First Business Financial Services, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. The filing also reports fourth-quarter results. The company is a Wisconsin-based commercial bank holding company operating through First Business Bank and its specialty-finance subsidiary, serving businesses, private-wealth clients and financial institutions, primarily in Wisconsin and the Kansas City area.
Financial performance and condition
| Metric | 2023 | 2022 |
|---|---|---|
| Top-line revenue (net interest income plus non-interest income) | $143.9 million | $127.9 million |
| Net interest income | $112.6 million | $98.4 million |
| Net income | $37.0 million | $40.9 million |
| Net income available to common shareholders | $36.2 million | $40.2 million |
| Diluted EPS | $4.33 | $4.75 |
| Net interest margin | 3.78% | 3.82% |
| Return on average assets | 1.13% | 1.46% |
| Return on average common equity | 13.79% | 16.79% |
| Non-interest expense | $88.6 million | $79.5 million |
| Provision for credit losses | $8.2 million expense | $3.9 million benefit |
| Operating cash flow | $52.3 million | $38.6 million |
Fourth-quarter 2023 net income was $9.8 million and diluted EPS was $1.15, versus $10.2 million and $1.18 in fourth-quarter 2022.
- Growth and balance sheet: Total assets rose 17.8% to $3.508 billion. Gross loans and leases increased 16.7% to $2.850 billion; deposits grew 29.0% to $2.797 billion. Commercial real estate was 59.6% of gross loans, while commercial and industrial loans were 38.8%.
- Credit quality: Non-performing assets increased to $20.8 million (0.59% of assets) from $3.8 million (0.13%). Non-performing loans were $20.6 million, primarily commercial and industrial. The allowance for loan losses was $31.3 million, or 1.10% of gross loans; including $1.7 million for unfunded commitments, total allowance for credit losses was $33.0 million, or 1.16% of gross loans.
- Liquidity and funding: Cash and cash equivalents were $139.5 million. Management-defined readily accessible liquidity was $734.4 million, up from $449.6 million. Uninsured deposits, net of collateralized balances, were $977.6 million, or 35.0% of deposits. Wholesale funds were approximately 24.0% of period-end bank funding.
- Debt and capital: Borrowings totaled $330.9 million, down from $456.8 million; this included $281.5 million of FHLB advances and $49.4 million of subordinated notes and debentures. Stockholders’ equity was $289.6 million, or 8.26% of assets. The Bank remained well-capitalized; its CET1 ratio was 10.23% and total capital ratio 11.21%.
- Cash flow: Investing activities used $506.8 million, mainly reflecting $408.6 million of net loan growth. Financing activities provided $491.4 million, principally from deposit growth, partly offset by debt repayments, dividends and repurchases.
Material changes and notable items
- Revenue grew 12.6%, led by higher loan balances and yields; however, deposit and wholesale funding costs rose sharply. Net interest income increased, but net interest margin edged down four basis points.
- Common earnings fell 10.0% and diluted EPS fell 8.8%, as the $12.1 million year-over-year swing in credit-loss provision and higher operating expenses outweighed revenue growth. Non-interest expense rose 11.5%, including higher compensation, FDIC insurance and other expenses.
- Credit costs increased amid loan growth, specific reserves and defaults in equipment finance, particularly among transportation and logistics borrowers. A fully collateralized $8.8 million asset-based lending loan defaulted; its liquidation moved to Chapter 7 bankruptcy, with final resolution expected to be delayed until the second half of 2024.
- The company adopted CECL on January 1, 2023, recording a $1.4 million decrease to opening retained earnings. Prior-year credit-loss figures use the prior incurred-loss model and are not directly comparable.
- A Wisconsin tax-law change prompted a valuation allowance against state deferred tax assets. The filing describes a $2.8 million one-time charge related to the allowance; the year-end state deferred-tax valuation allowance was $3.3 million. Management expects a 2024 effective tax rate of 18%–19%.
- The company issued $15 million of subordinated debentures in September 2023 at a fixed 8.0% rate, qualifying as Tier 2 capital. It did not expect to replace its expired share-repurchase authorization, citing balance-sheet growth.
Outlook, risks and contingencies
Management said C&I investment and product-line expansion position the company for continued growth in 2024 and beyond, while emphasizing that it will not relax underwriting standards to grow the loan book. The company was reassessing its long-term strategic plan and expected to disclose its key terms later in 2024. Apart from the stated expected 2024 tax rate, the filing does not provide specific earnings, revenue or loan-growth guidance.
- Management expects continued stress in transportation and logistics borrowers within equipment finance during 2024.
- Key exposures include commercial real estate concentration, commercial borrower performance, interest-rate and funding-cost changes, deposit outflows and uninsured-deposit liquidity risk. Office loans represented about 10% of total loans; management reported no non-performing office loans and cited local market conditions as mitigating factors.
- Available-for-sale securities had $23.5 million of gross unrealized losses at year-end, primarily attributed to market factors; management recorded no securities credit-loss allowance and said it did not expect to be required to sell securities in loss positions.
- Commitments to extend credit were $1.198 billion and standby letters of credit were $17.9 million. The SBA recourse reserve was $955,000; sold SBA loan guarantees may be subject to repurchase or recovery if the Bank fails to comply with program requirements.
- Management reported no material cybersecurity impact to date. The filing identifies cyber incidents, third-party service providers, competition, regulation and regional economic conditions as ongoing risks. Management and the auditor reported effective internal control over financial reporting; the audit opinion was unqualified. The auditor identified the allowance’s qualitative credit-loss factors as a critical audit matter.
Important facts for investors to verify
- Whether the $8.8 million asset-based lending workout resolves as expected and whether the transportation and logistics credit deterioration broadens.
- Future trends in non-performing loans, delinquencies, charge-offs, specific reserves and the CECL allowance, including the distinction between the loan allowance and the allowance that includes unfunded commitments.
- Deposit stability, uninsured-deposit concentration, wholesale funding costs and the refinancing or maturity profile of deposits and borrowings.
- Whether loan and deposit growth can sustain net interest income and margins without increased credit or funding risk.
- The actual effects of the Wisconsin tax exemption, deferred-tax valuation allowance and expected 2024 effective tax rate.
- Progress on the new strategic plan, capital and dividend decisions, and any subsequent changes in liquidity, securities values or regulatory requirements.