Business Context and Reporting Period
Bank First Corporation is a Wisconsin bank holding company for Bank First, N.A., which operated 23 Wisconsin locations at March 31, 2020. The unaudited Form 10-Q covers the three months ended March 31, 2020, with comparisons to March 31, 2019 and December 31, 2019. Unless stated otherwise, amounts are in thousands.
The company provides commercial, real estate, residential, consumer, deposit and treasury-management services. Its principal funding source is deposits, and its primary earning asset is the loan portfolio. The 2019 Partnership acquisition materially increased the company’s scale and affected year-over-year comparisons.
Financial Performance and Condition
| Metric | Q1 2020 | Comparable period or date |
|---|---|---|
| Total interest income | $23,296 | $19,723 in Q1 2019 |
| Net interest income | $18,643 | $15,200 in Q1 2019 |
| Provision for loan losses | $975 | $625 in Q1 2019 |
| Noninterest income | $3,897 | $3,540 in Q1 2019 |
| Noninterest expense | $12,741 | $9,536 in Q1 2019 |
| Income before taxes | $8,824 | $8,579 in Q1 2019 |
| Net income | $7,266 | $6,587 in Q1 2019 |
| Diluted earnings per share | $1.02 | $1.00 in Q1 2019 |
| Dividends per share | $0.20 | $0.20 in Q1 2019 |
- Tax-equivalent net interest margin was 3.81%, compared with 3.82% in Q1 2019. Return on average assets was 1.32% and return on average common equity was 12.45%.
- Total assets were $2.20 billion at March 31, 2020, compared with $2.21 billion at December 31, 2019. Net loans were $1.75 billion, up $27.3 million, or 1.6%, from year-end.
- Total deposits were $1.85 billion, up $3.9 million from December 31, 2019. Noninterest-bearing deposits were $476.6 million and interest-bearing deposits were $1.37 billion.
- Cash and cash equivalents declined to $54.2 million from $86.5 million at year-end. Total investment securities were $215.8 million, down from $225.2 million.
- Stockholders’ equity increased to $237.7 million from $230.2 million. Book value per common share was $33.21 and tangible book value per common share was $26.44.
- Cash flow was negative: operating activities used $2.1 million, investing activities used $18.6 million, and financing activities used $11.6 million. Cash and cash equivalents decreased by $32.3 million during the quarter.
- Borrowings included $38.8 million of FHLB advances, $10.0 million of bank lines of credit, $35.8 million of repurchase agreements and $18.6 million of subordinated notes. Two $5.0 million lines of credit were scheduled to mature in May 2020.
- The allowance for loan losses was $13.0 million, or 0.73% of total loans, compared with $11.4 million, or 0.66%, at December 31, 2019. Q1 net recoveries were $596, compared with net charge-offs of $660 in Q1 2019.
- Nonperforming loans were $7.4 million, or 0.42% of gross loans, versus $5.4 million, or 0.31%, at December 31, 2019. Nonperforming assets were 0.51% of total assets.
- The Bank remained well capitalized. At March 31, 2020, Bank First, N.A. reported total risk-based capital of 11.11%, Tier 1 risk-based capital of 10.47%, common equity Tier 1 capital of 10.47% and Tier 1 leverage capital of 9.91%.
Material Changes Versus Prior Comparable Period
- Net income increased $679,000, or approximately 10%, primarily because of the additional scale from the Partnership acquisition.
- Net interest income increased $3.4 million, or 22.7%, as average interest-earning assets increased to $2.01 billion from $1.65 billion and average loans increased by approximately $310 million. Lower purchase-accounting accretion partially offset core margin improvement.
- Interest income increased 18.1%, while interest expense increased 2.9%. The average cost of interest-bearing deposits declined to 1.20% from 1.55%.
- Noninterest income increased 10%. Growth in service charges, UFS income, loan servicing income and mortgage-loan sale gains was partly offset by the absence of prior-year investment-sale gains and lower gains on other investments.
- Noninterest expense increased 34% to $12.7 million. Increases reflected acquired operations, higher personnel and occupancy costs, remote-work and sanitation investments related to COVID-19, and costs incurred in anticipation of the Timberwood acquisition.
- The provision for loan losses increased to $975,000 from $625,000, primarily because management increased qualitative factors in the allowance calculation in response to heightened COVID-19 economic risks.
- Loans classified as watch increased to $128.3 million from $105.5 million at year-end, while substandard loans declined modestly to $58.3 million from $60.3 million.
- The company repurchased 52,032 shares during the quarter for approximately $3.0 million, including 760 shares under the publicly announced repurchase program. The $10 million repurchase authorization expired April 21, 2020.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal earnings or financial guidance.
- COVID-19 was identified as a significant uncertainty. The pandemic, business restrictions, unemployment, weaker consumer spending and economic contraction could adversely affect borrowers’ repayment capacity, collateral values, loan demand, credit losses, liquidity and operating results.
- Management reported increased requests for loan modifications and payment deferrals after March 31, 2020. The CARES Act permits qualifying COVID-19-related modifications to be exempted from troubled-debt-restructuring treatment.
- As of May 11, 2020, the company had secured funding for approximately 1,635 Paycheck Protection Program loans totaling approximately $266.8 million.
- The Timberwood merger was expected to close May 15, 2020. Consideration was expected to be approximately $32.6 million in Bank First common stock. Based on March 31 results, the combined company was expected to have approximately $2.4 billion of assets, $1.8 billion of loans and $2.0 billion of deposits.
- OREO losses and valuations increased to $976,000 from $36,000 in Q1 2019. The company also incurred one-time or acquisition-related expenses, including data-processing and outside-service costs.
- Management considers securities with unrealized losses to be temporarily impaired because of interest-rate and market-spread changes rather than credit deterioration. No other-than-temporary impairment was recorded.
- Credit-loss estimates remain highly judgmental. The company expects adoption of the current expected credit loss standard in periods beginning after December 15, 2022, and expects industry implementation generally to result in higher allowance balances.
- Interest-rate risk remains material. The company’s simulation estimated that a 100-basis-point decline in rates would reduce projected 12-month net interest income by 1.2%, while a 400-basis-point increase would increase it by 3.7%, assuming no balance-sheet growth.
- The company stated that current liquidity was adequate and that it knew of no trend or event expected to materially impair liquidity. Nonetheless, cash declined materially during the quarter and near-term line-of-credit maturities should be monitored.
- Management stated that no material changes occurred in previously disclosed risk factors, and that disclosure controls and procedures were effective at quarter-end.
Most Important Facts for Investors to Verify
- Track COVID-19-related payment deferrals, PPP loan performance, borrower concentrations and subsequent changes in nonperforming loans and the allowance for loan losses.
- Verify the May 2020 maturities and refinancing or repayment of the two $5.0 million bank lines of credit and other short-term funding sources.
- Confirm completion, accounting treatment and integration costs of the Timberwood merger.
- Assess whether loan growth, deposit trends and the $54.2 million quarter-end cash balance support liquidity needs under stressed conditions.
- Evaluate the sustainability of mortgage-loan sale gains, loan-servicing income and income from UFS and Ansay, including their contribution to noninterest income.
- Monitor the effect of lower interest rates and changing deposit pricing on the 3.81% net interest margin.
- Review the significant commercial real estate exposure, which represented approximately 47% of total loans, and the increase in watch-rated credits.
- Reconcile non-GAAP tangible book value and tangible equity measures to GAAP equity and assess future goodwill or intangible-asset effects.