First Business Financial Services, Inc. — 2011 Form 10-K
Business and period. The Wisconsin bank holding company provides commercial banking, lending, equipment finance, treasury management, and trust and investment services through First Business Bank and First Business Bank–Milwaukee and subsidiaries. This filing covers the fiscal year ended December 31, 2011; selected fourth-quarter results are also shown. Amounts below are in U.S. dollars.
Financial performance and condition
| Metric | 2011 | 2010 |
|---|---|---|
| Net interest income | $35.5 million | $32.0 million |
| Non-interest income | $7.1 million | $6.7 million |
| Total revenue (net interest income plus non-interest income) | $42.5 million | $38.7 million |
| Provision for loan and lease losses | $4.3 million | $7.0 million |
| Non-interest expense | $26.4 million | $28.4 million |
| Net income | $8.4 million | $0.9 million |
| Diluted earnings per share | $3.23 | $0.37 |
| Net interest margin | 3.29% | 3.04% |
| Return on average assets / equity | 0.75% / 14.03% | 0.09% / 1.67% |
2010 net income included a $2.7 million non-cash goodwill impairment; management reported 2010 net income of $3.6 million and diluted EPS of $1.42 excluding that charge. The 2011 improvement also reflected lower credit-loss provision and funding costs; interest expense fell to $20.8 million from $24.7 million.
- Balance sheet: Assets were $1.177 billion, up 6.3%; deposits were $1.051 billion, up $63.0 million. Net loans and leases fell 2.8% to $836.7 million, while securities rose to $170.4 million.
- Credit quality: Non-accrual loans and leases declined 43.3% to $21.8 million. Non-performing assets were $24.0 million, or 2.04% of assets, versus $40.2 million, or 3.63%, in 2010. Net charge-offs nevertheless increased to $6.4 million from $4.9 million. The allowance was $14.2 million, 1.66% of gross loans, versus 1.85% a year earlier.
- Cash flow and liquidity: Operating cash flow was $17.6 million; investing activities provided $0.7 million and financing activities provided $61.0 million, mainly reflecting deposit growth. Cash and cash equivalents increased to $130.1 million. Management reported immediate on-balance-sheet liquidity of $260.5 million.
- Debt and capital: Borrowings were $50.6 million, including $39.0 million of subordinated notes and $10.3 million of junior subordinated notes. Stockholders’ equity was $64.2 million, or 5.5% of assets. Both banks were classified as well capitalized; consolidated total risk-based capital was 13.11% and Tier 1 leverage was 6.22%.
In fourth-quarter 2011, net income was $2.4 million and diluted EPS was $0.90, compared with $0.6 million and $0.24 in fourth-quarter 2010. The filing presents no formal numerical earnings or growth guidance.
Changes, outlook, and risks
- Management said 2012 priorities included improving asset quality, building commercial and industrial relationships and in-market deposits, growing fee income, and adding business development staff as appropriate. It expected continued elevated impaired-loan and foreclosed-property levels in the near term and cautioned that loan demand remained weak.
- Brokered deposits declined to $446.7 million, but still represented 42.5% of ending deposits. The company intends to reduce reliance on them while continuing to use them for funding and interest-rate management.
- Commercial real estate represented 68.2% of gross loans. Management cited continuing uncertainty around real estate values and anticipated elevated charge-offs; further deterioration could increase reserves and losses.
- Other material exposures include interest-rate and funding risk, competition, regulatory and compliance costs, and the effect of weak local or national economic conditions. A $32.8 million portion of brokered certificates was callable before scheduled maturity.
- In 2011, the company recorded $420,000 of net losses on foreclosed properties, including $621,000 of impairment adjustments. It settled a Wisconsin tax assessment; the settlement did not materially differ from amounts previously accrued. A Wisconsin tax-law change led to release of a valuation allowance and contributed to a lower effective tax rate.
- After year-end, the FHLB repurchased about $619,000 of the banks’ excess stock. The company also issued about $6.2 million of subordinated debentures in 2012 and used the proceeds to repay part of existing subordinated debt.
- The company reported no pending or threatened litigation expected to materially affect its financial position, results, or cash flows. Its auditor issued an unqualified opinion, and management reported effective disclosure controls and internal control over financial reporting at year-end.
Investor verification priorities
- Review loan-level credit disclosures, collateral valuations, charge-offs, and allowance assumptions, especially for commercial real estate and construction lending.
- Assess the sustainability of lower credit provisions and improved earnings, including compensation growth and foreclosed-property costs.
- Verify deposit mix, brokered-deposit maturities and call features, and the availability and terms of contingent funding sources.
- Check regulatory capital and dividend capacity after the 2012 subordinated-debt issuance and repayment; the filing notes that bank dividends to the parent are subject to restrictions.
- Evaluate interest-rate sensitivity, including the reported modeled net-interest-income changes under rate scenarios and the effect of loan rate floors.
- Confirm the effect of the Wisconsin tax settlement and tax-law changes, and distinguish reported earnings from management’s non-GAAP adjusted comparisons.