Business Context and Reporting Period
Bank First National Corporation, a Wisconsin bank holding company whose principal subsidiary is Bank First, N.A., filed its Form 10-K for the fiscal year ended December 31, 2018. The Bank operated 18 Wisconsin offices and served consumers, professionals, and small- to mid-sized businesses through commercial, residential, consumer, mortgage, deposit, treasury-management, investment, and digital-banking services.
At year-end, consolidated assets were $1.79 billion, loans were $1.43 billion, deposits were $1.56 billion, and stockholders’ equity was $174.3 million. The filing provides full-year results and selected quarterly data; fourth-quarter 2018 net income was $6.1 million, or $0.91 per diluted share.
Financial Results and Key Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Interest income | $77.9 million | $53.5 million | +45.8% |
| Net interest income | $63.1 million | $45.7 million | +38.0% |
| Provision for loan losses | $2.9 million | $1.1 million | +178.2% |
| Noninterest income | $11.5 million | $9.8 million | +17.1% |
| Noninterest expense | $39.6 million | $30.4 million | +30.4% |
| Net income | $25.5 million | $15.3 million | +66.2% |
| Diluted earnings per share | $3.81 | $2.44 | +56.1% |
| Net interest margin, taxable equivalent | 3.89% | 3.45% | +44 basis points |
| Efficiency ratio | 52.16% | 53.28% | Improved |
| Return on average assets | 1.43% | 1.04% | Improved |
| Return on average equity | 15.36% | 11.26% | Improved |
Net interest income after provision for loan losses was $60.2 million, compared with $44.7 million in 2017. The increase primarily reflected a full year of contribution from the 2017 Waupaca acquisition, loan growth, and higher loan yields. Average interest-earning assets increased to $1.66 billion from $1.38 billion.
Interest expense increased to $14.8 million from $7.7 million as interest-bearing liabilities grew and their average cost increased to 1.25% from 0.79%. The average cost of interest-bearing deposits increased to 1.15% from 0.76%.
The lower 2018 effective tax rate of 20.6%, compared with 36.6% in 2017, substantially benefited net income. The reduction reflected the Tax Cuts and Jobs Act, which lowered the federal corporate tax rate to 21%. The 2017 tax expense included an approximately $0.6 million deferred-tax-asset write-down.
Balance Sheet, Credit Quality, Liquidity and Capital
- Total assets increased 2.3% to $1.79 billion; total loans increased 2.2% to $1.43 billion; and deposits increased 3.4% to $1.56 billion.
- Loan growth was concentrated in commercial and industrial loans, up 12.8% to $297.3 million, and commercial real estate loans, up 3.8% to $668.3 million. Construction and development loans declined 19.8% to $60.8 million, while residential loans declined 2.3% to $368.7 million.
- Real-estate-secured loans represented approximately 72.6% of total loans. Commercial real estate represented 46.8%, commercial and industrial loans 20.8%, and construction and development loans 4.3%.
- Nonperforming loans were $20.5 million, or 1.44% of total loans, compared with $20.6 million, or 1.47%, in 2017. Management attributed much of the elevated level to loans acquired in the Waupaca transaction.
- The allowance for loan losses was $12.2 million, or 0.86% of loans, compared with $11.6 million, or 0.83%, in 2017. Net charge-offs increased to $2.3 million from $0.2 million.
- Cash and cash equivalents were $107.7 million. The Bank had no outstanding FHLB advances at year-end and reported approximately $261.2 million of available FHLB liquidity. Securities sold under repurchase agreements were $31.5 million.
- Long-term debt consisted principally of $11.5 million of subordinated notes. A $3.5 million term loan and an $8.5 million note payable were repaid during 2018.
- Stockholders’ equity increased 7.8% to $174.3 million, and book value per share increased to $26.37 from $23.76.
- The Bank was well capitalized. At December 31, 2018, Bank First’s total risk-based capital ratio was 11.21%, CET1 ratio was 10.44%, Tier 1 risk-based capital ratio was 10.44%, and Tier 1 leverage ratio was 9.59%.
- Contractual obligations totaled $415.8 million, including $400.2 million of certificates of deposit, $11.5 million of subordinated debt, and $4.1 million of operating leases. Off-balance-sheet commitments totaled $358.8 million, primarily unused lines of credit and letters of credit.
Cash Flow and Capital Allocation
- Net cash provided by operating activities was $23.1 million, compared with $18.3 million in 2017.
- Net cash used in investing activities was $30.1 million, primarily reflecting a $29.2 million net increase in loans and $7.9 million of premises and equipment purchases.
- Net cash provided by financing activities was $12.8 million, including $51.0 million of deposit growth, offset by $10.4 million of common-stock repurchases, $4.5 million of dividends, and a $16.1 million decrease in repurchase-agreement balances.
- Cash and cash equivalents increased $5.8 million to $107.7 million at year-end.
- Dividends declared increased to $0.68 per share from $0.64, while the payout ratio declined to 18% from 26% because of higher earnings. The Board authorized a $10 million repurchase program, under which 48,656 shares were purchased during the fourth quarter at an average price of $48.96.
Material Changes Versus the Prior Comparable Period
- The Waupaca acquisition, completed October 27, 2017, contributed a full year of earnings, loans, deposits, employees, and operating costs in 2018 versus slightly more than two months in 2017. Management identified it as the principal driver of growth in net interest income and operating expenses.
- Noninterest expense increased $9.2 million, primarily because of the expanded branch network and employee base, higher data-processing and occupancy costs, amortization of acquired core-deposit intangibles, and costs to repossess and maintain collateral.
- Noninterest income increased $1.7 million. Service charges, income from Ansay and UFS, loan-servicing income, and other income increased, while mortgage-loan sale gains declined because of slower mortgage originations.
- Credit costs increased because of significant charge-offs and the establishment of allowances for acquired loans as they renewed after acquisition accounting fair-value marks were recognized.
- The Company listed its common stock on Nasdaq in October 2018, transitioning from the OTC Pink market.
- The Company adopted the revenue-recognition standard in 2018. The filing states that the impact on the Company was not material, although an unconsolidated subsidiary recorded a $1.6 million increase to retained earnings.
Outlook, Commentary, Risks and Unusual Items
Management’s strategy emphasizes relationship-based community banking, core-deposit growth, disciplined commercial lending, operating efficiency, technology and cybersecurity investment, and selective acquisitions. The filing does not provide numerical earnings or revenue guidance.
On January 22, 2019, the Company agreed to acquire Partnership Community Bancshares, Inc. in a transaction valued at approximately $41 million, consisting of 65% Company stock and 35% cash. Closing was expected in the third quarter of 2019, subject to regulatory and shareholder approvals. PCB had approximately $306.8 million of assets, $267.1 million of net loans, and $261.6 million of deposits at December 31, 2018. The filing estimated that the combined company would have approximately $2.1 billion of assets, $1.7 billion of loans, and $1.8 billion of deposits.
- Key risks include Wisconsin and local economic concentration, commercial real estate and construction exposure, interest-rate sensitivity, deposit pricing and liquidity, credit losses, and reliance on small- and mid-sized business borrowers.
- Approximately 98% of loans and 97% of deposits were associated with Wisconsin borrowers or depositors, limiting geographic diversification.
- The 18 largest borrowing relationships over $10 million represented approximately 15% of the loan portfolio, while the 10 largest depositor relationships represented approximately 9% of deposits.
- CECL becomes effective for the Company in the first quarter of 2020. Management expected the standard could increase the allowance for credit losses and introduce greater earnings volatility, but had not quantified the impact.
- Interest-rate modeling indicated that a 400-basis-point increase in rates would increase projected next-12-month net interest income by 5.0%, while a 100-basis-point decrease would reduce it by 4.1%, assuming no balance-sheet growth.
- The Company disclosed cybersecurity, third-party service-provider, regulatory-compliance, litigation, fair-lending, anti-money-laundering, and public-company compliance risks.
- Management stated that ordinary-course litigation was not expected to have a material adverse effect. The filing also disclosed a change in independent auditors during 2018; Porter Keadle Moore, LLC audited the 2018 financial statements and issued an unqualified opinion.
Most Important Facts for Investors to Verify
- Whether the planned Partnership Community Bancshares acquisition closed on schedule, at the stated valuation, and with the expected earnings and balance-sheet benefits.
- Whether nonperforming loans, charge-offs, and commercial real estate concentrations continue to decline or require additional provisioning.
- The quantified day-one and recurring impact of CECL adoption beginning in 2020.
- Deposit retention, deposit pricing, brokered-deposit usage, and the adequacy of available liquidity as funding costs rise.
- Actual post-acquisition operating expenses, efficiency ratio trends, and the sustainability of the 2018 tax-related earnings benefit.
- Regulatory capital ratios after the acquisition, dividends, repurchases, and any future capital needs.
- The effect of interest-rate changes on net interest margin, loan demand, mortgage activity, securities valuations, and economic value of equity.