First Business Financial Services, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance sheet comparisons are against December 31, 2012. The Wisconsin-based bank holding company serves businesses and individuals primarily through First Business Bank and First Business Bank–Milwaukee.
Financial results and position
| Metric | Q1 2013 / March 31, 2013 | Comparable period / prior year-end |
|---|---|---|
| Net income | $3.24 million | $2.21 million in Q1 2012 |
| Diluted earnings per share | $0.83 | $0.84 in Q1 2012 |
| Net interest income | $10.23 million | $8.93 million in Q1 2012 |
| Net interest margin | 3.53% | 3.15% in Q1 2012 |
| Top-line revenue | $12.18 million | $10.78 million in Q1 2012 |
| Total assets | $1.220 billion | $1.226 billion at year-end 2012 |
| Net loans and leases | $901.1 million | $896.6 million at year-end 2012 |
| Deposits | $1.072 billion | $1.092 billion at year-end 2012 |
| Stockholders’ equity | $102.1 million | $99.5 million at year-end 2012 |
Net income increased 47% year over year, while diluted EPS edged down because the December 2012 share offering increased the share base. Net interest income rose 14.6%, reflecting lower funding costs and higher average loan balances; the average yield on earning assets fell to 4.60% from 4.82%, while the average cost of interest-bearing liabilities declined to 1.28% from 1.91%. Return on average assets was 1.06% versus 0.74%; return on average equity was 12.80% versus 13.43%.
The loan-loss provision was $80,000, down from $504,000 in Q1 2012. Non-interest income increased 5.6% to $1.95 million, led by trust and investment services fees. Non-interest expense rose 5.1% to $7.18 million, principally due to compensation, professional fees, and data processing.
Operating cash flow was $2.02 million versus $3.36 million in Q1 2012. Investing activities used $6.15 million, while financing activities used $6.24 million; cash and cash equivalents declined $10.37 million to $75.21 million. The company reported immediate on-balance-sheet liquidity of $260.2 million. At quarter-end, borrowings included $15.0 million of FHLB advances, including a one-month advance due April 26, 2013, and $10.315 million of junior subordinated notes. The company reported compliance with senior line-of-credit covenants. The banks were categorized as well capitalized; consolidated total risk-based capital was 13.19% and Tier 1 leverage was 9.07%.
Material changes and asset quality
- Gross loans and leases grew modestly to $917.4 million. Commercial real estate represented about 69% of the portfolio.
- Deposits fell $20.5 million from year-end, including a $25.1 million decline in brokered certificates of deposit. Brokered deposits were $349.3 million, or 32.6% of deposits; management continued to emphasize in-market funding.
- Non-accrual loans fell to $11.7 million from $14.1 million; non-performing assets declined to $12.6 million from $15.7 million, or 1.03% of assets versus 1.28%. The allowance remained $15.5 million, or 1.69% of gross loans, and equaled 132.83% of non-accrual loans.
- Shareholders’ equity benefited from the prior-quarter stock offering, which raised $29.1 million gross; $27.1 million of net proceeds repaid subordinated debt. Q1 included $1.14 million from option exercises and $1.17 million of treasury-share purchases. Dividends declared were $0.14 per share, compared with $0.07 in Q1 2012.
Outlook, commentary, and risks
No specific earnings or financial guidance was provided. Management anticipated loan and lease activity would exceed normal amortization and support growth in coming quarters, while maintaining underwriting standards and pursuing more commercial and industrial relationships. It planned to use excess liquidity for lending, maturing debt repayment, brokered-deposit runoff, or securities investment.
Management noted that credit quality had improved but expected continued additions to non-accrual loans and historically elevated impaired-loan levels; further charge-offs or higher provisions could result from deteriorating borrower conditions or collateral values. Other stated sensitivities include interest-rate movements, loan demand, competition, economic conditions, deposit flows, and trust-fee exposure to market volatility. Securities had unrealized losses of $267,000 at quarter-end, attributed primarily to interest rates; no securities were considered other-than-temporarily impaired. The company reported no material change in its previously disclosed risk factors, no significant subsequent events, and effective disclosure controls. Management did not expect ordinary-course legal proceedings to have a material adverse effect.
Important facts for investors to verify
- Whether the improvement in net interest margin and earnings persists as asset yields remain under competitive and low-rate pressure.
- Loan-quality trends, particularly impaired commercial real estate exposures, non-accrual balances, and the adequacy of the $15.5 million allowance.
- Progress reducing brokered-deposit reliance while preserving liquidity and funding loan growth.
- The effect of the expanded share count and capital position on future EPS and returns on equity.
- Repayment or replacement of the $15.0 million short-term FHLB advance due April 26, 2013.