Bank First National Corporation — 2019 Q1 Form 10-Q Summary
Business context and reporting period
Bank First National Corporation is a Wisconsin bank holding company for Bank First, N.A., a full-service community bank with 18 locations in Wisconsin. The unaudited report covers the three months ended March 31, 2019, with comparisons to March 31, 2018 and December 31, 2018. Amounts are in thousands unless otherwise noted.
Key financial metrics
| Metric | Q1 2019 | Comparable period or date |
|---|---|---|
| Total interest income | $19.7 million | $19.3 million in Q1 2018 |
| Net interest income | $15.2 million | $16.3 million in Q1 2018 |
| Net interest margin, taxable equivalent | 3.82% | 4.04% in Q1 2018 |
| Provision for loan losses | $0.6 million | $0.5 million in Q1 2018 |
| Noninterest income | $3.3 million | $3.4 million in Q1 2018 |
| Noninterest expense | $9.3 million | $10.0 million in Q1 2018 |
| Net income | $6.6 million | $7.1 million in Q1 2018 |
| Diluted earnings per share | $1.00 | $1.05 in Q1 2018 |
| Return on average assets | 1.49% | 1.57% in Q1 2018 |
| Return on average common equity | 15.05% | 17.37% in Q1 2018 |
| Total assets | $1.805 billion | $1.793 billion at December 31, 2018 |
| Net loans | $1.419 billion | $1.416 billion at December 31, 2018 |
| Total deposits | $1.574 billion | $1.557 billion at December 31, 2018 |
| Cash and cash equivalents | $109.2 million | $107.7 million at December 31, 2018 |
| Total stockholders’ equity | $179.2 million | $174.3 million at December 31, 2018 |
Cash flow from operating activities was negative $1.4 million in Q1 2019, compared with positive $0.1 million in Q1 2018. Investing cash outflow was $3.9 million, compared with $14.2 million in Q1 2018. Financing activities provided $6.8 million, primarily reflecting a $16.6 million increase in deposits, partly offset by share repurchases, dividends and lower repurchase-agreement balances. Cash and cash equivalents increased $1.4 million during the quarter.
Debt consisted primarily of $11.5 million of subordinated notes and $25.5 million of securities sold under repurchase agreements. There were no FHLB advances or outstanding balances on either of two $5.0 million commercial-bank lines of credit at March 31, 2019. The Bank reported a total capital ratio of 11.40%, a Tier 1 risk-based capital ratio of 10.63%, a common equity Tier 1 ratio of 10.63%, and a leverage ratio of 9.68%, exceeding applicable well-capitalized thresholds.
Material changes versus prior comparable periods
- Net income declined 6.7% to $6.6 million, primarily because purchase-accounting accretion from the 2017 Waupaca acquisition fell to approximately $0.8 million from $1.5 million in Q1 2018.
- Net interest income decreased $1.1 million despite a $0.4 million increase in interest income. Interest expense increased $1.5 million, with interest-bearing deposit costs rising to 1.55% from 0.90%.
- Average loans increased approximately $29.5 million year over year, but the taxable-equivalent net interest margin declined 22 basis points to 3.82%.
- Noninterest income decreased $0.1 million. Ansay income declined $0.3 million because of a change that spreads recognition more evenly across the year. Other noninterest income benefited from a $0.6 million fair-value remeasurement of an investment in another financial institution.
- Noninterest expense declined $0.7 million, primarily due to lower occupancy costs, reduced OREO losses and lower charitable contributions. These benefits were partly offset by higher outside service fees and other expenses related to public-company obligations and the pending acquisition.
- Net loans increased $3.0 million from year-end, while total assets increased $12.2 million and deposits increased $16.5 million. Construction and development loans rose 10.9% from year-end, while a portion of acquired Waupaca loans was intentionally reduced.
- Credit metrics improved from year-end: nonperforming loans declined to $16.3 million, or 1.14% of gross loans, from $20.5 million, or 1.44%. However, net charge-offs increased to $0.7 million from negligible charge-offs in Q1 2018.
Guidance, outlook, risks and unusual items
- The Company does not provide specific earnings or revenue guidance in the filing. Management states that current liquidity is adequate and expects the Bank to remain above well-capitalized regulatory requirements.
- The Company agreed to acquire Partnership Community Bancshares. The transaction is expected to close early in the third quarter of 2019, subject to shareholder and regulatory approvals. Consideration is expected to be approximately $40.8 million, consisting of 65% common stock and 35% cash. Based on March 31, 2019 information, the combined company would have approximately $2.1 billion of assets, $1.7 billion of loans and $1.8 billion of deposits.
- Interest-rate risk is material. Management’s simulation estimated that a parallel 400-basis-point increase in rates would increase projected next-12-month net interest income by 6.8%, while a 100-basis-point decline would reduce it by 4.7%. These are model estimates, not forecasts.
- Credit losses remain a key risk. The allowance for loan losses was $12.2 million, or 0.85% of loans, and management states that the allowance is adequate. Actual losses, economic conditions, collateral values and regulatory reviews could require additional provisions.
- Commercial real estate represented approximately 47% of total loans, and residential 1-4 family loans represented approximately 26%, creating exposure to real-estate and regional economic conditions.
- CECL accounting becomes effective for the Company in the first quarter of 2020. Management was evaluating the impact and noted that implementation could increase required credit-loss reserves.
- ASC 842 lease adoption resulted in approximately $1.7 million of right-of-use assets and a corresponding lease liability. The filing also reports $341.6 million of off-balance-sheet commitments, including unused lines of credit, letters of credit and credit-card arrangements.
- The Company repurchased approximately 51,670 shares for $2.5 million during the quarter and renewed a $10 million share-repurchase authorization in April 2019. The quarterly dividend increased to $0.20 per share from $0.16.
- Management reported effective disclosure controls, no material changes to internal control over financial reporting, no material litigation exposure, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm completion timing, final consideration, funding mix, regulatory approvals and expected integration costs for the Partnership transaction.
- Assess whether the decline in purchase-accounting accretion and continued deposit-cost pressure will weigh on future net interest margin and earnings.
- Review nonperforming loans, classified loans, charge-offs and the allowance for loan losses, particularly within commercial real estate and owner-occupied commercial real estate.
- Evaluate the effect of CECL adoption on reserves, capital ratios and future earnings beginning in 2020.
- Monitor deposit pricing, certificate-of-deposit maturities, brokered deposits and the Company’s ability to maintain liquidity without increased wholesale funding.
- Distinguish recurring operating performance from unusual items, including the $0.6 million investment remeasurement, $0.2 million investment-sale gain and reduced Waupaca-related occupancy and OREO costs.