Bank First Corp. 2022 Q3 Form 10-Q Summary
Business context and reporting period
Bank First Corporation is the holding company for Bank First, N.A., a Wisconsin community bank operating 26 locations. The filing covers the unaudited quarter and nine months ended September 30, 2022, compared primarily with the same periods in 2021 and December 31, 2021 balance-sheet amounts.
On August 12, 2022, the Company completed its acquisition of Denmark Bancshares, Inc. and Denmark State Bank. The transaction added seven branches, approximately $457.1 million of loans and $604.8 million of deposits at fair value, and resulted in the issuance of 1,586,475 shares valued at approximately $125.3 million. Five acquired branches opened as Bank First branches on August 15, 2022.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net interest income | $27.7 million | $22.9 million | $73.5 million | $66.9 million |
| Provision for loan losses | $0 | $0.7 million | $1.7 million | $2.5 million |
| Noninterest income | $5.2 million | $5.0 million | $16.0 million | $18.0 million |
| Noninterest expense | $18.9 million | $12.5 million | $44.8 million | $37.1 million |
| Net income | $10.5 million | $11.2 million | $32.4 million | $34.3 million |
| Diluted EPS | $1.26 | $1.46 | $4.15 | $4.45 |
| Tax-equivalent net interest margin | 3.63% | 3.47% | 3.30% | 3.47% |
Q3 net income declined 6.1% year over year, while nine-month net income declined 5.6%. The principal offset to stronger net interest income was higher acquisition-related and operating expenses.
- Total assets increased 23.9% to $3.64 billion from $2.94 billion at December 31, 2021.
- Loans, net, increased 28.0% to $2.84 billion; gross loans were $2.86 billion.
- Total deposits increased 24.1% to $3.14 billion, including $971.8 million of noninterest-bearing deposits and $2.17 billion of interest-bearing deposits.
- Stockholders’ equity increased 36.2% to $439.4 million, primarily from shares issued for the Denmark acquisition, partly offset by accumulated unrealized securities losses and share repurchases.
- Cash and cash equivalents declined to $143.4 million from $296.9 million at year-end 2021.
- Available-for-sale and held-to-maturity securities totaled $344.1 million at September 30, 2022. Available-for-sale securities had $26.1 million of gross unrealized losses, attributed principally to interest-rate and market-spread changes rather than credit deterioration.
- The allowance for loan losses was $23.0 million, or 0.81% of loans, compared with $20.2 million, or 0.92%, at September 30, 2021.
- Nonperforming assets were $6.2 million, or 0.17% of total assets, compared with $12.1 million, or 0.42%, at September 30, 2021.
- FHLB borrowings declined to $2.6 million from $8.0 million at year-end; subordinated notes increased to $23.5 million from $17.5 million.
- Net cash provided by operating activities was $20.0 million. Investing activities used $139.2 million, including $162.7 million for net loan growth and $138.3 million for securities purchases, partly offset by $154.4 million of cash received in the Denmark acquisition. Financing activities used $34.2 million.
Material changes versus prior comparable periods
- Q3 net interest income rose $4.8 million, or 20.8%, driven by larger interest-earning assets and a higher quarterly net interest margin. Average interest-earning assets increased to $3.06 billion from $2.66 billion.
- Nine-month net interest income rose $6.6 million, or 9.9%, although the nine-month margin fell to 3.30% from 3.47%. Management attributed the margin decline partly to a temporary strategy involving approximately $300 million of short-term borrowings invested in short-term investments at a spread below 0.20%.
- Q3 noninterest expense increased 51.6%, primarily from Denmark acquisition costs, increased personnel and operating scale, data-processing expenses, outside service fees, and amortization of the newly recorded $15.1 million core deposit intangible.
- Nine-month noninterest income declined 11.5%, primarily because mortgage-loan sale gains fell 78% to $1.3 million as higher interest rates slowed residential mortgage production. Loan servicing income increased to $4.8 million, including $2.8 million of MSR valuation gains.
- Loan growth was largely acquisition-driven, with Denmark contributing approximately $457.1 million of loans. Commercial real estate represented approximately 49% of the loan portfolio, while residential 1-4 family loans represented approximately 25%.
- Accumulated other comprehensive loss was $18.7 million at September 30, 2022, compared with accumulated other comprehensive income of $3.6 million at year-end 2021, reflecting unrealized losses on available-for-sale securities.
Guidance, outlook, commentary, risks and unusual items
- Management stated that the Company has an asset-sensitive balance sheet and expects loan demand and higher interest rates to improve returns, but acknowledged uncertainty from inflation, monetary-policy tightening, supply-chain disruptions, labor shortages and economic conditions.
- The Company expects its acquisition of Hometown Bancorp, Ltd. to close during the first quarter of 2023, subject to shareholder and regulatory approvals. Consideration is expected to be approximately $124 million, consisting of no more than 30% cash and at least 70% Bank First common stock. Based on September 30 results, the combined company would have approximately $4.26 billion of assets, $3.25 billion of loans and $3.68 billion of deposits.
- The Company expects to adopt the current expected credit losses standard in the first quarter of 2023. Parallel calculations indicated an estimated allowance-to-loans ratio of 1.00% to 1.20%, compared with 0.81% under the current methodology as of September 30, 2022. The ultimate impact remains subject to assumptions and economic conditions.
- The Bank and Company exceeded applicable regulatory capital requirements. At September 30, 2022, the Company reported a 10.44% CET1 ratio, 10.44% Tier 1 risk-based capital ratio, 11.92% total capital ratio and 10.22% Tier 1 leverage ratio. The Bank was reported as well capitalized.
- Interest-rate sensitivity modeling estimated a 3.7% increase in next-12-month net interest income under an instantaneous 400-basis-point rate increase and a 2.8% decline under a 100-basis-point decrease. These estimates depend on assumptions regarding deposit pricing, prepayments and customer behavior.
- Off-balance-sheet commitments totaled $675.1 million, including $646.4 million of unused lines of credit, $11.9 million of letters of credit and $16.8 million of credit-card arrangements. Rate-lock commitments for mortgage loans were approximately $7.1 million.
- Management believes liquidity is adequate and stated that it knows of no trend or event expected to materially impair liquidity. Litigation is described as ordinary-course litigation not expected to materially affect financial condition, results or liquidity.
- The Company reactivated a $30 million share-repurchase program through April 18, 2023. It repurchased 28,423 shares in July and August 2022 at an average price of $78.29 per share, leaving 266,466 shares available under the program at September 30.
- Disclosure controls and procedures were deemed effective, and no material change in internal control over financial reporting was reported.
Investor verification points
- Verify the final purchase-accounting adjustments for the Denmark acquisition, including goodwill, core deposit intangibles, acquired-loan marks and related amortization.
- Assess the effect of the Hometown transaction on capital, tangible book value, dilution, liquidity and operating expenses if it closes as expected.
- Monitor deposit pricing, funding costs and net interest margin as interest rates continue to change.
- Evaluate the sustainability of MSR valuation gains and the reduced mortgage-loan sale revenue outlook.
- Review the CECL adoption impact and whether the allowance moves toward management’s preliminary 1.00%–1.20% range.
- Review unrealized securities losses, accumulated other comprehensive loss and the potential effect of any required securities sales on capital and earnings.
- Monitor commercial real estate, construction and development exposure, nonperforming loans, criticized credits and allowance adequacy as the loan portfolio expands.
- Confirm the remaining share-repurchase authorization and the effect of repurchases and acquisition-related share issuance on per-share results.