Bank First Corporation 2022 Form 10-K Summary
Business Context and Reporting Period
Bank First Corporation is a Wisconsin bank holding company whose principal subsidiary, Bank First, N.A., operates 28 banking offices and provides commercial, retail, mortgage, deposit, treasury-management and related financial services. The filing covers the fiscal year ended December 31, 2022, with comparisons to 2021 and 2020. The company serves customers primarily in Wisconsin and reported approximately 382 full-time equivalent employees.
Denmark Bancshares was acquired on August 12, 2022, and its results were included from the closing date. Hometown Bancorp was acquired on February 10, 2023, after year-end and therefore was not included in 2022 results.
Financial Performance and Key Metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net income | $45.2 million | $45.4 million | Down 0.1% |
| Diluted EPS | $5.58 | $5.92 | Down 5.7% |
| Total interest income | $116.5 million | $98.4 million | Up 18.4% |
| Net interest income | $104.1 million | $90.1 million | Up 15.6% |
| Net interest income after provision | $101.9 million | $87.0 million | Up 17.1% |
| Net interest margin | 3.41% | 3.47% | Down 6 basis points |
| Noninterest income | $19.8 million | $23.5 million | Down 15.7% |
| Noninterest expense | $62.1 million | $50.6 million | Up 22.8% |
| Provision for loan losses | $2.2 million | $3.1 million | Down $0.9 million |
| Effective tax rate | 24.2% | 24.2% | Unchanged |
Growth in interest income and net interest income was driven primarily by the Denmark acquisition, higher average earning assets and rising interest rates. Higher funding costs partially offset the benefit: interest expense increased 49.9% to $12.4 million, while the average cost of interest-bearing liabilities increased from 0.48% to 0.60%.
Noninterest income declined principally because net gains on mortgage-loan sales fell to $1.6 million from $7.4 million as retail mortgage activity slowed. This was partly offset by higher mortgage-servicing-rights valuation income and increased earnings from the UFS data-processing investment. Noninterest expense increased due to acquisition-related personnel, occupancy, data-processing, outside-service and intangible-amortization costs.
Financial Position, Cash Flow, Debt and Liquidity
- Total assets increased 24.6% to $3.66 billion, principally reflecting $685.8 million of assets acquired from Denmark.
- Total loans increased 29.4% to $2.89 billion; net loans were $2.87 billion. Commercial real estate represented approximately 48% of loans, residential 1-4 family loans 25%, commercial and industrial loans 17%, and construction and development loans 7%.
- Total deposits increased 21.0% to $3.06 billion. Noninterest-bearing deposits were $934.1 million, or approximately 30.5% of total deposits.
- Cash and cash equivalents declined to $119.4 million from $296.9 million, primarily because of loan growth, securities purchases and acquisition-related activity.
- Operating activities generated $40.0 million of cash. Investing activities used $177.8 million, including a $198.0 million net increase in loans and $142.4 million of securities purchases. Financing activities used $39.7 million.
- Repurchase agreements totaled $97.2 million at year-end, compared with $41.1 million in 2021. FHLB notes payable declined to $1.9 million from $8.0 million, while subordinated notes increased to $23.5 million from $17.5 million.
- Available liquidity included approximately $666.4 million of capacity for future FHLB draws. Management stated that current liquidity was adequate for anticipated needs, although deposits, wholesale funding costs and market conditions remain important sensitivities.
- Stockholders’ equity increased 40.4% to $453.1 million. Accumulated other comprehensive income declined to a $15.6 million loss, largely reflecting unrealized losses on available-for-sale securities.
Asset Quality, Capital and Other Unusual Items
- Nonaccrual loans declined to $3.6 million, or 0.13% of total loans, from $7.2 million, or 0.32%, in 2021. Total nonperforming assets were $6.4 million, or 0.18% of assets.
- The allowance for loan losses increased to $22.7 million, but coverage declined to 0.78% of loans from 0.91%, primarily because more loans were recorded under purchase accounting following the Denmark acquisition. Net recoveries were $0.2 million in 2022.
- The company’s available-for-sale securities had a fair value of $304.6 million and gross unrealized losses of $21.8 million at year-end. Management attributed the losses primarily to interest-rate changes and stated that it had the intent and ability to hold the securities.
- The Bank remained well capitalized. Bank First, N.A. reported a CET1 ratio of 11.03%, total risk-based capital ratio of 11.75% and leverage ratio of 9.93%, above applicable well-capitalized thresholds.
- Off-balance-sheet commitments totaled $688.3 million, including $660.6 million of unused lines of credit, $10.3 million of letters of credit and $17.4 million of credit-card arrangements.
- The company adopted the CECL credit-loss standard beginning January 1, 2023. Parallel modeling indicated that loan-loss coverage could increase from 0.78% to approximately 1.10%–1.20% of loans upon adoption.
Material Changes, Outlook and Risks
The principal 2022 changes were the Denmark acquisition, substantial balance-sheet growth, higher interest rates and funding costs, reduced mortgage-banking revenue, increased acquisition-related expenses and a significant decline in accumulated other comprehensive income from securities-market losses. Despite higher net interest income, net income was essentially flat because expense growth and lower mortgage gains offset the benefit.
No formal earnings, revenue or margin guidance is provided in the filing. Management’s stated priorities include profitable relationship-based growth, maintaining strong asset quality and liquidity, managing interest-rate sensitivity, expanding noninterest income, integrating acquisitions and strengthening information technology and cybersecurity.
Management identified elevated interest rates, inflation, deposit competition, funding costs, economic weakness, Wisconsin geographic concentration, commercial-real-estate exposure, real-estate values, credit losses, securities-market declines, cybersecurity, regulatory changes and acquisition integration as significant risks. A parallel rate-sensitivity analysis estimated that a 400-basis-point increase could increase projected 12-month net interest income by 3.6%, while a 100-basis-point decrease could reduce it by 4.4%; these are model estimates and not forecasts.
On February 10, 2023, the company completed the Hometown acquisition for approximately $130.5 million, including $115.1 million of stock and $15.4 million of cash. At closing, the combined company had approximately $4.2 billion of assets, $3.3 billion of loans and $3.5 billion of deposits. The filing notes that acquisition fair values were initially estimated and subject to refinement.
Most Important Facts for Investors to Verify
- Whether the Denmark and Hometown integrations produce the expected scale benefits without deterioration in credit quality, expense control or customer retention.
- The effect of CECL adoption on the allowance, provision expense, retained earnings and regulatory capital beginning in 2023.
- Deposit retention, deposit pricing and liquidity availability as interest rates and competition for funding remain elevated.
- Commercial real estate, construction and development concentrations and the sensitivity of collateral values to economic weakness and higher rates.
- The magnitude and duration of unrealized securities losses and any potential need to sell securities before recovery.
- Future mortgage-originations revenue, mortgage-servicing-rights valuations and the company’s ability to expand recurring noninterest income.
- The terms, maturity profile and variable-rate exposure of subordinated notes, repurchase agreements and other borrowings.
- Management’s estimates underlying the allowance, goodwill, mortgage-servicing rights and acquisition fair values.