Bank First Corp. 2022 Q2 Form 10-Q Summary
Business context and reporting period
Bank First Corporation is a Wisconsin-based bank holding company for Bank First, N.A., a full-service community bank with 21 Wisconsin locations. The filing covers the quarter and six months ended June 30, 2022; financial statements are unaudited except for the December 31, 2021 balance sheet.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $23.5 million | $21.8 million | $45.8 million | $43.9 million |
| Provision for loan losses | $0.5 million | $1.0 million | $1.7 million | $1.9 million |
| Noninterest income | $5.6 million | $6.6 million | $10.8 million | $13.0 million |
| Noninterest expense | $13.2 million | $12.3 million | $26.0 million | $24.7 million |
| Net income | $11.7 million | $11.5 million | $21.8 million | $23.1 million |
| Diluted EPS | $1.55 | $1.50 | $2.89 | $2.99 |
| Tax-equivalent net interest margin | 3.21% | 3.37% | 3.13% | 3.47% |
- Total assets were $2.96 billion at June 30, 2022, up 0.8% from December 31, 2021.
- Loans, net, were $2.365 billion, up $149.7 million, or 6.8%, from year-end 2021. Loan growth was broad-based, led by residential 1-4 family, commercial real estate, commercial and industrial, and construction and development loans.
- Total deposits were $2.601 billion, up $73.0 million, or 2.9%, from year-end 2021. Noninterest-bearing deposits were $819.9 million.
- Cash and cash equivalents declined to $44.0 million from $296.9 million at year-end, primarily because of loan growth and approximately $100 million invested in one-year Treasury notes.
- Allowance for loan losses was $22.7 million, or 0.95% of loans, versus $20.3 million, or 0.91%, at December 31, 2021. The company recorded net recoveries of $0.7 million during the first six months.
- Nonperforming assets were $5.5 million, or 0.18% of total assets, compared with $8.4 million, or 0.28%, at year-end 2021. Nonaccrual loans were $4.3 million.
- FHLB borrowings declined to $1.7 million from $8.0 million; subordinated notes remained $17.5 million. The company also maintained an undrawn $7.5 million bank line of credit.
- Stockholders’ equity was $314.2 million, down 2.6% from year-end. Book value per common share was $42.06 and tangible book value per common share was $34.18.
- Operating cash flow was $10.1 million for the first six months. Investing cash flow was negative $289.6 million, principally from net loan growth and securities purchases. Financing cash flow was positive $26.6 million.
- The Bank’s June 30 capital ratios exceeded well-capitalized standards: total risk-based capital was 11.70%, Tier 1 risk-based capital was 10.81%, CET1 was 10.81%, and Tier 1 leverage was 8.96%.
Material changes versus comparable periods
- Second-quarter net income increased $0.1 million, or approximately 1%, as higher net interest income and lower loan-loss provision largely offset weaker mortgage-related revenue and higher operating expenses.
- Six-month net income decreased $1.2 million, or approximately 5%, primarily because residential mortgage production slowed and PPP loan interest income declined to $1.1 million from $4.3 million.
- Six-month net interest income increased $1.9 million, or 4%, despite net interest margin declining 34 basis points to 3.13%. Management attributed the margin pressure partly to lower purchase-accounting accretion and a short-term balance-sheet strategy.
- Six-month noninterest income declined $2.2 million, or 17%. Mortgage loan-sale gains fell $3.9 million, or 79%, while loan servicing income rose $1.5 million, including approximately $2.0 million of MSR valuation benefits during the first half.
- Six-month noninterest expense increased $1.3 million, or 5%, including $1.1 million of Denmark acquisition-related outside service fees.
- Available-for-sale securities increased to $292.4 million from $212.7 million at year-end, while gross unrealized losses expanded to $17.1 million from $0.7 million because of interest-rate and market-spread changes. Management did not consider the losses credit-related or other-than-temporary.
- The company repurchased $12.2 million of common stock during the first six months and repurchased 100,837 shares during the second quarter at an average price of $72.04.
Guidance, outlook, risks and unusual items
- Management described the balance sheet as asset-sensitive and expects higher loan demand and interest rates to improve returns, although actual results remain exposed to economic conditions, competition, the yield curve and deposit pricing.
- The Denmark Bancshares merger was expected to close in the third quarter of 2022. Consideration was expected to total approximately $119 million, consisting of up to 20% cash and at least 80% Bank First common stock. Pro forma June 30 assets, loans and deposits were estimated at approximately $3.64 billion, $2.85 billion and $3.21 billion, respectively.
- On July 25, 2022, the company announced a proposed Hometown Bancorp merger, expected to close in the first quarter of 2023, subject to shareholder and regulatory approvals. Consideration was expected to total approximately $124 million, with up to 30% cash and at least 70% common stock.
- Management stated that implementation of CECL in the first quarter of 2023 was not expected to have a significant impact on overall allowance balances, although the filing notes that implementation may increase required reserves across the banking industry.
- Key risks include interest-rate sensitivity, unrealized securities losses, credit-loss estimation, commercial real estate and construction exposure, deposit retention and liquidity, merger execution and integration, inflation, labor and supply-chain pressures, and mortgage-market contraction.
- Interest-rate simulation indicated that a 400-basis-point increase could raise projected next-12-month net interest income by 1.4%, while a 100-basis-point decrease could reduce it by 2.5%. The company estimated a 2.91% increase in economic value of equity from an immediate 200-basis-point increase and a 3.51% decrease from a 100-basis-point decrease.
- Management reported effective disclosure controls, no material changes to internal control over financial reporting, no material litigation exposure, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Closing dates, consideration mix, approvals, fair-value marks and integration costs for the Denmark and Hometown acquisitions.
- Whether loan growth, deposit growth and the asset-sensitive balance sheet translate into sustainable net interest income and margin expansion.
- The effect of rising rates on the $17.1 million available-for-sale unrealized loss, tangible equity and regulatory capital.
- Credit performance in commercial real estate, construction and development, and residential lending, including allowance adequacy after CECL adoption.
- The sustainability of MSR valuation gains and the effect of reduced mortgage originations on loan-sale and servicing income.
- Liquidity trends following the decline in cash and cash equivalents, including reliance on deposits, securities liquidity, FHLB capacity and the undrawn line of credit.
- Share repurchase activity, capital requirements and the effect of acquisition funding on dilution and tangible book value.