Business Context and Reporting Period
Bank First Corporation, a Wisconsin-based bank holding company for Bank First, N.A., filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The Bank operated 24 Wisconsin locations and provided commercial, residential, consumer, deposit, treasury-management and related financial services.
The May 15, 2020 Timberwood acquisition added one branch, approximately $118.4 million of loans and $171.1 million of deposits. The Company also participated extensively in the Paycheck Protection Program (PPP), originating approximately 1,876 loans totaling $279.6 million.
Financial Highlights
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Net interest income | $22.9 million, versus $20.3 million | $62.4 million, versus $50.9 million |
| Provision for loan losses | $1.4 million, versus $3.0 million | $5.5 million, versus $4.1 million |
| Noninterest income | $5.1 million, versus $3.1 million | $16.8 million, versus $9.4 million |
| Noninterest expense | $12.2 million, versus $12.1 million | $39.4 million, versus $31.6 million |
| Net income | $11.0 million, versus $6.7 million | $26.5 million, versus $19.2 million |
| Diluted EPS | $1.42, versus $0.93 | $3.56, versus $2.83 |
- Tax-equivalent net interest margin was 3.84% for the quarter and 3.77% for the nine months, compared with 4.30% and 3.98%, respectively, in the prior-year periods.
- Third-quarter return on average assets was 1.67% and return on average common equity was 15.56%. Nine-month figures were 1.44% and 13.74%, respectively.
- Total assets were $2.64 billion at September 30, 2020, up 19.4% from December 31, 2019. Net loans were $2.18 billion, up $452.0 million, and deposits were $2.27 billion, up $427.7 million.
- Stockholders’ equity increased to $286.1 million from $230.2 million. Book value per common share was $37.01 and tangible book value per common share was $29.12.
- Cash and cash equivalents were $80.8 million, compared with $86.5 million at December 31, 2019.
- Net cash provided by operating activities was $22.3 million. Investing activities used $218.8 million, primarily reflecting a $348.8 million net increase in loans, while financing activities provided $190.8 million.
- Total borrowings included $25.1 million of notes payable, $20.5 million of subordinated notes and $23.9 million of repurchase agreements.
- The Bank’s September 30, 2020 capital ratios exceeded well-capitalized thresholds: total capital 11.72%, Tier 1 capital 10.96%, CET1 10.96% and leverage 9.25%.
Material Changes Versus Prior Comparable Period
- Net income increased 64.5% in the quarter and 37.8% for the nine months, driven by acquisition-related scale, PPP loan income, strong residential mortgage production, lower funding costs and higher mortgage-loan sale gains.
- Net interest income rose despite margin compression. Lower interest rates reduced deposit and borrowing costs, while average interest-earning assets increased to $2.42 billion in the quarter and $2.26 billion for the nine months.
- Noninterest income increased 63% in the quarter and 78% for the nine months. Nine-month gains included $3.1 million from securities sales and $3.1 million from mortgage-loan sales, compared with $0.3 million and $0.8 million, respectively, in the prior-year period.
- Noninterest expense increased 25% for the nine months, reflecting the Partnership and Timberwood acquisitions, higher personnel and data-processing costs, COVID-19 operating investments, increased intangible amortization and a $1.3 million penalty for early extinguishment of debt.
- The allowance for loan losses increased to $16.3 million, or 0.74% of loans, from $10.1 million, or 0.59%, at September 30, 2019. Management cited heightened economic risks related to COVID-19.
- Nonperforming loans increased to $17.9 million, or 0.84% of gross loans, from $5.2 million, or 0.30%, at September 30, 2019. Management attributed the increase primarily to five large commercial customers.
- Available-for-sale and held-to-maturity securities totaled $180.0 million, down from $225.2 million at year-end 2019, principally due to the sale of $36.6 million of U.S. Treasury notes.
Guidance, Outlook, Risks and Unusual Items
- The filing provides no formal earnings or revenue guidance. Management stated that current liquidity was adequate and that it knew of no trend expected to materially impair liquidity.
- COVID-19 created uncertainty regarding borrower repayment capacity, collateral values, employment, consumer spending, loan demand and future regulatory or governmental responses. The Company granted payment deferrals to more than 625 customers on loans totaling over $271.5 million; by September 30, 383 loans totaling $187.3 million remained subject to those arrangements.
- Management expects credit-loss estimates to remain judgmental and sensitive to economic conditions. The filing warns that additional provisions could adversely affect future earnings or financial position. The Company had not yet adopted CECL; implementation for the smaller reporting company was delayed until periods beginning after December 15, 2022.
- Mortgage banking activity was strong, but mortgage servicing rights declined to $4.1 million from $4.3 million at year-end, reflecting loan payments, valuation changes and amortization.
- The Company announced plans to sell its Chetek, Wisconsin branch during the fourth quarter of 2020, reducing the branch count by one.
- A $7.0 million subordinated note assumed in the Partnership acquisition was prepaid on October 1, 2020, after the reporting date. The Company had $12.0 million of additional subordinated-note borrowing availability through December 31, 2020 and had drawn $2.0 million at quarter-end.
- Off-balance-sheet commitments totaled $466.8 million, including $450.0 million of unused lines of credit and $6.9 million of letters of credit. Mortgage rate-lock commitments were approximately $73.0 million.
- Interest-rate modeling indicated projected 12-month net interest income would increase 4.2% under a 400-basis-point rate increase and decline 3.3% under a 100-basis-point decrease, assuming no balance-sheet growth. These are model estimates, not forecasts.
- Management reported effective disclosure controls, no material changes in internal control over financial reporting, and no material litigation exposure.
Most Important Facts to Verify
- Whether elevated nonperforming loans and COVID-19-related deferrals result in additional charge-offs or allowance provisions.
- The sustainability of PPP-related interest and fee income, mortgage-loan sale gains and unusually strong noninterest income.
- Future net interest margin performance as low interest rates and lower purchase-accounting accretion continue to pressure asset yields.
- Final accounting effects of the Timberwood acquisition and the planned Chetek branch sale.
- Liquidity, deposit retention and upcoming borrowing maturities, including the October 1, 2020 subordinated-note repayment.
- The eventual impact of CECL adoption on the allowance, earnings and regulatory capital.
- The accuracy and comparability of non-GAAP tangible book value measures, which exclude goodwill and other intangible assets.