Bank First Corp. 10-Q Summary
Business Context and Reporting Period
Bank First Corporation is the holding company for Bank First, N.A., a Wisconsin community bank operating 19 locations across seven Wisconsin counties. The filing covers the quarter and six months ended June 30, 2019. The unaudited interim financial statements are prepared under U.S. GAAP; amounts below are in thousands except per-share data and percentages.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 |
|---|---|---|
| Total interest income | $20,158 | $39,881 |
| Net interest income | $15,374 | $30,574 |
| Provision for loan losses | $500 | $1,125 |
| Noninterest income | $2,713 | $6,019 |
| Noninterest expense | $9,932 | $19,234 |
| Net income | $5,989 | $12,576 |
| Diluted EPS | $0.90 | $1.89 |
| Tax-equivalent net interest margin | 3.76% | 3.79% |
| Return on average assets | 1.33% | 1.41% |
| Return on average common equity | 13.20% | 14.11% |
- Total assets were $1.806 billion at June 30, 2019, compared with $1.793 billion at December 31, 2018.
- Net loans were $1.407 billion, down from $1.416 billion at year-end. Total loans before allowance and deferred costs were $1.419 billion.
- Total deposits were $1.575 billion, up from $1.557 billion at year-end. Noninterest-bearing deposits increased to $481.4 million from $448.8 million.
- Cash and cash equivalents were $125.9 million, compared with $107.7 million at December 31, 2018.
- Stockholders’ equity increased to $185.4 million from $174.3 million. Book value per common share was $28.20 and tangible book value per common share was $25.63.
- Subordinated notes totaled $11.5 million. Securities sold under repurchase agreements totaled $20.0 million. No FHLB advances or amounts were outstanding under either $5.0 million commercial-bank line of credit.
- The allowance for loan losses was $12.2 million, or 0.86% of total loans. Net charge-offs were $1.2 million for the first six months, and nonperforming loans were $17.0 million, or 1.20% of gross loans.
- Six-month cash flow from operating activities was $2.2 million, investing activities provided $14.7 million, and financing activities provided $1.2 million. Cash increased by $18.1 million to $125.9 million.
Material Changes Versus Prior Comparable Periods
- Second-quarter net income declined 6.4% to $6.0 million from $6.4 million; six-month net income declined 6.6% to $12.6 million from $13.5 million.
- Net interest income decreased 2.5% in the quarter and 4.6% year-to-date. Management attributed the decline primarily to lower purchase-accounting accretion from the 2017 Waupaca acquisition.
- Interest expense increased 32.7% in the quarter and 40.3% year-to-date, principally because of higher deposit funding costs. The average cost of interest-bearing deposits rose to 1.62% in the quarter and 1.58% year-to-date.
- The net interest margin declined from 3.86% to 3.76% in the quarter and from 3.95% to 3.79% year-to-date. Management stated that core margin improved, partially offsetting lower acquisition-related accretion.
- Noninterest income decreased 10.4% in the quarter and 7.0% year-to-date. Second-quarter loan servicing income fell 60%, primarily because a mortgage-servicing-rights valuation increase recorded in 2018 did not recur. Year-to-date Ansay income also declined because of a change in the timing of recognition.
- Noninterest expense declined 1.3% in the quarter and 4.0% year-to-date. Occupancy expense increased in the quarter because of investments related to anticipated Partnership branches, while outside service fees increased year-to-date due partly to public-company and acquisition costs.
- The allowance ratio decreased from 0.91% at June 30, 2018 to 0.86% at June 30, 2019, while net charge-offs increased from negligible levels in the prior-year period to $1.2 million year-to-date.
- Loans declined 0.7% from year-end, reflecting modest organic growth more than offset by planned reductions in portions of the Waupaca-acquired portfolio, including out-of-market and lower-quality loans.
Guidance, Outlook, Risks and Unusual Items
- The filing provides no formal earnings or revenue guidance. Management stated that current liquidity is adequate and expects the Bank to continue exceeding applicable well-capitalized regulatory requirements.
- The Partnership Community Bancshares merger closed on July 12, 2019, after the reporting date. Consideration was approximately $49.6 million, consisting of approximately $35.3 million of Bank First stock and $14.3 million of cash. The transaction added approximately $306.1 million of assets, $272.6 million of loans, $268.9 million of deposits and four branches. Preliminary purchase accounting included approximately $30.1 million of goodwill and $5.4 million of core deposit intangibles, subject to refinement.
- Interest-rate risk is significant. A modeled parallel increase of 400 basis points was estimated to increase next-12-month net interest income by 8.7%, while a 100-basis-point decline was estimated to reduce it by 3.5%. Economic value of equity was estimated to increase 8.2% under a 200-basis-point increase and decline 9.5% under a 100-basis-point decrease. These are model-based estimates, not forecasts.
- Credit quality remains a key risk. Nonperforming loans were $17.0 million, including $13.6 million of nonaccrual loans and $3.4 million of loans 90 days or more past due and accruing. Commercial real estate represented approximately 47% of the loan portfolio.
- Management’s allowance estimate is judgmental and could require additional provisions if economic conditions, collateral values, delinquencies or regulatory assessments deteriorate.
- ASU 2016-13, the current expected credit loss standard, was not yet effective. Management was evaluating its impact and noted that adoption could increase the allowance for loan losses. The filing also reports adoption of lease accounting that added approximately $1.7 million of right-of-use assets and lease liabilities.
- Off-balance-sheet commitments totaled $327.5 million, including $295.5 million of unused credit lines, $24.0 million of letters of credit and $8.1 million of credit card arrangements.
- The Board authorized a $10 million share-repurchase program in April 2019. No shares were repurchased under that program during the quarter; 2,408 shares were repurchased under the 401(k) plan.
- Management reported no material litigation exposure, no material changes to previously disclosed risk factors, and effective disclosure controls as of June 30, 2019.
Investor Verification Priorities
- Verify the final purchase accounting, goodwill, core deposit intangible, integration costs and earnings contribution from the Partnership merger.
- Monitor deposit pricing, funding mix and net interest margin as higher funding costs pressure profitability.
- Track nonperforming loans, charge-offs, classified loans and allowance coverage, particularly in commercial real estate and owner-occupied commercial real estate.
- Assess the effect of CECL adoption on reserves, capital ratios and future earnings.
- Reconcile reported liquidity and capital after the merger, including the use of cash, stock issuance, deposits and borrowings.
- Distinguish recurring noninterest income from unusual items, including investment revaluation gains, mortgage-servicing-rights valuation changes and acquisition-related costs.