First Business Financial Services, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing is an annual report, not a standalone fourth-quarter report. FBFS is a Wisconsin bank holding company focused on commercial banking, lending, equipment finance, asset-based lending, treasury management, and trust services, principally in Wisconsin.
Key financial results
| Metric | 2013 | 2012 |
|---|---|---|
| Total assets at year-end | $1.269 billion | $1.226 billion |
| Net interest income | $42.1 million | $37.9 million |
| Non-interest income | $8.4 million | $8.7 million |
| Net income | $13.7 million | $8.9 million |
| Diluted earnings per share | $3.49 | $3.29 |
| Net interest margin | 3.54% | 3.36% |
| Return on average assets / equity | 1.10% / 13.12% | 0.75% / 12.65% |
| Net cash from operating activities | $15.9 million | $16.0 million |
Net interest income after provision was $43.1 million, reflecting a negative loan-loss provision of $959,000 versus a $4.2 million provision in 2012. Non-interest expense was $30.4 million, up from $28.7 million; income tax expense was $7.4 million, with a 35.0% effective tax rate. The filing reports no standalone full-year operating margin measure.
Balance sheet, credit, debt, and liquidity
- Net loans and leases increased 7.9% to $967.1 million; gross loans were $982.0 million. Commercial real estate loans were $645.1 million, or 65.7% of gross loans; commercial and industrial loans were $293.6 million.
- Deposits increased 3.4% to $1.130 billion. Brokered certificates of deposit were $393.5 million, or 34.8% of year-end deposits. Management’s operating goal is brokered deposits at 50% or less of deposits.
- Year-end cash and cash equivalents were $81.3 million; available-for-sale securities were $180.1 million. Management reported immediate on-balance-sheet liquidity of $272.6 million and liquidity sufficient for approximately 28 months of brokered-deposit maturities.
- Borrowings totaled $22.3 million, including $11.9 million of subordinated notes and $10.3 million of junior subordinated notes. No FHLB advances were outstanding at year-end. On January 17, 2014, the company repaid $4.0 million of third-party subordinated notes; the filing states total subordinated debt was $7.9 million as of the filing date.
- Stockholders’ equity was $109.3 million, or 8.6% of assets. The Banks were categorized as well-capitalized; at year-end, First Business Bank’s total risk-based capital ratio was 12.57% and First Business Bank-Milwaukee’s was 14.66%.
- Nonperforming assets were $16.2 million, or 1.28% of assets, compared with $15.7 million and 1.28% in 2012. Nonaccrual loans rose to $15.9 million from $14.1 million, primarily due to one relationship. Net charge-offs fell to 0.06% of average loans from 0.35%; allowance coverage was 1.42% of gross loans and 87.7% of nonaccrual loans.
- Cash flow was $15.9 million provided by operations, $54.9 million used in investing, and $34.7 million provided by financing; deposits were the principal source of financing cash flow.
Changes and notable items
- Net income rose 54.0%, while top-line revenue (net interest income plus non-interest income) increased 8.5% to $50.5 million. Lower deposit and borrowing costs and loan growth lifted net interest income; declining asset yields partially offset the benefit.
- Non-interest income declined 3.0%, including lower loan fees after large, nonrecurring 2012 transactions and lower other income after a 2012 swap-related fair-value item. Trust and investment fees increased 28.3% to $3.8 million.
- In the fourth quarter, FBFS recorded a one-time $1.3 million endowment to the First Business Charitable Foundation. The company also reported $4.1 million of pretax unrealized securities losses through other comprehensive income; no securities were deemed other-than-temporarily impaired.
- Year-end assets under management and administration reached $959.0 million, up 22%. Average in-market deposits increased 9.8% to $712.3 million.
- The company declared $0.56 per share in dividends for 2013, double the $0.28 per share in 2012. Future dividends remain subject to board discretion, earnings, liquidity, capital, and regulatory limits.
Outlook, commentary, and risks
Management’s 2014 priorities are maintaining asset quality and the efficiency ratio, growing commercial relationships and in-market transaction deposits, and increasing treasury-management fee revenue. Management expects loan and lease activity to exceed normal amortization and support continued growth, while emphasizing that it will not relax underwriting standards. No quantitative earnings or revenue guidance is provided.
Key risks include commercial real estate and geographic concentration, borrower defaults and collateral values, deposit competition and reliance on brokered funding, low-rate and rising-rate sensitivity, and regulatory changes. Management noted that Basel III requirements generally begin applying in 2015, with phased elements thereafter; it was still evaluating whether to elect the available AOCI regulatory-capital opt-out. CFO James F. Ropella announced plans to retire in the fourth quarter of 2014; a successor search was underway. Management reported no litigation expected to materially affect the company. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Review whether the negative loan-loss provision and lower allowance remain appropriate as loan growth continues; examine the large relationship driving higher nonaccrual commercial and industrial loans.
- Assess the sustainability of earnings growth after accounting for the unusually low provision, reduced funding costs, and the $1.3 million charitable endowment.
- Verify brokered-deposit maturities, funding alternatives, and the company’s ability to sustain liquidity and its stated maturity coverage.
- Monitor interest-rate exposure and securities valuation effects, including unrealized losses and the pending Basel III AOCI election.
- Track execution of 2014 growth and deposit priorities, dividend capacity, and the CFO succession process.