First Business Financial Services, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed February 23, 2022. The filing is an annual report, with fourth-quarter results also presented. FBFS is a Wisconsin bank holding company operating primarily through First Business Bank and First Business Specialty Finance. It focuses on commercial banking, specialized lending, private wealth management and bank consulting, with principal markets in Wisconsin and Kansas City and specialized lending operations nationwide.
Financial results and position
| Metric | FY2021 / year-end | Comparable period |
|---|---|---|
| Top-line revenue (net interest income plus non-interest income) | $112.8 million, up 8.4% | $104.0 million in FY2020 |
| Net income | $35.8 million | $17.0 million in FY2020 |
| Diluted earnings per share | $4.17 | $1.97 in FY2020 |
| Net interest income / net interest margin | $84.7 million / 3.44% | $77.1 million / 3.40% in FY2020 |
| Non-interest income / expense | $28.1 million / $71.5 million | $26.9 million / $68.9 million in FY2020 |
| Return on average assets / equity | 1.37% / 16.21% | 0.70% / 8.64% in FY2020 |
| Total assets | $2.653 billion | $2.568 billion at year-end 2020 |
| Gross loans and leases | $2.241 billion | $2.151 billion at year-end 2020 |
| Deposits | $1.958 billion | $1.856 billion at year-end 2020 |
| Total borrowings, including junior subordinated notes | $413.5 million | $429.2 million at year-end 2020 |
| Stockholders’ equity | $232.4 million; 8.76% of assets | $206.2 million; 8.03% of assets at year-end 2020 |
Cash flow and liquidity: Operating activities provided $36.0 million; investing activities used $111.0 million, including $86.7 million of net loan growth; financing activities provided $75.2 million, largely from deposit growth. Cash and cash equivalents were $57.1 million at year-end. Management reported immediate on-balance-sheet liquidity of $529.5 million, down from $640.2 million a year earlier. In-market deposits grew 14.6% to $1.928 billion; wholesale funds fell to $398.4 million, or 17.1% of total bank funding, from $567.0 million, or 25.2%.
Credit and capital: The allowance for loan and lease losses was $24.3 million, or 1.09% of gross loans, versus $28.5 million, or 1.33%, in 2020. Non-performing assets declined to $6.5 million, or 0.25% of assets, from $26.7 million, or 1.04%. Commercial real estate represented 64.9% of gross loans. The Bank was categorized as well-capitalized; its year-end common equity Tier 1 ratio was 9.81% and total capital ratio was 10.78%.
Material changes versus FY2020
- Net income more than doubled, primarily reflecting a $22.6 million year-over-year swing in loan-loss provision: a $5.8 million benefit in 2021 versus $16.8 million of expense in 2020. The 2021 benefit reflected net recoveries, lower historical loss factors and reduced specific reserves, partly offset by loan growth.
- Net interest income increased 9.8%, supported by loan growth, PPP fee amortization and lower funding costs. Average earning-asset yield fell to 3.90% from 4.16%, but the average rate paid on interest-bearing liabilities declined to 0.63% from 0.99%.
- Non-interest income increased 4.3%. Private wealth fees rose 25.2% and SBA loan-sale gains rose 39.5%; these gains were partly offset by swap fees falling 80.1%, to $1.4 million.
- Non-interest expense rose 3.8%; adjusted operating expense increased 9.1%, driven largely by compensation, marketing and data processing. Compensation increased 12.8% to $51.7 million.
- Asset quality improved materially: non-accrual loans and leases fell to $6.4 million from $26.6 million. Gross loans excluding net PPP loans grew 15.2%; in-market deposits increased $245.3 million.
- The effective tax rate rose to 24.0% from 7.2%. FY2020 included historic tax credits that lowered tax expense; no tax credits were recognized in 2021.
Fourth-quarter results
For Q4 2021, net income was $8.6 million, or $1.01 per diluted share, compared with $6.1 million, or $0.71 per share, in Q4 2020. Net interest income was $20.9 million versus $22.5 million; non-interest income was $7.6 million versus $6.8 million. The provision was a $0.5 million benefit in Q4 2021, compared with $4.3 million of provision expense in Q4 2020.
Outlook, risks and contingencies
- Management anticipated low double-digit loan growth in 2022 and expected excess liquidity to move toward historical levels as lending grew. Its long-term objective was a net interest margin of at least 3.50% on average; adjusted FY2021 margin was 3.21%.
- Management expected a 22%–23% effective tax rate in 2022, excluding discrete items, while continuing to pursue tax-credit opportunities. It also expected modest increases in marketing and data-processing costs.
- The company described its balance sheet as neutral-to-asset-sensitive and said it was positioned to benefit from rising short-term rates. Its modeled 12-month net interest income response was +0.77% for a 100-basis-point increase, +5.64% for +200 basis points and +10.67% for +300 basis points; a 50-basis-point decline produced a modeled decrease of 2.48%. These are scenario estimates, not guidance.
- Key exposures include the concentration in commercial real estate, borrower and collateral deterioration, interest-rate and funding-cost changes, inflation and economic uncertainty, dependence on regional markets, competition, cybersecurity and third-party service providers, and compliance obligations. CECL adoption was scheduled for January 1, 2023 and could increase required credit-loss allowances.
- Off-balance-sheet commitments to extend credit were $768.4 million and standby letters of credit were $16.8 million at year-end. The company maintained a $635,000 reserve for potential recourse relating to sold SBA loans. Management reported no pending litigation expected to materially affect financial position, results or cash flows.
- The Board completed a $5 million share-repurchase authorization in October 2021, buying 182,151 shares at a weighted-average $27.40. No repurchase plan was active at year-end. The company declared $0.72 per share in FY2021 dividends.
Important facts for investors to verify
- Whether loan growth and the decline in non-performing assets persist, particularly in the 64.9% commercial-real-estate share of the loan portfolio.
- Whether the allowance remains adequate as loan balances grow and historical loss experience changes; the auditor identified qualitative allowance factors as a critical audit matter.
- How quickly PPP-related balances and fee income run off, and whether core loan growth and net interest margin offset that runoff.
- Whether deposit growth continues and wholesale funding needs remain controlled, including the scheduled 2022 maturities of $173.5 million in borrowings.
- The effect of rising rates on borrower repayment, funding costs, securities values and the company’s modeled interest-rate sensitivity.
- Progress on CECL implementation and the eventual opening allowance adjustment, as well as management’s 2022 tax-rate and loan-growth expectations.
The financial statements received an unqualified audit opinion, and the auditor also gave an unqualified opinion on the effectiveness of internal control over financial reporting as of December 31, 2021.