Bank First Corp. 2019 Q3 Form 10-Q Summary
Business Context and Reporting Period
Bank First Corporation is a Wisconsin bank holding company for Bank First, N.A., a full-service community bank with 23 locations across Wisconsin. The filing covers the three and nine months ended September 30, 2019. Results are unaudited and presented in accordance with U.S. GAAP. On July 12, 2019, the Company completed its acquisition of Partnership Community Bancshares, adding four banking locations and expanding its Wisconsin market presence.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net interest income | $20.3 million | $15.5 million | $50.9 million | $47.6 million |
| Provision for loan losses | $3.0 million | $0.8 million | $4.1 million | $2.2 million |
| Noninterest income | $3.1 million | $2.5 million | $9.2 million | $9.0 million |
| Noninterest expense | $12.1 million | $9.7 million | $31.3 million | $29.7 million |
| Net income | $6.7 million | $5.9 million | $19.2 million | $19.4 million |
| Diluted EPS | $0.93 | $0.89 | $2.83 | $2.90 |
| Tax-equivalent net interest margin | 4.30% | 3.81% | 3.98% | 3.90% |
| Return on average assets | 1.27% | 1.33% | 1.36% | 1.45% |
| Return on average common equity | 11.72% | 14.04% | 13.17% | 15.77% |
All dollar amounts in the table are in millions except per-share data.
- Total assets were $2.16 billion at September 30, 2019, up 20.7% from December 31, 2018.
- Net loans were $1.70 billion, up $287.8 million, or 20.3%, from year-end 2018. Growth was primarily attributable to loans acquired in the Partnership transaction.
- Total deposits were $1.84 billion, up 18.0% from December 31, 2018. Noninterest-bearing deposits were $566.1 million.
- Cash and cash equivalents were $118.4 million, compared with $107.7 million at year-end 2018.
- Total stockholders’ equity was $225.3 million, compared with $174.3 million at year-end 2018. Book value per share was $31.81; tangible book value per share was $24.86.
- Net charge-offs were $6.2 million for the first nine months, compared with $2.2 million in the prior-year period. The allowance for loan losses was $10.1 million, or 0.59% of loans, versus $11.6 million, or 0.80%, at September 30, 2018.
- Nonperforming loans were $5.2 million, or 0.30% of gross loans, compared with $20.5 million, or 1.44%, at December 31, 2018. Nonperforming assets were 0.52% of total assets.
- Regulatory capital remained strong. Bank First, N.A. reported total risk-based capital of 11.10%, common equity Tier 1 capital of 10.56%, and Tier 1 leverage capital of 9.79% at September 30, 2019, exceeding applicable well-capitalized standards.
- Operating cash flow was $9.1 million for the first nine months, compared with $10.2 million in the prior-year period. Investing activities used $23.5 million, while financing activities provided $25.0 million.
Material Changes Versus Prior Comparable Period
- Q3 net income increased 12.2%, while nine-month net income declined 0.8% because acquisition-related expenses offset stronger net interest income.
- Q3 net interest income rose 30.7%, supported by larger loan balances, the Partnership acquisition, and higher purchase-accounting accretion. Purchase-accounting accretion contributed approximately $2.6 million after tax in Q3 2019 versus $1.0 million in Q3 2018.
- The Q3 provision for loan losses increased by $2.2 million to $3.0 million. Management attributed the elevated provision and charge-offs to exiting poor-quality loan relationships retained from the 2017 Waupaca acquisition.
- Q3 noninterest income increased 25%, led by higher income from Ansay and UFS, increased loan-servicing income, and stronger mortgage-loan sale gains.
- Q3 noninterest expense increased 25%, reflecting the Partnership acquisition, additional staffing and occupancy costs, transaction expenses, data-processing and outside-service costs, and higher intangible amortization.
- Loans increased approximately 20.0% from December 31, 2018, with commercial real estate, construction and development, and residential lending showing the largest growth.
- Borrowings increased: FHLB advances were $39.8 million, notes payable were $10.0 million, and subordinated notes were $18.7 million at September 30, 2019. Repurchase agreements declined to $12.2 million from $31.5 million at year-end.
- Available-for-sale securities increased to $136.9 million from $118.9 million. Unrealized gains increased materially as market interest rates declined; management considered identified unrealized losses temporary and not credit-related.
Guidance, Outlook, Commentary, Risks and Unusual Items
- The filing does not provide formal earnings or revenue guidance. Management stated that liquidity was adequate and that it knew of no trend or event expected to materially impair liquidity.
- Management expects the Bank to continue exceeding applicable well-capitalized regulatory requirements and the capital conservation buffer.
- Management is evaluating the expected impact of the CECL accounting standard. The filing states that implementation generally may increase required allowance balances; the effective date for smaller public companies was expected to be delayed to periods beginning after December 15, 2022.
- Interest-rate risk is significant because earnings depend on the spread between loan and investment yields and deposit and borrowing costs. The Company’s simulation estimated that a 400-basis-point rate increase would increase projected 12-month net interest income by 5.3%, while a 100-basis-point decrease would reduce it by 3.3%.
- The economic value of equity model estimated an 8.2% increase from an instantaneous 200-basis-point rate increase and a 6.9% decrease from a 100-basis-point decrease. These estimates depend on uncertain assumptions regarding prepayments, reinvestment rates and deposit behavior.
- Off-balance-sheet commitments totaled $378.1 million at September 30, 2019, including $352.0 million of unused credit lines, $17.7 million of letters of credit and $8.4 million of credit card arrangements.
- Mortgage rate-lock commitments increased to approximately $20.7 million from $3.3 million at December 31, 2018.
- The Company recognized a $0.2 million gain on the sale of an other investment and a $0.6 million gain from revaluing another financial institution’s common stock during the first nine months.
- The Company adopted lease accounting guidance in 2019 and recorded approximately $1.7 million of right-of-use assets and lease liabilities.
- Management stated that litigation in the ordinary course is not expected to materially affect financial position, results of operations or liquidity. No material changes were reported to previously disclosed risk factors.
- PKM disclosed a potential auditor-independence issue involving a tax-provision template used as supplemental audit evidence. The Company stopped using the template in 2019. PKM resigned following its combination with Wipfli, and Dixon Hughes Goodman was engaged as the 2019 independent registered public accounting firm.
Most Important Facts for Investors to Verify
- Whether the elevated Q3 charge-offs and loan-loss provision were limited to legacy Waupaca credits or indicate broader deterioration in the expanded loan portfolio.
- The sustainability of earnings from purchase-accounting accretion, which materially benefited Q3 net interest income.
- Integration results, recurring expenses and expected earnings contribution from the Partnership acquisition.
- Deposit pricing, funding costs and net interest margin sensitivity as interest rates change.
- Credit concentrations in commercial real estate and construction and development loans, which represented approximately 47% and 7% of total loans, respectively.
- The adequacy of the allowance for loan losses and the eventual capital impact of CECL adoption.
- Liquidity and refinancing exposure associated with FHLB advances and the two $5.0 million lines of credit due in May 2020.
- The status and implications of the auditor-independence matter and the transition to Dixon Hughes Goodman.