First Business Financial Services, Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with FY 2021. The filing also reports fourth-quarter results. The company is a Wisconsin bank holding company operating through First Business Bank and its specialty-finance subsidiary, serving commercial, private-wealth, and financial-institution clients, primarily in Wisconsin and the Kansas City region.
Financial performance and condition
| Metric | FY 2022 | Prior period / change |
|---|---|---|
| Top-line revenue (net interest income plus non-interest income) | $127.9 million | Up 13.4% from $112.8 million |
| Net interest income | $98.4 million | Up 16.3%; net interest margin 3.82%, up 38 basis points |
| Net income / income available to common shareholders | $40.9 million / $40.2 million | Common income up 12.4% |
| Diluted earnings per common share | $4.75 | Up 13.9% from $4.17 |
| Return on average assets / common equity | 1.46% / 16.79% | 1.37% / 16.21% in 2021 |
| Efficiency ratio | 62.31% | Improved from 63.49% |
| Net provision for loan and lease losses | $3.9 million benefit | $5.8 million benefit in 2021 |
| Operating cash flow | $38.6 million | Investing cash flow $(245.3) million; financing cash flow $252.2 million |
In fourth-quarter 2022, net income was $10.2 million and diluted EPS was $1.18, compared with $8.6 million and $1.01 in fourth-quarter 2021. Quarterly net interest income was $27.5 million; provision expense was $702,000, versus a $508,000 provision benefit a year earlier.
At year-end, total assets were $2.977 billion, gross loans and leases $2.443 billion, deposits $2.168 billion, and consolidated stockholders’ equity $260.6 million. Cash and cash equivalents were $102.7 million. Borrowings were $456.8 million, including $416.4 million of FHLB advances and $34.3 million of subordinated notes. Readily accessible liquidity was $449.6 million, down from $529.5 million.
Loans grew 9.1% year over year; excluding PPP loans, period-end loan growth was 10.4%. Deposits increased $210.3 million, while wholesale funds rose to $618.6 million, or 23.9% of total bank funding, from $398.4 million, or 17.1%. Non-performing assets fell to $3.8 million (0.13% of assets) from $6.5 million (0.25%). The allowance was $24.2 million, or 0.99% of gross loans, versus 1.09% in 2021.
Material changes and notable items
- Net interest income benefited from higher loan yields, loan growth, and rising rates. Average earning-asset yield increased 81 basis points to 4.71%; average interest-bearing funding cost increased 60 basis points to 1.23%.
- Non-interest expense rose 11.1% to $79.5 million, led by compensation, professional fees, marketing, and occupancy. Full-time equivalent employees increased 10.9% to 337.
- Non-interest income rose 4.7% to $29.4 million. Higher loan fees, swap fees, mezzanine investment income, and a $809,000 bank-owned life-insurance claim offset a $1.5 million decline in SBA loan-sale gains. The claim and investment returns are notable contributors to reported results.
- Provision benefit reflected net recoveries, including a $4.1 million recovery on a legacy SBA relationship. Management expected CECL adoption on January 1, 2023 to increase credit-loss reserves, including unfunded commitments, by approximately $1 million to $4 million.
- Higher interest rates produced $27.7 million of pre-tax unrealized losses on available-for-sale securities through other comprehensive income. Total accumulated other comprehensive loss was $15.3 million at year-end, compared with $1.5 million in 2021. The company reported no securities impairment and no securities sales in 2022.
- The company issued $12.5 million of Series A preferred stock and $20 million of subordinated debt, redeemed $10.1 million of junior subordinated notes and $9.1 million of older subordinated notes, and repurchased approximately $5 million of common stock. A new $5 million repurchase authorization was approved in January 2023.
Outlook, risks, and contingencies
Management provided no comprehensive earnings or revenue guidance. It expected a 2023 effective tax rate of 21%–22% and said the year-end balance sheet was positioned to benefit modestly from further rate increases. Its 12-month interest-rate simulation estimated net interest income changes of +2.26% for an immediate 100-basis-point increase and +0.79% for a 100-basis-point decline; larger modeled moves included a 9.90% decline under a 300-basis-point decrease. These are model estimates, not forecasts.
Key risks include commercial-real-estate concentration (63.1% of gross loans), borrower and collateral stress in a weaker economy, rising funding costs and reliance on wholesale funding, interest-rate and securities-value exposure, and cybersecurity, third-party, regulatory, and talent risks. The filing lists $913.0 million of commitments to extend credit and $15.0 million of standby letters of credit; these are contractual amounts, not expected cash outflows. Management said pending or threatened legal matters were not expected to have a material adverse effect.
The company planned to reassess its five-year strategic plan during 2023, focusing on talent, efficiency, deposits, and business-line performance. CEO and bank leadership appointments were announced in January 2023; the CFO had notified the company of an intended March 2023 retirement, with the deputy CFO planned as successor. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; the allowance for loan and lease losses was identified as a critical audit matter because of judgment in qualitative reserve factors.
Important facts for investors to verify
- Whether CECL adoption resulted in a reserve increase within management’s estimated $1 million–$4 million range, and its effect on capital and earnings.
- Current CRE and C&I portfolio concentrations, borrower performance, collateral values, and allowance adequacy as economic conditions change.
- Deposit retention, wholesale funding levels and maturities, and available liquidity compared with the year-end figures.
- How higher deposit costs, loan repricing, and securities values affect net interest margin, capital, and the modeled rate sensitivity.
- How much 2022 earnings depended on the SBA recovery, insurance claim, mezzanine fund returns, and other nonrecurring or variable items.
- Execution of the leadership transition, new repurchase authorization, and the company’s post-2023 strategic plan.