First Business Financial Services, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet figures are as of March 31, 2023. The company is a Wisconsin bank holding company operating primarily through First Business Bank, serving commercial clients and high-net-worth individuals in Wisconsin and the greater Kansas City area. Financial statements are unaudited.
Financial performance
| Metric | Q1 2023 | Q1 2022 / prior-period comparison |
|---|---|---|
| Net interest income | $26.7 million | $21.4 million; up 24.6% |
| Non-interest income | $8.4 million | $7.4 million; up 13.9% |
| Total revenue (net interest income plus non-interest income) | $35.1 million | $28.8 million; up 21.9% |
| Provision for credit losses | $1.6 million expense | $855,000 benefit |
| Net income | $9.0 million; $8.8 million available to common shareholders | $8.7 million |
| Diluted EPS | $1.05 | $1.02 |
| Net interest margin | 3.86% | 3.39% |
| Annualized ROA | 1.17% | 1.30% |
| Annualized return on average common equity | 13.96% | Management’s summary reports 14.70%; MD&A table reports 14.47% |
| Non-interest expense | $21.8 million | $18.8 million; up 15.6% |
| Efficiency ratio | 62.02% | 65.55% |
| Operating cash flow | $9.9 million provided | $2.1 million provided |
| Investing cash flow | $116.3 million used | $40.1 million used |
| Financing cash flow | $189.7 million provided | $76.5 million provided |
Financial position, funding and asset quality
- Total assets were $3.164 billion, up $187.8 million from December 31, 2022. Gross loans and leases were $2.539 billion, up $96.1 million during the quarter; deposits were $2.477 billion, up $308.6 million. Stockholders’ equity was $266.6 million.
- Cash and cash equivalents were $186.0 million. Readily available liquidity was $656.6 million; reported total liquidity, including additional funding capacity, was $1.729 billion. Management said it had not used the Federal Reserve’s Bank Term Funding Program as of quarter-end.
- Uninsured deposits were $941.4 million, or 38.0% of deposits. Extended deposit insurance covered $567.4 million. Wholesale funding was $729.6 million, or 26.2% of total bank funding.
- Federal Home Loan Bank advances and other borrowings totaled $341.9 million, down from $456.8 million at year-end. The company reported compliance with debt covenants. The senior credit line was renewed through February 19, 2024.
- Non-performing loans were $3.4 million, or 0.13% of gross loans; non-performing assets were $3.5 million, or 0.11% of total assets. The allowance for credit losses, including unfunded commitments, was $27.6 million, or 1.08% of gross loans, versus 0.99% at year-end.
- Available-for-sale securities had a fair value of $237.0 million and gross unrealized losses of $24.3 million. Management attributed the losses to market factors, reported no securities credit-loss provision, and said it did not intend, nor expect to be required, to sell securities in loss positions.
- Regulatory capital remained above applicable minimums. At quarter-end, consolidated total capital to risk-weighted assets was 11.04%, common equity Tier 1 was 8.61%, and Tier 1 leverage was 9.00%; the Bank was classified as well capitalized.
Changes, outlook and risks
- Year-over-year drivers: Higher loan yields and average loan balances lifted net interest income and margin amid rising rates. Deposit and borrowing costs also rose sharply; interest expense was $15.4 million versus $2.8 million. Fee revenue increased, notably from mezzanine fund returns, loan fees and swap fees, partly offset by lower wealth fees, deposit charges and SBA loan-sale gains. Expenses rose primarily due to compensation, staffing, professional fees, marketing and technology.
- Credit accounting: The company adopted CECL on January 1, 2023, recording a $1.4 million reduction to retained earnings, including an increase to the reserve for unfunded commitments. Management’s one-year forecast and reversion assumptions reflected somewhat weaker projected economic conditions by March 31; further charge-offs or provisions may occur as conditions and borrower situations evolve.
- Management outlook: No overall earnings guidance was provided. Management expects a 21%–22% effective tax rate for 2023, citing tax-credit investments; said the unusually strong C&I loan growth in the quarter is not sustainable and expects growth to moderate to lower double-digit levels; and expects positive annual operating leverage while pursuing revenue growth, process improvements and automation. Management noted quarterly margin and fee volatility, including from loan fees and deposit pricing.
- Liquidity and interest-rate risks: The filing discusses industry concern following March 2023 bank failures. Management described liquidity sources and its focus on deposits, but warned that rapid deposit withdrawals, funding-market disruption, rising funding costs and losses on securities could adversely affect liquidity and margin. Interest-rate sensitivity estimates are model-based and depend on uncertain assumptions and client behavior.
- Other risks and contingencies: Newly highlighted risks include possible additional regulation or capital/liquidity requirements, higher FDIC assessments, and liquidity exposure from uninsured deposits. The company disclosed ordinary-course legal proceedings and said significant losses are not expected. It recorded a $423,000 SBA recourse reserve for potential losses related to sold guaranteed loans. Disclosure controls were deemed effective, with no material change in internal control reported.
- Capital returns: The company declared common dividends of $0.2275 per share and paid $219,000 in preferred dividends. During the quarter it repurchased 41,526 shares under its $5.0 million repurchase program for approximately $1.3 million; additional shares were withheld for taxes on vesting awards.
Important facts for investors to verify
- Reconcile the filing’s inconsistent prior-year ROACE comparison: the summary gives 14.70%, while the MD&A table gives 14.47%.
- Track deposit mix, uninsured balances, wholesale funding costs and the availability of contingent liquidity as market conditions change.
- Assess whether loan growth moderates as management expects, and monitor credit quality, commercial real estate exposure, CECL assumptions and reserve changes.
- Evaluate whether higher asset yields continue to outpace rising deposit and borrowing costs, and whether fee income and expense trends support management’s operating-leverage objective.
- Monitor unrealized securities losses, regulatory capital, potential FDIC assessments and any changes to the company’s stated liquidity or capital plans.