First Business Financial Services, Inc. — Q1 2021 Form 10-Q
Business context and period. The Wisconsin bank holding company operates primarily through First Business Bank, serving businesses and individuals in Wisconsin and the greater Kansas City area, with specialty finance, private wealth, and bank consulting businesses. This unaudited filing covers the three months ended March 31, 2021; income and cash flow comparisons are with Q1 2020, while balance-sheet comparisons are with December 31, 2020. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior year-end |
|---|---|---|
| Net income; diluted EPS | $9.7 million; $1.12 | Q1 2020: $3.3 million; $0.38 |
| Net interest income | $20.9 million | Q1 2020: $17.1 million |
| Net interest margin | 3.44% | Q1 2020: 3.44%; adjusted margin was 3.20% versus 3.32% |
| Non-interest income / expense | $7.2 million / $17.3 million | Q1 2020: $6.4 million / $16.1 million |
| Provision for loan and lease losses | $2.1 million benefit | Q1 2020: $3.2 million expense |
| Total assets | $2.621 billion | December 31, 2020: $2.568 billion |
| Gross loans and leases | $2.241 billion | December 31, 2020: $2.151 billion |
| Deposits | $1.903 billion | December 31, 2020: $1.856 billion |
| FHLB advances and other borrowings | $448.4 million | December 31, 2020: $419.2 million |
| Cash and cash equivalents | $58.9 million | December 31, 2020: $56.9 million |
| Operating / investing / financing cash flow | $6.8 million provided / $79.5 million used / $74.6 million provided | Q1 2020: $1.2 million / $33.7 million used / $60.4 million provided |
Annualized return on average assets was 1.51% and return on average equity was 18.48%, compared with 0.62% and 7.14% in Q1 2020. The efficiency ratio improved to 62.19% from 67.74%. Management-reported adjusted pre-tax, pre-provision earnings, a non-GAAP measure, rose 40.1% to $10.6 million. The quarterly dividend declared was $0.18 per share.
Material changes and drivers
- Net income increased substantially, supported by higher net interest income, lower funding costs, increased loan-fee income and SBA loan-sale gains, and a loan-loss provision benefit. The benefit included $2.5 million of net recoveries, including a large recovery received in January, and a reduction in historical loss factors; it should not be assumed to recur.
- Top-line revenue (net interest income plus non-interest income) increased 19.6% to $28.1 million. Average loans and leases rose 25.9% year over year, including PPP loans; excluding net PPP loans, average loans and leases increased 11.9%.
- Q1 loan and lease interest income included $2.2 million of PPP processing fees recognized. PPP loans outstanding were $272.7 million at quarter-end and are 100% SBA-guaranteed subject to lender compliance.
- Non-interest income rose 12.2%. SBA loan-sale gains increased to $1.1 million from $0.3 million; private wealth fees grew 14.0%. Swap fee income fell 59.3% to $0.7 million, making fee revenue variable.
- Non-interest expense increased 7.3%, led by compensation (up 14.5%), software, and FDIC insurance costs. The company reported 306 full-time equivalent employees at quarter-end, up from 281 a year earlier.
- Gross loans and leases excluding net PPP loans increased 9.8% annualized from year-end. Commercial real estate was 70.5% of loans excluding net PPP loans, a material portfolio concentration.
- Credit indicators improved from year-end: non-performing assets declined to $19.0 million, or 0.73% of total assets, from $26.7 million, or 1.04%; 99.4% of loans were current. The allowance was $29.0 million, or 1.29% of gross loans (1.47% excluding net PPP loans), compared with 1.33% (1.48% excluding net PPP loans) at year-end.
Liquidity, capital, outlook and risks
Management reported immediate on-balance-sheet liquidity of $724.2 million, including Federal Reserve PPPLF availability, or $456.6 million excluding that availability. Wholesale funding was $581.3 million, 25.1% of total bank funding. The Bank was in compliance with its liquidity policy and was characterized as well capitalized; its March 31, 2021 ratios included 11.24% total capital to risk-weighted assets, 9.99% Tier 1 capital, 9.99% common equity Tier 1, and 9.08% Tier 1 leverage.
Management said it expects to achieve a net interest margin of at least 3.50% on average over the long term, while noting quarterly volatility from loan fees, PPP activity, non-accrual recoveries, and deposit inflows. It expects modest positive operating leverage and continued growth initiatives in specialty finance, commercial banking, and private wealth. These are management expectations, not a specific near-term earnings forecast.
COVID-19 remains a key uncertainty. Exposure to retail, hospitality, entertainment, and restaurants/food service totaled $194.5 million, or 9.9% of gross loans excluding net PPP loans. Seven COVID-related deferrals totaling $13.0 million remained at quarter-end, down from $27.0 million at December 31, 2020. Management cautioned that the pandemic’s ultimate effects on borrowers and the economy remain uncertain. Other stated risks include credit deterioration, interest-rate and market changes, competition, growth execution, cybersecurity and fraud, regulation, and compliance with SBA program requirements. Management did not expect pending legal proceedings to have a material adverse effect; the SBA recourse reserve was $593,000. No significant subsequent events requiring disclosure were reported, and no material changes to previously disclosed risk factors were identified.
The company adopted a $5 million share repurchase authorization in January 2021, ending January 31, 2022; by March 31 it had repurchased 5,736 shares for $129,000. It also reported a 9% increase in the quarterly dividend to $0.18 per share. Dividend and repurchase decisions remain subject to capital, regulatory, and other constraints.
Important facts for investors to verify
- Whether the large loan recovery, net recoveries, and allowance release materially inflated Q1 earnings and how credit costs develop in subsequent quarters.
- Underlying loan growth and yield trends excluding PPP balances and processing fees, alongside the sustainability of the stated long-term margin outlook.
- Credit quality in commercial real estate and COVID-affected industries, including the status of remaining deferrals and non-accrual loans.
- Funding mix, liquidity excluding PPPLF availability, and capital headroom as loans grow and wholesale borrowings mature.
- Whether fee income, especially SBA loan-sale gains, private wealth fees, and volatile swap fees, can support revenue growth amid rising compensation and technology costs.