 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⁾

April 2019 0 $ 0 0 148,920
May 2019 0 0 0 148,920
June 2019 2,408 67.15 0 148,920
Total 2,408 $ 67.15 0 148,920
~~(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 June 28, 2019 ($67.15)~~
~~(3)~~ ~~Includes 2,408 shares repurchased from the 401(k) Plan.~~
The foregoing repurchases during the second quarter of 2019 were purchased through open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act, and pursuant to the Company’s 401(k) Plan and Equity Plan.
~~ITEM 3.~~ ~~DEFAULTS UPON SENIOR SECURITIES~~
ITEM 3.       DEFAULTS UPON SENIOR SECURITIES
None.

~~ITEM 4.~~ ~~MINE SAFETY DISCLOSURES~~
ITEM 4.       MINE SAFETY DISCLOSURES
None.

~~ITEM 5.~~ ~~OTHER INFORMATION~~
ITEM 5.       OTHER INFORMATION
None

64

62

Table of Contents

~~ITEM 6.~~ ~~EXHIBITS~~
ITEM 6.       EXHIBITS
Exhibit Index
~~Exhibit Number~~
~~Description~~
Exhibit Number
Description
~~31.1~~

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.~~

*            Filed herewith.
65
**          Furnished herewith.

63

Table of Contents

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: ~~August 13, 2019~~
~~BY:~~
August 7, 2020
BY:
/s/Kevin M. LeMahieu

Kevin M. LeMahieu

Chief Financial Officer

(Principal Financial and Accounting Officer)

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


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


Large accelerated filero☐	Accelerated filero☒
Non-accelerated filerx☐	Smaller reporting companyx☒
	Emerging growth companyx☒


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

			~~Page Number~~
		Page Number
Part I. Financial Information		3
ITEM 1.	Financial Statements	3
	Consolidated Balance Sheets – June 30, ~~2019~~2020 (unaudited) and December 31, ~~2018~~2019	3
	Consolidated Statements of Income – Three and Six Months Ended June 30, 2020 and 2019 ~~and 2018~~ (unaudited)	4
	Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2020 and 2019 ~~and 2018~~ (unaudited)	5
	Consolidated Statements of Changes in Stockholders’ Equity – Three and Six Months Ended June 30, 2020 and 2019 ~~and 2018~~ (unaudited)	6
	Consolidated Statements of Cash Flows – Six Months Ended June 30, 2020 and 2019 ~~and 2018~~ (unaudited)	7
	Notes to Unaudited Consolidated Financial Statements	9
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	31 30
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	61 59
ITEM 4.	Controls and Procedures	63 61
Part II. Other Information		63 62
ITEM 1.	Legal Proceedings	63 62
ITEM 1A.	Risk Factors	63 62
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63 62
ITEM 3.	Defaults Upon Senior Securities	64 62
ITEM 4.	Mine Safety Disclosures	64 62
ITEM 5.	Other Information	64 62
ITEM 6.	Exhibits	65 63
Signatures		66 64

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

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

	June 30, 2019			December 31, 2018
	(Unaudited)			(Audited)
Assets
Cash and due from banks	$	19,204		$	41,435
Interest-bearing deposits		89,833			21,830
Federal funds sold		16,837			44,478
Cash and cash equivalents		125,874			107,743
Securities held to maturity, at amortized cost ($40,552 and $40,477 fair value at June 30, 2019 and December 31, 2018, respectively)		39,537			40,768
Securities available for sale, at fair value		120,083			118,906
Loans, net		1,407,022			1,416,246
Premises and equipment, net		28,097			24,489
Goodwill		15,024			15,024
Other investments		4,517			4,555
Cash value of life insurance		24,488			24,178
Intangible assets, net		4,974			5,297
Other real estate owned ("OREO")		3,543			3,592
Investment in minority-owned subsidiaries		26,434			25,397
Other assets		6,874			6,970
TOTAL ASSETS	$	1,806,467		$	1,793,165

Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Interest-bearing deposits	$	1,093,636		$	1,108,402
Noninterest-bearing deposits		481,362			448,765
Total deposits		1,574,998			1,557,167
Securities sold under repurchase agreements		20,034			31,489
Subordinated notes		11,500			11,500
Other liabilities		14,487			18,686
Total liabilities		1,621,019			1,618,842
Stockholders' equity:
Serial preferred stock - $0.01 par value
Authorized - 5,000,000 shares		-			-
Common stock - $0.01 par value
Authorized - 20,000,000 shares
Issued - 7,368,083 shares as of June 30, 2019 and December 31, 2018
Outstanding - 6,576,171 and 6,610,358 shares as of June 30, 2019 and December 31, 2018, respectively		74			74
Additional paid-in capital		27,436			27,601
Retained earnings		178,314			168,363
Treasury stock, at cost - 791,912 and 757,725 shares
as of June 30, 2019 and December 31, 2018, respectively		(23,386	)		(21,349	)
Accumulated other comprehensive income (loss)		3,010			(366	)
Total stockholders' equity		185,448			174,323
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,806,467		$	1,793,165


	June 30, 2020		December 31, 2019
	(Unaudited)		(Audited)
Assets
Cash and due from banks	$	33,994	$	33,817
Interest-bearing deposits		310		19,242
Federal funds sold		142,927		33,393
Cash and cash equivalents		177,231		86,452
Securities held to maturity, at amortized cost ($9,600 and $44,803 fair value at June 30, 2020 and December 31, 2019, respectively)		9,579		43,734
Securities available for sale, at fair value		174,067		181,506
Loans held for sale		1,479		587
Loans, net		2,098,952		1,724,947
Premises and equipment, net		39,645		35,286
Goodwill		55,052		43,456
Other investments		7,838		4,933
Cash value of life insurance		30,996		24,945
Identifiable intangible assets, net		10,507		9,666
Other real estate owned ("OREO")		2,269		6,888
Investment in minority-owned subsidiaries		41,870		40,287
Other assets		8,426		7,481
TOTAL ASSETS	$	2,657,911	$	2,210,168

Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Interest-bearing deposits	$	1,554,833	$	1,366,846
Noninterest-bearing deposits		708,312		476,465
Total deposits		2,263,145		1,843,311
Securities sold under repurchase agreements		57,442		45,865
Notes payable		25,172		49,790
Subordinated notes		18,549		18,622
Other liabilities		17,503		22,369
Total liabilities		2,381,811		1,979,957
Stockholders' equity:
Serial preferred stock - $0.01 par value
Authorized - 5,000,000 shares		—		—
Common stock - $0.01 par value
Authorized - 20,000,000 shares
Issued - 8,478,383 and 7,902,742 shares as of June 30, 2020 and December 31, 2019, respectively
Outstanding - 7,733,457 and 7,084,728 shares as of June 30, 2020 and December 31, 2019, respectively		85		79
Additional paid-in capital		92,277		63,085
Retained earnings		202,082		189,494
Treasury stock, at cost - 744,926 and 818,014 shares as of June 30, 2020 and December 31, 2019, respectively		(23,847)		(24,941)
Accumulated other comprehensive income		5,503		2,494
Total stockholders' equity		276,100		230,211
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	2,657,911	$	2,210,168


											Accumulated
	Serial				Additional						Other		Total
	Preferred		Common		Paid-in		Retained		Treasury		Comprehensive		Stockholders'
	Stock		Stock		Capital		Earnings		Stock		Income (loss)		Equity

	(In Thousands, except share and per share amounts)

Balance at January 1, 2019	$	—	$	74	$	27,601	$	168,363	$	(21,349)	$	(366)	$	174,323
Net income		—		—		—		6,587		—		—		6,587
Other comprehensive income		—		—		—		—		—		1,853		1,853
Purchase of treasury stock		—		—		—		—		(2,489)		—		(2,489)
Issuance of treasury stock as deferred compensation payout		—		—		14		—		43		—		57
Cash dividends ($0.20 per share)		—		—		—		(1,306)		—		—		(1,306)
Amortization of stock-based compensation		—		—		152		—		—		—		152
Vesting of restricted stock awards		—		—		(462)		—		462		—		—

Balance at March 31, 2019		—		74		27,305		173,644		(23,333)		1,487		179,177
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)	$	3,009	$	185,447

Balance at January 1, 2020	$	—	$	79	$	63,085	$	189,494	$	(24,941)	$	2,494	$	230,211
Net income		—		—		—		7,266		—		—		7,266
Other comprehensive income		—		—		—		—		—		1,021		1,021
Purchase of treasury stock		—		—		—		—		(2,968)		—		(2,968)
Issuance of treasury stock as deferred compensation payout		—		—		—		—		3,368		—		3,368
Cash dividends ($0.20 per share)		—		—		—		(1,431)		—		—		(1,431)
Amortization of stock-based compensation		—		—		215		—		—		—		215
Vesting of restricted stock awards		—		—		(628)		—		628		—		—

Balance at March 31, 2020		—		79		62,672		195,329		(23,913)		3,515		237,682
Net income		—		—		—		8,296		—		—		8,296
Other comprehensive income		—		—		—		—		—		1,988		1,988
Cash dividends ($0.20 per share)		—		—		—		(1,543)		—		—		(1,543)
Amortization of stock-based compensation		—		—		296		—		—		—		296
Vesting of restricted stock awards		—		—		(66)		—		66		—		—
Shares issued in the acquisition of Tomah Bancshares, Inc. (575,641 shares)		—		6		29,375		—		—		—		29,381

Balance at June 30, 2020	$	—	$	85	$	92,277	$	202,082	$	(23,847)	$	5,503	$	276,100

														Accumulated
	Serial				Additional									Other			Total
	Preferred		Common		Paid-in			Retained			Treasury			Comprehensive			Stockholders'
	Stock		Stock		Capital			Earnings			Stock			Income (Loss)			Equity

Balance at January 1, 2018	$	-	$	74	$	27,528		$	145,879		$	(12,730	)	$	977		$	161,728
Net income		-		-		-			7,062			-			-			7,062
Other comprehensive loss		-		-		-			-			-			(1,352	)		(1,352	)
Purchase of treasury stock		-		-		-			-			(5,648	)		-			(5,648	)
Sale of treasury stock		-		-		-			-			951			-			951
Cash dividends ($0.16 per share)		-		-		-			(1,066	)		-			-			(1,066	)
Amortization of stock-based compensation		-		-		121			-			-			-			121
Vesting of restricted stock awards		-		-		(433	)		-			433			-			-

Balance at March 31, 2018		-		74		27,216			151,875			(16,994	)		(375	)		161,796
Net income		-		-		-			6,401			-			-			6,401
Other comprehensive loss		-		-		-			-			-			(294	)		(294	)
Purchase of treasury stock		-		-		-			-			(2,171	)		-			(2,171	)
Sale of treasury stock		-		-		-			-			396			-			396
Cash dividends ($0.16 per share)		-		-		-			(1,072	)		-			-			(1,072	)
Amortization of stock-based compensation		-		-		144			-			-			-			144
Vesting of restricted stock awards		-		-		(50	)		-			50			-			-

Balance at June 30, 2018	$	-	$	74	$	27,310		$	157,204		$	(18,719	)	$	(669	)	$	165,200

Balance at January 1, 2019	$	-	$	74	$	27,601		$	168,363		$	(21,349	)	$	(366	)	$	174,323
Net income		-		-		-			6,587			-			-			6,587
Other comprehensive income		-		-		-			-			-			1,854			1,854
Purchase of treasury stock		-		-		-			-			(2,489	)		-			(2,489	)
Issuance of treasury stock as deferred compensation payout		-		-		14			-			43			-			57
Cash dividends ($0.20 per share)		-		-		-			(1,306	)		-			-			(1,306	)
Amortization of stock-based compensation		-		-		152			-			-			-			152
Vesting of restricted stock awards		-		-		(462	)		-			462			-			-

Balance at March 31, 2019		-		74		27,305			173,644			(23,333	)		1,488			179,178
Net income		-		-		-			5,989			-			-			5,989
Other comprehensive income		-		-		-			-			-			1,522			1,522
Purchase of treasury stock		-		-		-			-			(161	)		-			(161	)
Issuance of treasury stock as deferred compensation payout		-		-		12			-			45			-			57
Cash dividends ($0.20 per share)		-		-		-			(1,319	)		-			-			(1,319	)
Amortization of stock-based compensation		-		-		182			-			-			-			182
Vesting of restricted stock awards		-		-		(63	)		-			63			-			-

Balance at June 30, 2019	$	-	$	74	$	27,436		$	178,314		$	(23,386	)	$	3,010		$	185,448


	As Recorded by				As Recorded by
	Timberwood		Fair Value Adjustments		the Company
Cash, cash equivelants and securities	$	79,614	$	(656)	$	78,958
Other investments		533				533
Loans		117,343		1,068		118,411
Premises and equipment, net		2,538		(1,006)		1,532
Core deposit intangible		—		1,697		1,697
Other assets		11,392		(2,605)		8,787
Total assets acquired	$	211,420	$	(1,502)	$	209,918

Deposits	$	170,362	$	742	$	171,104
Subordinated debt		6,500				6,500
Other borrowings		12,938		210		13,148
Other liabilities		1,923		(974)		949
Total liabilities assumed	$	191,723	$	(22)	$	191,701

Excess of assets acquired over liabilties assumed	$	19,697	$	(1,480)	$	18,217
Less: purchase price						29,812
Goodwill					$	11,595


			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value

June 30, 2020
Obligations of U.S. Government sponsored agencies	$	14,045	$	556	$	(2)	$	14,599
Obligations of states and political subdivisions		71,446		3,799		(19)		75,226
Mortgage-backed securities		51,171		2,940		—		54,111
Corporate notes		27,291		221		—		27,512
Certificates of deposit		2,580		39		—		2,619
Total available for sale securities	$	166,533	$	7,555	$	(21)	$	174,067

December 31, 2019
Obligations of U.S. Government sponsored agencies	$	12,218	$	—	$	(158)	$	12,060
Obligations of states and political subdivisions		52,594		2,197		(20)		54,771
Mortgage-backed securities		50,770		988		(38)		51,720
Corporate notes		62,794		172		(11)		62,955
Total available for sale securities	$	178,376	$	3,357	$	(227)	$	181,506

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value

June 30, 2019
Obligations of states and political subdivisions	$	49,030	$	2,155	$	(4	)	$	51,181
Mortgage-backed securities		50,610		1,446		(25	)		52,031
Corporate notes		16,761		211		(101	)		16,871
Total available for sale securities	$	116,401	$	3,812	$	(130	)	$	120,083

December 31, 2018
Obligations of states and political subdivisions	$	51,292	$	709	$	(108	)	$	51,893
Mortgage-backed securities		51,519		66		(1,016	)		50,569
Corporate notes		16,708		-		(264	)		16,444
Total available for sale securities	$	119,519	$	775	$	(1,388	)	$	118,906


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

June 30, 2020 - Available for Sale
Obligations of U.S. Government sponsored agencies	$	615	$	(2)	$	—	$	—	$	615	$	(2)
Obligations of states and political subdivisions		2,540		(19)		—		—		2,540		(19)
Totals	$	3,155	$	(21)	$	—	$	—	$	3,155	$	(21)


December 31, 2019 - Available for Sale
Obligations of U.S. Government sponsored agencies	$	12,059	$	(158)	$	—	$	—	$	12,059	$	(158)
Obligations of states and political subdivisions		5,636		(19)		999		(1)		6,635		(20)
Mortgage-backed securities		4,038		(26)		2,187		(12)		6,225		(38)
Corporate notes		3,925		(11)		—		—		3,925		(11)
Totals	$	25,658	$	(214)	$	3,186	$	(13)	$	28,844	$	(227)

December 31, 2019 - Held to Maturity
U.S. Treasury securities	$	2,958	$	(22)	$	—	$	—	$	2,958	$	(22)

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

June 30, 2019 - Available for Sale
Obligations of states and political subdivisions	$	-	$	-		$	1,646	$	(4	)	$	1,646	$	(4	)
Mortgage-backed securities		-		-			3,460		(25	)		3,460		(25	)
Corporate notes		-		-			7,785		(101	)		7,785		(101	)
Totals	$	-	$	-		$	12,891	$	(130	)	$	12,891	$	(130	)

June 30, 2019 - Held to Maturity
U.S. Treasury securities	$	-	$	-		$	1,494	$	(2	)	$	1,494	$	(2	)

December 31, 2018 - Available for Sale
Obligations of states and political subdivisions	$	10,024	$	(64	)	$	4,132	$	(44	)	$	14,156	$	(108	)
Mortgage-backed securities		13,352		(183	)		31,718		(833	)		45,070		(1,016	)
Corporate notes		-		-			12,531		(264	)		12,531		(264	)
Totals	$	23,376	$	(247	)	$	48,381	$	(1,141	)	$	71,757	$	(1,388	)

December 31, 2018 - Held to Maturity
U.S. Treasury securities	$	8,422	$	(46	)	$	11,580	$	(343	)	$	20,002	$	(389	)

	Available for Sale				Held to Maturity
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value

									Available for Sale				Held to Maturity
									Amortized		Estimated		Amortized		Estimated
									Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	2,533	$	2,573	$	2,324	$	2,322	$	13,794	$	13,856	$	751	$	751
Due after one year through five years		23,122		23,421		14,638		14,890
Due after five years through ten years		9,827		10,311		19,666		20,431
Due after ten years		30,309		31,747		2,909		2,909
Due after one year through 5 years										12,529		13,063		3,524		3,545
Due after 5 years through ten years										11,149		11,691		2,395		2,395
Due after 10 years										77,890		81,346		2,909		2,909
Subtotal		65,791		68,052		39,537		40,552		115,362		119,956		9,579		9,600
Mortgage-backed securities		50,610		52,031		-		-		51,171		54,111		—		—
Total	$	116,401	$	120,083	$	39,537	$	40,552	$	166,533	$	174,067	$	9,579	$	9,600

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

ALL - January 1, 2019	$	3,021		$	3,459		$	2,100		$	725		$	2,472		$	148		$	32		$	291		$	12,248
Charge-offs		(594	)		(659	)		(54	)		-			(11	)		(11	)		(8	)		-			(1,337	)
Recoveries		1			2			1			-			122			4			4			-			134
Provision		(285	)		2,631			(99	)		(314	)		(556	)		(2	)		1			(251	)		1,125
ALL - June 30, 2019		2,143			5,433			1,948			411			2,027			139			29			40			12,170

ALL ending balance individuallyevaluated for impairment		-			2,285			-			-			-			-			-			-			2,285

ALL ending balance collectivelyevaluated for impairment	$	2,143		$	3,148		$	1,948		$	411		$	2,027		$	139		$	29		$	40		$	9,885

Loans outstanding -June 30, 2019	$	271,838		$	415,451		$	255,072		$	73,522		$	370,261		$	28,138		$	5,493		$	-		$	1,419,775
Loans ending balance individuallyevaluated for impairment		-			9,992			-			-			176			-			-			-			10,168

Loans ending balance collectivelyevaluated for impairment	$	271,838		$	405,459		$	255,072		$	73,522		$	370,085		$	28,138		$	5,493		$	-		$	1,409,607


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

ALL - January 1, 2020	$	2,320	$	4,587	$	1,578	$	548	$	2,169	$	141	$	53	$	291	$	11,396
Charge-offs		(8)		(101)		—		—		(59)		—		(9)		—		(177)
Recoveries		1		640		40		—		37		—		9		—		727
Provision		235		905		2,180		224		558		19		4		(280)		4,125
ALL - June 30, 2020		2,548		6,031		3,798		772		2,705		160		57		11		16,071

ALL ending balance individually evaluated for impairment		702		525		1,469		—		—		—		—		—		2,696

ALL ending balance collectively evaluated for impairment	$	1,846	$	5,506	$	2,329	$	772	$	2,705	$	160	$	57	$	236	$	13,375

Loans outstanding - June 30, 2020	$	574,052	$	525,908	$	410,931	$	126,653	$	451,070	$	28,532	$	5,365	$	—	$	2,122,511
Loans ending balance individually evaluated for impairment		1,973		10,860		7,987		—		—		—		—		—		20,820

Loans ending balance collectively evaluated for impairment	$	572,079	$	515,048	$	402,944	$	126,653	$	451,070	$	28,532	$	5,365	$	—	$	2,101,691

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

ALL - January 1, 2018	$	2,362	$	2,855		$	1,987		$	945		$	2,728		$	191		$	23		$	521		$	11,612
Charge-offs		-		(17	)		(1	)		(83	)		(81	)		(3	)		(23	)		-			(208	)
Recoveries		1		58			2			-			188			3			6			-			258
Provision		1,042		385			177			16			(33	)		57			43			(302	)		1,385
ALL - June 30, 2018		3,405		3,281			2,165			878			2,802			248			49			219			13,047

ALL ending balance individually evaluated for impairment		-		498			-			-			160			-			-			-			658

ALL ending balance collectively evaluated for impairment	$	3,405	$	2,783		$	2,165		$	878		$	2,642		$	248		$	49		$	219		$	12,389

Loans outstanding - June 30, 2018	$	314,087	$	415,097		$	226,677		$	67,558		$	365,502		$	40,226		$	5,714		$	-		$	1,434,861
Loans ending balance individually evaluated for impairment		-		652			-			-			709			-			-			-			1,361

Loans ending balance collectively evaluated for impairment	$	314,087	$	414,445		$	226,677		$	67,558		$	364,793		$	40,226		$	5,714		$	-		$	1,433,500

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


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

Commercial/industrial	$	-	$	589	$	665	$	1,254	$	—	$	—	$	1,989	$	1,989
Commercial real estate - owner occupied		348		2,567		11,914		14,829		73		—		12,253		12,326
Commercial real estate - non-owner occupied		-		-		-		-		—		—		7,522		7,522
Construction and development		919		-		-		919		319		—		—		319
Residential 1-4 family		744		276		1,028		2,048
Residential 1‑4 family										220		78		1,241		1,539
Consumer		61		1		4		66		21		2		32		55
Other		-		-		-		-		—		—		—		—
	$	2,072	$	3,433	$	13,611	$	19,116
									$	633	$	80	$	23,037	$	23,750

	Pass (1-5)		6		7		8		Total


											Pass (1‑5)		6		7		8		Total

Commercial/industrial	$	255,273	$	6,127	$	10,438	$	-	$	271,838	$	565,623	$	3,046	$	5,383	$	—	$	574,052
Commercial real estate - owner occupied		381,034		4,237		30,180		-		415,451		482,490		9,944		33,474		—		525,908
Commercial real estate - non-owner occupied		253,020		1,213		839		-		255,072		400,361		—		10,570		—		410,931
Construction and development		73,522		-		-		-		73,522		126,513		—		140		—		126,653
Residential 1-4 family		368,774		-		1,487		-		370,261
Residential 1‑4 family												449,056		—		2,014		—		451,070
Consumer		28,135		-		3		-		28,138		28,500		—		32		—		28,532
Other		5,493		-		-		-		5,493		4,804		561		—		—		5,365

	$	1,365,251	$	11,577	$	42,947	$	-	$	1,419,775

											$	2,057,347	$	13,551	$	51,613	$	—	$	2,122,511

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


																					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	$	-	$	6,695	$	-	$	-	$	-	$	-	$	-	$	-	$	6,695	$	1,973	$	5,681	$	7,987	$	—	$	—	$	—	$	—	$	—	$	15,641
Unpaid principal balance		-		6,695		-		-		-		-		-		-		6,695		1,973		5,681		7,987		—		—		—		—		—		15,641
Related allowance		-		2,285		-		-		-		-		-		-		2,285		702		525		1,469		—		—		—		—		—		2,696


With no related allowance recorded:
Recorded investment	$	-	$	3,297	$	-	$	-	$	176	$	-	$	-	$	-	$	3,473	$	—	$	5,179	$	—	$	—	$	—	$	—	$	—	$	—	$	5,179
Unpaid principal balance		-		3,297		-		-		176		-		-		-		3,473		—		5,179		—		—		—		—		—		—		5,179
Related allowance		-		-		-		-		-		-		-		-		-		—		—		—		—		—		—		—		—		—


Total:
Recorded investment	$	-	$	9,992	$	-	$	-	$	176	$	-	$	-	$	-	$	10,168	$	1,973	$	10,860	$	7,987	$	—	$	—	$	—	$	—	$	—	$	20,820
Unpaid principal balance		-		9,992		-		-		176		-		-		-		10,168		1,973		10,860		7,987		—		—		—		—		—		20,820
Related allowance		-		2,285		-		-		-		-		-		-		2,285		702		525		1,469		—		—		—		—		—		2,696


Average recorded investment	$	2,834	$	8,894	$	-	$	-	$	439	$	-	$	-	$	-	$	12,167	$	1,926	$	7,379	$	3,994	$	—	$	—	$	—	$	—	$	—	$	13,299

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


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

With an allowance recorded:
Recorded investment	$	5,667	$	2,099	$	-	$	-	$	523	$	-	$	-	$	-	$	8,289	$	1,878	$	960	$	—	$	—	$	—	$	—	$	—	$	2,838
Unpaid principal balance		5,667		2,099		-		-		523		-		-		-		8,289		1,878		960		—		—		—		—		—		2,838
Related allowance		566		353		-		-		160		-		-		-		1,079		760		80		—		—		—		—		—		840


With no related allowance recorded:
Recorded investment	$	-	$	5,697	$	-	$	-	$	179	$	-	$	-	$	-	$	5,876	$	—	$	2,938	$	—	$	—	$	—	$	—	$	—	$	2,938
Unpaid principal balance		-		5,697		-		-		179		-		-		-		5,876		—		2,938		—		—		—		—		—		2,938
Related allowance		-		-		-		-		-		-		-		-		-		—		—		—		—		—		—		—		—


Total:
Recorded investment	$	5,667	$	7,796	$	-	$	-	$	702	$	-	$	-	$	-	$	14,165	$	1,878	$	3,898	$	—	$	—	$	—	$	—	$	—	$	5,776
Unpaid principal balance		5,667		7,796		-		-		702		-		-		-		14,165		1,878		3,898		—		—		—		—		—		5,776
Related allowance		566		353		-		-		160		-		-		-		1,079		760		80		—		—		—		—		—		840


Average recorded investment	$	2,834	$	4,036	$	-	$	-	$	706	$	-	$	-	$	-	$	7,576	$	3,773	$	5,847	$	—	$	—	$	351	$	—	$	—	$	9,971

	June 30, 2019				December 31, 2018
	Recorded Investment		Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance

									June 30, 2020				December 31, 2019
											Unpaid				Unpaid
									Recorded		Principal		Recorded		Principal
									Investment		Balance		Investment		Balance
Commercial & Industrial	$	417	$	420	$	555	$	701	$	1,265	$	1,393	$	191	$	212
Commercial real estate - owner occupied		1,318		1,932		1,558		2,069		5,414		7,190		518		785
Commercial real estate - non-owner occupied		-		-		233		475		1,244		1,409		—		—
Construction and development		226		250		171		171		94		104		213		237
Residential 1-4 family		1,072		1,170		1,664		1,828
Residential 1‑4 family										888		1,013		901		1,031
Consumer		-		-		-		-		—		—		—		—
Other		-		-		-		-		—		—		—		—
	$	3,033	$	3,772	$	4,181	$	5,244
									$	8,905	$	11,109	$	1,823	$	2,265

	June 30, 2019						December 31, 2018
	Accretable			Non-accretable			Accretable			Non-accretable
	discount			discount			discount			discount


													June 30, 2020				December 31, 2019
													Accretable		Non-accretable		Accretable		Non-accretable
													discount		discount		discount		discount

Balance at beginning of period	$	318		$	745		$	583		$	800		$	222	$	220	$	318	$	745
Acquired balance, net		-			-			-			-			1,064		727		44		333
Reclassifications between accretable and non-accretable		203			(203	)		55			(55	)		11		(11)		858		(858)
Accretion to loan interest income		(324	)		-			(320	)		-			(29)		—		(998)		—
Disposals of loans		-			-			-			-
Balance at end of period	$	197		$	542		$	318		$	745		$	1,268	$	936	$	222	$	220


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

	Six Months Ended			Year Ended
	June 30, 2019			December 31, 2018


							Six Months Ended		Year Ended
							June 30, 2020		December 31, 2019

Fair value at beginning of year	$	3,085		$	2,610		$	4,287	$	3,085
MSR asset acquired								384		1,859
Servicing asset additions		209			356			713		740
Loan payments and payoffs		(246	)		(475	)		(705)		(821)
Changes in valuation inputs and assumptions used in the valuation model		37			594			(553)		(576)
Amount recognized through earnings		-			475			(545)		(657)
Fair value at end of period	$	3,085		$	3,085		$	4,126	$	4,287


Unpaid principal balance of loans serviced for others	$	319,173		$	316,480		$	643,676	$	554,374
Mortgage servicing rights as a percent of loans serviced for others		0.97			0.97
MSR as a percent of loans serviced for others								0.64		0.77


					June 30,		December 31,
	Maturity	Rate			2020		2019

				(dollars in thousands)
Fixed rate, fixed term	01/27/2020	1.42	%	$	—	$	1,000
Fixed rate, fixed term	11/02/2020	1.28	%		400		400
Fixed rate, fixed term	11/02/2020	2.83	%		500		—
Fixed rate, fixed term	12/08/2020	2.76	%		500		—
Fixed rate, fixed term	12/28/2020	2.07	%		250		—
Fixed rate, fixed term	01/22/2021	1.67	%		2,000		2,000
Fixed rate, fixed term	01/25/2021	2.37	%		5,000		5,000
Fixed rate, fixed term	01/27/2021	1.60	%		1,000		1,000
Fixed rate, fixed term	03/29/2021	0.00	%		2,377		—
Fixed rate, fixed term	05/03/2021	2.87	%		500		—
Fixed rate, fixed term	05/03/2021	0.00	%		4,000		—
Fixed rate, fixed term	05/03/2021	0.00	%		4,000		—
Fixed rate, fixed term	06/28/2021	2.00	%		250		—
Fixed rate, fixed term	11/03/2021	1.46	%		400		400
Fixed rate, fixed term	12/08/2021	2.87	%		500		—
Fixed rate, fixed term	12/27/2021	1.99	%		250		—
Fixed rate, fixed term	01/24/2022	2.51	%		250		—
Fixed rate, fixed term	05/02/2022	2.98	%		500		—
Fixed rate, fixed term	06/08/2022	2.92	%		500		—
Fixed rate, fixed term	08/08/2022	1.76	%		—		10,000
Fixed rate, fixed term	11/21/2022	3.02	%		600		—
Fixed rate, fixed term	08/08/2023	1.74	%		—		10,000
Fixed rate, fixed term	11/21/2023	3.06	%		600		—
Fixed rate, fixed term	08/08/2024	1.75	%		—		10,000
Fixed rate, fixed term	01/04/2027	0.00	%		103		—
Fixed rate, fixed term	04/22/2030	0.00	%		508		—
					24,988		39,800
Adjustment due to purchase accounting					184		(10)
				$	25,172	$	39,790


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

June 30, 2020
Total capital (to risk-weighted assets):
Corporation	$	243,784	11.57	%		NA	NA			NA	NA			NA	NA
Bank	$	240,638	11.42	%	$	168,605	8.00	%	$	221,294	10.50	%	$	210,757	10.00	%
Tier 1 capital (to risk-weighted assets):
Corporation	$	209,164	9.92	%		NA	NA			NA	NA			NA	NA
Bank	$	224,567	10.66	%	$	126,454	6.00	%	$	179,143	8.50	%	$	168,605	8.00	%
Common Equity Tier 1 capital (to risk-weighted assets):
Corporation	$	209,164	9.92	%		NA	NA			NA	NA			NA	NA
Bank	$	224,567	10.66	%	$	94,840	4.50	%	$	147,530	7.00	%	$	136,992	6.50	%
Tier 1 capital (to average assets):
Corporation	$	209,164	8.50	%		NA	NA			NA	NA			NA	NA
Bank	$	224,567	9.18	%	$	97,879	4.00	%	$	97,879	4.00	%	$	122,349	5.00	%
December 31, 2019
Total capital (to risk-weighted assets):
Corporation	$	208,900	10.35	%		NA	NA			NA	NA			NA	NA
Bank	$	215,347	10.69	%	$	161,163	8.00	%	$	211,527	10.50	%	$	201,454	10.00	%
Tier 1 capital (to risk-weighted assets):
Corporation	$	178,882	8.86	%		NA	NA			NA	NA			NA	NA
Bank	$	203,951	10.12	%	$	120,872	6.00	%	$	171,236	8.50	%	$	161,163	8.00	%
Common Equity Tier 1 capital (to risk-weighted assets):
Corporation	$	178,882	8.86	%		NA	NA			NA	NA			NA	NA
Bank	$	203,951	10.12	%	$	90,654	4.50	%	$	141,018	7.00	%	$	130,945	6.50	%
Tier 1 capital (to average assets):
Corporation	$	178,882	8.46	%		NA	NA			NA	NA			NA	NA
Bank	$	203,951	9.67	%	$	84,390	4.00	%		84,390	4.00	%	$	105,487	5.00	%

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

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

	Notional Amount
	June 30, 2019		December 31, 2018

					Notional Amount
					June 30, 2020		December 31, 2019
Commitments to extend credit:
Fixed	$	44,412	$	57,911	$	68,022	$	49,741
Variable		251,085		268,541		377,052		333,468
Credit card arrangements		8,064		7,119		9,719		11,148
Letters of credit		23,962		25,261		7,501		17,121


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

June 30, 2020
Assets
Securities available for sale
Obligations of U.S. Government sponsored agencies	$	14,599	$	—	$	14,599	$	—
Obligations of states and political subdivisions		75,226		—		75,226		—
Mortgage-backed securities		54,111		—		54,111		—
Corporate notes		27,512		—		27,512		—
Certificates of deposit		2,619		—		2,619		—
Mortgage servicing rights		4,126		—		4,126		—

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

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

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

December 31, 2018
Assets
Securities available for sale
Obligations of states and political subdivisions	$	51,893	$	-	$	51,493	$	400
Mortgage-backed securities		50,569		-		50,569		-
Corporate notes		16,444		-		16,444		-
Mortgage servicing rights		3,085		-		3,085		-


	June 30, 2020		December 31, 2019

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