First Business Financial Services, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014. The company is a Wisconsin bank holding company serving businesses and individuals through banking subsidiaries in Wisconsin and Kansas City. The results include Alterra Bank, acquired November 1, 2014, making year-over-year comparisons partly acquisition-driven.
Key financial results
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Net interest income | $14.930 million | $10.801 million; up 38.2% |
| Non-interest income | $3.848 million | $2.321 million; up 65.8% |
| Total operating revenue | $18.778 million | $13.122 million; up 43.1% |
| Provision for loan and lease losses | $684,000 | $180,000 |
| Non-interest expense | $11.732 million | $7.852 million; up 49.4% |
| Net income | $4.192 million | $3.337 million; up 25.6% |
| Diluted EPS | $0.97 | $0.84 |
| Net interest margin | 3.79% | 3.58% |
| Efficiency ratio | 62.47% | 59.84% |
| ROAA / ROAE | 1.00% / 11.98% | 1.06% / 12.01% |
| Effective tax rate | 34.1% | 34.4% |
Management attributed revenue and expense growth primarily to Alterra. Net interest margin benefited from purchase-accounting accretion, a more favorable deposit mix and loan yields; management reported a 26-basis-point favorable effect from Alterra purchase-accounting accretion/amortization, partly offset by competitive loan pricing and other factors.
Financial position, liquidity and credit
- Assets: $1.681 billion at March 31, up $51.3 million (3.1%) from year-end. Deposits were $1.486 billion, up $47.5 million.
- Loans: Gross loans and leases were $1.298 billion, up from $1.282 billion at year-end. Commercial real estate represented approximately 63% of the portfolio; commercial and industrial lending grew during the quarter. The filing’s balance-sheet and loan-note presentations differ on the net loan balance; investors should verify the reported figure in the source statements.
- Liquidity: Cash and cash equivalents were $141.9 million. Management-defined immediate on-balance-sheet liquidity was $383.1 million, versus $290.8 million at year-end. Q1 operating cash flow was $2.8 million; investing activities used $11.3 million and financing activities provided $47.2 million, producing a $38.7 million increase in cash and cash equivalents.
- Funding and debt: Wholesale deposits were $431.0 million, or 29.0% of deposits. Borrowings and junior subordinated notes totaled approximately $44.8 million; the company reported compliance with senior-line covenants. The filing reports $10.315 million of junior subordinated notes and other borrowings, including $22.926 million of subordinated notes payable.
- Credit quality: Non-accrual loans and leases were $9.4 million (0.72% of gross loans), down from $9.8 million (0.76%) at year-end. Non-performing assets were $10.9 million, or 0.65% of assets, versus $11.5 million, or 0.70%. The allowance was $14.7 million, or 1.13% of gross loans, compared with 1.12% at year-end. Q1 net charge-offs were $319,000.
- Capital: Management said the company and banks met applicable capital requirements and remained well capitalized under the new rules. Consolidated common equity Tier 1 capital ratio was 8.34%; total capital ratio was 11.40%.
Material changes, outlook and risks
- Non-interest income included $653,000 of gains on loan sales, primarily residential mortgage and SBA loans. Other income also benefited from lease-asset termination gains and the release of Alterra-related purchase-accounting reserves; $276,000 remained in the reserve for unfunded commitments at quarter-end.
- Expense growth reflected the acquisition, higher compensation and staffing, technology projects and $78,000 of non-recurring merger-transition costs. The company reported 212 full-time equivalent employees, up from 151 a year earlier.
- Management expects loan and lease activity to exceed normal amortization and support continued growth, while noting competition and adherence to underwriting standards. It anticipates non-accrual levels may improve more slowly and could fluctuate; additional charge-offs or provisions may be required if credit conditions or borrower circumstances worsen.
- Management cited economic conditions, interest-rate changes, loan demand, competition, borrower defaults and regulatory actions as risks. Interest-rate sensitivity was not materially changed from year-end. The company had no material change in previously disclosed risk factors, and reported no material subsequent events or material changes in contractual obligations.
- No specific earnings or financial guidance was provided. Management stated it had adequate liquidity and capital; it also noted that dividends remain subject to regulatory and other restrictions.
Important facts for investors to verify
- How much of the reported growth and margin improvement is sustainable apart from Alterra acquisition effects and purchase-accounting accretion.
- The loan-balance presentation discrepancy between the balance sheet and Note 5, and the composition, risk ratings and performance of the commercial real estate and C&I portfolios.
- Whether the higher loan-loss provision and Q1 net charge-offs indicate emerging credit pressure, despite lower non-performing assets.
- The quality and repeatability of loan-sale gains and other acquisition-related income, as well as the trajectory of the 62.47% efficiency ratio.
- Wholesale-deposit concentration, deposit pricing and maturity profile, liquidity assumptions, debt costs and regulatory capital headroom.