Bank First Corp. 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019, filed March 11, 2020. The filing also provides fourth-quarter 2019 information. Bank First Corporation operates primarily through Bank First, N.A., a Wisconsin community bank with 23 offices serving businesses, professionals and consumers.
Business Context and Reporting Period
- At year-end, the Company had $2.21 billion of assets, $1.74 billion of loans, $1.84 billion of deposits and $230.2 million of shareholders’ equity.
- Approximately 97% of loans and 96% of deposits were tied to Wisconsin borrowers or depositors, creating significant geographic concentration.
- The July 12, 2019 acquisition of Partnership Community Bancshares added four branches and was the primary driver of balance-sheet growth during the second half of 2019.
- The Company owns interests in UFS, a data-processing and technology provider, and Ansay & Associates, an insurance agency. Its Ansay ownership increased from 30% to 40% in October 2019.
Financial Performance and Key Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net income | $26.7 million | $25.5 million | Up 4.9% |
| Basic EPS | $3.91 | $3.81 | Up 2.6% |
| Diluted EPS | $3.87 | $3.81 | Up 1.6% |
| Net interest income | $69.7 million | $63.1 million | Up $6.6 million |
| Provision for loan losses | $5.3 million | $2.9 million | Up $2.3 million |
| Noninterest income | $12.6 million | $11.5 million | Up $1.1 million |
| Noninterest expense | $42.8 million | $39.6 million | Up $3.1 million |
| Net interest margin | 3.95% | 3.89% | Up 6 basis points |
| Efficiency ratio | 51.29% | 52.16% | Improved |
| Return on average assets | 1.37% | 1.43% | Down 6 basis points |
| Return on average equity | 13.14% | 15.36% | Down 222 basis points |
Interest income increased 14.4% to $89.2 million, primarily from loan growth and the Partnership acquisition. Interest expense rose 31.3% to $19.5 million as the average cost of interest-bearing liabilities increased from 1.25% to 1.57%. The effective tax rate increased to 22.1% from 20.6%, partly due to nondeductible Partnership acquisition expenses.
Balance Sheet, Asset Quality, Debt and Liquidity
- Total assets increased 23.3% to $2.21 billion. Total loans increased 21.6% to $1.74 billion, while deposits increased 18.4% to $1.84 billion.
- Loan growth was concentrated in commercial real estate, up 21.7% to $813.1 million; construction and development, up 117.4% to $132.2 million; and residential 1-4 family loans, up 21.7% to $448.6 million.
- Commercial real estate represented 46.8% of loans, commercial and industrial loans 17.4%, construction and development loans 7.6%, and residential 1-4 family loans 25.8%.
- Nonperforming loans declined to $5.4 million, or 0.31% of loans, from $20.5 million, or 1.44%, in 2018. Nonaccrual loans declined to $5.1 million from $20.1 million.
- Net charge-offs increased to $6.1 million from $2.3 million. Management attributed significant 2019 charge-offs to exiting certain poor-quality relationships acquired in the Waupaca transaction.
- The allowance for loan losses was $11.4 million, or 0.66% of loans, compared with $12.2 million, or 0.86%, in 2018.
- Cash and cash equivalents declined to $86.5 million from $107.7 million. Investment securities increased to $225.2 million from $159.7 million.
- Combined short- and long-term debt was approximately $68.4 million. Year-end borrowings included $39.8 million of FHLB advances, $10.0 million of bank lines of credit, $18.6 million of subordinated notes and $45.9 million of repurchase agreements.
- The Bank reported a 10.69% total capital ratio, 10.12% Tier 1 ratio, 10.12% common equity Tier 1 ratio and 9.67% Tier 1 leverage ratio, exceeding applicable well-capitalized standards.
- Off-balance-sheet commitments totaled $411.5 million, including $383.2 million of unused lines of credit, $17.1 million of letters of credit and $11.1 million of credit-card arrangements.
Cash Flow and Capital Allocation
| Cash flow measure | 2019 | 2018 |
|---|---|---|
| Cash provided by operating activities | $22.6 million | $23.1 million |
| Cash used in investing activities | $(106.2) million | $(30.1) million |
| Cash provided by financing activities | $62.2 million | $12.8 million |
| Ending cash and cash equivalents | $86.5 million | $107.7 million |
- The Company paid $5.5 million of dividends and repurchased $4.2 million of common stock during 2019.
- Dividends declared increased to $0.80 per share from $0.68, representing a 20% payout ratio.
- Management stated that current liquidity was adequate and identified deposits, investment securities, FHLB borrowing capacity and correspondent-bank lines as principal liquidity sources.
Fourth-Quarter 2019
- Fourth-quarter net income was $7.5 million, compared with $6.1 million in fourth-quarter 2018.
- Fourth-quarter diluted EPS was $1.04, compared with $0.91 in the prior-year quarter.
- Net interest income was $18.8 million, provision for loan losses was $1.1 million, noninterest income was $3.2 million and noninterest expense was $11.2 million.
Material Changes Versus the Prior Comparable Period
- The Partnership acquisition materially increased assets, loans, deposits, equity, operating expenses and goodwill. The Company issued approximately 534,659 shares and paid approximately $14.3 million in cash for total consideration of approximately $49.6 million.
- Net interest income benefited from greater scale, but higher deposit and funding costs partially offset the benefit of loan growth.
- Credit quality improved materially based on lower nonperforming loans, although charge-offs and the provision for loan losses increased substantially.
- Noninterest income benefited from higher UFS earnings, mortgage-loan sale gains and investment-security gains, but declined in loan servicing income and Ansay income.
- Goodwill increased to $43.5 million from $15.0 million, primarily due to $28.4 million of goodwill recorded in the Partnership acquisition.
- The Company adopted the new lease standard in 2019, recognizing approximately $1.7 million of right-of-use assets and lease liabilities.
Guidance, Outlook, Management Commentary and Risks
- No specific quantitative earnings, revenue or balance-sheet guidance was provided. Management’s long-term strategy emphasizes earnings-per-share growth, core-deposit growth, capital strength, asset quality, liquidity and operating efficiency.
- On November 20, 2019, the Company agreed to acquire Timberwood. The all-stock transaction was expected to close in the second quarter of 2020, subject to shareholder and regulatory approvals, with estimated consideration of approximately $32.6 million. Pro forma assets, loans and deposits were estimated at approximately $2.4 billion, $1.8 billion and $2.0 billion, respectively.
- Management highlighted integration, transaction-cost, employee-retention, customer-retention, regulatory-approval and potential earnings-accretion risks related to Timberwood.
- CECL adoption was delayed for the Company until periods beginning after December 15, 2022. Management expected the standard could increase required credit-loss reserves but had not quantified the impact.
- Principal risks include Wisconsin and real-estate concentration, commercial real estate and construction lending, larger borrower exposures, deposit concentration, interest-rate changes, funding costs, liquidity, regulatory capital, cybersecurity, third-party technology providers, competition and acquisition integration.
- The ten largest depositor relationships represented approximately 9% of deposits, while 16 borrowing relationships exceeding $10 million represented approximately 11% of loans.
- Management stated that pending legal matters were routine and were not expected to have a material adverse effect. The independent auditor issued an unqualified opinion on the 2019 financial statements, and management concluded that disclosure controls and internal control over financial reporting were effective.
Important Facts for Investors to Verify
- Whether Timberwood closed as expected and whether the projected asset, loan and deposit levels and anticipated synergies were realized.
- Whether the elevated 2019 charge-offs were isolated to exited Waupaca relationships or indicate broader deterioration in commercial real estate, construction or commercial lending.
- The sustainability of the 3.95% net interest margin as deposit costs, interest rates and funding mix change.
- The adequacy of the $11.4 million allowance for loan losses and the eventual balance-sheet and capital impact of CECL adoption.
- Liquidity coverage after the decline in cash, the addition of FHLB borrowings and the maturity of $214.4 million of certificates of deposit within one year.
- The quality and valuation sensitivity of goodwill, mortgage servicing rights, other real estate owned and other Level 3 assets.
- The effect of Wisconsin geographic concentration, commercial real estate exposure, large borrower relationships and unused credit commitments on future losses and capital.