Bank First National Corporation — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and nine months ended September 30, 2018. Bank First National Corporation is the holding company for Bank First, N.A., a Wisconsin full-service community bank with 18 locations in seven Wisconsin counties. The bank provides commercial, real estate, residential, consumer, deposit and treasury-management services. Results include the operations of Waupaca Bancorporation, acquired on October 27, 2017, including six additional branches.
Financial statements are unaudited and presented in accordance with U.S. GAAP. Amounts below are in thousands unless otherwise indicated.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Change |
|---|---|---|---|
| Interest income | $19,510 | $12,629 | 54.5% increase |
| Interest expense | $3,974 | $1,998 | 98.9% increase |
| Net interest income | $15,536 | $10,631 | 46.1% increase |
| Provision for loan losses | $800 | $255 | Increase |
| Noninterest income | $2,508 | $2,247 | 12% increase |
| Noninterest expense | $9,708 | $6,974 | 39% increase |
| Net income | $5,932 | $3,831 | 54.9% increase |
| Basic and diluted EPS | $0.89 | $0.62 | 43.5% increase |
| Tax-equivalent net interest margin | 3.81% | 3.35% | 46 basis-point increase |
| Return on average assets | 1.33% | 1.08% | Increase |
| Return on average common equity | 14.04% | 11.32% | Increase |
| Metric | Nine months 2018 | Nine months 2017 | Change |
|---|---|---|---|
| Net interest income | $47,586 | $30,608 | 55.5% increase |
| Provision for loan losses | $2,185 | $635 | Increase |
| Noninterest income | $8,978 | $7,961 | 13% increase |
| Noninterest expense | $29,749 | $19,976 | 49% increase |
| Net income | $19,395 | $12,035 | 61.2% increase |
| Basic and diluted EPS | $2.90 | $1.95 | 48.7% increase |
| Tax-equivalent net interest margin | 3.90% | 3.27% | 63 basis-point increase |
| Return on average assets | 1.45% | 1.15% | Increase |
| Return on average common equity | 15.77% | 12.19% | Increase |
Balance sheet, liquidity and capital
- Total assets were $1.736 billion, down 1.0% from $1.753 billion at December 31, 2017.
- Net loans were $1.430 billion, up 3.2% from $1.386 billion at year-end. Gross loans were $1.441 billion; commercial real estate represented approximately 45% and residential 1-4 family loans 25% of the portfolio.
- Total deposits were $1.486 billion, down 1.3% from $1.507 billion. Noninterest-bearing deposits declined, while interest-bearing deposits increased.
- Cash and cash equivalents declined to $35.3 million from $102.0 million at year-end. Nine-month operating cash flow was $10.2 million, investing cash use was $46.4 million and financing cash use was $30.4 million.
- Borrowings included $46.0 million of short-term Federal Home Loan Bank advances, $2.0 million of notes payable and $11.5 million of subordinated notes. The subordinated notes carry variable rates, mature in 10 years and qualify as Tier 2 capital.
- Stockholders’ equity increased 4.6% to $169.1 million. Book value per common share was $25.40 and tangible book value per common share was $22.78.
- The bank met all applicable capital requirements and was well capitalized. Bank total capital to risk-weighted assets was 11.00%, common equity Tier 1 was 10.27% and Tier 1 leverage was 9.36% at September 30, 2018.
Material changes versus comparable periods
- The Waupaca acquisition substantially increased the scale of the loan portfolio, earning assets, deposits, personnel and operating expenses. Management attributed most of the year-over-year revenue and expense changes to the acquisition, supplemented by higher interest rates.
- Loan interest income increased 57.7% in the third quarter and 63.9% year to date, while average interest-earning assets increased to approximately $1.7 billion from $1.3 billion in the comparable periods.
- Funding costs rose materially. Q3 average interest-bearing deposit cost increased to 1.23% from 0.82%, and nine-month average cost of interest-bearing liabilities increased to 1.18% from 0.78%.
- Noninterest income benefited from higher service charges, subsidiary earnings and other income, but mortgage loan-sale gains declined 55% in Q3 and 40% year to date because of slower mortgage originations.
- Noninterest expense increased primarily from additional employees, branch operations, data processing, foreclosure and collection costs, OREO activity and amortization of acquisition-related intangibles.
- Credit metrics weakened relative to the prior-year comparable period. Nonperforming loans increased to $28.7 million, or 1.99% of gross loans, from $1.0 million, or 0.10%; management attributed approximately $19.4 million of acquired nonperforming loans to the Waupaca transaction.
- Net charge-offs were $2.3 million in Q3 and $2.2 million for the first nine months, compared with $76,000 and $120,000, respectively, in the prior-year periods. The allowance for loan losses was $11.6 million, or 0.80% of loans.
- Available-for-sale securities had $2.5 million of gross unrealized losses at quarter-end versus $0.5 million at year-end, primarily from interest-rate and market-spread changes. Management did not consider the securities other-than-temporarily impaired.
Outlook, risks, contingencies and unusual items
- No formal earnings or revenue guidance was provided. Management stated that current liquidity was adequate and identified no known trend or event expected to materially impair liquidity.
- Management expects higher public-company costs for legal, regulatory, accounting, investor-relations, technology and compliance activities following the company’s 2018 registration as a public company.
- Interest-rate risk is material. The company’s simulation estimated that a parallel 400-basis-point increase could increase projected 12-month net interest income by 2.5%, while a 100-basis-point decline could reduce it by 2.6%. These estimates assume no balance-sheet growth and are sensitive to deposit-pricing and behavioral assumptions.
- Credit-loss estimates depend on loan growth, portfolio mix, delinquencies, collateral values, economic conditions and regulatory review. Management acknowledged that additional provisions could be required if actual outcomes or regulatory assessments differ from estimates.
- Off-balance-sheet commitments totaled $352.3 million, including $320.4 million of unused lines of credit, $25.4 million of letters of credit and $6.5 million of credit-card arrangements. Rate-lock mortgage commitments were $7.0 million.
- The company authorized a $10 million share-repurchase program expiring in April 2019. It repurchased 4,587 shares in Q3 for approximately $246 thousand, leaving approximately $7.6 million available under the program.
- A regular quarterly dividend of $0.20 per share was declared on October 16, 2018, payable January 7, 2019, totaling approximately $1.3 million.
- The company adopted several accounting updates in 2018 without material impact. It is evaluating the future expected-credit-loss standard, which management expects could increase required allowance balances across the banking industry.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. Normal-course litigation is not expected to materially affect financial position, results or liquidity.
Investor verification checklist
- Verify the sustainability of loan growth and net interest margin as funding costs continue to rise.
- Assess the credit performance of the acquired Waupaca portfolio, including nonaccrual loans, charge-offs, classified loans and OREO.
- Review whether the $11.6 million allowance adequately covers the $28.7 million of nonperforming loans and the portfolio’s commercial real estate concentration.
- Monitor liquidity after the substantial decline in cash and the increased use of Federal Home Loan Bank advances.
- Evaluate the effect of higher public-company costs, acquisition-related expenses and acquisition-intangible amortization on future operating leverage.
- Confirm capital ratios, the fully phased-in capital conservation buffer and the treatment of subordinated debt as regulatory capital.
- Track unrealized securities losses, deposit repricing, interest-rate sensitivity and the impact of mortgage origination volumes on noninterest income.
- Confirm execution and remaining capacity of the share-repurchase program and the company’s ability to fund dividends while supporting loan growth.