First Business Financial Services, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are to December 31, 2023. The company is a Wisconsin-based commercial bank holding company operating primarily through First Business Bank, serving businesses and related clients in Wisconsin and the greater Kansas City area.
Financial results and condition
| Metric | Q1 2024 / March 31, 2024 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $29.5 million | $26.7 million in Q1 2023; up 10.5% |
| Net income / common net income | $8.8 million / $8.6 million | $9.0 million / $8.8 million in Q1 2023 |
| Diluted EPS | $1.04 | $1.05 in Q1 2023 |
| Net interest margin | 3.58%; adjusted NIM 3.43% | 3.86%; adjusted NIM 3.74% in Q1 2023 |
| Top-line revenue | $36.3 million | $35.1 million in Q1 2023; up 3.3% |
| Total assets | $3.531 billion | $3.508 billion at year-end 2023 |
| Gross loans and leases | $2.911 billion | $2.850 billion at year-end 2023 |
| Deposits | $2.755 billion | $2.797 billion at year-end 2023 |
| FHLB advances and other borrowings | $381.7 million | $330.9 million at year-end 2023 |
| Stockholders’ equity | $297.8 million | $289.6 million at year-end 2023 |
- Profitability and expenses: Provision for credit losses was $2.3 million, versus $1.6 million in Q1 2023. Non-interest income fell 19.7% to $6.8 million, while non-interest expense rose 7.2% to $23.3 million. Annualized ROAA was 0.98% versus 1.17%; ROACE was 12.24% versus 13.96%. The efficiency ratio increased to 63.76% from 62.02%.
- Cash flow: Operating activities provided $8.7 million; investing activities used $82.7 million; financing activities provided $6.6 million. Cash and cash equivalents decreased $67.5 million to $72.0 million. Investing outflows primarily reflected net loan growth and securities purchases.
- Credit quality: Non-performing assets were $20.1 million, or 0.57% of assets, versus $20.8 million, or 0.59%, at year-end. Non-accrual loans were 0.68% of gross loans. Allowance for credit losses, including unfunded commitment reserves, was $34.6 million, or 1.19% of gross loans, versus $33.0 million and 1.16% at year-end. Net charge-offs were $694,000.
- Liquidity and capital: Readily accessible liquidity was $676.6 million; reported total liquidity, including borrowing capacity, was $1.888 billion. Uninsured deposits net of collateral were $978.8 million, 35.5% of deposits. The Bank’s CET1 ratio was 10.34% and total capital ratio was 11.37%; it remained classified as well capitalized.
Material changes and drivers
- Loan growth and higher asset yields lifted net interest income, but funding costs rose faster in some categories, compressing NIM by 28 basis points year over year. Average loans and leases increased 16.4%; average interest-bearing deposit cost increased to 4.04% from 2.94%.
- Lower mezzanine investment returns, swap fees, and SBA loan-sale gains contributed to the decline in non-interest income. Private wealth fees and deposit service charges increased.
- Loan growth was concentrated in commercial real estate and commercial and industrial lending. CRE represented 59.8% of gross loans; office real estate exposure was approximately 9.8% of gross loans.
- Period-end deposits declined $41.4 million from year-end, partly because a recurring core deposit arrived on April 1. Including that deposit, management said core deposits increased $24.2 million from year-end.
- Borrowings increased $50.8 million from year-end, which management attributed partly to the delayed deposit inflow and its funding strategy.
Outlook, risks, and unusual items
- Management outlook: The company expects a 2024 effective tax rate of 17%–19%. Management said NIM is nearing a floor, expects it to approach the prior long-term target of 3.50% in the current rate environment, and over time targets 3.60%–3.65%. It aims to manage loan growth toward a long-term target of 10% and expects positive operating leverage on an annual basis. These are management expectations, not guarantees.
- Credit risks: Management expects continued stress in transportation and logistics borrowers in Equipment Finance during 2024. These borrowers contributed to defaults, additional reserves, and charge-offs. The company also identified office and multifamily real estate exposure, while reporting no non-performing loans in those portfolios at quarter-end.
- Funding and market risks: Interest-rate changes, deposit competition and outflows, reliance on wholesale funding, and the 35.5% uninsured-deposit share may affect liquidity and margins. Company simulations estimated net interest income sensitivity ranging from -0.51% under an instantaneous 300-basis-point rate decrease to +4.65% under a 300-basis-point increase; outcomes depend on assumptions and actual results may differ.
- Other items: Securities available-for-sale had $25.5 million of gross unrealized losses, primarily attributed by management to market and interest-rate factors; no securities credit-loss provision was recorded. The company recorded a $1.1 million SBA recourse reserve. It had a $3.4 million equity-investment funding obligation, funded in April 2024. Management reported no material changes to previously disclosed risk factors and no significant subsequent events requiring adjustment or disclosure.
Important facts for investors to verify
- Whether deposit balances and funding costs stabilize, and whether management’s NIM expectations are achieved.
- Subsequent trends in Equipment Finance and other transportation-related credit losses, non-accruals, and allowance adequacy.
- Loan concentration and performance in CRE, particularly office and multifamily, alongside the pace and underwriting quality of loan growth.
- Liquidity composition and wholesale-funding reliance, including uninsured deposits and available borrowing capacity.
- Whether fee income recovers from unusually lower mezzanine investment returns, swap fees, and SBA loan-sale gains, and whether expense growth moderates.